Court Opinion

ID: 9753245
Source: CourtListenerOpinion
Date Created: 2023-08-28 19:05:08.810025+00
Date Added: 2024-06-11T09:55:29.078634
License: Public Domain

United States Tax Court

                               T.C. Memo. 2023-109

                             R. J. CHANNELS, INC.,
                                    Petitioner

                                           v.

               COMMISSIONER OF INTERNAL REVENUE,
                           Respondent

                                      —————

Docket No. 17446-21.                                         Filed August 28, 2023.

                                      —————

Ronald J. Channels (an officer), for petitioner.

Vincent A. Gonzalez and Sheri A. Wight, for respondent.

         MEMORANDUM FINDINGS OF FACT AND OPINION

      FOLEY, Judge: The sole issue for decision is whether the Court
should strike the parties’ revised Proposed Stipulated Decision. 1

                               FINDINGS OF FACT

       On February 23, 2021, respondent issued petitioner,
R. J. Channels, Inc., a California corporation, a notice of deficiency
relating to 2017. Petitioner attached a partial copy of the notice of
deficiency (Petition Notice) to the Petition timely filed on May 12, 2021.
The Petition Notice included the first page of the notice of deficiency;
Form 4549–A, Report of Income Tax Examination Changes; and Form
886–A, Explanation of Items. The front page of the Petition Notice was

       1 Unless otherwise indicated, statutory references are to the Internal Revenue

Code, Title 26 U.S.C., in effect at all relevant times, and Rule references are to the Tax
Court Rules of Practice and Procedure.

                                  Served 08/28/23
                                    2

[*2] stamped “ORIGINAL” and set forth respondent’s determination of
a deficiency and a section 6663 civil fraud penalty.

       On September 29, 2021, the Court filed respondent’s timely
Answer signed by Vincent A. Gonzalez and Sheri A. Wight. Attached to
respondent’s Answer was a copy of a notice of deficiency (Answer Notice)
that respondent alleged was a “complete copy.” The first page of the
notice of deficiency in the Answer Notice was stamped “ORIGINAL.”
The Answer Notice contained a Continuation Sheet with an “Interest on
Deficiencies” section and a “Civil Fraud Penalty IRC section 6663”
section.

       On October 3, 2022, the Court filed the parties’ Proposed
Stipulated Decision. The parties stipulated a section 6662(a) accuracy-
related penalty, yet there was no reference to this penalty in the record.
In response on October 17, 2022, the Court struck the Proposed
Stipulated Decision and ordered appropriate revisions.

      On November 1, 2022, the Court filed the revised Proposed
Stipulated Decision which was accompanied by a Status Report
(respondent’s first Status Report) signed by Wight. The revised
Proposed Stipulated Decision set forth a deficiency, a civil fraud penalty,
and an accuracy-related penalty. Respondent’s first Status Report
stated:

      [R]espondent wishes to clarify that respondent asserted
      the I.R.C. § 6662 accuracy-related penalty as an
      alternative penalty to the I.R.C. § 6663 civil fraud penalty
      in this case. This is reflected on the “Continuation Sheet”
      and the “Civil Penalty Approval Form” included with the
      notice of deficiency, dated February 23, 2021, a complete
      copy of which is attached hereto as Exhibit A.

Exhibit A of respondent’s first Status Report included another notice of
deficiency (Status Report Notice). The first page of the Status Report
Notice was stamped “FILE COPY.” The Continuation Sheet
accompanying the Status Report Notice had an “Interest on
Deficiencies” section, a “Civil Fraud Penalty IRC section 6663” section,
and an “Alternative Penalty Position” section. The “Alternative Penalty
Position” section was in a different font size, had different margins, and
was diagonal relative to the other sections.

      Upon review of the revised Proposed Stipulated Decision and the
multiple versions of the notice of deficiency, the Court ordered
                                   3

[*3] respondent to explain the discrepancies between the Answer Notice
and the Status Report Notice. On November 18, 2022, the Court filed
respondent’s Status Report (respondent’s second Status Report) which
was signed by Wight. Respondent stated:

      4. Upon review, several discrepancies exist between the
      “complete copy” attached to respondent’s Answer (“Answer
      Notice”) and the complete copy attached to respondent’s
      November 1 Status Report (“Status Report Notice”),
      including: (1) the Continuation Sheets in the Answer
      Notice exclude respondent’s alternative penalty position of
      I.R.C. § 6662, while the Status Report Notice’s
      Continuation Sheet includes it; (2) the Answer Notice
      excludes the signed Civil Penalty Approval form reflecting
      signed managerial approval of the I.R.C. § 6662 penalty as
      an alternative but the Status Report Notice includes it; and
      (3) the Form 886–A, Explanation of Items, is only included
      with the Status Report Notice.

      5. At the time the Answer was filed in this case,
      respondent’s counsel did not possess the case’s physical
      administrative file due to constraints imposed by the
      COVID-19 pandemic and could not obtain said file prior to
      the Answer’s deadline. As a result, respondent’s counsel
      attempted to reconstruct a complete and accurate copy of
      the notice of deficiency to attach to the Answer. This
      reconstruction process involved accessing records kept in
      an electronic database and extracting the first page of the
      incomplete copy of the notice of deficiency attached to the
      petition, as the Letter 531 version on the database was
      undated. Respondent’s counsel notes that this explains
      why the first page of the Answer Notice is stamped
      “ORIGINAL,” despite the rest of the Answer Notice
      stemming from electronic database records. Unfortunately,
      during the reconstruction process, respondent’s counsel
      inadvertently excluded the signed civil penalty approval
      form and Form 886–A, as well as missed that the Letter
      531 on respondent’s electronic database originated from a
      draft version of the notice that excluded the I.R.C. § 6662
      alternative penalty position on the Continuation Sheet.

       In an attempt to replicate what he believed the IRS had sent to
petitioner, Gonzalez accessed documents from electronic databases,
                                   4

[*4] combined the first page of the Petition Notice with a draft version
of a notice of deficiency, and created the Answer Notice. After receiving
respondent’s second Status Report, the Court ordered a status hearing
to review the documents at issue.

       On February 7, 2023, the Court held a hearing attended by
Gonzalez and Wight, respondent’s counsel. Petitioner did not attend.
Gonzalez stated that after the onset of the COVID-19 pandemic it
became a “common practice to reconstruct the SNOD [statutory notice
of deficiency] when we didn’t have access to the admin file.” Gonzalez
admitted he knowingly submitted the reconstructed Answer Notice
which he and Wight signed. Wight stated that, at the time respondent
submitted the Answer, she was not aware that Gonzalez had
reconstructed the Answer Notice. When the Court asked why
respondent’s counsel, in respondent’s first Status Report, failed to
inform the Court of the discrepancies between the Answer Notice and
the Status Report Notice, Wight stated: “I was simply hoping that just
by attaching a complete copy back with the Status Report it would at
least put the correct notice on record.”

       On May 19, 2023, the Court ordered petitioner to “submit a
complete copy of the notice of deficiency that petitioner received from
the Internal Revenue Service.” In an attempt to comply with the Order,
petitioner responded by sending a notice relating to years not at issue.
On June 15, 2023, the Court again ordered petitioner to submit a
complete copy of the notice of deficiency. In response petitioner
submitted to the Court a copy of the Petition Notice.

       Gonzalez and Wight contend that the Status Report Notice was
sent to petitioner. Petitioner contends he received the Petition Notice.

                               OPINION

       Respondent’s counsel submitted to the Court, as an attachment
to the Answer, the Answer Notice. This version of the notice was labeled
“ORIGINAL” and purportedly was a “complete copy” of the notice of
deficiency sent to petitioner. To the contrary, the Answer Notice was
reconstructed from the Petition Notice and a draft version of the notice
of deficiency from electronic databases. Respondent could have simply
requested additional time to file his Answer. See generally Rule 25.
Instead, respondent created a new document. Thus, the Status Report
Notice was materially different from the Answer Notice but was
submitted by respondent’s counsel as a “complete copy” of the notice sent
                                     5

[*5] to petitioner. Moreover, both the Answer Notice and the Status
Report Notice were materially different from all other notices in the
record.

       Respondent’s conduct falls woefully short of our expectations for
practitioners who regularly appear before this Court. Respondent’s
counsel knew that the Answer Notice was the byproduct of an
undisclosed reconstruction process. Counsel failed, in respondent’s first
Status Report, to inform the Court of the reconstruction process. When
questioned about the authenticity of the Answer Notice, respondent’s
counsel admitted he had knowingly submitted a reconstructed
document.

       We have no confidence that the slipshod-cut-and-paste Status
Report Notice presented to the Court was the version of the notice of
deficiency actually sent to petitioner. The statutory notice of deficiency
is critical to both the adjudicative and settlement processes. Thus,
respondent’s “common practice” of reconstructing notices of deficiency is
particularly disconcerting. Because respondent’s reconstruction has
created doubt as to whether respondent determined the accuracy-
related penalty in the notice of deficiency sent to petitioner, striking the
revised Proposed Stipulated Decision is warranted. The parties shall file
a revised decision document.

      An appropriate order will be issued.