Court Opinion

ID: 6318086
Source: CourtListenerOpinion
Date Created: 2022-02-28 20:01:33.386353+00
Date Added: 2024-06-11T09:00:46.906262
License: Public Domain

United States Tax Court

                                 T.C. Memo. 2022-11

                         SCOTT NICHOLAS SHADDIX,
                                 Petitioner

                                            v.

               COMMISSIONER OF INTERNAL REVENUE,
                           Respondent

                                       —————

Docket No. 12683-20L.                                       Filed February 28, 2022.

                                       —————

Scott Nicholas Shaddix, pro se.

Michelle A. Monroy, for respondent.

                           MEMORANDUM OPINION

       LAUBER, Judge: In this collection due process (CDP) case peti-
tioner seeks review pursuant to sections 6320(c) and 6330(d)(1) of the
determination by the Internal Revenue Service (IRS or respondent) to
uphold the filing of a notice of federal tax lien (NFTL) for tax years 2013–
2016. 1 Respondent has filed a Motion to Dismiss for Lack of Jurisdiction
as to tax years 2012 and 2017, which we will grant. Respondent has
filed a Motion for Summary Judgment as to the remaining years, con-
tending that there are no disputed issues of material fact and that his
determination to sustain the collection action was proper as a matter of

        1 Unless otherwise indicated, all statutory references are to the Internal Reve-

nue Code, Title 26 U.S.C., in effect at all relevant times, all regulation references are
to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times,
and all Rule references are to the Tax Court Rules of Practice and Procedure.

                                   Served 02/28/22
                                         2

[*2] law. We will deny that Motion and remand the case to the IRS Of-
fice of Appeals (Appeals) for a supplemental CDP hearing. 2

                                   Background

       The following facts are based on the parties’ pleadings and motion
papers, including the accompanying declarations and exhibits. See Rule
121(b). They are stated solely for the purpose of deciding respondent’s
motions and not as findings of fact in this case. See Sundstrand Corp.
v. Commissioner, 98 T.C. 518, 520 (1992), aff’d, 17 F.3d 965 (7th Cir.
1994). We construe factual materials and inferences drawn from them
in the light most favorable to petitioner, the nonmoving party. See ibid.
Petitioner resided in California when he filed his Petition.

       As of March 15, 2018, petitioner had unpaid tax liabilities of
$39,198 for 2013–2016. For purposes of ruling on respondent’s Motion
for Summary Judgment, we assume that these liabilities were self-
reported. Respondent attached to his motion account transcripts with
entries for each year stating: “RETURN FILED & TAX ASSESSED.”
The transcripts have no indication that petitioner’s returns were
examined or that any additional tax was assessed after the returns were
filed. The record includes no evidence that the IRS issued petitioner a
notice of deficiency for any relevant year.

       On March 27, 2018, in an effort to collect these liabilities, the IRS
sent petitioner a Notice of Federal Tax Lien Filing and Your Right to a
Hearing, and he requested a CDP hearing. The IRS initially viewed his
hearing request as untimely, but he was able to show that his request,
sent via certified mail, was delayed due to U.S. Postal Service error. The
IRS ultimately agreed to treat his hearing request as timely filed.

       The case was assigned to a settlement officer (SO1) in Philadel-
phia, Pennsylvania. SO1 scheduled a telephone conference for October
31, 2018. She informed petitioner that, in order for her to consider a
collection alternative, he would need to complete the relevant IRS forms
and supply financial information.

      Petitioner called in to the telephone conference as scheduled. SO1
began the conference by stating that she had reviewed internal IRS rec-
ords and determined that the assessments for 2013–2016 were valid.

        2 On July 1, 2019, the IRS Office of Appeals was renamed the IRS Independent

Office of Appeals. See Taxpayer First Act, Pub. L. No. 116-25, § 1001, 133 Stat. 981,
983 (2019).
                                           3

[*3] She also told petitioner that he was not entitled to challenge his
underlying liability for any year at issue. Her determination that he
could not challenge his underlying liabilities seems to have been based
on her belief that petitioner’s tax returns had been audited. She wrote
in her notes: “He admits to participating in the audit but states he has
more receipts to be considered. [Petitioner] states he does owe [some
tax] but not the amount stated. SO provided Audit Recon process and
address.” 3

       Petitioner indicated that he wished the IRS to consider an offer-
in-compromise (OIC) based on doubt as to collectibility. SO1 gave him
an additional 14 days to supply Form 656, Offer in Compromise, which
he submitted on November 9, 2018. He proposed a lump-sum offer of
$4,400 to compromise his outstanding liabilities for 2013–2016 (the tax
years listed on the NFTL) as well as 2017, which also had a balance due.
His total liabilities for 2013–2017 were $54,365. Petitioner also
submitted, as required, Form 433-A, Collection Information Statement
for Wage Earners and Self-Employed Individuals, and Form 433-B,
Collection Information Statement for Businesses. The Form 433-B
included information about Sweetwater Holdings, Inc. (Sweetwater), an
S corporation wholly owned by petitioner.

       On March 13, 2019, petitioner’s OIC was assigned for review to
an offer specialist (OS), who was tasked with making a preliminary rec-
ommendation to Appeals regarding the offer. The OS investigated peti-
tioner’s finances and discovered that Sweetwater in 2017 had reported
a net operating loss (NOL) of $713,378.

       After receiving additional financial information from petitioner,
the OS determined that the amount petitioner offered—$4,400—was
sufficient given his current financial circumstances. However, she rec-
ommended that Appeals not accept his offer unless he signed a collateral
agreement waiving his right to claim NOLs and unused investment
credits related to Sweetwater. The OS accordingly sent petitioner, and
asked that he execute, Form 2261-C, Collateral Agreement—Waiver of
Net Operating Losses, Capital Losses, and Unused Investment Credits.

        3 “Audit recon,” short for audit reconsideration, is a process used by the IRS to

help taxpayers who disagree with the results of an audit or a substitute for return.
Audit reconsideration is pursued separately from the CDP procedure. See Spain v.
Commissioner, T.C. Memo. 2021-58, 121 T.C.M. (CCH) 1439, 1440 (citing Durda v.
Commissioner, T.C. Memo. 2017-89, 113 T.C.M. (CCH) 1420, 1422 n.3). There is no
evidence that petitioner pursued audit reconsideration, which is consistent with our
inference, for purposes of ruling on respondent’s Motion, that there was no prior audit.
                                    4

[*4] The agreement recited that it was intended to supply “additional
consideration for acceptance of [petitioner’s] offer in compromise.”

       The first paragraph of the proposed collateral agreement stated
that “any net operating losses sustained for the years 2013 to 2019, in-
clusive, shall not be claimed” as NOL deductions under section 172. The
fifth paragraph, however, limited the extent of this waiver. It provided:
“[T]he agreement amount paid under the terms of the offer in compro-
mise [viz., $4,400] and the additional amounts of taxes paid as a result
of the waiver of the losses and credits involved in this agreement shall
not exceed an amount equivalent to the liability covered by the offer plus
statutory additions that would become due in the absence of the compro-
mise.”

       Taken together, these two paragraphs specified the amount of
NOLs to be waived and the time when this waiver would affect peti-
tioner’s future tax returns. The NOLs to be waived would be limited to
the 2013–2017 liabilities to be compromised, minus the $4,400 paid, plus
statutory additions (i.e., interest and additions to tax) that would be-
come due on the 2013–2017 liabilities if there were no compromise. And
the waived NOLs would come at the front, rather than at the back, of
the line. In other words petitioner would be required to pay future taxes
in an amount corresponding to the waiver amount, and he would then
be permitted to use the balance of his NOL carryforwards on subsequent
tax returns.

       Petitioner declined to sign the collateral agreement. The OS, in
consultation with her manager, accordingly sent the case back to Ap-
peals with a recommendation that Appeals reject the OIC. The case was
reassigned to a new settlement officer (SO2), who confirmed that peti-
tioner’s most recent tax return (for 2018) showed an NOL carryforward
of $734,428 passed through to him from Sweetwater. After discussing
the matter with two examination specialists, SO2 concluded that a par-
tial waiver of NOL carryforwards is permissible if the facts support that
determination. See Internal Revenue Manual (IRM) 5.8.6.2.3(6) (Oct. 4,
2017). Because petitioner had no remaining basis in his Sweetwater
stock, he could use no portion of the $734,428 NOL carryforward unless
he injected additional capital into the company. And because peti-
tioner’s OIC was premised on his inability to pay any more than $4,400,
SO2 regarded petitioner’s ability to use the NOL as questionable.

     SO2 sent petitioner a letter scheduling a telephone conference for
December 17, 2019. The letter stated: “You may not dispute the liability
                                    5

[*5] in your CDP hearing because.” Then, in the space where one would
have expected SO2 to explain why petitioner could not dispute his lia-
bility, the following typographical error or unfinished phrase appears:
“[en.”

       During that telephone conference and in subsequent communica-
tions, petitioner did not object to waiver of NOLs in an amount equal to
the liabilities being compromised (minus $4,400). But he objected to
having the waiver extend to “statutory additions that would become due
in the absence of the compromise.” And he urged that the NOLs being
waived should go to the back, rather than the front, of the line. In other
words, he contended that he should be allowed to use his reduced NOL
balance to begin offsetting his future tax liabilities immediately.

       SO2 left petitioner a voice message on February 5, 2020, drawing
his attention to paragraph 5 of the proposed collateral agreement and
asking why this was not sufficient to address his concern. On February
14, 2020, petitioner replied with a voice message stating that “he would
not sign the waiver even with the provisions listed.” Because petitioner
declined to execute the collateral agreement, SO2 decided to reject the
OIC as not in the best interest of the Government. See IRM 5.8.6.2(6)
(Oct. 4, 2017). SO2’s manager approved that decision.

       After delays related to COVID-19, the IRS issued petitioner, on
September 22, 2020, a notice of determination sustaining the NFTL fil-
ing for 2013–2016. The notice recited Appeals’ conclusion that peti-
tioner’s offer “was acceptable with the collateral agreement.” But it con-
tinued: “Appeals asked you to review the agreement, especially item 5
which stated the amount of tax paid as a result of the waiver would not
exceed an amount of the liability compromised along with statutory ad-
ditions. You still refused to sign the agreement.” Finally, despite SO1’s
notes recounting petitioner’s assertions that (1) he owed some tax “but
not the amount stated” and (2) he “ha[d] more receipts to be considered,”
the notice of determination asserted: “You did not dispute your liability.”

       Petitioner timely petitioned this Court for review. He disputed
the rejection of his OIC, contending that SO2 should have limited the
NOL waiver to the liabilities being compromised (less $4,400) and
should have permitted him to begin claiming NOL carryforward deduc-
tions (as thus reduced) immediately. He urged that the collateral agree-
ment upon which SO2 insisted was unfair, asserting that it “puts me in
a worse position than I would be without it” by “requir[ing] me to
                                     6

[*6] immediately begin to pay additional [penalties and interest] that I
would not otherwise owe.”

       On July 23, 2021, respondent filed a Motion to Dismiss for Lack
of Jurisdiction as to 2012 and 2017, years that were not the subject of
any collection action. Petitioner has conceded that we lack jurisdiction
as to 2012 but opposes the Motion to Dismiss as to 2017. On August 5,
2021, respondent filed a Motion for Summary Judgment, to which peti-
tioner replied.

                                Discussion

A.    Motion to Dismiss for Lack of Jurisdiction

       The Tax Court is a court of limited jurisdiction. Naftel v. Com-
missioner, 85 T.C. 527, 529 (1985). We may exercise jurisdiction only to
the extent expressly provided by statute. § 7442; Breman v. Commis-
sioner, 66 T.C. 61, 66 (1976). Jurisdiction must be shown affirmatively,
and petitioner, as the party invoking the Court’s jurisdiction, bears the
burden of proving that the Court has jurisdiction. See David Dung Le,
M.D., Inc. v. Commissioner, 114 T.C. 268, 270 (2000), aff’d, 22 F. App’x
837 (9th Cir. 2001).

       Under section 6330(d)(1) we have jurisdiction to review collection
action only with respect to tax liabilities for which the IRS issued a valid
notice of determination. Petitioner has failed to show that the IRS is-
sued him any notice that would give us jurisdiction over tax years 2012
and 2017. Respondent represents that no such notice has been issued.

       Petitioner urges that we exempt tax year 2017 from the dismissal
to ensure our ability to address his OIC, which proposed to compromise
his 2017 liability as well as his liabilities for prior years. Our lack of
jurisdiction over 2017 creates no impediment in that respect. In deter-
mining whether Appeals abused its discretion in rejecting the OIC, we
would be authorized to consider “any relevant issue.” See §§ 6320(c),
6330(c)(2)(A). We would thus evaluate Appeals’ exercise of discretion by
taking into account all the liabilities that were proposed to be compro-
mised, even though we do not have jurisdiction to review collection ac-
tion with respect to 2017 in particular. See, e.g., Orum v. Commissioner,
123 T.C. 1 (2004) (reviewing an OIC that covered income tax liabilities
for years within and outside of the Court’s jurisdiction), aff’d, 412 F.3d
819 (7th Cir. 2005); Dean v. Commissioner, T.C. Memo. 2009-269, 98
T.C.M. (CCH) 488, 490–91. We will thus grant respondent’s Motion to
Dismiss as to both 2012 and 2017.
                                     7

[*7] B.      Motion for Summary Judgment

        The purpose of summary judgment is to expedite litigation and
avoid costly, time-consuming, and unnecessary trials. Fla. Peach Corp.
v. Commissioner, 90 T.C. 678, 681 (1988). Under Rule 121 the Court
may grant summary judgment when there is no genuine dispute as to
any material fact and a decision may be rendered as a matter of law.
Rule 121(b); Sundstrand Corp., 98 T.C. at 520. In deciding whether to
grant summary judgment, we construe factual materials and inferences
drawn from them in the light most favorable to the nonmoving party
(here, petitioner). See Sundstrand Corp., 98 T.C. at 520. Where the
moving party makes and properly supports a motion for summary judg-
ment, “an adverse party may not rest upon the mere allegations or de-
nials of such party’s pleading,” but rather must set forth specific facts,
by affidavits or otherwise, “showing that there is a genuine dispute for
trial.” See Rule 121(d); see also Sundstrand Corp., 98 T.C. at 520.

        Neither section 6320(c) nor section 6330(d)(1) prescribes the
standard of review that this Court should apply in reviewing an IRS
administrative determination in a CDP case. But the general parame-
ters of such review are marked out by our precedents. Where the valid-
ity of a taxpayer’s underlying tax liability is properly at issue, we review
the IRS’s determination de novo. Sego v. Commissioner, 114 T.C. 604,
610 (2000); Goza v. Commissioner, 114 T.C. 176, 181–82 (2000). Where
the taxpayer’s underlying liability is not in dispute, we review the IRS
decision for abuse of discretion only. Goza, 114 T.C. at 182. Abuse of
discretion exists when a determination is arbitrary, capricious, or with-
out sound basis in fact or law. See Murphy v. Commissioner, 125 T.C.
301, 320 (2005), aff’d, 469 F.3d 27 (1st Cir. 2006).

       Absent stipulation to the contrary, our decision in this case is ap-
pealable to the U.S. Court of Appeals for the Ninth Circuit. See
§ 7482(b)(1) and (2). That court has held that, where de novo review is
not applicable, the scope of review in CDP cases is confined to the ad-
ministrative record. See Keller v. Commissioner, 568 F.3d 710, 718 (9th
Cir. 2009), aff’g in part T.C. Memo. 2006-166, and aff’g in part, vacating
in part decisions in related cases. In such cases, our review is limited to
deciding whether the agency action is supported by the administrative
record and is not “arbitrary, capricious, an abuse of discretion, or other-
wise not in accordance with law.” Belair v. Commissioner, 157 T.C. 10,
17 (2021) (quoting Van Bemmelen v. Commissioner, 155 T.C. 64, 79
(2020)).
                                    8

[*8] Respondent contends that petitioner’s underlying tax liabilities
are not at issue because he failed to challenge those liabilities during
the CDP hearing. Respondent accordingly urges that we review Ap-
peals’ determination for abuse of discretion and find that Appeals did
not err in rejecting petitioner’s OIC.

        A taxpayer may challenge his underlying liability in a CDP case
if he “did not receive any statutory notice of deficiency for such tax lia-
bility or did not otherwise have an opportunity to dispute” it.
§ 6330(c)(2)(B). If these conditions are met, a taxpayer may challenge a
liability that he reported on his own tax return (or that the IRS calcu-
lated on a substitute for return pursuant to section 6020(b)). See Mont-
gomery v. Commissioner, 122 T.C. 1, 9 (2004); Treas. Reg. § 301.6320-
1(e)(1).

       On the basis of the record now before us, we conclude that SO1
erred when she informed petitioner that he was not entitled to challenge
his underlying tax liabilities. Evidently believing that petitioner had
participated in a prior IRS audit, SO1 referred him instead to audit re-
consideration. But in opposing summary judgment petitioner avers that
he never “discussed anything about ‘participating in the audit.’” There
is no indication in petitioner’s account transcripts or elsewhere in the
record (apart from the assertion in SO1’s notes) that the IRS examined
his 2013–2016 returns. There is likewise no evidence that petitioner
received a notice of deficiency for 2013–2016 or that he had any other
opportunity (e.g., at a prior Appeals conference) to dispute those liabili-
ties. In short, SO1 appears to have given petitioner incorrect infor-
mation, and SO2 appears to have perpetuated that error by reiterating
SO1’s conclusion and leaving unfinished the portion of his letter explain-
ing why an underlying liability challenge was not possible.

        We have previously held that, when an Appeals officer errs in re-
fusing to consider a taxpayer’s underlying liability challenge, that mat-
ter was properly at issue in the CDP hearing. Perkins v. Commissioner,
129 T.C. 58, 67 (2007). “Where a taxpayer is incorrectly advised at a
CDP hearing that she had a prior opportunity to contest her underlying
liability, we consider the underlying liability.” Mason v. Commissioner,
132 T.C. 301, 320 (2009). Our review on that point would be de novo.
Id. at 321; Perkins, 129 T.C. at 67.

        The administrative record as it now exists does not support SO1’s
assertion that petitioner was not entitled to challenge his underlying tax
liabilities or the assertion in the notice of determination that “You did
                                     9

[*9] not dispute your liability.” We will therefore deny respondent’s Mo-
tion for Summary Judgment and remand the case to Appeals for a sup-
plemental CDP hearing. See Lepore v. Commissioner, T.C. Memo. 2013-
135, 105 T.C.M. (CCH) 1811, 1813 (“Because he did not have a prior
opportunity to dispute his liability . . . , we will remand this case to the
Appeals Office . . . .”).

        If Appeals concludes on remand that petitioner is not entitled to
dispute his underlying liabilities for 2013–2016, it shall explain the fac-
tual and legal basis for that conclusion. If Appeals determines that pe-
titioner is entitled to dispute these liabilities, it shall offer him the op-
portunity to submit relevant evidence and then resolve his underlying
liability challenge. We do not reach at this time the question whether
Appeals abused its discretion in declining to accept petitioner’s OIC. In
addition to presenting, at the supplemental hearing, appropriate evi-
dence concerning his underlying tax liabilities, petitioner is free to re-
sume negotiations concerning the terms that should properly be in-
cluded in such an offer.

      To implement the foregoing,

      An appropriate order will be issued.