Court Opinion

ID: 4633101
Source: CourtListenerOpinion
Date Created: 2020-11-21 03:13:14.640075+00
Date Added: 2024-06-11T07:58:00.239114
License: Public Domain

CRAIG K. POTTS AND KRISTEN H. POTTS, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent Potts v. Comm'rDocket No. 12116-16L United States Tax Court2017 Tax Ct. Memo LEXIS 231; November 20, 2017, FiledDecision text below is the first available text from the court; it has not been editorially reviewed by LexisNexis. Publisher's editorial review, including Headnotes, Case Summary, Shepard's analysis or any amendments will be added in accordance with LexisNexis editorial guidelines.*231 Docket No. 12116-16L. Filed November 20, 2017.John S. Jagiela, for petitioners.Trisha S. Farrow and Rachael J. Zepeda, for respondent.MEMORANDUM OPINIONLAUBER, Judge: In this collection due process (CDP) case petitioners seekreview pursuant to section 6330(d)(1)1 of the determinations by the Internal1All statutory references are to the Internal Revenue Code in effect at all relevant times, and all Rule references are to the Tax Court Rules of Practice and Procedure. We round all monetary amounts to the nearest dollar.- 2 -[*2] Revenue Service (IRS or respondent) to uphold notices of intent to levy withrespect to petitioners' unpaid Federal income tax liabilities for 2005 and 2013.Respondent has moved for summary judgment under Rule 121, contending thatthere are no material facts in dispute and that his determination to sustain the pro-posed collection action was proper as a matter of law. We agree and accordinglywill grant the motion.BackgroundThe following facts are based on the parties' pleadings and motion papers,including the attached affidavits and exhibits. SeeRule 121(b). Petitioners resid-ed in Arizona when they filed their petition.On August 7, 2007, petitioners filed a delinquent Federal income tax returnfor*232  2005. On this return they reported taxable income of $30,769,612 and a taxliability of $2,166,225. The IRS assessed the tax liability as reported plus addi-tions to tax under sections 6651(a)(1) and (2) and 6654(a).The IRS selected petitioners' 2005 return for examination and proposed asubstantial deficiency. After filing a protest, petitioners reached a settlement withthe IRS Appeals Office. Petitioners thereby agreed to a deficiency of $2,978,789for 2005 plus an addition to tax of $509,136 under section 6651(a)(1).- 3 -[*3] This settlement was memorialized on Form 870-AD, Offer to Waive Re-strictions on Assessment and Collection of Tax Deficiency and to Accept Over-assessment. Petitioners' authorized representative signed the Form 870-AD onFebruary 15, 2013. An IRS appeals team manager accepted the offer on March 1,2013.By executing the Form 870-AD petitioners agreed to "waive the restrictionsprovided in section 6213(a) * * * and to consent to the assessment and collectionof the deficienc[y] and addition[] to tax" as set forth above. The agreement pro-vided that, upon acceptance of petitioners' offer, the IRS would not reopen thecase absent fraud, malfeasance, misrepresentation of a material fact, or an import-ant mistake in mathematical calculation.*233  On April 4, 2013, the IRS assessed theagreed-upon deficiency and addition to tax for 2005, together with applicable in-terest, for a total additional assessment of $4,921,701.Petitioners did not pay any portion of this assessed liability. Instead theysubmitted to the IRS, on September 23, 2013, a Form 656-L, Offer in Compromise(OIC) (Doubt as to Liability). The IRS rejected this OIC on January 30, 2014.The IRS determined that there was no doubt as to petitioners' liability for 2005,and hence no basis for compromising their tax, because they had consented to asettlement with the IRS Appeals Office and signed a Form 870-AD.- 4 -[*4] For their 2013 taxable year petitioners filed a timely return but did not paythe tax shown as due. The IRS assessed the tax for that year plus additions to taxunder sections 6651(a)(2) and 6654(a). Petitioners subsequently filed amendedreturns for 2013. On the basis of those amended returns the IRS abated part ofpetitioners' 2013 tax liability, but a substantial balance remains unpaid.As of June 30, 2015, petitioners' aggregate unpaid liabilities for 2005 and2013 were $6,000,797 and $381,139, respectively. In an effort to collect these lia-bilities the IRS sent each petitioner a Final*234  Notice of Intent to Levy and Notice ofYour Right to a Hearing. On July 13, 2015, petitioners timely requested a CDPhearing and checked the box "Offer in Compromise." They attached to their hear-ing request a letter from their attorney indicating their intention to submit an OICbased on effective tax administration. They also challenged their underlying taxliability for 2005.On February 25, 2016, a settlement officer (SO) from the IRS Appeals Of-fice sent petitioners' counsel a letter scheduling a telephone CDP hearing forMarch 23, 2016. The letter explained that, in order for the SO to consider an OIC,petitioners would need to submit a Form 433-A, Collection Information Statementfor Wage Earners and Self-Employed Individuals, supporting financial informa-tion for the Form 433-A, and a Form 656, Offer in Compromise. The SO set- 5 -[*5] deadlines of March 12, 2016, for submission of the financial information andMarch 17, 2016, for submission of the OIC package. Petitioners submitted noth-ing by those deadlines.During a March 21 telephone call petitioners' representative asked that theCDP hearing be rescheduled to April 13, and the SO granted this request. Duringthe call the SO emphasized*235  that, if petitioners wished her to consider an OIC, theyneeded to submit financial information. Noting that she had received nothing sofar, she warned that, if petitioners failed to supply the requested information forher review before the CDP hearing date, they would not be given any additionaltime to do so.The CDP hearing was held on April 13. The SO explained that petitionerscould not challenge their underlying tax liability for 2005, having waived thatright by executing a settlement with Appeals and signing the Form 870-AD. Dur-ing the hearing petitioners did not challenge their self-reported liability for 2013.With respect to collection alternatives, the SO observed that petitioners hadmade no offer and had submitted none of the forms or financial documentation shehad requested. She explained that she could not consider a collection alternativewithout that information. Petitioners' representative replied that petitioners didnot intend to submit any financial information, believing it to be unnecessary in- 6 -[*6] the case of an OIC predicated on effective tax administration. He stated thatpetitioners planned to submit an offer of that type by April 29; the SO replied thatshe would*236  grant no further extensions. The SO accordingly closed the case and,on April 30, 2016, the IRS issued each petitioner a notice of determinationsustaining the levy.Petitioners timely petitioned this Court seeking review of the determina-tion. In their petition they allege that they submitted to the IRS on May 2, 2016,an OIC based on effective tax administration, offering to compromise their taxliabilities for 2005, 2008, 2009, 2010, 2011, 2012, and 2013 for $2,034,216. Ac-knowledging receipt of this offer, respondent states that the IRS rejected it becausepetitioners refused to submit any financial information.DiscussionA. Summary Judgment StandardThe purpose of summary judgment is to expedite litigation and avoid costly,time-consuming, and unnecessary trials. Fla. Peach Corp. v. Commissioner, 90T.C. 678, 681 (1988). The Court may grant summary judgment when there is nogenuine dispute as to any material fact and a decision may be rendered as a matterof law. Rule 121(b); Sundstrand Corp. v. Commissioner, 98 T.C. 518">98 T.C. 518, 520 (1992),aff'd, 17 F.3d 965">17 F.3d 965 (7th Cir. 1994). In deciding whether to grant summary judg-- 7 -[*7] ment, we construe factual materials and inferences drawn from them in thelight most favorable to the nonmoving party. Sundstrand Corp., 98 T.C. at 520.However, the nonmoving party may not rest upon*237  mere allegations or denials ofhis pleadings but instead must set forth specific facts showing that there is a gen-uine dispute for trial. Rule 121(d); see Sundstrand Corp., 98 T.C. at 520.In their opposition to the summary judgment motion, petitioners make nu-merous assertions concerning the IRS examination of their 2005 return and the al-leged loss of their original tax records. As explained more fully below, we con-clude that none of these allegations creates a genuine dispute of material fact. Weaccordingly find this case appropriate for summary adjudication.B. Standard of ReviewSection 6330(d)(1) does not prescribe the standard of review that this Courtshould apply in reviewing an IRS administrative determination in a CDP case.But our case law tells us what standard to adopt. Where the validity of the tax-payers' underlying tax liabilities is properly at issue, we review the IRS' determi-nation de novo. Goza v. Commissioner, 114 T.C. 176">114 T.C. 176, 181-182 (2000). Wherethe taxpayer's underlying liability is not before us, we review the IRS decision forabuse of discretion. Ibid.- 8 -[*8] C. Underlying Tax LiabilityPetitioners seek to challenge their underlying tax liability only with respectto their 2005 taxable year.2 A taxpayer may challenge the existence or amount ofhis underlying liability in*238  a CDP proceeding only "if the person did not receiveany statutory notice of deficiency for such liability or did not otherwise have anopportunity to dispute" it. Sec. 6330(c)(2)(B). Respondent contends that petition-ers cannot challenge their underlying liability for 2005 because they had a prioropportunity to dispute that liability in this Court but waived their right to do so bysigning Form 870-AD. On this point we agree with respondent.Ordinarily, if the IRS makes an adjustment to a taxpayer's return and issuesa notice of deficiency setting forth that adjustment, the taxpayer has 90 days to filea petition for redetermination with this Court. Seesec. 6213(a). If a taxpayer filesa timely petition, there can be no assessment of the deficiency before the Court has2Petitioners did not dispute their 2013 liability during the CDP hearing or in their petition to this Court, and that issue is thus deemed waived. SeeRule 331(b)(4) ("Any issue not raised in the assignments of error shall be deemed to be conceded."); Thompson v. Commissioner, 140 T.C. 173">140 T.C. 173, 178 (2013) (noting that a taxpayer "is precluded from disputing the underlying liability if it was not properly raised in the CDP hearing"). Petitioners have advised the Court that they are working with the IRS to resolve their*239  2013 tax liability outside of this CDP case. This has no effect on our jurisdiction to consider the propriety of the IRS collec-tion action under review. See, e.g., Ahmad v. Commissioner, T.C. Memo 2011-269">T.C. Memo. 2011-269.- 9 -[*9] rendered a decision. Seesecs. 6215(a), 7485(a). But taxpayers may elect towaive the restrictions on assessment set forth in section 6213(a). Section 6213(d)provides that "[t]he taxpayer shall at any time (whether or not a notice of deficien-cy has been issued) have the right, by a signed notice in writing filed with the Sec-retary, to waive the restrictions provided in subsection (a) on the assessment andcollection of the whole or any part of the deficiency."One way a taxpayer can waive the restrictions on assessment is by executinga Form 870-AD upon reaching a settlement with the IRS Appeals Office. Thisform states:Under the provisions of section 6213(d) * * * the undersigned offers to waive the restrictions provided in section 6213(a) * * * and to consent to the assessment and collection of the following deficiencies and additions to tax, if any, with interest as provided by law.At the examination level taxpayers can effect an equivalent waiver by executingForm 870, Waiver of Restrictions on Assessment and Collection of Deficiency inTax and Acceptance of Overassessment. That form similarly states:*240  "I consent tothe immediate assessment and collection of any deficiencies * * *. I understandthat by signing this waiver, I will not be able to contest these years in the UnitedStates Tax Court."- 10 -[*10] This Court has consistently held that taxpayers who execute Form 870 or870-AD cannot thereafter contest in a CDP proceeding the liabilities covered bythose agreements. As we explained in Estate of Deese v. Commissioner, T.C.Memo. 2007-362, 94 T.C.M. (CCH) 546">94 T.C.M. (CCH) 546, 547: "[B]y submitting the Form 870-AD, consenting to the immediate assessment and collection of their deficiencies,* * * [the taxpayers] waived their right to a notice of deficiency and gave up anyright to challenge their underlying liabilities in a collection proceeding." Wehave similarly ruled that "[t]axpayers who execute a Form 870 * * * waive theirright to receive a notice of deficiency and, hence, the right to contest the underly-ing liability in a subsequent collection action." Lance v. Commissioner, T.C.Memo. 2009-129, 97 T.C.M. (CCH) 1670">97 T.C.M. (CCH) 1670, 1671; see Rivera v. Commissioner,T.C. Memo. 2003-35, 85 T.C.M. (CCH) 832">85 T.C.M. (CCH) 832, 835 ("By signing Form 870, peti-tioner waived his right to a notice of deficiency and exhausted his opportunity tocontest the tax liability."), aff'd, 102 F. App'x 594 (9th Cir. 2004).Petitioners' authorized representative executed a valid Form 870-AD ontheir behalf,*241  and the IRS accepted it on March 1, 2013. By this agreement peti-tioners consented to the immediate assessment of the agreed-upon liability andwaived their right to receive a notice of deficiency, which would have entitledthem to contest their 2005 liability in this Court. Because petitioners had, but- 11 -[*11] elected to forgo, a prior opportunity to challenge that liability, they wereforeclosed from disputing it during the CDP proceeding. Seesec. 6330(c)(2)(B).As we noted in Aguirre v. Commissioner, 117 T.C. 324">117 T.C. 324, 327 (2001): "The factthat section 6330 now provides an opportunity to contest tax liability for taxpayerswho did not receive a notice of deficiency * * * provides no consolation to peti-tioners who themselves made the choice not to receive such notice."Petitioners contend that the Form 870-AD agreement should not bind them,because of alleged errors by the IRS and/or the U.S. Department of Justice (JusticeDepartment). Petitioners allege that the accountant who prepared their 2005 re-turn provided their original tax records to the IRS in connection with its examin-ation of that return. The IRS forwarded some or all of those records to the TaxDivision of the Justice Department, and petitioners' representatives in August2010 requested those documents*242  back.In November 2010 the Justice Department returned to petitioners "a bindercontaining the documents that the Government received" from their accountant.But petitioners insist that there were other records, not contained in the binder,which were never returned to them and are now lost. The loss of those records,petitioners contend, complicated their task of reconstructing their cost bases incertain stock they sold during 2005.- 12 -[*12] Petitioners assert that execution of the Form 870-AD does not bar themfrom disputing their 2005 tax liability "because the IRS failed to disclose and con-cealed material facts." But petitioners have failed to identify any facts that the IRScould be thought to have concealed or neglected to disclose. If any of petitioners'records were lost, petitioners and their attorneys were fully aware of that fact nolater than November 2010, when the Justice Department returned to them what itdescribed as "a binder containing the documents that the Government received"from their accountant.Notwithstanding this knowledge, petitioners prosecuted a protest to the IRSAppeals Office, negotiated with Appeals concerning their 2005 tax liability, andsettled the case with*243  Appeals by executing a Form 870-AD in February 2013. Ifpetitioners believed they were handicapped by the alleged loss of records, theywere free to demand (and may have demanded) corresponding concessions fromAppeals. Or they could have declined a settlement and taken their chances incourt. They elected instead to settle the case on the basis of hazards of litigationby executing a Form 870-AD.For these reasons we conclude that petitioners have alleged no facts suffi-cient to create a material dispute of fact concerning the validity of the Form- 13 -[*13] 870-AD. As explained previously, their execution of that agreement fore-closes them from disputing in this CDP case their underlying tax liability for2005.3D. Abuse of DiscretionWhere a taxpayer's underlying liability is not properly before us, we reviewthe IRS' determinations for abuse of discretion only. See Goza, 114 T.C. at 182.Abuse of discretion exists when a determination is arbitrary, capricious, or withoutsound basis in fact or law. Murphy v. Commissioner, 125 T.C. 301">125 T.C. 301, 320 (2005),aff'd, 469 F.3d 27">469 F.3d 27 (1st Cir. 2006); see also Keller v. Commissioner, 568 F.3d 710">568 F.3d 710,716 (9th Cir. 2009), aff'g in partT.C. Memo 2006-166">T.C. Memo. 2006-166.In deciding whether the SO abused her discretion in sustaining the collec-tion actions, we consider whether she: (1) properly verified that the requirementsof*244  any applicable law or administrative procedure had been met;4 (2) considered3Petitioners cite cases holding that execution of a Form 870-AD does not necessarily prevent a taxpayer from later filing a refund suit. See, e.g., Whitney v.United States, 826 F.2d 896">826 F.2d 896 (9th Cir. 1987). But the question in this CDP case is not whether the Form 870-AD bound petitioners for all purposes, but whether by executing that agreement they waived a prior opportunity to dispute their 2005 liability in this Court. The answer to that question is clearly "yes."4Section 6751(b)(1) provides that "[n]o penalty under this title shall be as-sessed unless the initial determination of such assessment" receives supervisory approval. This provision does not apply to "any addition to tax under section(continued...)- 14 -[*14] any relevant issues petitioners raised; and (3) determined whether "anyproposed collection action balances the need for the efficient collection of taxeswith the legitimate concern of * * * [petitioners] that any collection action be nomore intrusive than necessary." Seesec. 6330(c)(3).We conclude that the SO satisfied all of these requirements. Petitioners ex-pressed interest in an OIC. But they failed to submit by the SO's deadline eitheran actual offer on Form 656 or the financial*245  information (including Form 433-A)required for consideration of a collection alternative. The SO warned petitioners'representative during their March 21 telephone call that, if petitioners failed tosupply the required information for her review before the CDP hearing date, theywould not be given any additional time to do so.Petitioners supplied none of the required financial information before theCDP hearing on April 13. Indeed, petitioners' representative informed the SOduring that hearing that petitioners would not submit any financial information,asserting that it was unnecessary because their intended OIC would be based oneffective tax administration. That assertion was incorrect: The Internal Revenue4(...continued)6651, 6654, or 6655." Sec. 6751(b)(2)(A). Accordingly, the SO was not required to verify that the $509,136 addition to tax assessed against petitioners for 2005 under section 6651(a)(1) had been approved by a supervisor.- 15 -[*15] Manual (IRM) requires Appeals officers to conduct, for an OIC based oneffective tax administration, the same financial analysis as for an OIC based ondoubt as to collectibility, thus enabling the IRS to determine the taxpayer'sreasonable collection potential and an acceptable*246  offer amount. See IRM pt.5.8.11.4.2 (Aug. 5, 2015); id. pt. 5.8.11.1(6) ("The taxpayer must include theCollection Information Statement (CIS) (Form 433-A (OIC)) * * * whensubmitting an offer requesting consideration under ETA."). An Appeals officerdoes not abuse her discretion when following IRM guidelines in evaluatingcollection alternatives. Lemann v. Commissioner, T.C. Memo. 2006-37, 91T.C.M. (CCH) 846, 851.We have consistently held that it is not an abuse of discretion for an Ap-peals officer to reject collection alternatives and sustain the proposed collectionaction where taxpayers have failed to put a specific offer on the table and havefailed, after being given sufficient opportunities, to supply the SO with the re-quired forms and supporting financial information. See Huntress v. Commission-er, T.C. Memo. 2009-161; Prater v. Commissioner, T.C. Memo. 2007-241; Romanv. Commissioner, T.C. Memo. 2004-20. Petitioners had more than two months tosubmit the financial information the SO had requested. When they submitted none- 16 -[*16] and told the SO that they did not intend to submit any, she did not abuse herdiscretion by closing the case.Finding no abuse of discretion in this or in any other respect, we will grantrespondent's motion for summary judgment and affirm the proposed collectionaction as to 2005 and 2013. Petitioners*247  are advised that they are free to submit tothe IRS, for its consideration and possible acceptance, an OIC on Form 656 sup-ported by the necessary financial information.5To reflect the foregoing,An appropriate order and decisionwill be entered.5Before and after the CDP proceeding, petitioners submitted no fewer than six OICs seeking to compromise their outstanding tax liabilities. The SO did not consider any of these offers, and they are irrelevant to our determination in this case.