The opinion
T.C. Memo. 2009-86
UNITED STATES TAX COURT
DAVID HARRIS SHER AND CATHERINE GAIL NEMSER, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 27548-07L. Filed April 28, 2009.
In April 1999 Ps requested an extension of time to
file their 1998 Federal income tax return and
separately submitted a $70,000 estimated tax payment.
Although Ps’ 1998 return includes signature dates in
July 1999, R did not receive the return until 2004. R
assessed the tax reflected on the return, along with
additions to tax and interest, in 2004.
In October 2000 Ps filed their 1999 return and
paid their 1999 taxes in full. In November 2000, R
refunded the $70,000 estimated tax payment that R
received in April 1999 and had credited to Ps’ account
for 1999.
After receiving a notice of deficiency for 2000,
Ps filed a 2000 return. R processed this return and
assessed tax, additions to tax, and interest in
December 2002. Ps later conceded that they omitted
income from their 2000 return and agreed to an
additional assessment.
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Ps submitted an offer-in-compromise (OIC) seeking
relief based upon doubt as to collectibility and doubt
as to liability, and R rejected it. R’s Appeals Office
sustained the rejection and rejected a second OIC,
affirming that Ps’ reasonable collection potential
exceeded the amounts offered and concluding that Ps’
liability was properly determined and assessed.
R filed a Federal tax lien and notified Ps. Ps
requested a CDP hearing, seeking relief from interest
and penalties. R’s settlement officer sustained the
filing of the Federal tax lien.
Held: R’s determination is sustained, and Ps are
not entitled to any abatement of interest.
David Harris Sher and Catherine Gail Nemser, pro sese.
Frederick C. Mutter, for respondent.
MEMORANDUM OPINION
PANUTHOS, Chief Special Trial Judge: This case is before
the Court on petitioners’ request for judicial review of an
Internal Revenue Service (IRS) determination to sustain a Federal
tax lien filing.
Unless otherwise indicated, all section references are to
the Internal Revenue Code, as amended.
Background
Some of the facts have been stipulated, and we so find.
Petitioners resided in New York when they filed the petition.
Petitioners were married at all relevant times, and they filed
joint Federal income tax returns for each year in issue.
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On April 15, 1999, the IRS received petitioners’ request for
an extension of time to file their Federal income tax return for
taxable year 1998. On April 22, 1999, the IRS received a $70,000
estimated tax payment from petitioners. Petitioners mailed the
estimated tax payment separately from the extension request and
did not direct the IRS to apply the $70,000 to any particular tax
year. The IRS applied the estimated tax payment toward
petitioners’ account for taxable year 1999.
The record includes petitioners’ 1998 Form 1040, U.S.
Individual Income Tax Return. Petitioners’ return preparer dated
this return July 6, 1999, and petitioners dated their signatures
July 10, 1999. The return reports total tax due of $86,417,
withholding credits of $5,803, estimated tax payments of $70,000,
and a balance due of $10,614. IRS records reflect petitioners’
1998 extension request and the 1998 withholding credit on April
15, 1999. However, IRS records further reflect that the IRS
received and processed petitioners’ 1998 return on February 26,
2004. The IRS assessed tax, additions to tax, and interest as
follows:
Total tax for 1998 $86,417.00
Failure to file addition to tax 18,138.15
Failure to pay addition to tax 20,153.50
Interest 40,111.38
Petitioners filed their 1999 Federal income tax return, with
an extension, on October 12, 2000, and included full payment of
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their 1999 liability with the return. On November 20, 2000, the
IRS refunded $70,000 to petitioners as an overpayment for 1999.
With the $70,000 income tax refund, the IRS included a
statement explaining that the sum of petitioners’ 1999
withholding tax credits and the payment submitted with the 1999
return exactly equaled their 1999 tax liability. The statement
listed a $70,000 estimated tax payment made on April 22, 1999,
and credited toward taxable year 1999.1
On receipt of the $70,000 income tax refund check in
November 2000, petitioners called the IRS to ask whether there
had been some mistake and whether they should cash the check.
Apparently because the IRS computer system did not have any
record of a liability for 1998 (because the IRS had not yet
received or processed a return from petitioners for 1998), an IRS
employee told petitioners that the IRS did not have any record of
petitioners’ having any outstanding liability, that petitioners
had overpaid their 1999 taxes, and that the refund was valid.
Petitioners did not inform the IRS at any time before cashing the
refund check that they wanted the IRS to apply that $70,000
payment to their account for 1998 rather than 1999.
The IRS issued petitioners a notice of deficiency for
taxable year 2000, after which petitioners filed a Form 1040 for
1
Petitioners’ only estimated tax payment in 1999 was the
$70,000 payment the Internal Revenue Service (IRS) received April
22, 1999, and credited toward petitioners’ account for 1999.
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2000. The IRS received this late-filed return on August 3, 2002,
processed it, and assessed the following on December 9, 2002:
Total tax for 2000 $22,768.00
Failure to file addition to tax 3,561.30
Failure to pay addition to tax 1,187.10
Interest 1,268.93
On December 31, 2002, the IRS informed petitioners that
their late-filed 2000 return failed to include certain income.
Petitioners ultimately agreed with the IRS that they
underreported their income for 2000, and they agreed to the
assessment of additional tax, additions to tax, and interest.
The IRS assessed the following on December 8, 2003:
Additional tax assessed for 2000 $20,006.00
Additional failure to file addition to tax 8,767.25
Additional failure to pay addition to tax 838.40
Additional interest 4,524.74
Petitioners submitted a Form 656, Offer in Compromise (OIC),
dated January 10, 2004, in response to the IRS’s determination of
unreported income on petitioners’ 2000 tax return. This OIC does
not state which liabilities petitioners sought to compromise, but
petitioners offered $17,000 and claimed as grounds for compromise
both doubt as to collectibility (DATC) and doubt as to liability
(DATL). It appears from the record that the IRS informed
petitioners that this OIC could not be processed because the IRS
did not have any record of petitioners’ filing a tax return for
1998. Petitioners then submitted a 1998 Form 1040, which the IRS
processed on February 26, 2004.
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Petitioners submitted another OIC in March 2004, again
offering to pay $17,000 and claiming both DATC and DATL, but this
time listing tax years 1998 and 2000. They explained in a letter
to the IRS that it had erroneously applied the $70,000 estimated
tax payment they made in April 1999 to taxable year 1999 and
erroneously refunded that amount to petitioners in November 2000.
Petitioners also explained that they had a large net operating
loss (NOL) that they proposed carrying back to offset their 1998
liability.
On January 3, 2005, the OIC reviewer informed petitioners
that if there was an error with the application or refund of the
estimated tax payment, petitioners might avoided some penalties
and interest if they had taken action to inform the IRS of the
error when it occurred rather than accepting the refund and
cashing the check. The OIC reviewer advised petitioners that the
IRS could not agree to petitioners’ proposal to reduce their NOL
by the amount of the refunded estimated tax payment. He also
informed petitioners that they were not entitled to relief under
either DATC or DATL and that formal notification of the rejection
of their offer would follow.
On March 1, 2005, the IRS rejected petitioners’ OIC. The
OIC rejection letter recited that an analysis of petitioners’
ability to pay dictated rejecting the $17,000 offer because
petitioners’ reasonable collection potential (RCP) was
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$161,708.07. The letter also explained that petitioners did not
present any information indicating that the amount of tax
assessed for 1998 or 2000 was incorrect; rather, petitioners
claimed they were not liable for interest and penalties which
accrued on the $70,000 portion of their 1998 tax liability that
they intended to pay. The letter further stated that “Your
failure to return this refund contributed to the accrual of
penalties and interest.” The IRS considered both collectibility
and liability in rejecting petitioners’ OIC.
Petitioners timely appealed the rejection of their OIC,
challenging the DATC and the DATL conclusions. They complained
of two IRS errors: Refunding the $70,000 estimated tax payment;
and telling petitioners they had no tax liability. Petitioners
also complained that the IRS notified them about the taxes due
for 1998 nearly 5 years after they made the estimated tax payment
in April 1999. Petitioners sought relief from interest and
additions to tax due to the passage of time and due to the errors
they ascribe to the IRS. Petitioners also argued that the IRS
collectibility calculations did not properly account for the
legitimate expenses of living in New York.
In November 2005, apparently as part of the appeal of the
rejection of their $17,000 OIC, petitioners offered $28,000 to
settle their liabilities for 1998 and 2000, again asserting DATC
and DATL. Petitioners made arguments similar to those in their
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OIC appeal, and they did not assert that they filed their 1998
tax return before February 2004.
On February 9, 2006, the IRS Appeals Office determined that
the tax liability was legally due and that petitioners’ RCP was
$139,277. Appeals noted that the 1998 return was filed February
26, 2004, well after petitioners fully paid their 1999 taxes and
received the refund and also well after an IRS employee informed
petitioners in 2000 that IRS records indicated that petitioners
did not have any outstanding liability. Appeals sustained the
rejection of the earlier OIC and rejected the new OIC.
On April 24, 2007, the IRS mailed a Notice of Federal Tax
Lien Filing and Your Right to a Hearing Under IRC 6320 (filing
notice) to petitioners. The IRS prepared the tax lien on April
13, 2007, and mailed a notice of Federal tax lien (NFTL) to New
York County on April 18, 2007. The filing notice states that the
lien was filed on April 17, 2007.2
Petitioners filed a Form 12153, Request for a Collection Due
Process or Equivalent Hearing, on May 8, 2007, challenging the
lien filing for their liabilities for 1998 and 2000.3 On that
form, petitioners indicated that they sought an OIC as a
2
New York County recorded the notice of Federal tax lien on
May 14, 2007.
3
The notice of Federal tax lien listed liabilities of
$143,164.03 for 1998, $51,740.72 for 2000, and $956.07 for 2003.
Petitioners did not challenge the lien filing for 2003 in their
collection hearing request.
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collection alternative and withdrawal of the lien because: “1)
Notification by IRS was late. 2) Amount assessed is wrong. 3)
We dispute liability for interest and penalties.”
In an attachment to their collection hearing request,
petitioners asserted that the IRS failed to notify them within 5
days of filing the lien, and they challenged the underlying tax
liability reflected in the filing notice for 1998 and 2000.
Petitioners’ challenge to the underlying liability for 1998
involved the estimated tax payment that the IRS refunded, the
interest and additions to tax on that amount, and the fact that
the IRS did not demand payment of their liability for 1998 until
2004. Petitioners’ challenge to the liability for 2000 concerned
the application of their subsequent year tax refunds. They
complain that the IRS applied some of those refunds to 1998 and
some to 2000. They also asserted that Appeals finally rejected
their OIC on February 9, 2006, but that, as a result of delays in
transferring the file from Appeals to Collections, the IRS did
not send a new tax due bill until March 12, 2007; that they were
told that interest and additions to tax would not accrue during
the OIC process; and that they are not liable for all of the
assessed and accrued interest and additions to tax.
The settlement officer (SO) assigned to petitioners’
collection hearing instructed petitioners to submit certain
information required for her to consider collection
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alternative(s). The SO informed petitioners that she could not
consider challenges to the underlying tax liability for either
1998 or 2000 because petitioners received a notice of deficiency
and/or had prior opportunities to dispute their liability. She
scheduled a telephone conference with petitioners for October 30,
2007.
Petitioners did not submit any of the information the SO
requested, and petitioners informed the SO during the collection
hearing that they wished to pursue their case in court.
Following the hearing, the IRS issued a Notice of Determination
Concerning Collection Action(s) Under Section 6320 and/or 6330
(notice of determination), dated November 2, 2007. The SO
recited in the notice of determination that petitioners did not
provide a statement detailing any collection alternative sought
and also did not submit the financial information required for
her to consider collection alternatives. The SO explained that
she verified that the applicable legal and administrative
procedures were followed in the issuance of the Federal tax lien;
that she considered the issues petitioners raised in their
hearing request and during the conference, and that petitioners’
arguments did not support the IRS’s withdrawing the lien; that
she could not consider challenges to the underlying tax liability
because petitioners had prior opportunities to dispute the
liability at issue; and that she balanced the need for efficient
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collection with petitioners’ concerns that collection be no more
intrusive than necessary. The IRS sustained the filing of the
NFTL.
In their petition, petitioners assert:
I request a hearing to establish important facts and to
require the IRS to remove interest and penalties from its
collection action for the tax year 1998. During the hearing
I intend to bring evidence of the following problems with
the IRS collection action. 1) That the IRS in filing for a
federal tax lien failed to obey proper procedure by not
notifying me in writing 5 business days after the filing of
a lien. 2) That the IRS has not provided an accurate
accounting of liability. 3) That the IRS applied penalties
and interest charges in a capricious fashion and that it
cannot account for the numbers. 4) That interest and
penalties should not have been applied at all considering
that late payment of 1998 tax bill was due entirely to IRS
error. 4) That the IRS has on a number of occasions
misrepresented material facts to us that harmed our
situation and led to greater liability. (A detailed
explanation can be found on attached request for due process
hearing).
Petitioners alleged at trial that they filed their 1998
return in 1999. This was the first time this allegation had been
made. Petitioners also asserted that the IRS failed to timely
notify them of the lien filing, and they sought to challenge the
interest and penalty determinations.4 Petitioners acknowledge
their principal tax liabilities but assert that only reducing the
additions to tax and interest can correct the IRS’s errors.
4
As noted, the IRS assessed taxes, interest, and additions
to tax for failure to file and failure to pay. It has not
assessed any penalties for either 1998 or 2000.
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The issue for decision is whether respondent abused his
discretion in upholding the filing of the NFTL and denying
petitioners’ request for an abatement of interest.
Discussion
On the record before us, we find that, although petitioners’
1998 return bears signature dates in 1999, petitioners did not
file the 1998 return until 2004.
I. Review of Collection Determination
Pursuant to sections 6320(c) and 6330(d)(1), we have
jurisdiction to review the IRS’s determination that the NFTL was
properly filed.
In reviewing the Commissioner’s decision to sustain
collection actions, where tax liability is properly at issue, the
Court reviews the Commissioner’s determination of tax liability
de novo. Sego v. Commissioner, 114 T.C. 604, 610 (2000); Goza v.
Commissioner, 114 T.C. 176, 181-182 (2000). The Court reviews
determinations regarding proposed collection actions for abuse of
discretion. Sego v. Commissioner, supra at 610; Goza v.
Commissioner, supra at 182. An abuse of discretion occurs when
the exercise of discretion is without sound basis in fact or law.
Murphy v. Commissioner, 125 T.C. 301, 308 (2005), affd. 469 F.3d
27 (1st Cir. 2006).
At the collection hearing, a taxpayer may raise any relevant
issues relating to the unpaid tax or lien filing, including
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spousal defenses, challenges to the appropriateness of the
collection actions, and offers of collection alternatives. In
addition, he may challenge the existence or amount of the
underlying tax liability, but only if he did not receive a notice
of deficiency or otherwise have an opportunity to dispute such
liability. Sec. 6330(c)(2)(B).
In making a determination following a collection hearing,
the IRS must consider: (1) Whether the requirements of any
applicable law or administrative procedure have been met, (2) any
relevant issues the taxpayer raised, and (3) whether the proposed
collection action balances the need for efficient collection with
legitimate concerns that the collection action be no more
intrusive than necessary. Sec. 6330(c)(3).
II. Procedural Error
At trial petitioners challenged the timing of the filing
notice, arguing that the IRS failed to notify them within 5 days
of the date the IRS filed the tax lien as required by section
6320(a)(2).
Although the IRS prepared the tax lien on April 13, 2007,
the filing notice states that the IRS filed the tax lien on April
17, 2007. The IRS mailed the NFTL to New York County on April
18, 2007. The IRS then mailed the filing notice to petitioners
on April 24, 2007, which is within 5 business days of both April
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17 and April 18. The IRS properly notified petitioners of the
lien filing.5
III. Challenges to the Underlying Tax Liabilities
Petitioners submitted an OIC challenging both collectibility
and liability. The IRS concluded that petitioners could pay more
than the amount of their offer and that the liability, including
additions to tax and interest, had been properly assessed on the
basis of petitioners’ late-filed tax returns. The IRS rejected
petitioners’ OIC. Petitioners appealed that rejection. The
Appeals Office reconsidered the challenges and entertained a new
OIC. During the appeal the Appeals officer confirmed that the
IRS properly assessed the liabilities and that petitioners’ RCP
exceeded their offer amounts. Appeals concluded that
petitioners’ offers were not acceptable.
Section 6330(c)(2)(B) allows a taxpayer to challenge an
underlying tax liability in a collection hearing only if he did
not receive any notice of deficiency for the liability and he did
not otherwise have an opportunity to dispute the underlying tax
5
We have made findings as to the relevant dates of the (1)
mailing of the NFTL to New York County, (2) mailing of the lien
filing notice to petitioners, (3) hearing date request by
petitioners, and (4) recordation by New York County. Petitioners
did not argue, nor do we conclude, that petitioners were
adversely affected by the timing of the recording of the notice
of lien since they requested and received administrative review.
Further, they filed a timely petition in response to a notice of
determination and had a full opportunity for judicial review.
See Golub v. Commissioner, T.C. Memo. 2008-122.
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liability. We have previously held that where a taxpayer
received a notice of deficiency and did not file a timely
petition, an OIC-DATL made during the later collection hearing
was a challenge to the underlying tax liability. Thus,
respondent properly refused to consider the underlying tax
liability. Sec. 6330(c)(2)(B); Baltic v. Commissioner, 129 T.C.
178, 183 (2007).
For tax year 1998 petitioners did not receive a notice of
deficiency.6 For tax year 2000 petitioners received a notice of
deficiency but did not file a petition with this Court. For
each tax year petitioners challenged the tax liability with their
OIC-DATL submissions before the collection proceeding.
It would appear that an OIC-DATL is an opportunity to
dispute the underlying tax liability and that the SO did not
abuse her discretion by not considering this challenge. Sec.
6330(c)(2)(B); see Baltic v. Commissioner, supra; Lewis v.
Commissioner, 128 T.C. 48 (2007); Sego v. Commissioner, supra at
609-611; Goza v. Commissioner, supra at 180-181, 183-184.
Even if petitioners could dispute the tax liability as
discussed further below (see discussion on interest abatement),
petitioners’ failure to designate the period to which the $70,000
6
The IRS is not required to issue a notice of deficiency
when the assessment is of taxes determined by the IRS or the
taxpayer and based on returns filed by the taxpayer. Montgomery
v. Commissioner, 122 T.C. 1, 8 (2004); see also sec. 6201(a)(1).
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payment should be applied would result in a denial of
petitioners’ claim for relief.7
IV. Interest Abatement
In the attachment to the collection hearing request, which
petitioners also attached to their petition, petitioners seek
relief from interest and additions to tax.8 As discussed,
section 6330(c)(2)(B) appears to foreclose the challenge to the
underlying tax liability, including the additions to tax.9
7
Finally, as to petitioners’ complaint that the IRS applied
some of their subsequent year overpayments to offset the 1998
liability when petitioners would have preferred to offset the
2000 liability, sec. 6402(a) allows the IRS to credit any
overpayment to any liability owed by a taxpayer. Petitioners
will not be heard to challenge the IRS’s choice of which
liability to offset. See Kalb v. United States, 505 F.2d 506,
509 (2d Cir. 1974).
8
Petitioners assert that the additions to tax and interest
for 1998 should be reduced on account of the erroneous refund of
their $70,000 estimated tax payment. We have found that
petitioners filed their 1998 return in 2004. Respondent assessed
and petitioners have not specifically challenged the failure to
file addition to tax.
The failure to pay addition to tax accrues at 0.5 percent
per month, to a maximum of 25 percent, from the date prescribed
for payment of such tax. Sec. 6651(a)(2). The maximum failure
to pay addition to tax, therefore, accrues in 50 months.
Petitioners’ 1998 tax payment was due Apr. 15, 1999. More than
50 months have clearly elapsed since Apr. 15, 1999, even
excluding the 19 months during which the IRS held petitioners’
$70,000 estimated tax payment. Respondent has properly assessed
the maximum failure to pay addition to tax.
9
As to the additions to tax, even if petitioners could so
challenge, they have not shown reasonable cause or good faith for
their failure to timely file or pay their taxes for 1998 or 2000.
Thus, they are liable for these additions to tax. See sec.
(continued...)
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However, we will consider whether the IRS abused its discretion
in refusing to abate any of the interest on petitioners’ 1998 or
2000 liability. We note that because Congress did not intend the
interest abatement statute to be used routinely, we grant
abatement only “‘where failure to abate interest would be widely
perceived as grossly unfair.’” Lee v. Commissioner, 113 T.C.
145, 149 (1999) (quoting H. Rept. 99-426, at 844 (1985), 1986-3
C.B. (Vol. 2) 1, 844, and S. Rept. 99-313, at 208 (1986), 1986-3
C.B. (Vol. 3) 1, 208).
A taxpayer may be entitled to an abatement of interest when
an unreasonable error or delay in an IRS employee’s performing a
ministerial or managerial act causes an error or delay in payment
of tax. See sec. 6404(e). Transferring a case between IRS
offices after a request for transfer has been approved and
misplacing a taxpayer’s file are managerial acts; unreasonable
errors or delays in either may be grounds for abatement of
interest. See Palihnich v. Commissioner, T.C. Memo. 2003-297;
sec. 301.6404-2(c), Examples (1), (6), Proced. & Admin. Regs.
To qualify for abatement, the taxpayer must show: (1) An
error or delay by the IRS in performing a ministerial or
managerial act; (2) a correlation between a specific period of
delay in payment and an error or delay by the IRS; and (3) that
9
(...continued)
6651(a)(1) and (2).
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the taxpayer would have paid the tax liability earlier but for
the IRS’s error. Braun v. Commissioner, T.C. Memo. 2005-221.
Petitioners identified the period between the final
rejection of their OIC, on February 9, 2006, and the issuance of
a new tax due bill, on March 12, 2007, as a period of
unreasonable delay.10 However, they have not provided any link
between any delay in producing a new tax due bill and their delay
in payment. Petitioners were well aware of the principal amounts
due for 1998 and 2000, and they knew the amounts of interest and
additions to tax which were due before their filing OICs. Even
though their attempts to compromise their liabilities had failed,
they did not pay any of these amounts while waiting for a new
bill from the IRS. Petitioners have not demonstrated that they
would have paid their tax liability for 1998 and 2000 earlier but
for the IRS’s delay in preparing a tax due bill. See id.
It would not be unfair to hold petitioners liable for the
interest on their tax liability. Petitioners are not entitled to
abatement of interest.
10
To the extent that petitioners might seek abatement of
interest during the 19 months the IRS had petitioner’s $70,000
estimated tax payment, such abatement is foreclosed by sec.
6404(e)(1) and (2). Petitioners made their estimated tax payment
late and did not challenge the refund in 2000 as erroneous on the
grounds that they intended the IRS to apply the estimated tax
payment to a different year. Finally, their self-serving
testimony is the only evidence they offered of any intent to
apply the $70,000 payment toward tax year 1998.
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V. Conclusion
The notice of determination indicates that the SO considered
relevant issues petitioners raised, whether the IRS met the
requirements of applicable law and administrative procedure, and
whether the proposed collection action balances collection
efficiency and intrusiveness. Petitioners did not raise any
spousal defenses or pursue any collection alternatives during the
collection hearing. The SO properly determined that petitioners
were not entitled to challenge the existence or amount of the
underlying tax liability.
The SO satisfied the requirements of sections 6320 and 6330,
and we conclude that respondent’s decision sustaining the filing
of the NFTL was neither erroneous nor an abuse of discretion.
In reaching our holdings, we have considered all the
parties’ contentions, and to the extent not addressed herein, we
conclude that they are irrelevant, moot, or without merit.
To reflect the foregoing,
Decision will be entered
for respondent.