Court Opinion

ID: 4337811
Source: CourtListenerOpinion
Date Created: 2018-11-14 03:33:57.399724+00
Date Added: 2024-06-11T14:20:37.599798
License: Public Domain

133 T.C. No. 10

               UNITED STATES TAX COURT

           ANTHONY G. MICHAEL, Petitioner v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 21341-07L.           Filed October 8, 2009.

     R assessed return preparer penalties of $35,000 under
sec. 6694(b), I.R.C., against P in June 1995 for taxable
years 1989, 1990, and 1991. P paid $5,250, the equivalent
of 15 percent of the assessed sec. 6694, I.R.C., penalties,
and R credited $1,000 toward 1989, $4,250 toward 1990, and
nothing toward 1991. P filed a refund claim with the IRS,
which was denied, and then commenced a suit for refund.

     In August 1997 the parties to the refund suit reached a
settlement agreement in which P agreed to pay $15,500 in
satisfaction of his liabilities, minus the $5,250 payments
already made plus interest under the settlement. P’s agreed
liability for 1989 was $250. P did not pay the amount due
under the settlement agreement. In April 2005 R issued a
notice of intent to levy based on the assessment. P
requested and received a CDP hearing in which the settlement
officer determined that P was entitled to a reduction in
accordance with the settlement agreement.
                               - 2 -

          On Aug. 22, 2007, R issued a notice of determination
     upholding the levy for taxable years 1989, 1990, and 1991.

          R has filed a motion for summary judgment. P
     alternatively argues: (1) This Court lacks jurisdiction to
     sustain the levy; (2) R failed to make a valid assessment;
     (3) R failed to issue a notice and demand for payment for
     the settlement amount; and (4) a genuine issue of material
     fact exists.

          Held: R’s determination to sustain the levy for 1989
     was an abuse of discretion because the facts show that
     petitioner has overpaid his tax liability for that year
     according to the terms of the settlement agreement.

          Held, further, R did not abuse his discretion with
     respect to the levy for the taxable years 1990 and 1991 and
     is entitled to summary judgment for the taxable years 1990
     and 1991 as a matter of law because a levy is a permissible
     means for R to collect the amount in the settlement
     agreement.

     David A. Salim, for petitioner.

     A. Gary Begun, for respondent.

                              OPINION

     GOEKE, Judge:   This matter is before the Court on

respondent’s motion for summary judgment pursuant to Rule 121.1

The issue we must decide is whether respondent abused his

discretion in sustaining a levy to collect tax preparer penalties

under section 6694 for 1989, 1990, and 1991.   Petitioner opposes

respondent’s motion for summary judgment and argues that the

     1
      Unless otherwise indicated, all Rule references are to the
Tax Court Rules of Practice and Procedure, and all section
references are to the Internal Revenue Code.
                                  - 3 -

Court should grant summary judgment in his favor.       For the

reasons set forth below, we shall grant summary judgment in

petitioner’s favor for the taxable year 1989 and grant

respondent’s motion for summary judgment for the taxable years

1990 and 1991.

                             Background

     At the time the petition was filed, petitioner resided in

Michigan.

     In June 1995 respondent assessed tax preparer penalties

under section 6694(b) against petitioner of $1,000 per return for

recklessly or intentionally disregarding rules and regulations

with respect to 35 returns as follows:

                           Returns            Penalty
            Year           at Issue          Sec. 6694

            1989              1                $1,000
            1990             25                25,000
            1991              9                 9,000
              Total          35                35,000

Respondent assessed the penalties with statutory interest and

issued to petitioner statutory notices of assessment and demand

for payment.    See sec. 6303(a).   Petitioner paid $5,250 or 15

percent of the assessed section 6694 penalties, which he was

required to pay to file a refund claim.     See sec. 6694(c)(1).

The Internal Revenue Service (IRS) credited $1,000 toward 1989

and $4,250 toward 1990.    The IRS did not credit any portion of

petitioner’s payment toward 1991.     The IRS’s crediting of
                                  - 4 -

petitioner’s $5,250 payment did not reflect his intended

allocation to the years at issue as reflected on Form 6118, Claim

of Income Tax Return Preparers.     Petitioner filed a refund claim

for each year at issue, which respondent denied.

       Petitioner commenced a refund suit in the District Court for

the Eastern District of Michigan alleging that he was not liable

for the section 6694(b) penalty for any of the years at issue.

The United States filed a counterclaim to collect the unpaid

balance of the section 6694(b) penalty assessments.      In August

1997 the parties reached a settlement in which petitioner agreed

to pay the section 6694(b) penalty for a portion of the 35

returns and to pay a section 6694(a) penalty of $250 per return

for the remainder of the 35 returns for an understatement of tax

liability due to a position that does not have a realistic

possibility of being sustained on the merits.      In total,

petitioner agreed to pay $15,500 in section 6694 penalties minus

any payments already made plus interest (the settlement

agreement) allocated as follows:

          No. Returns    No. Returns
          Subject to     Subject to               Penalties
Year      Sec. 6694(a)   Sec. 6694(b)     Sec. 6694(a) Sec. 6694(b)

1989           1              0             $250          -0-
1990          19              6            4,750        $6,000
1991           6              3            1,500         3,000
                               - 5 -

The parties read the terms of the settlement into the court

record at the final pretrial conference.     The District Court

dismissed the complaint with prejudice.     The District Court’s

dismissal order stated that “either party may reopen the matter

within sixty (60) days of the date of this order to enforce the

settlement agreement.”   Petitioner did not pay the amount due

under the settlement agreement, and the Government did not seek

to reopen the case within the 60-day enforcement period.

     On April 13, 2005, respondent issued a notice of intent to

levy for the years at issue to petitioner for amounts based on

the original assessments.   The levy notice did not reflect the

terms of the settlement agreement.     On May 5, 2005, respondent

received petitioner’s request for a collection due process

hearing (CDP hearing).   At the CDP hearing petitioner argued that

the assessments are invalid because the District Court dismissed

the Government’s counterclaim in the refund suit with prejudice,

the parties did not enter a decision document in the refund suit,

and respondent failed to issue to petitioner a notice and demand

for payment that was based on the terms of the settlement

agreement.   Petitioner did not propose any collection

alternatives during the CDP hearing.

     Following the CDP hearing, the settlement officer determined

that petitioner is entitled to a reduction in the amounts

assessed against him in accordance with the terms of the
                                  - 6 -

settlement agreement.    The settlement officer incorrectly

allocated the $15,500 settlement agreement to the years at issue

as follows:

          Year             Returns        Penalty

          1989                4           $1,000
          1990               28           11,500
          1991                3            3,000
            Total            35           15,500

The settlement officer requested an adjustment to the assessments

against petitioner for 1990 and 1991 to reflect the settlement

agreement.    The record establishes that petitioner’s payment

credited to 1989 exceeds his agreed-upon 1989 penalty.      On August

22, 2007, respondent issued a notice of determination for the

taxable years 1989, 1990, and 1991 that granted relief from the

levy in part and sustained the levy in part.

                             Discussion

     Summary judgment is intended to expedite litigation and

avoid unnecessary and expensive trials.    Fla. Peach Corp. v.

Commissioner, 90 T.C. 678, 681 (1988).    The Court may grant

summary judgment where there is no genuine issue of material fact

and a decision may be rendered as a matter of law.      Rule 121(a)

and (b); Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520

(1992), affd. 17 F.3d 965 (7th Cir. 1994).    The moving party

bears the burden of proving that there is no genuine issue of

material fact and the Court will view any factual inferences in a

light most favorable to the nonmoving party.       Dahlstrom v.
                               - 7 -

Commissioner, 85 T.C. 812, 821 (1985).    Under Rule 121(d), where

the moving party properly makes and supports a motion for summary

judgment “an adverse party may not rest upon the mere allegations

or denials of such party’s pleading” but must set forth specific

facts, by affidavits or otherwise “showing that there is a

genuine issue for trial.”

     Respondent has conceded that petitioner is not liable for

the amount of the original assessments in excess of the amount in

the settlement agreement.   Petitioner challenges respondent’s

authority to collect the settlement amount by levy.    Petitioner

is not entitled to challenge the merits of his liability for the

section 6694 penalties because he had an opportunity to dispute

his liability in the refund suit.   See sec. 6330(c)(2)(B); Farley

v. Commissioner, T.C. Memo. 2004-168.    Where the underlying tax

liability is not properly at issue, the Court reviews the

administrative determination regarding the collection action for

abuse of discretion.   Sego v. Commissioner, 114 T.C. 604, 610

(2000); Goza v. Commissioner, 114 T.C. 176, 182 (2000).     The

abuse of discretion standard requires the Court to decide whether

the Appeals officer’s determination was arbitrary, capricious, or

without sound basis in fact or law.     Mailman v. Commissioner, 91

T.C. 1079, 1084 (1988).
                               - 8 -

     Upon issuance of a notice of levy, a taxpayer is entitled to

an administrative hearing before an impartial officer or employee

of the Appeals Office.   Sec. 6330(b).   At the hearing a taxpayer

may raise any relevant issue regarding the collection action,

including possible collection alternatives.    Sec. 6330(c)(2)(A).

Following a CDP hearing, the Appeals officer must determine

whether to proceed with the collection action, after verification

that the requirements of applicable law and administrative

procedure have been met, considering any relevant issues the

taxpayer raised and whether the collection action balances the

need for the efficient collection of taxes with the legitimate

concern of the taxpayer that any collection action be no more

intrusive than necessary.   Sec. 6330(c)(3).   The settlement

officer assigned to petitioner’s case determined that all

requirements of applicable law and administrative procedure were

met, including that respondent made the assessments pursuant to

section 6201 and mailed a notice and demand for payment to

petitioner at his last known address within 60 days of the

assessments pursuant to section 6303.

     Petitioner argues that respondent abused his discretion in

sustaining the levy for the years at issue.    Petitioner argues:

(1) The Court lacks jurisdiction to sustain the levy; (2)

respondent failed to make a valid assessment against petitioner;

(3) respondent failed to issue a notice and demand for payment
                                - 9 -

for the settlement amount; and (4) a genuine issue of material

fact exists because respondent failed to provide the settlement

agreement in support of his summary judgment motion.

I.   Jurisdiction Argument

     Petitioner argues that the Court lacks jurisdiction to

sustain respondent’s levy action because the District Court

dismissed the Government’s counterclaim for collection with

prejudice and this Court lacks jurisdiction to enforce the terms

of the settlement agreement, citing Kokkonen v. Guardian Life

Ins. Co. of Am., 511 U.S. 375 (1994).    In Kokkonen, the Supreme

Court held that when a Federal District Court dismisses a case

with prejudice upon the basis of a settlement agreement in a

nontax case, the parties must bring an action for enforcement of

the settlement in State court rather than resorting to the

District Court for enforcement where the District Court did not

retain jurisdiction to enforce the settlement.    Id. at 382.    The

District Court in petitioner’s refund action limited the parties’

right to seek enforcement through the District Court to 60 days.

     Section 6330(d) grants this Court exclusive jurisdiction to

review appeals from all section 6330 determinations made after

October 16, 2006, irrespective of the type of tax making up the

underlying tax liability.    Sec. 6330(d)(1); Pension Protection

Act of 2006, Pub. L. 109-280, sec. 855, 120 Stat. 1019; see

Ginsberg v. Commissioner, 130 T.C. 88, 92 (2008).    In a levy
                               - 10 -

action under section 6330, the Court’s jurisdiction depends on

the issuance of a notice of determination and the taxpayer’s

timely filing of a petition.   See Sarrell v. Commissioner, 117

T.C. 122, 125 (2001); Moorhous v. Commissioner, 116 T.C. 263, 269

(2001).   The Government’s counterclaim in the refund suit does

not preclude the Court’s having jurisdiction to review section

6330 determinations.   The statutory collection remedies available

to the Commissioner are separate from the Government’s right to

counterclaim for unpaid taxes in a refund action.    Except as may

be required by the application of estoppel principles, the

District Court’s dismissal of the refund action with prejudice on

the basis of the settlement agreement does not render the

administrative statutory collection remedies unavailable.     See

secs. 6321, 6331.   Nor does the District Court’s retention of

jurisdiction for the 60-day enforcement period eliminate

respondent’s right to statutorily created collection remedies

such as a levy.   Sec. 6331(a).   Accordingly, we hold that the

Court has jurisdiction to review respondent’s determination to

sustain the levy and to determine whether respondent may collect

the unpaid section 6694 penalties by levy.

II.   Validity of Assessment Argument

      Respondent’s levy notice was based on the original

assessments.   Petitioner argues that the levy is not based on a

valid assessment.   According to petitioner, the settlement
                                - 11 -

agreement invalidated the original assessments, and respondent

did not make a new assessment to reflect the terms of the

settlement agreement.    Petitioner does not argue that the levy

notice was otherwise invalid.

     Deficiency procedures do not apply to section 6694

penalties.    Sec. 6696(b).   The assessments at issue were valid

when made.    Petitioner does not argue that the original

assessments were arbitrary or without sound basis in fact.

     Petitioner’s argument is unconvincing.     An assessment is not

invalid because the liability is afterwards reduced by

settlement.    Section 6404(a)(1) authorizes the Secretary to abate

the unpaid portion of the assessment of any tax to the extent the

assessment may be excessive.

     The reference in section 6404(a) to abating a portion of an

assessment implies that abatement is not an all-or-nothing

proposition.    If a penalty under section 6694(a) or (b)

concerning a return or claim for refund has been assessed against

a preparer, and if it is established at any time in a final

administrative determination or a final judicial decision that

only a portion of the assessment is valid, then the excess

assessment must be abated.     If an amount of the abated assessed

penalty was paid, that amount must be refunded, as if the payment
                               - 12 -

were an overpayment of tax, without consideration of any period

of limitations.    Sec. 1.6694-1(d), Income Tax Regs.

     Section 301.6325-1(a), Proced. & Admin. Regs., provides that

a lien shall be released when the entire liability has been

satisfied and the lien has become legally unenforceable.   Section

6325 does not apply because petitioner’s liability has not been

fully satisfied.

     An incorrect assessment is not void.    When a court is faced

with an incorrect but otherwise valid assessment, the proper

course is not to void the assessment but to determine what, if

anything, the taxpayer owes the Government.    See Helvering v.

Taylor, 293 U.S. 507 (1935).    As long as the assessment had any

foundation, the assessment would not be void.    See Burns v.

United States, 974 F.2d 1064, 1066 (9th Cir. 1992); United States

v. Schroeder, 900 F.2d 1144, 1148-1149 (7th Cir. 1990).

     Respondent was not required to issue a second or

supplemental assessment based on the terms of the settlement

agreement.   See sec. 6204 (granting the Commissioner authority to

issue supplemental assessments); sec. 6404 (granting the

Commissioner authority to abate an assessment); sec. 1.6694-1(d),

Income Tax Regs. (requiring abatement of the assessment of a

section 6694 penalty where it is established that there was no

understatement of tax liability).    The statutory requirement that
                                - 13 -

the Commissioner abate the excessive amount of the assessment

clearly implies that the valid portion of the assessment will

stand.    Accordingly, we hold that the assessments are valid and

provide a basis for the levy action.

III.    Notice and Demand Argument

       Petitioner argues that the IRS failed to provide notice and

demand for payment of petitioner’s agreed-upon tax liability

pursuant to the settlement agreement.    Section 6331 authorizes

the IRS to collect unpaid assessments by levy where the taxpayer

fails to pay any tax liability within 10 days after notice and

demand for payment.    The failure to provide the statutory notice

and demand may bar administrative collection actions such as a

levy.    United States v. Berman, 825 F.2d 1053, 1060 (6th Cir.

1987); see also United States v. Chila, 871 F.2d 1015, 1019 (11th

Cir. 1989).    Section 6303 requires the Secretary to give notice

and to demand payment within 60 days of assessment by leaving the

notice and demand at the taxpayer’s dwelling or usual place of

business or mailing it to the taxpayer’s last known address.       See

sec. 1.6694-4(a)(2), Income Tax Regs. (requiring notice and

demand upon the assessment of section 6694 penalties); sec.

1.6696-1(a)(1), Income Tax Regs.     Failure to provide notice and

demand within the 60-day period does not invalidate an otherwise

valid assessment.     Sec. 301.6303-1(a), Proced. & Admin. Regs.
                                - 14 -

      Respondent issued to petitioner the notice and demand for

payment based on the original assessment as required by section

6303(a) on June 9, 1995.   There is no requirement for respondent

to issue a second notice and demand for payment based on the

terms of the settlement agreement.       See sec. 7122 (relating to

compromises of tax liability).    Petitioner was not prejudiced by

not receiving a second notice and demand for payment because he

had an opportunity to contest the assessments on the merits.

Petitioner entered into the settlement agreement with full

knowledge that his liability was reduced to $15,500.       Because

respondent satisfied the assessment and notice and demand

requirements, we reject petitioner’s argument that section 6331

forbids respondent to collect the unpaid section 6694 penalties

by levy.

IV.   Failure To Provide Settlement Agreement Argument

      Petitioner argues that the Court should deny respondent’s

summary judgment motion because respondent failed to provide a

transcript of the settlement agreement, creating a genuine issue

of material fact for trial.   In support of the motion for summary

judgment, respondent presented the District Court’s transcript of

the pretrial conference where the parties entered the terms of

the settlement on the record.    We find this evidence sufficient

to establish the terms of the settlement agreement.       Petitioner

has not set forth specific facts with respect to the terms of the
                              - 15 -

settlement agreement that show a genuine issue of material fact

exists for trial.   Bare allegations will not avoid summary

judgment.   Rauenhorst v. Commissioner, 119 T.C. 157, 176 (2002).

In addition, petitioner’s allegations that respondent failed to

provide his entire administrative file in response to his request

under the Freedom of Information Act does not necessitate a

denial of respondent’s summary judgment motion since petitioner

has not set forth specific facts that create a genuine issue of

material fact for trial.2

     We hold that respondent’s determination to sustain the levy

for 1989 was an abuse of discretion because the facts show that

on the basis of the terms of the settlement agreement, petitioner

has overpaid his tax liability for that year.   Accordingly, we

shall deny respondent’s motion for summary judgment for the

     2
      The petition raised the statute of limitations as a
defense. However, petitioner did not raise the statute of
limitations in his response to respondent’s summary judgment
motion. The Commissioner may collect an unpaid tax liability by
levy within 10 years after the assessment. Sec. 6502(a)(1). A
CDP request suspends the running of the period of limitations for
collection while the hearing and any appeals thereof are pending.
Sec. 6330(e)(1); see also sec. 6694(c)(3). Respondent assessed
the sec. 6694 penalties on June 9, 1995. Respondent received
petitioner’s request for a CDP hearing on May 5, 2005, suspending
the 10-year limitations period as of that date. Accordingly, the
statute of limitations does not bar respondent from collecting
petitioner’s tax liability. Petitioner’s filing of the refund
action in District Court would also suspend the running of the
period of limitations. See sec. 6694(c)(1), (3).
                             - 16 -

taxable year 1989 and grant summary judgment in petitioner’s

favor for the taxable year 1989.

     We find that respondent did not abuse his discretion with

respect to the levy for the taxable years 1990 and 1991.   We hold

that there is no dispute of material fact with respect to the

taxable years 1990 and 1991, and respondent is entitled to

summary judgment for the taxable years 1990 and 1991 as a matter

of law.3

     To reflect the foregoing,

                                        An appropriate order and

                                   decision will be entered.

     3
      In petitioner’s response to respondent’s motion for summary
judgment, petitioner contends that the Court should grant costs
and attorney’s fees to petitioner. We shall deny this request.