TAX COURT OPINION

Case: Estate of Joseph L. Mangiardi, Deceased; Joseph L. Mangiardi Declaration of Trust Dated February 13,
Docket Number: 3958-08L
Judge: Wherry
Opinion Type: memo
Filed: 01/27/2011
Pages: 16

T. C. Memo. *2011 24 UNI'fED STATES TAX COURT ESTATE OF JOSEPH L. MANGIARDI, DECEASED, JOSEPH L MANGIARDI DECLARATION OF TRUST DATED FEBRUARY 13, 1998, MAUREEN G. MANGIARDI, CO-TPUSTEE AND' STATUTORY EXECUTOR, Petitioner 'v. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No. 3958-08L. Filed January 27, 2011. P filed a petition for judicial review pursuant to sec. 6330(d) (1), levy action was appropriate I.R.C.; in response to R's determination that Held: R' s determiná.tion to maintain the levy to the Gove'rnment' s interest does inôt constitute R' s determination to proceed protect an abuse of discretion. with collection action is sustained.; W . Morgan 'Sùee for spétitioner . John T. Lortie, for respondent. SERVED JAN 2 7 201 MEMC RANDUM OPINION WHERRY, Judge: This case is before the Court on a petition for j dicial review of a Notice of Determination Concerning Colle tion Action (s) Under Section 6320 and/or 6330 (notice of determination) .1 The Estate of Joseph Mangiardi, Deceased, Josepl L. Mangiardi Declara ion .of Trust Dated February 13, 1998, Maureen G. Mangiardi, Co-Tr stee and Statutory Executor (peti ioner) , seeks judicia L review of respondent ' s determination to práceed with a proposed evy with respect to petitioner's estate tax liability. The ole issue for decision is whether respo dent's -determination to proceed with a proposed levy for collection of unpaid estate tax liability constitutes an abuse of discretion. Background This case was submitted fully stipulated pursuant to Rule 122. The parties' stipulation of facts, with accompanying exhib ts, is incorporated herein by this reference. The estate's legal residence was Florida at the time the petition was filed. The cètrustee of the previoµsly referenced trust (trust) and statutory executor of the estate, Ms. Maureen G. Mangiardi resided in the State of New York at the time the petition was ! I. Unless otherwise indicated, all the I ternal Revenue Code cff 1986, as references are to the Tax Court Rules section references are to amended, and all Rule of Practice and Procedure. - 3 - filed. Dr. Joseph L. Mangiardi (decedent), who established the trust, which was revocable during his lifetime, was a resident of the ,State of Florida when he died on April 5, 2000. On July 5, 2001, petitioner filed a Form 106, United States Estate (and Generation-Skipping Transfer) Tax Return, showing an unpaid estate tax liability of $2,621,810. The Form 706 ,stated that the value of the gross estate was $8,050,042 but that most of decedent's assets were not subject to distribution thorough probate. The nonprobage assets of decedent'is estate included the trust, valued at $4,577,360 as of the alternate,valuation date, and individual retirement.accounts (IRAs) decedent held totaling $3,433,007. The IRAs ultimately passed by.contract under applicable State law to decedent's nine children (the beneficiaries). Petitioner filed an amended Form 706 on December 28, 2001. The Form 706 was selected for examination; however, no additional assessment was made. Instead, an abatementsof tax of3143,152 was made on December 22, 2003. Pursuant to section 6161, petitioner requested a.total of six extensions to pay the estate tax liability,,all of which respondent granted. Petitioner's final Form 4768, Application for Extension of Time To File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer).Taxes, was submitted in June 2004. The attachment to the.Form 4768 requested an additional 12 - 4 -- months until "July 5,' 2005, fto pay estate taxes under the hards1ip pÊovisions ofa Treabury Regulcations 20.6161-1(a) (2) or in the a]ternative, request if made under the "reasonable cause provisions of Treasury ReguLations 20 . 6161-1 (a) (1-) . "I Petitioner claim d that "the a'ssets iri the gross estate which must be liqui ated to pay the estatŠ tak can only be sold at a sàcrifiae price or in a depressed market, if tlie tax is to be paid on the above êeferenced ex'tended dhe date." The unliquidated value of the t ust account as of May 31, 2004,' was approximately ! $542 , 713 . 60 . Hence , "the liquidatiòn of the se curit ies in this accou t at this time" woul'd haire resulted in a' substantial loss to th estate and the berieficiai-ies. The attachment to the Form 4768 provided a detailed de c iption of the events that led to' the d valuation of the assets in the trust account . n September 20, 2004, respondent approved petitioner's request' for additional time to pay -the estate tax liability; but only antil December-5, 20044, and advised petitioner that no furth r extensions to pay the estate tax would~be granted beyond that date. Respondent's letter warned: if the liability is not paid in full by that date, the The extensio'n to pay isi only being allowed until 12/5/2004 b cause, the IRS will begin mak-ling transferee assessments against h'eirs of td thà IRS their portiŠn of o ed. must ensure that the tZansferee assessments are made priör t the estate- tax and interest* time because we the estate thàt received assets and have not paid We can not provide any additional the assessment expi ation date to make those assessmènts. --5 - The estate tax liability Iremained unpa d after the extended deadline of -December 5, 2004'. e On Uul 13 006, respondent sent to petitioner a Final Notice of Intent- to Lévy and Notice of'Your If Right - to a Hearirig (levy notice) , -for the unpaid estate tax !i leiabil:ity. Petitioner timely submitted Form 12153 Request for a Collection Duer Process Hearing (CDP hearing request ) , in response to the leüy notice . Internal Revenue Service Officerof Appeals (-Apþeals) Settlement -Officer David C. Varnerin (Mr.IVårnerin-) , conducted: the CDP hearing through a series of confereñces and/örs i communications with petitioner 'commencing 'oÈi Odtober :11, 200 T. At ther CDP hearing petitioner" claimed that iespondent was precluded from collecting the estatet tar li bility *from the IRA beneficiaries because the time for making a transferee assessment under seation 6901 had expired Accordingl , petitioner requested that ,the estate tax ]iability be esolved through an offer-in-compromise ins which petitioner would offer a reduced amount based on doubt as -to collectibility of the remaining: assets-in the trust. 9 Mr. Varnerin sought legal adviceafrom respondent's .counsel as to whether the unpaid estate' ta'xaliability could be collected. Counsel respónded ;vici memo' dated December 5 2007 (counsel' s memo),2-stating that the estate tax liability could be coHected either; from the executor/personal represent-ative under 313 U.S.C. I. - 6 - sectio 3713 or from the ber eficiaries by enforcing the estate tax li n under section 6324 (a) (2) without a prior assessment agains the transferees undEr SectiOn 6901. O i January 11, 2008, respondent sustained the proposed 1 levy action and issued to petitioner a notice of determination. n issuin the notice of determination, Mr. Varnerin. relied on counse ' s memo but made a clierical error by stating that an assessment7could be made against transferee/beneficiaries under sectio 6901. • Mr. Varnerin iintended that the notice of determ nation state that a lawsuit could be brought. against the transf ree/beneficiaries under section 6324 (a) (2) . On February 14, 20 8, petitioner filed a petition, in this Court to review respon ent' s intended collection action. Discussion I. Se tion 6161 Extension c f Time To Pay Estate Tax: Liabil-ity The Commissioner may, ursuant to section 6161(a) (2),. for reason ble cause upon reque to of the executor extend the time for paymen of the tax shown onathe estate tax return, for a reasonable period not in excess of 10 years .» The extension may be grahted in up to -12-month chunks "if "an examination of all the facts and circumstances discloses that such request is based upon reason ble cause . " Sec . 20 a6161--l (a) (1) , Estate Tax Regs . Under the re ulations prescribed by the Commissioner, if "the district direct r finds that paymentgon the- due date * * * would impose I , 7 -- undue hardship upon the estatg, " he may extend the payment due date as detailed in the applicable regulatiops Sec. 20.6161- 1 (a) (2) (i) , Estate Tax Regs . " [U] ndue hardship" involves more than mere inconvenience . A taxpayer, claimin undue hardship must shöw that the estate would sustain a very su stantial and severe financial loss ifaforced to pay. a tax on the due date; i.e.,- that "The assets in the gross estate which musk be liquidated to pay the estate etax can only be sold at a sacrifice price or in a depressed market if the tax is to be paid when otherwise due." Sec . 20 . 6161-1 (a) (2) (ii) , Example (1) , EstatesTax Regs . A Federal agency is bound to follow its owg regulations. Twp. of S. Fayette v. Allegheny Cntys Hous. Auth., 27 F. Supp. 2d 582, 595 (W.D. Pa. 1998) (citing United States..v. Nixon, 418 IJ.S. 683, 695-696 (1974) ) , af f d. without published opinion 185 F . 3d 863 (3d Cir. 1999) . "An agency of the gover ment must scrupulously observe rules, regulations or procedures which it has established. When it fails, to do so, its action cannot stand 2While Congress amended sec. 6161(a) (2) in the Tax Reform to for "undue hardship", Act of 1976, Pub. L. 94--455, sec. 2004(c), 90 Stat. 1867, substitute the words "reasonable cause" regulations havè never been updated to refléct this chanse: Nevertheless, we refer to them here because the legislative history indicates clearly that reasonable cause is intended to be a less restrictive standard than undue hardship. would satisfy the latter should also satisfy the former test. Staf f of Joint Comm. on Taxation, General Eiplanation of the Tax Reform Act ofe1976, sat 555-558 (J. Comm. Print 1976), 1976-3 C.B. (Vol. 2) 1, 555-558. the Thus, one who - 8 - and co rts will strike it dcwn." United States v. Heffner, 420 F.2d à 9, 811 (4th Cir. 1969) . Respondent claimed he dould not rant petitioner any - additional time to pay the estate tax liability beyond Deòember 5, á004, edause he needed to make transferee assessments against'the heirs f the estate,- i.e., the benéficiaries, before the section 6901 assessment expiration date . However, respondent has never made *s ch assessments and now asserts that a transferee assessment under ection 6901 is not required before personal liability can be imp sed' under section 6324 (a) (2) . I respondent's assertion is correct, then res'pondent did not proper y apply his own regu]ations under section 6161. Those a regula ions regarding undue hardship and reasonable caus'e should have been fully considered in September 2004 before denying petitioner' s request for a 12-month extension to pay the estate tax li ility and announcing that no further extensions woùld' be grante without regard to any facts which might exist' in the future However, the record indicates that respondent made no such consideration. Instead, he did not fully allow the requested extens on and prematurely denied any additional requests by petiti ner under section 6161 for an extension to pay t-he estate tax liability. On the inconsistent and poorly deÛeloped record before us, we are un ble to decide whet her respondent abused his discretion in - 9 - denying petitioner's request for an extension of time to pay the estate tax liability.3 However, given that the maximum allöwable extension of time under section 6161(a) (2) (10 years:) expired on Januarya5, 2011,aremanding 'the ca-se sto Appeals for further - a consideration-of this issue wouldo pi-ove unproductive, as the issue is now moot . II. Levy Action Section 6331(a) authorizes the Commissioner sto levy upon property or property rights of a taxpayer liable for taxes who fails to pay those taxes within 10 days aftár la notice and-demand for payment is made. ? Section 6331(d) provides that the levy authorized in section 63311(-a) may be made wieth respect to unpaid tax liability only if the Commissioner has given swritten notice to 1) the taxpayer 30adays before the-levy.- Section 6330(a) requïres the Commiss.ioner to send a written notice to the tãxpayer of the amount of ther unpaid tax and of the taxpayer's wri'ght to a section 6330 hearing at least 30 days before the fikst levy is made. If an administrative hearing is requested in a levy case, the hearing is to lbe conducted by Appeal's. «Sec. 6330(b) (1) . *At the hearing the Appeals officer conducting it must- verïfy that, the ! 3The Codrt also pYeviously denieÃ iespondent' s May 15, 2008, motion for summary judgment, which was predicated on essentially the same facts as those in the stïpulation which áccompanied the Rule 122 motion. that thus summary judgment was inappropriate at3that In denying,that motion, addge Thornton noted time. there were mat efål factual -questions (stili enresolved and - 10 - requirements of any applicable law or administrative procedure have b en met . Sec . 6330 (c) (1) . A taxpayer may raise any relevant issue relating -to the unpaid tax or the proposed levy, including a spousal defense or collec ion alternatives such as an offer-in-compromise or an instal ment agreement . Sec . 6330 (c) (2) ; sec . 301.6330-1(e) (1) , Proced & Admin. Regs . Following the hearing , the Appeals of f ice must d termine," among other things, "whether the proposed collection action should proceed. -: In making the determination the Appeals officer shall take into consideration: (1) Whether the requirkments of all applicable laws and administrative a procedu~res have b en satisfied; (2) -any relevant issues raised by the a * taxpayer during the, section 6330 hearing; and (3) whether the propos d collection action alances the ,need for efficient collec ion of taxes with th taxpayer' s legitimate concern that any collection action be no more intrusive than necessary. Sec. 6330 (c) (3) . - T is Court has jurisdiction to review the Appeals officer's determ nation. Sec. 6330 (d) (1).. Where the taxpayer's underlying liabil ty was not properly at issue in the hearing, we review the determanation for abuse of discretion. Sego v. Commissioner, 114 T.C. 6 4, 610 (2000) ; Goza v. Commissioner, 114 'I.C. 1'76, 181-182 (200 ) An Appeals officer's determination is not an abuse of discre ion unless the deter ination is arbitrary, capricious, or i 7 - 11 - without sound basis in law or fact. Giamelli v. Commissioner, 129 T.C. 107, 111 (2007) ; Freiie v. Commissioner, 125 T.C. 14, 23 (2005) . Petitioner claims that respondent applied the law erroneously in sustaining the collection action and improperly determined that a section 6901 assessment was not required before instituting collection action against the beneficiaries under section 6324 (a) (2) . Petitioner further argues that respondent abused his discretion by "refusing to consider any compromise" and denying petitioner's offer-in-compromise based on doubt as to collectibilty. Respondent argues that Mr. Varnerin die not abuse his discretion by upholding the proposed collection action against petitioner because respondent can collect the full estate tax liability from the beneficiaries pursuant to section 6324 (a) (2) without a prior assessment against them under section 6901. Respondent claims that any erroneous application of law was harmless error and that Mr. Varnerin verified that respondent followed all relevant legal and administrative procedures regarding the collection of the estate tax liability before making his determination to sustain the levy. A. Section 6901 Assessment Both petitioner's and respondent's arguments turn on whether a section 6901 assessment is required before the initiation of - 12 - collec ion action under sect ion 6324 (a) (2) . Few courts have consid red this issue direct ly; however, the Courts of Appeals fo the Th rd Circuit and the T nth Circuit have held that respondent may collect estate tax from a transferee pursuant to section 6324 (a (2) without a prior assessment against the transferee unde section 6901. United States v. Geniviva, 16 F.3d 522, 525 (3d Cir. l 94) ; United States v. Russell, 461 F.2d 605, 607 (10th Cir 19'7/2) . This Court has found tl ose cases to be persuasive and well reason d. Ripley v. Commissioner, 102 T.C. 654, 659 (1994) . In its holding in United Stated v. Geniviva, supra at 525, the Court of App als for the Third Ci cuit noted "a certain sorrow that what seems nherently unfair is a.lso quite in accordance with the law" We als sympathize with the beneficiaries of decedent's estate in that y ars later they find t hemselves at risk of forfeiting their inheri ance without prior nåtice, especially after respondent had ample pportunity to make assessments against them. Nevertheless as dis ussed above it has previously been determined that a section 6901 assessment is r ot required before initiation of collec ion action under sect ion 6324 (a) (2) . B. Respondent's Denial of Petitioner's Offer-in-Compromise Among the issues that niay be raised at Appeals and are review d for abuse of discrètion are "of fers of collection altern tives" such as offers-in-compromise. Sec. 6330(c (2) (A) (iii). The Court reviews the Appeals officer's 13 rejection of an offer-in-comproinise to decide whether the rejection was arbitrary, capricious, or without sound basis in fact, or, law and. therefore an abuse of discr tiorie. Murphy. v. Commissioner, 125 T.C.. 301, 320 (2005), aff . 469 F.3d 27 (1sta Cir. 2006) ; Woodral v. Commissioner, 122-T. 19, 23 (1999) . Section 7122 (a) authorizes the'ICominissioner to compromise any civil case arising under the internal3revenne alaws. In general, the debision to acaept or reject an offer, is well a¯s the terms and conditions agreed tog are left to the discretión of the Commissioner. Sec. 301.7122-1(c) (1), Proce01. & Admin. ;Regs. However, regulations prornulgated under section47122 provide: "No offer to compromise may be rejected solely n the basis 'of ithe amount of the offer without evaluating that offer under the provisions" of the law, regulations, and the Commissiorier' s "policies and procedures regarding the comp omise- of cases . " Sec . 301.7122-1(f) (3) , Proced. & Admin. Regs The grounds for compromise-of a tax liÀbility are doubt as to liability, doubt as to collectibility, and promotion of effective tax administiration. Sec.:30127122-1(b)a, Prôced. & Admid. Regs; • Petitioner based thesoffér in-compromise on doubt as tá If collectibility, which "existá vincany casè wËere the taipayer's assets-and income are less than -the fu'll amòunt of ttie liability." Sec . 3 01. 7122 -1 (b) (2) , Proced . & Admin . Regå The Commissioner -will generally comprorñíse a 'liabili-ty on the basis of doubt as to col-l'ectibility only if the liability exceeds 14 - the ta<payer's reasonable cc]:lection potential; "i.e., that amount less than the full liability, a that the- IRS could collect throug i means such as administrative and judicial collection remedi s " . Murphy v . Commids ioner , supra at 3 0 9 - 310 . The Commis ioner has no duty to negotiate with a taxpayer before reject ng the taxpayer's offer-in-compromise. Fargo v. Commis ioner, 447 F.3d 706, 713 _(9th Cir.. 2006),s affg. T.C. Memo. I 2004-13; Catlow v. CommissiOner, T.C. Memo. 2007-47, affd. in part and vahated in part sub nom Keller v. Commissioner, 568 F.3d 710 (9th Cir. .2009) . Pititioner argues that the reasonable collection potential should not include any amount which respondent could collect from the be eficiaries through an) action in ,equity under section 6324 (a) (2) because the statute of limitations for making a i r transf ree assessment under Nection 6901 has -expired. Howeier, this C urt determined supra thati respondent is not required to make a section 6901 assessment before initiating collection actior under ection 6324 (a) (2) . Therefore, any amount of the unpaid3 estate tax liability that rejspondent could collect from the benefi iaries should be included in petitioner's reasonable collec ion potential; i.e., the amount of the IRA distributions. P titioner offered the remaining assets in the estate (appro imately $700,000) as an offer-in-compromise; however, respon ient determined petitioner' s reasonable collection potential to be t least $3 million -given that the beneficiaries received 1 - 15 $3,433,007 in IRA distributions. Because petidioner, did not offer an acceptable amount, respondent did not abuse -his discretion in re j ecting petitioner' s of f er -in- compromise . C. Harmless Error If infected by an error of law, the determination of the Appeals officer may be set aside. Swanson v. Commissioner, 121 T.C. 1171, 119 (2003) ; Perkins v. Commissioner, T.C. Memo. 2008- 103. However, if the error is harmless and causes no prejudice or does not affect the ultimate determination in the case," the Court should not f ind an abuse of discretion. See e . g. , Perkins v. Commissioner, 129 T.:C. 58 (2007) ; BoŸd v. Commissioner, 322 F. Supp. 2d 1229 (D.N.M. 2004) , affd. 121 Fed. Appx. 348 (10th Cir. 2005) . None of respondent' s questionable actions, as of the present time, prejudice petitioner or affect respondent's conclusion that a lawsuit can be brought against the beneficiaries under section 6324 (a) (2) to collect the unpaid estate tax iability. The facts do not establish a currently existing abuse of discretion on respondent's part. The Court kill therefore sustain respondent's pžoposed collection actions. The Court has considered all of petitioner' s contentions, arguments, requests, and statements To the extent not discussed herein, the Court concludes that they are meritless, moot, or irrelevante. Tc reflect the foregoin , - 16 - Decision will be entered f or respondent . 1 1 1 1 i 1: 1 .. P 1 1