Court Opinion

ID: 4337480
Source: CourtListenerOpinion
Date Created: 2018-11-14 03:23:48.041041+00
Date Added: 2024-06-11T07:50:24.498657
License: Public Domain

T.C. Memo. 2009-48

                UNITED STATES TAX COURT

             JAMES ZIGMONT, Petitioner v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 8388-07L.              Filed March 5, 2009.

     In January 2006, R issued a final notice of intent
to levy and filed a notice of Federal tax lien in
respect of P’s outstanding liabilities for taxable
years no later than 2003. In March 2007, R’s Appeals
Office issued notices of determination, sustaining the
proposed levy and the filing of the tax lien. P timely
filed a petition seeking judicial review pursuant to
sec. 6330(d)(1), I.R.C.
     In January 2007, R issued a Backup Withholding
Notification subjecting P, on a prospective basis, to
backup withholding pursuant to sec. 3406, I.R.C. P
filed a motion to restrain assessment and collection
directed solely at the Backup Withholding Notification.
     1. Held: R’s action subjecting P to backup
withholding is not a collection action within the
meaning of secs. 6320 and 6330, I.R.C.
     2. Held, further, P’s motion to restrain will be
denied.
                                  - 2 -

      James Zigmont, pro se.

      Terry Serena and Audra Dineen, for respondent.

                          MEMORANDUM OPINION

     ARMEN, Special Trial Judge:      This case is before the Court

on petitioner’s Motion To Restrain Assessment And Collection, as

supplemented.     As explained in greater detail below, we shall

deny petitioner’s motion.1

I.   Background

     The facts necessary to a resolution of the motion before us

may be summarized as follows.

     Petitioner resided in the State of West Virginia at the time

that the petition was filed.

     A.   Notices of Deficiency

     By a notice of deficiency dated March 4, 2005, respondent

determined a deficiency in petitioner’s Federal income tax for

2002 of $119,751, together with an accuracy-related penalty under

section 6662(a) and (b)(1) for negligence or intentional

disregard of rules or regulations.2       See sec. 6212(a).   By a

      1
        Except as otherwise indicated, all section, subchapter,
and chapter references are to the Internal Revenue Code of 1986,
as amended.
      2
        The record does not include a copy of petitioner’s tax
return for 2002; however, the record does demonstrate that
petitioner reported zero liability on that return.
                                - 3 -

second notice of deficiency dated March 23, 2005, respondent

determined a deficiency in petitioner’s Federal income tax for

2003 of $185,482, together with additions to tax under section

6651(a)(1) for failure to file and section 6654(a) for failure to

pay estimated tax.3

     The deficiency in tax for 2002 is based principally on

respondent’s determination that petitioner received, but failed

to report, net short-term capital gain of $319,867.    The

deficiency is also based on respondent’s determination that

petitioner received, but failed to report other items of income,

specifically including interest income of $22,424 received from

Ferris, Baker Watts, Inc.4

     The deficiency in tax for 2003 is based principally on

respondent’s determination that petitioner received, but failed

to report, net short-term capital gain of $529,324, specifically

including net short-term capital gain of $337,731 received from

Ferris, Baker Watts, Inc.    The deficiency is also based on

respondent’s determination that petitioner received, but failed

     3
        Both notices of deficiency were sent to petitioner by
certified mail addressed to him at the same address that
petitioner has used throughout the instant proceeding.
     4
        According to its Web site, Ferris, Baker Watts, Inc. is a
full-service investment banking firm headquartered in Washington,
D.C.; it is a member of the New York Stock Exchange and the
Securities Investor Protection Corp. http://www.fbw.com.
                                   - 4 -

to report other items of income, specifically including interest

income of $32,592 received from Ferris, Baker Watts, Inc.

     Petitioner did not file a petition for redetermination with

this Court in respect of either the March 4, 2005 notice of

deficiency or the March 23, 2005 notice of deficiency.       See sec.

6213(a).       Accordingly, on July 18, 2005, respondent assessed the

determined deficiency and penalty for 2002, together with

statutory interest, see sec. 6601(a), and sent petitioner a

statutory notice of balance due, i.e., notice and demand for

payment, see sec. 6303(a).       On September 5, 2005, respondent

assessed the determined deficiency and additions to tax for 2003,

together with statutory interest, and sent petitioner a statutory

notice of balance due.

     B.       Petitioner’s Other Liabilities

     On various dates, respondent assessed against petitioner

$500 civil penalties under section 6702 for filing frivolous

income tax returns for 2002 and 2003, as well as for 1998 and

2001.5       In each instance, respondent sent petitioner a statutory

notice of balance due on the date of assessment.

         5
        The civil penalty under sec. 6702 is not subject to the
deficiency procedures of subch. B of ch. 63 (secs. 6211-6216).
Sec. 6703(b). Accordingly, no notice of deficiency was sent to
petitioner in respect of any of these penalties.
                                 - 5 -

     C.    Respondent’s Collection Efforts

     On January 11, 2006, respondent sent petitioner a Final

Notice/Notice Of Intent To Levy And Notice Of Your Right To A

Hearing (final notice).    See sec. 6330(a).   The final notice was

issued in respect of petitioner’s outstanding liabilities for

2002 and 2003.

     On January 17, 2006, respondent filed a Notice of Federal

Tax Lien (tax lien) with the Clerk of the County Commission of

Harrison County in Clarksburg, West Virginia.     See sec. 6323(a),

(f); Behling v. Commissioner, 118 T.C. 572, 575 (2002).     Shortly

thereafter, respondent sent petitioner a Notice of Federal Tax

Lien Filing and Your Right to a Hearing Under IRC 6320 (lien

notice).    See sec. 6320(a).   Both the tax lien and the lien

notice were issued in respect of petitioner’s outstanding

liabilities for 2002 and 2003, as well as petitioner’s

outstanding liabilities for 1998 and 2001.

     Petitioner timely filed with respondent Form 12153, Request

for a Collection Due Process Hearing, in respect of the final

notice.    Petitioner also timely filed a second Form 12153 in

respect of the lien notice.

     On March 12, 2007, respondent’s Office of Appeals sent

petitioner a Notice Of Determination Concerning Collection

Action(s) Under Section 6320 and/or 6330 (notice of

determination) in respect of petitioner’s liabilities for 2002
                               - 6 -

and 2003.   See sec. 6330(c)(3); see also sec. 6320(c).   Also on

March 12, 2007, respondent’s Office of Appeals sent petitioner a

notice of determination in respect of petitioner’s liabilities

for 1998 and 2001.   In each instance, the Office of Appeals

sustained the proposed levy and the filing of the tax lien.

     D.   Petitioner’s Pleadings and Motion

     Petitioner timely filed an imperfect petition with the

Court, see secs. 6330(d)(1), 7502(a), “regarding a Notice of

Determination I received from the Internal Revenue Service for

the tax year[s] 2002 and 2003.”   Petitioner attached to his

imperfect petition a single exhibit, namely, a copy of the notice

of determination for 2002 and 2003.

     In response to the Court’s Order requiring the filing of a

proper amended petition, petitioner filed an Amended Petition.

Paragraph 2 of the Amended Petition recites as follows:

          2. Petitioner(s) disagree(s) with the
     determination contained in the notice issued by the
     Internal Revenue Service for the year(s) or period(s)
     UNKNOWN as set forth in such notice BACKUP WITHHOLDING
     NOTIFICATION, dated 01/01/07 * * *.

Petitioner’s pleadings had not previously included any allegation

regarding backup withholding or a backup withholding

notification.

     Petitioner attached only one document as an exhibit to his

amended petition, namely, a partial copy of a Backup Withholding

Notification (Notice CP-543) dated January 1, 2007.    The Backup
                              - 7 -

Withholding Notification, which was issued by respondent’s

Philadelphia, Pennsylvania Service Center and sent to Ferris,

Baker Watts, Inc., began as follows:

          The taxpayers named below or on the attached list
     are now subject to backup withholding under section
     3406(a)(1)(C) of the Internal Revenue Code because of a
     notified payee underreporting.

          This is your notice to begin backup withholding at
     a rate of 28% on the dividend and/or interest payments
     you make to these taxpayers. Begin withholding no
     later than 30 days from the date of this letter and
     continue until IRS notifies you in writing to stop.

Petitioner was one of the taxpayers “named below or on the

attached list” that had become subject to backup withholding.

See sec. 3406, discussed infra.

     Contemporaneously with the Amended Petition, petitioner

filed his Motion To Restrain Assessment And Collection.

Petitioner’s motion is directed solely at the January 1, 2007

Backup Withholding Notification.   In his motion, petitioner

states, inter alia, that “Respondent’s [Backup] Withholding

Notification informed Petitioner that because he did not file an
                              - 8 -

income tax return reporting all income for tax year 2004[6] he was

now subject to backup withholding.”7

     6
        The record is silent regarding the status of petitioner’s
account for 2004. As previously discussed, the tax lien and the
final notice were issued only in respect of petitioner’s income
tax liabilities for 2002 and 2003 and petitioner’s sec. 6702
liabilities for those 2 years and 1998 and 2001.
     Further, the Jan. 1, 2007 Backup Withholding Notification
was prospective in its application. At the hearing on
petitioner’s motion, respondent’s counsel suggested that a backup
withholding indicator may have been inserted into petitioner’s
account transcript for 2004 (and possibly subsequent years as
well) merely to alert respondent’s agents that petitioner had
been made subject to backup withholding at some point (but not
necessarily in, or for, that taxable year).
     7
        Although the record includes a copy of the Backup
Withholding Notification (Notice CP-543) that was sent to Ferris,
Baker Watts, Inc., the record does not include a copy of the
notification that was sent to petitioner as the affected
taxpayer. According to respondent’s counsel, respondent would
have sent petitioner either Backup Withholding Notification
(Notice CP-539) or Backup Withholding Notification (Notice CP-
541). Judging from petitioner’s motion, it would appear that
respondent sent petitioner the latter version of the
notification. The latter version, as applicable to petitioner,
would have provided, in part, as follows:

          Our records show that you did not timely file the
     income tax return reporting all your income from
     interest, dividends, or patronage dividends you
     received for tax year 2004 * * * .

          You are now subject to backup withholding.

          We are instructing all payers of dividends and
     interest that we have on record for you, to begin
     withholding 28% of those payments. * * *

          Backup withholding will usually remain in effect
     until the end of the year. In order for backup
     withholding to stop by January 1, 2008, you must pay
     all the amounts you owe, and report all the income,
     related to backup withholding by October 15, 2007. If
                                                   (continued...)
                                  - 9 -

     As previously stated, petitioner’s motion to restrain is

focused solely on the January 1, 2007 Backup Withholding

Notification.      He complains that “Respondent has not informed

Petitioner of any possible procedure to challenge or otherwise

dispute the unlawful [Backup] Withholding Notification, which was

erroneously and arbitrarily issued against Petitioner’s wages

[sic].”8     Petitioner complains further that he “attempted to

submit a Form 12153, Request [for] a Collection Due Process

hearing [in respect of the Backup Withholding Notification] but

it was returned by Respondent” on the ground that hearings under

section 6320 or 6330 are only offered in response of a notice of

Federal tax lien filing or a final notice of intent to levy.

Finally, petitioner complains that in issuing the Backup

Withholding Notification, “Respondent is attempting to conduct a

     7
     (...continued)
     you do not meet the October 15 date, backup withholding
     will continue for the following year.

         Notes:   (1) At the end of each calendar year, your
                      payer(s) will give you a Form 1099 showing
                      the amount of backup withholding. You may
                      claim that amount as regular income tax
                      withholding on your federal income tax
                      return.
         8
        Respondent’s Backup Withholding Notification was not
issued “against Petitioner’s wages”; rather, as discussed infra,
it was issued in respect of “reportable payments”, such as
interest income for which Ferris, Baker Watts, Inc. was required,
as the payor, to file an information return and issue a Form
1099-INT, Interest Income, to petitioner as the payee-recipient-
taxpayer.
                               - 10 -

collection action on Petitioner without issuing a Notice of

Deficiency or even giving Petitioner a Hearing to challenge the

collection action.”   Therefore, in petitioner’s view, injunctive

relief “pursuant to IRC Title 26 §6213(a) and pursuant to the

prohibition on collection provided by IRC Title 26 §6330(a)” is

warranted and the Court should order respondent to “withdraw” the

January 1, 2007 Backup Withholding Notification.

      In contrast, respondent contends that the January 1, 2007

Backup Withholding Notification does not constitute a collection

action within the purview of sections 6320 and 6330 and that such

notification need not therefore have been preceded by a final

notice of intent to levy offering the right to an administrative

hearing and judicial review.

II.   Discussion

      The parties agree that petitioner was made subject to income

tax withholding through respondent’s action in serving Ferris,

Baker Watts, Inc. with the January 1, 2007 Backup Withholding

Notification.   The parties also agree that respondent’s action

was not preceded by (or, for what matter, followed by) the

issuance of a final notice of intent to levy in respect of the

Backup Withholding Notification.   Essentially, then, petitioner’s

motion to restrain requires that we decide whether respondent’s

action constitutes a prohibited collection action that should be

(or can be) enjoined by this Court.
                                 - 11 -

       A.   Backup Withholding

       As discussed in detail in Davis v. Commissioner, T.C. Memo.

2008-238, legislation requiring the withholding of income taxes

at the source on wages was enacted in 1943, and this pay-as-you-

go system for employees has been in place ever since.

       Obviously, wage withholding does not apply to investment

income.     Rather, with respect to payments made after December 31,

1983, a backup withholding system applies to so-called reportable

payments.     Sec. 3406 (as added by the Interest and Dividend Tax

Compliance Act of 1983, secs. 104(a) and 110(a), Pub. L. 98-67,

97 Stat. 371, 384); see H. Conf. Rept. 98-325 (1983), 1983-2 C.B.

362.    A “reportable payment” includes any reportable interest or

dividend payment, sec. 3406(b)(1)(A), or “any other reportable

payment”, specifically including any payment of a kind, and to a

payee, required to be shown on an information return required

under section 6045 (relating to returns of brokers), sec.

3406(b)(1)(B), (3)(C).     Essentially then, and as relevant herein,

a reportable payment is one for which the payor is required to

issue a Form 1099-INT, Interest Income, see sec. 6049, Form 1099-

DIV, Dividends and Distributions, see sec. 6042, or Form 1099-B,

Proceeds From Broker and Barter Exchange Transactions, see sec.

6045.

       The requirement to deduct and withhold in respect of a

reportable payment is triggered by one of the circumstances set
                              - 12 -

forth in section 3406(a)(1), for example, where there has been “a

notified payee underreporting”.     Sec. 3406(a)(1)(C).9   Once the

requirement is triggered, the payor of the reportable payment is

required to withhold income tax at “the fourth lowest rate of tax

applicable under section 1(c)”.10    Sec. 3406(a)(1).

     Section 3406(i) authorizes “such regulations as may be

necessary or appropriate to carry out the purposes of this

section.”   Promulgated regulations are outlined at

section 31.3406-0, Employment Tax Regs., and appear as sections

31.3406(a)-1 through 31.3406(j)-1, Employment Tax Regs.      The

nitty-gritty regarding the operation of the Commissioner’s Backup

Withholding Program is set forth at 2 Administration, Internal

Revenue Manual (IRM)(CCH) pt. 5.19.3 at 18,327.

     Because backup withholding is a species of income tax

withholding, amounts withheld by the payor of a reportable

payment are creditable to the payee-recipient of the reportable

     9
        A “notified payee underreporting” is defined in sec.
3406(c). If, inter alia, the Commissioner determines with
respect to any payee that there has been “payee underreporting”
(as defined in sec. 3406(c)(2)), then the Commissioner may notify
payors of reportable payments “with respect to such payee of the
requirement to deduct and withhold under subsection (a)(1)(C)”.
Sec. 3406(c)(1).
     10
        Sec. 1(c) sets forth the tax rates applicable to
unmarried individuals (other than surviving spouses and heads of
households). For 2007, the year of respondent’s Backup
Withholding Notification, the fourth lowest rate was 28 percent.
Id.
                               - 13 -

payment, i.e., to the taxpayer, for the year in which the amount

is withheld.    See Davis v. Commissioner, supra.

     B.    Jurisdiction To Enjoin--Deficiency Action

     In the instant case, petitioner seeks injunctive relief

“pursuant to IRC Title 26 §6213(a)”.

     In the context of an action for redetermination of

deficiency, i.e., in an action commenced pursuant to section

6213(a), this Court’s authority to restrain assessment or

collection is found in the penultimate sentence of section

6213(a):

     The Tax Court shall have no jurisdiction to enjoin any
     action or proceeding or order any refund under this
     subsection unless a timely petition for a
     redetermination of the deficiency has been filed and
     then only in respect of the deficiency that is the
     subject of such petition.[11]

     Petitioner never commenced an action for redetermination in

respect of either the March 4, 2005 notice of deficiency or the

March 23, 2005 notice of deficiency.    Regardless, the instant

case is not, and does not even purport to be, an action for

redetermination.   Moreover, backup withholding (which is “the

subject” of petitioner’s motion), does not constitute a

“deficiency”.   See sec. 6211(a).

     11
        We note that this Court is a court of limited
jurisdiction. See sec. 7442. Accordingly, we may exercise
jurisdiction only to the extent expressly authorized by statute.
Breman v. Commissioner, 66 T.C. 61, 66 (1976).
                                - 14 -

       In view of the foregoing, we lack jurisdiction to enjoin

assessment or collection “pursuant to IRC Title 26 §6213(a)”.

See Davis v. Commissioner, supra.

       C.   Jurisdiction To Enjoin--Collection Action

       Petitioner also seeks injunctive relief in the instant case

“pursuant to the prohibition on collection provided by IRC Title

26 § 6330(a)”.

       In the context of a lien or levy action (collection action),

this Court’s authority to restrain assessment or collection is

found not in section 6330(a) but rather in section 6330(e)(1),

the last sentence of which provides as follows:

       The Tax Court shall have no jurisdiction under this
       paragraph to enjoin any action or proceeding unless a
       timely appeal has been filed under subsection (d)(1)
       and then only in respect of the unpaid tax or proposed
       levy to which the determination being appealed relates.

       Thus, section 6330(e)(1) makes plain that our authority to

enjoin in a lien or levy action is only applicable “in respect of

the unpaid tax or proposed levy to which the determination being

appealed relates.”    See Davis v. Commissioner, T.C. Memo. 2008-

238.

       In the instant case, the “determination being appealed” is

respondent’s determination made in the March 12, 2007 notices of

determination.    Those determinations sustained the proposed levy

and the filing of the tax lien, which levy and lien relate only

to petitioner’s outstanding income tax liabilities for 2002 and
                               - 15 -

2003 and petitioner’s outstanding section 6702 liabilities for

those 2 years and 1998 and 1991.   Neither determination addressed

the propriety of backup withholding.

     In addition, backup withholding is prospective in nature;

the January 1, 2007 Backup Withholding Notification could not,

therefore, affect any of the taxable years in respect of which

the March 2007 notices of determination were issued.   But even

more fundamentally, respondent’s January 1, 2007 Backup

Withholding Notification does not constitutes a notice of

determination within the meaning of sections 6320 and 6330.    See

Davis v. Commissioner, supra; Ballard v. Commissioner, T.C. Memo.

2007-159, affd.       Fed. Appx.     (9th Cir., Jan. 26, 2009).

     Ignoring the foregoing, petitioner essentially argues that

respondent’s January 1, 2007 Backup Withholding Notification

constitutes a species of collection action that is governed by

sections 6320 and 6330.   We disagree.   As we said in Ballard v.

Commissioner, supra, “There is nothing in the legislative history

of the Internal Revenue Service Restructuring and Reform Act of

1998, Pub. L. 105-206, 112 Stat. 685, that would indicate that

Congress intended to include withholding of income tax as the

type of collection action for which a hearing must be offered to

the taxpayer.”    See also Davis v. Commissioner, supra (rejecting

the notion that all collection activity is governed by section

6330).   Thus, the Commissioner’s issuance of a Backup Withholding
                               - 16 -

Notification need not be preceded by the issuance of a final

notice offering the taxpayer the right to an administrative

hearing followed by judicial review. Id.   Stated otherwise, a

Backup Withholding Notification is not a levy.

     Finally, in Davis v. Commissioner, supra, we held that there

is no “fundamental principle of law” that the “remedy” to a Lock-

in Letter is necessarily found in section 6330.    Here we hold

similarly that there is no fundamental principle of law that the

remedy to a Backup Withholding Notification is necessarily found

in section 6330.   Like the taxpayer in Davis who becomes subject

to the Commissioner’s Withholding Compliance Program, the

taxpayer who becomes subject to the Commissioner’s Backup

Withholding Program may bring him- or herself into compliance by

filing a return, claiming the amount withheld as a credit against

his or her tax liability, and requesting a refund.    That approach

failing, the taxpayer may always file with the Commissioner a

claim for refund and then institute a refund suit pursuant to

section 7422 with either the appropriate U.S. District Court or

the U.S. Court of Federal Claims.   See McCormick v. Commissioner,

55 T.C. 138, 142 n.5 (1970).   Administrative recourse may also be

available.   E.g., 2 Administration, IRM (CCH) pt. 5.19.3.4.2.8 at

18,336 (May 8, 2000).
                               - 17 -

       In sum, we lack jurisdiction to enjoin assessment or

collection “pursuant to the prohibition on collection provided by

IRC Title 26 § 6330(a)”.    See Davis v. Commissioner, supra.

III.    Conclusion

       To give effect to the foregoing,

                                          An order denying

                                     petitioner’s Motion To

                                     Restrain Assessment And

                                     Collection, as supplemented,

                                     will be issued.