Tax Return Preparer – section 6694 - Fraudulent tax returns: False statements.



Two tax return preparers and their accounting services organization were permanently enjoined under Code Sec. 7408 because they engaged in conduct subject to penalty under Code Secs. 6700 and 6701. The preparers organized and marketed the scheme that assisted their customers in preparing false tax returns. They falsely stated that those who participated in the scheme had a right to exclude compensation for personal services or labor from taxation. Moreover, the preparers had knowledge that their representations and advice were false or fraudulent and the documents prepared by them would be used to understate their customers' correct tax liabilities. Additionally, there was no indication that the preparers would not engage in violation of the tax code.




ORDER OF DEFAULT JUDGMENT OF PERMANENT INJUNCTION


NICHOLAS, United States District Court: This matter come before the Court on plaintiff's motion for Default Judgement of Permanent Injunction. Defendants Archie J. Pugh, Jr., and Theodore Pugh were properly served and have failed to appear in this matter. Entry of Default was made against them on August 27, 2007. (Docket No. 6). Having reviewed the record in this case, the Court makes the following findings of fact and conclusions of law and enters this permanent injunction against Archie J. Pugh, Jr., and Theodore Pugh.


FINDINGS OF FACT


Defendants Archie J. Pugh, Jr., and Theodore Pugh are marketing the so-called "Claim of Right" tax-evasion scheme. Accordingly to the complaint, the Pughs falsely claim that all compensation or earnings are deemed nontaxable. Moreover, defendants also prepare income tax returns for customers based on the fraudulent Claim of Right program. Defendants market the Claim of Right program to customers of Archie's Tax and Accounting Service. The Pughs charge customers $250 to have the Claim of Right tax returns prepared.

As part of the scheme, defendants falsely tell their customers that they have a common-law and constitutional right (under the Fourteenth Amendment to the United States Constitution) to exclude from taxation all compensation for personal services or labor rendered. Defendants falsely state that I.R.C. § 1341 codifies this so-called common-law or constitutional right and entitles their customers to take a deduction in the amount of compensation earned, which in most cases eliminates a participant's tax liability. Defendants state that this can be done by claiming an itemized deduction to offset wages reported on W-2 forms, or by taking a Schedule C deduction to offset any net income from self-employment.

As part of their marketing ploy, defendants make numerous false or fraudulent statements in support of their abusive program, including:
 Compensation earned is immune from taxation.

 Money earned in exchange for personal labor or services does not constitute taxable income and may be deducted.

 Income earned for labor is a not for profit activity and thus deductible on tax returns.

 Their "claim of right" claim is a "mandatory deduction allowed by United States law."

Defendants' claims regarding the tax benefits associated with their Claim of Right program are false. In addition, the tax returns defendants have prepared based on the Claim of Right tax-evasion scheme are fraudulent, and understate their customers' income based on this false, discredited concept.

Moreover, defendants know or have reason to know that the tax-fraud scheme they promote is unlawful and that their statements to customers about the scheme's tax benefits are false. Indeed, other federal courts have permanently enjoined other persons from promoting similar Claim of Right tax-fraud schemes, such as United States v. Lloyd, 2005 U.S. Dist. LEXIS 32747 (M.D.N.C. 2005), aff'd, 2006 U.S. App. LEXIS 16254 (4 th Cir. 2006). (Cmplt. ¶¶ 21-23.)


CONCLUSIONS OF LAW




A. Default Judgment Standard

Rule 55 of the Federal Rules of Civil Procedure provides that where a party fails to plead or otherwise defend against a complaint, and after entry of default, default judgment may be entered against such person. Upon entry of default, the well-pleaded allegations of the complaint relating to a defendant's liability are taken as true, with the exception of the allegations as to the amount of damages, which is not an issue here because the United States is seeking injunctive, not monetary, relief. 1 Default judgment should not be different in kind than what is sought in the complaint. 2 Here, the United States seeks only the injunctive relief requested in the complaint.



B. The United States' Substantive Claims Set Forth in its Complaint Satisfy the Standards for a Permanent Injunction Under IRC § 7407.

Section 7407 authorizes the Court to enjoin a federal-tax-return preparer from engaging in conduct subject to penalty under I.R.C. §§ 6694 or 6695 if the Court finds that injunctive relief is appropriate. 3 Where a return preparer's conduct subjecting them to penalty under IRC §§ 6694 or 6695 has been continual or repeated, the Court may enjoin them from preparing any federal returns if the Court finds that a more narrow injunction prohibiting only specific misconduct would be insufficient to prevent further interference with the administration of the internal revenue laws. 4 Because the Pughs are continually and repeatedly engaging in conduct subject to penalty under both IRC §§ 6694 and 6695, the Court finds that a permanent injunction under IRC § 7407 is necessary to bar them from preparing federal tax returns. 5



1. Defendants Have Continually and Repeatedly Engaged in Conduct Subject to Penalty Under IRC § 6694.

Section 6694 penalizes preparers on two grounds. First, under § 6694(a), a preparer is subject to penalty for negligently understating a customer's tax liability due to unrealistic positions. Second, under § 6694(b), a preparer is subject to penalty for any willful attempt to understate the tax liability of customer or any reckless or intentional disregard of rules or regulations.



a. Negligently Understating a Customer's Tax Liability Due to Unrealistic Positions under IRC § 6694(a).

A return preparer is subject to penalty under IRC § 6694(a) if (1) the preparer submits a return that contains an understatement of liability; (2) the understatement is based upon a position taken for which there was not a realistic possibility of being sustained. These elements are met. The Pughs have prepared numerous false Forms 1040, Forms 1041, and Schedules C in order to support false and fictitious claims for refund on behalf of customers. Moreover, they have advanced unrealistic positions deducting from income the amount paid to their customers' for wages --based on the frivolous "claim of right" scheme. 6



b. Willful Understatement of Tax Liability or Intentional or Reckless Disregard of Rules and Regulations under IRC § 6694(b).

A return preparer is subject to penalty under Code § 6694(b) if any part of an understatement of a tax liability is due to (1) "a willful attempt in any manner to understate the liability for tax by a person who is an income tax return preparer with respect to such return or claim" or (2) "any reckless or intentional disregard of rules or regulations." In this case, defendants deduct wages from income under their frivolous Claim of Right program, thus subjecting them to penalty under § 6694(b).



2. Defendants Have Continually and Repeatedly Engaged in Conduct Subject to Penalty Under IRC § 6695.

IRC § 6695(b)-(c) penalizes a return preparer who fails to list his trade name or other identifying information, or sign returns. See IRC § 6695(b)-(c) & 6109(a)(4). Here, the Pughs prepared, but failed to sign their customers' income returns or identify themselves as the income tax return preparer. Their failure to do so subjects them to penalty under IRC § 6695(b)-(c).



3. Defendants Have Repeatedly Engaged in Conduct Proscribed by IRC § 7407(b).

Defendants have also engaged in conduct proscribed by IRC § 7407(b). The Pughs have engaged in conduct proscribed by Section 7407(b)(1)(D) by asserting the frivolous Claim-of-Right deductions on numerous returns for customers, and by failing to present completed copies of returns to customers before filing with the IRS. 7 Moreover, defendants' fraudulent and deceptive conduct has interfered with the internal revenue laws and the IRS conservatively estimates that they have cost the U.S. Treasury roughly $2.4 million.



4. Defendants Are Barred from Preparing Federal Tax Returns.

Since a narrow injunction would not prevent the Pugh's conduct, they should be barred from preparing returns altogether. 8 Defendants entire return preparation business is focused on preparing fraudulent returns that interfere with the administration of the internal revenue laws. Moreover, the Pugh's fraudulent returns limited to misuse of a single IRS form, or a single factual misrepresentation. Rather, the Pugh's have falsified Forms 1040, Forms 1041A, and Schedules C. For these reasons, the Court enjoins them from preparing all federal tax returns.



C. The United States is Entitled to Injunctive Relief under IRC § 7408

An injunction under IRC § 7408 is warranted to enjoin a person from further engaging in conduct subject to penalty under IRC §§ 6700 or 6701. The facts in this case establish that defendants engaged in such conduct and that injunctive relief is appropriate to prevent recurrence of that conduct.



1. Defendants Engaged in Conduct Subject to Penalty under IRC § 6700

Section 7408 authorizes a court to enjoin persons who have engaged in any conduct subject to penalty under § 6700 if the Court finds that injunctive relief is appropriate to prevent the recurrence of such conduct. Under § 6700, any plan or arrangement "having some connection to taxes can serve as a 'tax shelter' and will be an 'abusive' tax shelter if the defendant makes the requisite false or fraudulent statements concerning the tax benefits of participation." 9 To establish a violation of § 6700 warranting an injunction under § 7408, the United States must show that:
(1) the defendant organized or sold, or participated in the organization or sale of, an entity, plan, or arrangement; (2) he made or caused to be made, false or fraudulent statements concerning the tax benefits to be derived from the entity, plan, or arrangement; (3) he knew or had reason to know that the statements were false or fraudulent; (4) the false or fraudulent statements pertained to a material matter; and (5) an injunction is necessary to prevent recurrence of this conduct. 10

This Court has the authority to grant the requested injunction if the Government establishes that defendant engaged in conduct subject to penalty under § 6700 and injunctive relief is appropriate to prevent the recurrence of such conduct. The record submitted with this motion makes that showing.



a. Defendant organized and sold a plan or arrangement.

There is no question that defendants organized and sold a plan or arrangement. The Claim of Right program is organized and marketed by the defendants through word-of mouth, and defendants assist customers in preparing false income tax returns based on the scheme. Moreover, defendants charge for participation in the program. Thus, defendants organized and marketed the Claim of Right program within the meaning of IRC § 6700. 11



b. Defendant made false or fraudulent statements regarding the tax benefits associated with their "claim of right" program.

Defendants also misrepresent the tax benefits of the Claim of Right program. The Pughs falsely states that participants have a right to exclude compensation for personal services or labor from taxation. They maintain that participants are entitled to a "Claim of Right" deduction on their federal income tax returns in the amount of compensation earned on their labor, and that the deduction is based on IRC §§ 183, 212 or 1341.

The Pugh's purported reliance on §1341 is groundless. 12 IRC § 1341 applies only to those situations where a taxpayer properly reports income in one year and later repays all or a portion of it in a later year because the taxpayer, in fact, did not have an unrestricted right to that income. The section allows the taxpayer to take a deduction in the later year for the amount repaid. (It is not a mechanism for amending the previous year's return.) See Wicor, Inc. v. United States, 263 F.3d 659, 661 (7th Cir. 2001); Rev. Rul. 2004-29, 2004-12 I.R.B. 627. It does not apply unless it is "established after the close of [the] prior taxable year (or years) that the taxpayer did not have an unrestricted right to such [income]." IRC § 1341(a)(2). There is simply no "Claim of Right" doctrine under that IRC section or any other statute that allows an individual to take the position espoused by the Pughs that neither the individual nor the individual's income is subject to federal income taxes.

Furthermore, IRC § 1341 requires a taxpayer to return the funds that he previously reported as taxable income before he can claim a deduction. See Chernin v. United States, 149 F.3d 805, 815-16 (8th Cir. 1998); Treas. Reg. 1-1341-1(a). The Pugh's are certainly not telling customers that they have to return their earned income to their employers in order to participate in the tax scheme. IRC § 1341 has no application to the defendant's frivolous Claim of Right program.

The Pughs also rely on IRC §§ 183 and 212 for their Claim of Right program. The purported reliance on §§ 183 and 212 is equally groundless. IRC § 183 prohibits an individual taxpayer from deducting expenses attributable to an activity that is not engaged in for profit. "Activity not engaged in for profit" includes all activities other than those with respect to which deductions are allowable, inter alia, under § 212 as expenses incurred in the production of income or for management, conservation or maintenance of property held for production of income. IRC § 183(a). Earnings from employment cannot qualify as expenses incurred in the "production or collection" of that same income. Neither § 183 nor § 212, nor any combination thereof, stands for the proposition that income or compensation for services rendered is deductible.

In simple terms, the Claim of Right program is a rehash of the oft-rejected anti-tax argument that wages and other compensation for services rendered are not subject to income tax. For federal income tax purposes, "gross income" means all income from whatever source derived and includes compensation for services. See IRC § 61. Any income, from whatever source, is presumed to be income under § 61, unless the taxpayer can prove that it is specifically exempt or excluded. Reese v. United States, 24 F.3d 228, 230 (Fed. Cir. 1994). If a taxpayer is not able to sustain the burden that his income is excluded, then that amount must be included as income. All compensation for personal services, no matter what the form of payment, must be included in gross taxable income. This includes salary or wages paid in cash, as well as the value of property and other economic benefits received because of services performed, or to be performed in the future. Commissioner v. Kowalski, 434 U.S. 77 (1977); Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 431 (1955) (income not limited to gains or profits); Ledford v. Commissioner, 297 F.3d 1378, 1381 (Fed. Cir. 2002); United States v. Connor, 898 F.2d 942, 943-44 (3d Cir.) ("Every court which has ever considered the issue has unequivocally rejected the argument that wages are not income."), cert. denied, 497 U.S. 1029 (1990); United States v. Sassak, 881 F.2d 276, 281 (6th Cir. 1989); Casper v. Commissioner, 805 F.2d 902 (10th Cir. 1986); Coleman v, United States, 791 F.2d 68 (7th Cir. 1986) (all individuals must pay income tax on their wages); Stelly v. Commissioner, 761 F.2d 1113, 1115 (5th Cir. 1985) (finding argument that taxing wages and salary is unconstitutional, because compensation for labor is an even exchange, obviously frivolous); Connor v. Commissioner, 770 F.2d. 17, 20 (2d Cir. 1985); United States v. Romero, 640 F.2d. 1014 (9th Cir. 1981). See also Lonsdale v. United States, 919 F.2d 1440, 1448 (10th Cir. 1990); Biermann v. Commissioner, 769 F.2d 707 (11th Cir. 1985).

Finally, defendants blatantly and falsely claim that the Claim of Right program is in compliance with the Internal Revenue Code. As stated above, the Claim of Right program is annually reported on the IRS's consumer alert of tax scams that taxpayers are urged to avoid.



c. Defendant knew or had reason to know that their tax statements were false or fraudulent.

Defendants knew or had reason to know that their statements regarding the tax consequences of purchasing the tax programs were false or fraudulent. The United States is not required to establish that the defendants acted with subjective bad faith, i.e., to show that defendants actually knew, at the time they sold the program, that they were espousing false and fraudulent statements. Rather, it is sufficient (for the purpose of establishing a violation of § 6700) for the Government to show that, as a result of the courts' uniform rejection of the same or similar statements, the defendant should have known that their representations regarding the tax benefits of their program were false or fraudulent. 13 White, 769 F.2d at 515 (person knew or had reason to know of false or fraudulent statements because such statements had been consistently rejected by courts); Buttorff, 761 F.2d at 1062.

The "knew or had reason to know" standard includes "what a reasonable person in the [defendant's] ... subjective position would have discovered." Estate Pres. Servs., 202 F.3d at 1103. As shown above, the law is well settled that the tax statements made by defendants are false or fraudulent. "[T]he average citizen knows that the payment of income taxes is legally required." Schiff v. United States, 919 F.2d 830, 834 (2d Cir. 1990). The Pughs prepare income tax returns for others, and are, thus, charged with a minimal understanding of the tax laws. A modicum of research would have revealed to them that the Claim of Right program simply rehashes discredited positions espoused by tax protesters.



d. Defendant's false or fraudulent statements were material.

In proving materiality, the Government need not demonstrate that a purchaser has relied on the promoter's misrepresentations. Rather, "[m]aterial matters are those which would have a substantial impact on the decision-making process of a reasonably prudent investor and includes matters relevant to the availability of a tax benefit." United States v. Campbell, 897 F.2d 1317, 1320 (5th Cir. 1990) (citing Buttorff, and S. Rep. No. 97-494, at 267 (1982), reprinted in 1982 U.S.C.C.A.N. 781, 1015). The false representations contained in the defendant's promotion are "material" because, as explained in White, 769 F.2d at 515, "[t]he taxpayers who have been or are now being audited by the IRS or are involved in litigation because they relied upon [the promoters' representations] should certainly have been informed about their complete lack of merit." The representations made by defendants concerning the Claim of Right program undoubtedly affect the decision making process of a purchaser of the program. Statements pertaining to the "availability of tax deductions, credits, or to other mechanisms for reducing tax liability ... clearly qualify as 'material'" under § 6700. United States v. Estate Pres. Servs., 38 F. Supp.2d 846, 855 (E.D. Cal. 1998), aff'd 202 F.3d 1093 (9th Cir. 2000). In that the primary purpose of defendants' programs is tax avoidance, the tax statements made in the promotion of the programs are certainly material. 14



e. An injunction is appropriate and necessary to prevent future violations of IRC § 6700.

The need for injunctive relief in order to prevent future violations of IRC § 6700 in the present case is readily apparent. Through their marketing techniques, defendants are canvassing this district encouraging persons to put into practice discredited theories of federal tax laws. Their customers have been harmed by the abusive promotions because the customers have paid defendant significant sums to prepare tax returns that understate their income tax liabilities. The United States is harmed because defendants' customers are not paying the correct amount of taxes to the United States Treasury. Moreover, given the IRS's limited resources, identifying and recovering all revenues lost from the Pugh's abusive schemes may be impossible, resulting in a permanent loss to the Treasury. The public is harmed because the IRS is forced to devote some of its limited resources to identifying and attempting to recover revenue lost as a result of the defendants' programs, thereby reducing the level of service that the IRS can give to other taxpayers.

The extent of the defendants' participation in the abusive programs is broad. Defendants are attempting to wrench tax statutes out of context to encourage a willful misreading of the law. The conduct is recurrent and defendants have never renounced the promised tax aspects of the program. As income tax return preparers, defendants promote themselves as knowledgeable about the Claim of Right program. Absent an injunction there is no indication that defendants will cease engaging in violations of the tax code. Defendants' conduct in promoting their abusive tax program thus warrants an injunction under IRC § 7408.



2. Defendants Engaged in Conduct Subject to Penalty under IRC § 6701

IRC § 6701 imposes a penalty on any person who aids in or advises with respect to the preparation of any portion of a tax return, claim for refund or other document that the person knows, if used, would result in an understatement of tax liability. As part of the Claim of Right program, defendants advise customers to take improper deductions and prepares or assists in filing false or fraudulent income tax returns. Defendants have knowledge that their advice and those documents would be used to understate their customers' correct tax liabilities. As such, defendants' conduct is subject to penalty under § 6701, and therefore further grounds exist for an injunction under IRC § 7408.



D. An Injunction Should Issue Based Upon IRC § 7402 to Prevent Defendants from Engaging in Activities that Interfere with the Enforcement of the Internal Revenue Laws.

This Court is authorized by IRC § 7402 to issue an injunction "as may be necessary or appropriate for the enforcement of the internal revenue laws." That statute manifests "a Congressional intention to provide the district courts with a full arsenal of powers to compel compliance with the internal revenue laws," 15 and "has been used to enjoin interference with tax enforcement even when such interference does not violate any particular tax statute." 16 The legislative history accompanying § 7408 explicitly states that "the court will continue to have full authority under [ § 7402] and will continue to possess the great latitude inherent in equity jurisdiction to fashion appropriate relief." 17 "Courts interpreting this section have concluded that the traditional equitable injunction factors should be considered in determining the propriety of a preliminary injunction." 18 Those factors are: (1) the likelihood that the plaintiff will sustain irreparable injury as a result of the defendant's conduct; (2) the likelihood of harm to the defendant if an injunction is entered; (3) the likelihood the plaintiff will ultimately prevail on the merits; and (4) the public interest.

Here, injunctive relief under § 7402 is appropriate to prevent defendants from continuing to interfere with tax enforcement. Defendants' false tax advice to customers and their abusive program interferes with the enforcement of the internal revenue laws by delaying examination and collection and by discouraging their customers from complying with the internal revenue laws. The defendants' activities undermine public confidence in the fairness of the federal tax system and incite violations of the internal revenue laws. The defendants' promotion causes the Government irreparable harm and the Government's remedies at law are inadequate.

Customers who follow defendants' advice file improper, inaccurate tax returns or do not pay their proper federal income taxes. In short, defendants' activities will cause irreparable harm to the Government, the public, and their customers unless they are not enjoined. 19 The injunction causes no harm to defendants, on the other hand, because it only requires them to follow the law. Because defendants' tax-fraud scheme has been thoroughly discredited, the Government's likelihood of success is unquestionable. Injunctive relief under § 7402 is therefore necessary and appropriate to prevent defendants from continuing to disrupt the federal tax system.


ORDER


Based on the foregoing finding of fact and for good cause shown the Court ORDERS

A. That pursuant to IRC §§ 7402, 7407 and 7408, Archie J. Pugh, Jr. And Theodore Pugh individually and doing business as Archie's Tax Service, and anyone acting in concert with them, is permanently enjoined from:
(1) Organizing, promoting, marketing, or selling any tax shelter, plan or arrangement that advises or incites customers to attempt to violate the internal revenue laws or unlawfully evade the assessment or collection of their federal tax liabilities;

(2) Making false or fraudulent statements about the securing of any tax benefit by the reason of participating in any tax plan or arrangement, including the false statements that individuals can obtain tax freedom by participating in their program and that wages or compensation for labor constitutes nontaxable income;

(3) Encouraging, instructing, advising and assisting others to violate the tax laws, including to evade the payment of taxes;

(4) Engaging in conduct subject to penalty under 26 U.S.C. § 6694, including preparing a return or claim for refund that includes an unrealistic or frivolous position;

(5) Engaging in conduct subject to penalty under 26 U.S.C. § 6695, including failing to sign income tax returns, or failing to furnish a customer list upon request of the Internal Revenue Service;

(6) Engaging in conduct subject to penalty under 26 U.S.C. § 6700, i.e., by making or furnishing, in connection with the organization or sale of a shelter, plan, or arrangement, a statement the defendant knows or has reason to know to be false or fraudulent as to any material matter under the federal tax laws;

(7) Engaging in conduct subject to penalty under 26 U.S.C. § 6701, i.e., preparing or assisting others in the preparation of any tax forms or other documents to be used in connection with any material matter arising under the internal revenue laws and which the defendant knows will (if so used) result in the understatement of tax liability;

(8) Acting as federal income tax return preparers, or providing any tax advice or services for compensation, including preparing or filing, or assisting in preparing or filing tax returns for any other person or entity, providing consultative services, or representing any persons or entities before the Internal Revenue Service in any manner, either directly or indirectly; and

(9) Engaging in any conduct that interferes with the administration and enforcement of the internal revenue laws.

B. That pursuant to IRC § 7402, the Pughs are ORDERED to contact all persons and entities for whom they prepared any federal income tax returns or other tax-related documents after January 1, 2000, and inform those persons of the entry of the Court's findings concerning the falsity of representations defendants made on their customers' tax returns, and that a permanent injunction has been entered against them within 30 days of service of this Order.

C. That pursuant to IRC § 7402, defendants are ORDERED to provide counsel for the United States a list of the names, addresses, e-mail addresses, phone numbers, and Social Security numbers of all individuals or entities for whom they prepared or helped to prepare any tax-related documents, including claims for refund or tax returns since January 1, 2000; and

D. That the United States is permitted to engage in post-judgment discovery to ensure compliance with the permanent injunction.

1 Merrill Lynch Mortg. Corp. v. Narayan, 908 F.2d 246, 253 (7 th Cir. 1990); Angelo lafrate Const., LLC v. Potashnick Const., Inc., 370 F.3d 715, 721-22 (8 th Cir. 2004).

2 Fed. R. Civ. P. 54(c).

3 IRC § 7407(b).

4 Id.

5 Because § 7408 expressly provides for an injunction, the traditional guidelines for equitable relief do not have to be established for an injunction to issue. Id.; United States v. H & L Schwartz, Inc., 60 A.F.T.R.2d 87-6031, 87-6036 (C.D. Cal. 1987) ( "Traditional equity grounds need not be proven in order for an injunction that is authorized by statute is issued.") The same is true for an injunction under § 7407. United States v. Gray, 2007 U.S. Dist. LEXIS 19833 (W.D. Mich., March 19, 2007).

6 United States v. Saladino, 2005 U.S. Dist. LEXIS 38080 (C.D. Cal. 2005), aff'd, 2006 U.S. App. LEXIS 7881 (9 th Cir. 2006) (discussing the frivolous nature of the "claim of right" program).

7 United States v. Venie, 691 F.Supp. 834, 838 (M.D. Pa. 1988) (held that the fraudulent overstatement of child care expenses based on a frivolous position subjected defendant to punishment under § 7407(b)(1)(D)); See also, United States v. Franchi, 756 F.Supp. 889, 893 (W.D. Pa. 1991) (same).

8 United States v. Gray, 2007 U.S. Dist. LEXIS 19833 (W.D. Mich. March 19, 2007) (enjoining tax preparer from preparing any tax returns because he had continuously falsified numerous IRS forms and persisted in maintaining an unrealistic position.)

9 United States v. Raymond, 228 F.3d 804, 811 (7 th Cir. 2000).

10 United States v. Estate Pres. Servs., 202 F.3d 1093, 1098 (9 th Cir. 2000); see also Abdo v. United States Internal Revenue Service, 234 F. Supp.2d 553, 561 (M.D.N.C. 2002).

11 United States v. Schulz, 2007 WL 2286410, at *3 (N.D. N.Y. 2007) (discussing selling and organizing a "tax shelter" within the meaning of IRC § 6700.)

12 United States v. Saladino, 2005 U.S. Dist. LEXIS 38080 (C.D. Cal. 2005), aff'd, 2006 U.S. App. LEXIS 7881 (9 th Cir. 2006) (discussing the frivolous nature of the "claim of right" program); United States v. Lloyd, 2005 U.S. Dist. LEXIS 32747 (M.D.N.C. 2005), aff'd, 2006 U.S. App. LEXIS 16254 (4 th Cir. 2006) (same).

13 If it is clear beyond any doubt that a scheme is illegal under established principles of tax law, then the participants have fair notice of its illegality even if no court has so ruled. See United States v. Ingredient Technology Corp., 698 F.2d 88 (2d Cir. 1983).

14 United States v. Schulz, 2007 WL 2286410, at *7 (N.D. N.Y. 2007).

15 Body v. United States, 243 F.2d 378, 384 (1 st Cir. 1957). See United States v. First Nat'l City Bank, 568 F.2d 853 (2 nd Cir. 1977).

16 United States v. Ernst & Whinney, 735 F.2d 1296, 1300 (11 th Cir. 1984). See United States v. Kaun, 633 F. Supp. 406, 409 (E.D. Wis. 1986) ( "federal courts have routinely relied on [ § 7402(a)] ... to preclude individuals ... from disseminating their rather perverse notions about compliance with the Internal Revenue laws or from promoting certain tax avoidance schemes"), aff'd, 827 F.2d 1144 (7 th Cir. 1987).

17 S. Rep. No. 97-494, 97th Cong., 2d Sess. at 266 (1982 U.S. Code Cong. & Ad. News 781, 1014).

18 Ernst & Whinney, 735 F.2d at 1301; United States v. Bell, 238 F. Supp. 2d 696 (M.D. Pa. 2003), aff'd, 414 F.3d 474 (3 rd Cir. 2005).

19 United States v. Schulz, 2007 WL 2286410, at *7 (N.D. N.Y. 2007).

Alvin S. Brown, Esq.
Tax Attorney
703 425-1400 ex 106
www.irstaxattorney.com

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IRS Problem - not a valid IRA rollover under section 72

Ramzy M. and Lena Kopty v. Commissioner.

Dkt. No. 4188-05 , TC Memo. 2007-343, November 21, 2007.

[Appealable, barring stipulation to the contrary, to CA-DC. --CCH.]

[Code Secs. 72 and 408]
IRA rollovers: Premature IRA distributions: --
A husband and wife were liable for income tax and the additional tax on early distributions from a rollover IRA because they did not introduce evidence that the brokerage account they established was not an IRA, or that the distributions from it were attributable to the husband's being disabled. Although the husband claimed that he did not intend to roll over his balance in an employee stock ownership plan (ESOP) into the IRA, the paperwork he executed was consistent with an intent to make a rollover, rather than take a distribution, and satisfied the requirements for establishing an IRA rollover account. The husband's heart problems, while serious, did not constitute a disability that would have avoided the additional tax on premature IRA distributions.


[Code Sec. 6651]
Penalties, civil: Late-filing penalty. --
A husband and wife were liable for a late-filing penalty because, despite the husband's health problems, and their ongoing correspondence with both the IRS and their financial institutions concerning an IRA distribution, they did not establish that their failure to file a return was due to reasonable cause.


[Code Sec. 6662]
Penalties, civil: Accuracy-related penalty. --
A husband and wife were liable for the accuracy-related penalty despite the husband's health problems, and their ongoing correspondence with both the IRS and their financial institutions concerning an IRA distribution. The taxpayers did not establish that their failure to report the IRA distribution was due to reasonable cause. -





Ramzy M. and Lena Kopty, pro se; Cleve Lisecki, for respondent.





MEMORANDUM FINDINGS OF FACT AND OPINION



WHALEN, Judge: Respondent determined the following deficiencies in, and penalties with respect to, petitioners' Federal income tax for 1999 and 2000:





Additions to Tax/Penalties

Year Deficiency Sec. 6651(a)(1) Sec. 6662(a)

2000 1,000.00 None None

1999 $94,699.32 $23,674.83 $12,793.13





Unless stated otherwise, all section references in this opinion are to the Internal Revenue Code as in effect during the years in issue.



The issues for decision are: (1) Whether the distributions received by petitioners during 1999 and 2000 from petitioner Ramzy M. Kopty's individual retirement account (IRA) in the aggregate amounts of $331,500 and $10,000, respectively, are includable in petitioners' gross income, pursuant to section 408(d); (2) whether petitioners are subject to the 10-percent additional tax on early distributions imposed by section 72(t) on the distributions received by petitioners from Mr. Kopty's IRA during 1999 and 2000; (3) whether petitioners are liable for the addition to tax of $23,674.83 determined by respondent under section 6651(a)(1) for failure to file a timely return for 1999; and (4) whether petitioners are subject to the accuracy-related penalty of $12,793.13 determined by respondent under section 6662(a) with respect to their 1999 return.





FINDINGS OF FACT



Petitioners are husband and wife. They resided in Waterloo, Belgium, at the time they filed their petition in this case. In this opinion, references to petitioner are references to Mr. Ramzy M. Kopty.



From March 18, 1991, through the end of 1997, petitioner was employed by a software company, J.D. Edwards & Co. On or about July 1, 1992, he began participating in the J.D. Edwards Employee Stock Ownership Plan (ESOP), a qualified plan under which the company made contributions of its stock to petitioner's account in the plan. By December 31, 1997, when petitioner left the employ of J.D. Edwards & Co., the company had contributed 10,323.9064 shares of its stock into petitioner's ESOP account. Set out below are the number of shares of J.D. Edwards & Co. stock, the aggregate value of those shares of stock, the cash held in petitioner's ESOP account, and the total value of petitioner's account, at the end of each of the years 1992 through and including 1997:





Year Shares Value Cash Total

1992 20.3100 $3,756.70 ($57.43) $3,699.27

1993 36.1085 6,818.47 1,608.94 8,427.41

1994 66.0084 15,698.12 1,725.72 17,423.84

1995 108.1071 46,776.86 6.29 46,783.15

1996 144.5164 108,732.69 30.90 108,763.59

1 Number of
shares
restated to
reflect a
70-to-1
stock
split.

1996 10,116.1480

1997 10,323.9064 304,555.24 10.31 304,565.55





After petitioner left J.D. Edwards & Co. at the end of 1997, he began working through a sole proprietorship, Kopty Management Consulting. In that capacity, he provided management, scientific, and technical consulting services to various clients. The Schedules C, Profit or Loss From Business, for petitioner's sole proprietorship that were filed with petitioners' returns for 1998, 1999, and 2000 are summarized below:





1998 1999 2000

Income:

1 Gross receipts or sales $114,634 -0- -0-

2 Returns and allowances -0-

3 Subtract line 2 from line 1 114,634

4 Cost of goods sold -0-

5 Gross profit, subtract line 4
from line 3 114,634

6 Other income -0-

7 Gross income. Add lines 5 and 6 114,634

Expenses:

10 Car and truck expenses 2,340 $2,340.00 $1,270

11 Commissions and fees 7,900 8,560.00 5,330

13 Depreciation and section 179
expense deduction 3,756 3,756.00 1,430

18 Office expense -0- 667.59 267

20 Rent or lease

a Vehicles, machinery, and
equipment

b Other business property 1,500 24,931.51 18,670

24 Travel, meals, and entertainment

a Travel 33,288 10,208.49 2,450

b Meals and entertainment $5,000 $3,415.00 $1,760

c Enter nondeductible amount 2,500 1,707.50 880

d Subtract line 24c from line
24b 2,500 1,707.50 880

25 Utilities -0- 1,744.96 1,460

26 Wages (less employment credits) None 28,916.44 14,320

27 Other expenses

Telephone 7,191 12,588.64 6,380

Other misc. 2,300 -0- -0-

Total expenses 60,775 95,421.13 52,457

Net profit or (loss) 53,859 -95,421.13 -52,457





Circa June of 1999, petitioner's wife and children moved from Dubai in the United Arab Emirates to Waterloo, Belgium. Until sometime during 2000, petitioner's business activities were based in Dubai, and he retained a residence there. Between June 1999 and the latter part of 2000, petitioner traveled between Belgium, where he and his family resided, and Dubai, where his business activities were centered. Some of the expenses claimed on the above Schedules C for 1999 and 2000 reflect Mr. Kopty's travel between his home in Belgium and his business in the United Arab Emirates.



On or about July 1, 1998, after leaving the employ of J.D. Edwards & Co., petitioner sent a distribution request form to the company asking the company to distribute to him the shares of stock and cash held in his ESOP account. As completed by petitioner, the distribution request form states: "I elect a payout of all my whole shares of J.D. Edwards stock, plus cash, * * * payable to me with the applicable taxes withheld for federal tax."



On the following day, petitioner transmitted a facsimile of the distribution request form to a representative of Norwest Investment Services, Inc. (hereinafter Norwest). Several days later, on or about July 8, 1998, petitioner applied to open a self-directed IRA with Norwest. As completed by petitioner, the application states that petitioner wanted to establish a "Rollover IRA".



On or about July 15, 1998, in response to petitioner's distribution request, the ESOP's trustee, Wells Fargo Bank, sent 10,323 shares of J.D. Edwards & Co. stock to the transfer agent and registrar of the stock, Harris Trust Co. of California, with instructions to reissue the stock in petitioner's name. In accordance with those instructions, on or about July 30, 1998, the transfer agent mailed to petitioner a stock certificate for 10,323 shares of J.D. Edwards & Co. stock. The stock certificate, No. JDE1185, was dated July 15, 1998. The shares represented by that stock certificate had not been registered under the Securities Act of 1933, and the stock certificate bore the following restricted legend:



THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER SAID ACT OR OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED. * * *



Petitioner received the stock certificate from the transfer agent, but the record does not reveal precisely when he received it.



On August 4, 1998, 5 days after the stock certificate had been mailed to him by the transfer agent, petitioner hand-delivered it to Norwest. In return, a representative of Norwest gave petitioner a receipt for the stock certificate. The receipt states that the purpose of receiving the stock certificate was "Deposit to account". Thus, according to the receipt, Norwest received the J.D. Edwards & Co. stock certificate from petitioner for the purpose of depositing the shares into petitioner's rollover IRA at Norwest.



Mr. Kopty's rollover of the stock distribution from his ESOP account to his IRA was confirmed by the statement for petitioner's IRA which was issued by Norwest for the period ending August 31, 1998. That statement records a "stock rollover DS" on August 24, 1998, consisting of 10,323 shares of J.D. Edwards & Co. stock valued at $40.50 per share in the aggregate amount $418,081.50. It is not clear from the record why the rollover was not booked into petitioner's account as of August 4, 1998, the date of the receipt issued by Norwest for petitioner's J.D. Edwards & Co. stock certificate.



A letter to petitioner dated August 11, 1998, written by a representative of the ESOP's trustee, Wells Fargo Bank, states as follows:



You elected to take a distribution from the J.D. Edwards & Company (the "Company") Employee Stock Ownership Plan (the "ESOP"). In accordance with the terms of the ESOP and your distribution request form, a stock certificate in the amount of 10,323 shares. [sic] You will receive your stock certificate from J.D. Edwards in the near future.



You elected not to rollover your ESOP account balance. As a result, the cash balance, consisting of your cash account and fractional shares, has been withheld for tax purposes. You will receive a 1099R in January 1999 to reflect your distribution. You may be liable for additional taxes concerning this distribution.



The above letter is wrong on two important points. First, as discussed above, by August 11, 1998, the date of the letter, petitioner had already received the stock certificate for 10,323 shares of J.D. Edwards & Co. stock from the transfer agent. Second, by the date of the letter, petitioner had already hand-delivered the stock certificate to Norwest for deposit into his rollover IRA.



Enclosed in the above letter is a "Settlement Statement (Prepared 8/11/98 with values as of 7/15/98)". According to that statement, the market value of petitioner's current vested account balance in the ESOP amounted to $467,817.48. The statement says that $467,766.10 of that amount was paid to petitioner in the form of 10,323 shares of J.D. Edwards & Co. stock. The stock was valued as of July 15, 1998, at $45.31 per share. The statement also says that the payment to petitioner was "less withholding" of $51.38 "consisting of your cash account and fractional shares". We note that the value of petitioner's fractional share, $41.07 (i.e., 0.90164 x $45.31), plus the cash balance in his account, $10.31, is $51.38.



On October 2, 1998, petitioner executed a Norwest form entitled Self-Directed IRA Rollover/Direct Rollover Documentation. According to that form, petitioner's signature signified his irrevocable election, "pursuant to IRS regulation 1.402(a)(5)-1T, to treat this contribution [viz. of 10,323 shares of J.D. Edwards & Co. stock] as a rollover contribution." Petitioner's signature appears on the form a second time in order to give Norwest the following "Commingling Authorization":



The undersigned authorizes the Trustee/Custodian to commingle regular IRA contributions with rollover/direct rollover contributions pursuant to Part II above. I understand that commingling regular IRA contributions with rollover/direct rollover contributions from employer plans may preclude me from rolling over funds in my rollover IRA into another qualified plan or 403(b) plan. With such knowledge, I authorize and direct the Trustee/Custodian to place regular IRA contributions in my rollover IRA or vice versa.



Sometime after petitioner had hand-delivered his J.D. Edwards & Co. stock certificate to Norwest, representatives of Norwest prepared the paperwork necessary to permit the registration and sale of petitioner's shares, and they sent the paperwork to petitioner for completion. The completed paperwork was received from petitioner by Norwest's office in Boulder, Colorado, on or about October 7, 1998, and was forwarded to Norwest's home office in Minneapolis, Minnesota. The paperwork and the stock certificate were then sent to the transfer agent on or about October 20, 1998, and the shares of stock were registered in unrestricted form on or about November 4, 1998.



Norwest sold petitioner's J.D. Edwards & Co. stock on or about November 16, 1998. The statement for petitioner's IRA for the period ending November 30, 1998, reflects the following sales of J.D. Edwards & Co. stock:





Net Proceeds
(after
Trade Date Shares Price Commissions)

Nov. 19, 1998 300 $32.750 $9,786.79

Nov. 19, 1998 23 32.750 750.62

Nov. 19, 1998 8,000 32.625 260,087.75

Nov. 19, 1998 2,000 32.812 65,396.92

10,323 32.737 336,022.08





The above proceeds were invested in a money-market mutual fund and earned dividend income in the amount $509.90 for the remaining 12 days of November and $1,322.35 for the month of December. Thus, through the end of 1998, petitioner's IRA earned dividend income in the aggregate amount of $1,832.25 on the net proceeds realized from the sale of his J.D. Edwards & Co. stock.



In early 1999, the ESOP's trustee, Wells Fargo Bank, issued to petitioner a Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., for tax year 1998. According to that form, during 1998, petitioner had received gross distributions from the J.D. Edwards ESOP of $467,817.48 of which the taxable amount is $42,695.14, and on which Federal income tax of $51.38 had been withheld. Similarly, Norwest Bank Minnesota, N.A., issued to petitioner a Form 5498, IRA Contribution Information, on behalf of Norwest Bank MN NA IRA C/F Ramzy Kopty reporting rollover contributions of $411,629.63 for 1998. According to that form, the fair market value of petitioner's IRA account was $337,854.33.



During 1999, petitioner's IRA earned dividend income in the aggregate amount of $6,093.21. During the year, petitioner caused Norwest to make distributions from his IRA in the aggregate amount of $331,500, as follows:





Date Amount

Jan. 4, 1999 $70,000

Jan. 4, 1999 20,000

Feb. 1, 1999 15,000

Apr. 26, 1999 30,000

May 13, 1999 30,000

May 31, 1999 15,000

July 19, 1999 20,000

July 19, 1999 50,000

Sept. 20, 1999 10,000

Oct. 18, 1999 20,000

Oct. 18, 1999 10,000

Oct. 25, 1999 17,000

Nov. 15, 1999 10,000

Nov. 29, 1999 10,000

Dec. 1, 1999 4,500

331,500





With one exception, all of the distributions that petitioner requested from his IRA were accompanied by a Norwest form entitled "Self-Directed IRA Withdrawal Request". According to each such form, the type of withdrawal that petitioner requested was "Premature Distribution (under age 59 1/2) (no known exception)". Each form also instructed Norwest not to withhold Federal income tax from the amount distributed. The form states:



If I elect not to have Federal income tax withheld, I am still liable for payment of Federal income tax on the taxable portion of my distribution; I also may be subject to tax penalties under the estimated tax payment rules, if my payments or estimated tax and withholding, if any, are not adequate.



Finally, as the source of the funds, each form states that "Funds will first be withdrawn from the liquid asset portion of my IRA."



Subsequently, during the year 2000, Norwest Bank Minnesota, NA, sent a Form 1099-R to petitioners reporting gross distributions of $331,500 from petitioner's IRA during 1999.



During 2000, the money invested in petitioner's IRA earned mutual fund dividends in the amount of $141.27. During that year, petitioner requested distributions of $10,000 from his IRA. By the end of 2000, the value of petitioner's IRA was zero. Wells Fargo Investments, LLC, later issued a Form 1099-R to petitioners reporting gross distributions of $10,000 from petitioner's IRA during the year 2000. The record of this case suggests that Wells Fargo Bank acquired Norwest, but it does not say when the acquisition took place.



Petitioners filed their Federal income tax return for 1998 on October 18, 2000. The return had been prepared by Arthur Anderson. Consistent with the Form 1099-R issued to petitioners by Wells Fargo Bank, and the Form 5498, IRA Contribution Information, issued by Norwest Bank Minnesota, N.A., petitioners' 1998 return reports total pensions and annuities of $467,817. Petitioners' 1998 return reports that the taxable amount of the distribution is "NONE". Petitioners' 1998 return also reports income tax withholding of $51. Finally, petitioners' 1998 return reports none of the dividend income earned by petitioners' IRA during 1998 in the aggregate amount of $1,832.25.



In passing, we note that by October 18, 2000, when petitioners filed their return for 1998, and reported that "NONE" of the ESOP distribution was taxable, they had already withdrawn most, if not all, of the money from the IRA. Stated differently, by October 18, 2000, the distributions received from Mr. Kopty's IRA amounted to most, if not all, of the proceeds realized from the sale of the J.D. Edwards & Co. stock and the income realized on those proceeds.



Prior to filing petitioners' return for 1998, Mr. Kopty had sent a letter to the Internal Revenue Service dated May 27, 2000, in which he explained why petitioners' 1998 return had not been filed. Petitioner's letter, which was mailed on June 6, 2000, states as follows:



Please be informed that the 1998 taxes are held up due to an error made by my ex-employer J.D. Edwards in the preparation of the Form 1099. Please take note of the following:



1. The 1099 Form of J.D. Edwards indicates that the gross distribution is US $467,817.48 attached.



2. J.D. Edwards claims that the calculation for the above is based on 10,323 shares x $45.313 per share.



3. According to the bank statement, Norwest Investment Services the shares were $31.00 per share when they were finally "free and clear" on November 4, 1998. As a matter of fact, the shares were sold by Norwest Investment Services on November 16, 1998, for a total of $339,203 which is an average per share of $32.85. This was put in an IRA account.



4. I re-addressed this issue again with J.D. Edwards and based on their last response they believe that their calculation is correct. From what appears to be the issue is that J.D. Edwards has made their calculation at a much higher price per share on July 15, 1998. On the other hand, the shares were not "free and clear" on that date of preparation which was solely under JDEdwards control.



5. We are considering to hand this matter over to a legal adviser to resolve this matter since it has material repercussions on lost amounts and taxable income.



In order to avoid penalties and interests, we have forwarded to you earlier a check amount of US $13,529.00 to be considered as a pre-payment for the time being. Also we would like to request from you any suggestions that will help us resolve this matter. [Emphasis added.]



In substance, the above letter states that the filing of petitioners' 1998 return was delayed due to an error made by Mr. Kopty's ex-employer, J.D. Edwards & Co., in preparing his Form 1099-R for 1998. Petitioner complains that the gross distribution shown on the Form 1099-R in the amount of $467,817.48, valued as of July 15, 1998, greatly exceeds the proceeds realized from the sale of the shares on November 16, 1998, in the amount of $339,230. Petitioner complains that the value of the distribution reported to the Internal Revenue Service on the Form 1099-R was based upon the higher price per share on July 15, 1998, when "the shares were not 'free and clear'". In effect, petitioner's letter suggests that the Form 1099-R overstates the value of the stock issued to petitioner and, thus, overstates the amount includable in petitioners' income. The letter refers to the fact that petitioner had made a "pre-payment" of tax of $13,529, and it requests "any suggestions that will help us resolve this matter."



When petitioner transmitted his 1998 Federal income tax return to the IRS, he did so with a cover letter dated October 4, 2000, which states as follows:



Reference - 1998 taxes (Ramzy Kopty - SSN * * *)



The error in the 1099-R was discovered during the tax preparation in December 1999 which would have added an additional income of $42,695.14. Immediately I contacted JD Edwards for the problem & did not receive any correction or attention to this date.



April, 2000 - with no correction from JD Edwards/their bank, and in avoidance of delay of payments I did a rough calculation without the $42,695.14 & immediately I forwarded a check on April 17, 2000 for the amount of $13,529.00 (copy attached)



June 2000 - and still, with no correction from JD Edwards/their bank I sent a detailed explanation to the IRS on June 6, 2000 [i.e., above-quoted letter dated May 27, 2000] with all the supporting documents (Attached) & requested any suggestions that will help resolve the matter. I did not get a response from the IRS on this issue, and contrary, I received a letter dated September 18, 2000 (cover sheet attached for your reference) which included name & a contact of Robert Stathntan (telephone - 215- * * *)



Upon Receipt and on September 26, 2000 I called the IRS & talked to Ms. Kazlauskas who was very understanding to the issues and we agreed that I file the tax return (attached) citing the error & the pervious correspondence



Under the circumstance I would like you to consider all the above points while reviewing this situation and confirm to me your finding. Additionally there was a medical factor involved in this time frame (attached medical report). In view of my health situation I have also applied for long term disability with the Social security (Social security confirmation attached).



Thus, petitioner's transmittal letter of October 4, 2000, again raises the issue discussed in his letter dated May 27, 2000, quoted above. That issue involves his contention that the gross distribution reported on the Form 1099-R issued for 1998, consisting of the stock of J.D. Edwards & Co., is overstated, as shown by the fact that the amount reported on the Form 1099-R greatly exceeds the proceeds realized from the sale of the stock. The transmittal letter expresses petitioner's concern that the amount of the gross distribution reported on the Form 1099-R would cause additional income of $42,695.14 for 1998.



Petitioners filed their 1999 Federal income tax return on or about November 21, 2001. That return does not report any of the distributions from petitioner's IRA at Norwest during 1999 in the aggregate amount of $331,500. At the same time, the return reports none of the dividend income in the aggregate amount of $6,093.21 realized by petitioner's IRA during the year.



Petitioners also filed their 2000 Federal income tax return on or about November 21, 2001. That return does not report the distributions of $10,000 received from petitioner's IRA during 2000. Furthermore, that return does not report the dividends of $141.27 realized on the moneys invested in petitioner's IRA during 2000.



In the later part of 1999, petitioner consulted doctors at the cardiopulmonary department of the American Hospital in Dubai. He was briefly treated in the emergency room of the American Hospital in Dubai on November 29, 1999, and approximately one week later, on December 6, 1999, he returned to the hospital to engage in a treadmill test. The interpretation of that test states the following:



Exercise EKG positive for Ischemie by EKG criteria. No exercise induced chest pains or arrhythmia. Normal BP response to exercise. Impaired functional capacity for patient's age achieving 10.6 METS.



Subsequently, Mr. Kopty was admitted to the American Hospital in Dubai on March 3, 2000, with the symptoms of a heart attack. Approximately 2 weeks later he was transported to the Universite Catholique De Louvain Cliniques Universitaires Saint-Luc, a hospital in Belgium, where he underwent coronary bypass and mitral valve repair on March 25, 2000. Mr. Kopty was released on April 10, 2000, but was readmitted from time to time for further treatment through the end of June 2000.



The medical records submitted by petitioners make it clear that Mr. Kopty's heart attack and related medical problems between March and June of 2000 were serious. Mr. Kopty's treating physician in Belgium wrote on July 29, 2000, "since March 3, 2000 Mr. Kopty had to stop his professional activities. It seems obvious that these activities will have to be strongly reduced in the future."



In November of 2004, after the Internal Revenue Service audited petitioners' returns for 1999 and 2000 and issued the notice of deficiency which is at issue in this case, Mr. Kopty contacted Wells Fargo and asked the bank to issue a new Form 5498, IRA Contribution Information, for taxable year 1998 and new Forms 1099-R for taxable years 1999 and 2000. Pursuant to his request, Wells Fargo issued a new Form 5498 for 1998 stating that his IRA contribution for the year was zero, and it issued new Forms 1099-R reporting gross distributions from his account at Norwest of zero for 1999 and 2000.





OPINION




Taxability of the Distributions From Petitioner's IRA During 1999 and 2000


The principal issue in this case is whether petitioners are subject to tax, as provided by section 408(d)(1), on the aggregate distributions of $331,500 and $10,000 that they received from petitioner's IRA during 1999 and 2000, respectively. Petitioners argue that they are not subject to tax on those distributions because the account from which the distributions were made was not an IRA.



Mr. Kopty had established that account with Norwest in 1998, and he funded it by making a purported rollover contribution of the stock he had received as a distribution from the J.D. Edwards ESOP. According to petitioners, they learned in 2004, during the audit of their returns for 1999 and 2000, that Mr. Kopty had failed to complete the rollover contribution within 60 days following the day on which he had received the stock from the ESOP, as required by section 402(c)(3). We discuss the basis for petitioners' assertion that Mr. Kopty failed to make a valid rollover in more detail below.



Based on the factual premise that Mr. Kopty failed to make a valid rollover, petitioners contend that Mr. Kopty's account at Norwest was not an IRA within the meaning of section 408(a) and they are not subject to tax on the distributions from that account. Furthermore, petitioners argue that the determination made by respondent in the notice of deficiency is based upon Norwest's incorrect conclusion that Mr. Kopty had made a valid rollover of his J.D. Edwards & Co. stock in 1998. They argue that, because Norwest's conclusion was wrong, the notice of deficiency, based thereon, must also be wrong. According to petitioners:



respondents [sic] relied on the erroneous bank determination that the 1998 roll over of the ESOP to the IRA account * * * was valid and relied on the erroneous reporting that followed that determination by the bank. * * * Hence, respondent's determination in paragraph 3 [of the notice of deficiency] and consequently the deficiency notice is null and void.



Petitioners do not explain the legal basis, or cite any authority, for their conclusion that they are not subject to tax on the distributions from Mr. Kopty's account at Norwest. The general rule is that any amount "paid or distributed out of" an IRA is subject to tax as prescribed by section 72. See sec. 408(d)(1). Petitioners seem to be arguing that Mr. Kopty's Norwest account is disqualified from being an IRA because it was funded by an excess contribution. To the contrary, an IRA is not necessarily disqualified by the fact that it accepted excess contributions, even if it was funded entirely with excess contributions. See Orzechowski v. Commissioner, 69 T.C. 750 (1978), affd. 592 F.2d 677 (2d Cir. 1979); see also Boggs v. Commissioner, 83 T.C. 132 (1984), affd. 774 F.2d 740 (7th Cir. 1985); Benbow v. Commissioner, 82 T.C. 941 (1984). In another context we concluded that excess contributions were not subject to tax when distributed by an IRA. See Campbell v. Commissioner, 108 T.C. 54 (1997) (holding that the taxpayer received basis to the extent of his "investment in the contract" under section 72(e)(6)). Petitioners have not made any such argument in this case.



Respondent urges the Court to reject petitioner's position. Respondent asserts that "the record clearly reflects that the position taken by petitioners on their 1998 return was correct" and that a valid rollover of the distribution received from the ESOP was made in that year. Furthermore, respondent points out that petitioners' 1998 return reported the receipt of the ESOP distribution in the amount of $467,817 and reported that the taxable amount of such distribution was "NONE". Respondent asserts that "petitioners are estopped, pursuant to the duty of consistency doctrine, from adopting a position on their 1999 and 2000 tax returns inconsistent with the position taken on their 1998 Return."



We agree with respondent that, under the facts of this case, Mr. Kopty made a valid rollover of the stock distribution he received from the J.D. Edwards ESOP in 1998. Accordingly, we reject the factual premise of petitioners' argument that Mr. Kopty's account at Norwest was not an IRA, and we find that the distributions from that account during 1999 and 2000 are subject to tax under sections 408(d)(1) and 72(a). We do not reach respondent's second point that petitioners are estopped under the duty of consistency from taking a different position on their 1999 and 2000 returns.



In order to fully address petitioners' argument, we must set out petitioners' argument in more detail. Petitioners acknowledge that they physically transferred the J.D. Edwards & Co. stock certificate to Norwest within 60 days of the date on which they received it, but they contend that they did not irrevocably elect to make a rollover contribution to the IRA at that time. According to petitioners, the stock certificate "was hand-delivered to Norwest Bank [only] for safekeeping until the shares become our [sic] unrestricted and eventually sold." They assert that "the bank placed the restricted shares by mistake in the new account while the bank proceeded with the paperwork to un-restrict and sell the shares."



Petitioners contend that the stock certificate did not properly become invested in the IRA account until October 2, 1998, when Mr. Kopty executed the Norwest form entitled "Self-Directed IRA Rollover/Direct Rollover Documentation". Petitioners point out that October 2, 1998, is 79 days after Mr. Kopty had constructively "received" the certificate on July 15, 1998, and is beyond the 60-day period specified in section 402(c)(3) during which a distributee is required to transfer the property distributed to an eligible retirement plan. Petitioners further contend that the form executed on October 2, 1998, was not properly completed and did not serve to transfer the stock to Norwest. In effect, petitioners' position is that Mr. Kopty did not elect to treat the contribution of his J.D. Edwards & Co. stock certificate as a rollover contribution until October 2, 1998, when he executed the Norwest form entitled "Self-Directed IRA Rollover/Direct Rollover Documentation".



According to the regulations promulgated under section 402, an election to treat a contribution to an IRA as a rollover contribution is made simply by designating the contribution as a rollover contribution. The regulations promulgated under section 402 provide as follows:



In order for a contribution of an eligible rollover distribution to an individual retirement plan to constitute a rollover and, thus, to qualify for current exclusion from gross income, a distributee must elect, at the time the contribution is made, to treat the contribution as a rollover contribution. An election is made by designating to the trustee, issuer, or custodian of the eligible retirement plan that the contribution is a rollover contribution. This election is irrevocable. Once any portion of an eligible rollover distribution has been contributed to an individual retirement plan and designated as a rollover distribution, taxation of the withdrawal of the contribution from the individual retirement plan is determined under section 408(d) rather than under section 402 or 403. Therefore, the eligible rollover distribution is not eligible for capital gains treatment, five-year or ten-year averaging, or the exclusion from gross income for net unrealized appreciation on employer stock. [Sec. 1.402(c)-2, Q&A-13, Income Tax Regs.; emphasis added.]



Thus, no particular form is required by the regulations in order to designate a contribution as a rollover contribution.



In this case, petitioner opened a "Rollover IRA" at Norwest on July 8, 1998, and he hand-delivered his J.D. Edwards & Co. stock certificate to Norwest on August 4, 1998, several days after the transfer agent had mailed the stock certificate to him. According to the receipt issued to petitioner by a representative of Norwest, "Deposit to account" was the purpose for which Norwest received petitioner's stock certificate. Petitioner's only account at Norwest was the "Rollover IRA" which he had opened by submitting an application to Norwest on or about July 8, 1998. Furthermore, the statement issued by Norwest for petitioner's IRA for the period ending August 31, 1998, reflects a "stock rollover" of 10,323 shares of J.D. Edwards & Co. stock on August 24, 1998. Thus, it is evident that Norwest, the trustee, issuer, or custodian of the IRA, believed that petitioner had designated his J.D. Edwards & Co. stock as a "rollover contribution" to his IRA. See sec. 1.402(c)-2, Q&A-13, Income Tax Regs.



Petitioner's contribution of J.D. Edwards & Co. stock to his IRA and his designation of the contribution as a rollover contribution took place well within 60 days of receipt as required by section 402(c)(3). This is true no matter what we use as the starting date, that is, "the day on which the distributee received the property distributed." See sec. 402(c)(3). In this case, the starting date of the 60-day period could be the date on which petitioner constructively received the stock, July 15, 1998. See generally Rev. Rul. 82-75, 1982-1 C.B. 116 and Rev. Rul. 81-158, 1981-1 C.B. 205 (holding that, for purposes of section 402, the distributee received shares from an employer established profit-sharing plan that qualified under section 401(a) when the trustee of the plan delivered to the transfer agent stock certificates previously issued in the trustee's name, together with written instructions to reissue the certificates in the name of the distributee). The starting date could also be the date on which petitioner actually received the stock. Petitioner actually received the stock certificate between July 30, 1998, when the transfer agent mailed it to him, and August 4, 1998, when he hand-delivered the stock certificate to Norwest.



Furthermore, in this case, the 60-day period is satisfied regardless of the date used as the date of the "transfer of a distribution". See sec. 402(c)(3). That date could be August 4, 1998, the day on which petitioner hand-delivered the certificate to Norwest, or August 24, 1998, the day on which Norwest recorded the transfer on its statement for petitioner's IRA for the period ending August 31, 1998.



Petitioners do not deny that they intended to rollover the distribution which Mr. Kopty received in 1998 from the J.D. Edwards & Co. ESOP. Further, they do not deny that Mr. Kopty delivered his J.D. Edwards & Co. stock certificate to Norwest on August 4, 1998. What they argue is that when Mr. Kopty hand-delivered the stock certificate to Norwest on August 4, 1998, he intended to give the certificate to Norwest only for safekeeping, pending the reissuance of the stock without restriction and its sale. Petitioners assert that Norwest made a mistake by depositing the stock into petitioner's IRA before October 2, 1998, the date on which petitioner executed the Norwest form entitled "Self-Directed IRA Rollover/Direct Rollover Documentation".



One problem we have with this factual contention is that there is nothing in the record, other than petitioners' testimony, to substantiate it. Certainly, Mr. Kopty did nothing to call this alleged mistake to the attention of the Norwest representative who issued the receipt for Mr. Kopty's stock certificate. Additionally, Mr. Kopty said nothing about this alleged mistake when he received the August 1998 statement for his IRA on which was recorded a "stock rollover DS" on August 24, 1998, consisting of 10,323 shares of J.D. Edwards & Co. stock.



Furthermore, petitioners' argument presupposes that no rollover to Mr. Kopty's IRA at Norwest could take place for purposes of section 402(c) unless and until the form entitled "Self-Directed IRA Rollover/Direct Rollover Documentation" was submitted to Norwest. To the contrary, as discussed above, the regulations promulgated under section 402 merely require the contribution to be designated a rollover contribution. The Norwest form which petitioner executed on October 2, 1998, entitled "Self-Directed IRA Rollover/Direct Rollover Documentation" may have been helpful in terms of petitioner's relationship with Norwest, to document Mr. Kopty's wishes, but it was not essential for purposes of finding a rollover contribution under section 402(c).



Finally, petitioners' assertion that Mr. Kopty transferred the stock certificate to Norwest only for safekeeping until the shares could be reissued in unrestricted form and sold is contradicted by Mr. Kopty's actions. The fact is that Mr. Kopty executed the form on October 2, 1998, well before the shares were registered in unrestricted form and sold on November 16, 1998. Indeed, it appears that Mr. Kopty may have executed the form even before he returned to Norwest the paperwork necessary to permit the registration and sale of the shares. As mentioned above, the completed paperwork to permit the registration and sale of petitioner's stock was not received from petitioner by Norwest's office in Boulder until October 7, 1998.



Based on the facts of this case, we find that Mr. Kopty made an irrevocable election to roll over, to his IRA, the distribution of stock he had received from the J.D. Edwards ESOP. We further find that petitioner made this irrevocable election within the 60-day period required by section 402(c)(3).




Ten Percent Additional Tax on Early Distributions


The second issue in this case is whether petitioners are liable for the 10-percent additional tax on early distributions from qualified retirement plans imposed by section 72(t)(1). Respondent applied the 10-percent additional tax on the aggregate distributions of $331,500 made by petitioner's IRA in 1999 and the aggregate distributions of $10,000 made by the IRA in 2000. Accordingly, respondent determined taxes under section 72(t)(1) for 1999 and 2000 in the amounts of $31,500 and $1,000, respectively.



Petitioners argue that section 72(t)(1) does not apply to any of the subject distributions because all of them qualify under the exception set forth in section 72(t)(2)(A)(iii) for distributions "attributable to the employee's being disabled within the meaning of subsection (m)(7)". Section 72(m)(7) provides as follows: "an individual shall be considered disabled if he is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or to be of long-continued and indefinite duration". See also sec. 1.72-17A(f)(1), Income Tax Regs. Whether an impairment constitutes a disability is to be determined with reference to all of the facts in the case. Sec. 1.72-17A(f)(2), Income Tax Regs. The regulations provide examples of impairments which would ordinarily be considered as preventing substantial gainful activity. One of those examples is the following:



Diseases of the heart, lungs, or blood vessels which have resulted in major loss of heart or lung reserve as evidenced by X-ray, electrocardiogram, or other objective findings, so that despite medical treatment breathlessness, pain, or fatigue is produced on slight exertion, such as walking several blocks, using public transportation, or doing small chores * * * [Sec. 1.72-17A(f)(2)(iii), Income Tax Regs.]



The regulations point out that the existence of one or more of the impairments described therein, including the one quoted above, "will not, however, in and of itself always permit a finding that an individual is disabled as defined in section 72(m)(7)." See sec. 1.72-17A(f)(2), Income Tax Regs. Furthermore, the regulations caution that any impairment must be evaluated in terms of whether it does in fact prevent the individual from engaging in his customary or any comparable substantial gainful activity. Id. In order to meet the requirements of section 72(m)(7), the regulations provide that "an impairment must be expected either to continue for a long and indefinite period or to result in death." Sec. 1.72-17A(f)(3), Income Tax Regs. An impairment which is remediable does not constitute a disability, and an individual will not be deemed disabled if it can be diminished to the extent that the individual can engage in his customary or any comparable substantial gainful activity. Sec. 1.72-17A(f)(4), Income Tax Regs. Furthermore, a taxpayer may be engaged in a gainful activity even though he realizes a net loss from that activity during the year. See Dwyer v. Commissioner, 106 T.C. 337, 341 (1996).



In this case, petitioners introduced into evidence certain medical records involving the medical treatment of Mr. Kopty's heart condition. Based upon those records they claim that "from 1999 onwards, Ramzy Kopty was disabled due to heart failure and unable to engage in any substantial gainful activity." According to petitioners, Mr. Kopty "had no income after 2000 which is reflected in petitioners['] tax returns for the years 2001, 2002, 2003, 2004." Petitioners assert that Mr. Kopty receives long-term disability benefits from the U.S. Social Security Administration. Based upon Mr. Kopty's heart disease, petitioners assert that they are not subject to the 10-percent additional tax on early distributions under section 72(t) because all of the distributions are attributable to Mr. Kopty's being disabled within the meaning of section 72(m)(7).



As to the distributions made during 1999, we do not accept petitioners' assertion that the distributions are attributable to Mr. Kopty's being disabled. According to the medical records submitted by petitioners, Mr. Kopty was briefly treated in the emergency room of the American Hospital in Dubai on November 29, 1999, and approximately 1 week later, on December 6, 1999, returned to engage in a treadmill test. According to petitioners' brief: "petitioner was diagnosed in 1999 with Pectoris Spasm and Ischemia which limited petitioner's ability to have gainful activity from 1999 onwards and that the same disease led to an myocardial infarction (MI) in March 2000." That diagnosis, however, did not even take place until December 6, 1999, at the earliest. By that time, all of the distributions for 1999 had been made. In our view, the record of this case fails to show that any of the distributions made during 1999 in the amount of $331,500 were attributable to Mr. Kopty's being disabled.



As to the distributions made during 2000, Mr. Kopty was admitted to the American Hospital in Dubai on March 3, 2000, with the symptoms of a heart attack. Approximately 2 weeks later, he was transported to a hospital in Belgium where he underwent coronary bypass and mitral valve repair on March 25, 2000. Mr. Kopty was released on April 10, 2000, but was readmitted from time to time for further treatment through the end of June 2000. The medical records submitted by petitioners make it clear that Mr. Kopty's heart attack and related medical problems between March and June of 2000 were serious. Mr. Kopty's treating physician in Belgium wrote on July 29, 2000: "since March 3, 2000 Mr. Kopty had to stop his professional activities. It seems obvious that these activities will have to be strongly reduced in the future."



The record in this case, however, makes it difficult to find that Mr. Kopty was "disabled" within the meaning of section 72(m)(7) by his heart condition. First, after June of 2000 he continued to travel between Dubai and Belgium. He testified at trial about the steps which he had to take in order to close his business in Dubai and "relocate" to Belgium. Furthermore, petitioners' income tax return for 2000 includes a Schedule C of Mr. Kopty's sole proprietorship which reflects business expenses of $52,457 for the year. The expenses claimed on that Schedule C include travel expenses of $2,450, expenses for meals of $1,760, and telephone expenses of $6,380. The business activities suggested by those expenses belie petitioners' claim that Mr. Kopty was "unable to engage in any substantial gainful activity" during the year. See sec. 72(m)(7). Significantly, petitioners' return for 2000 also reports that Mr. Kopty received wages of $22,795.28 from J.D. Edwards World Solutions. Finally, Mr. Kopty presented his case at trial. The Court had an opportunity to observe him over the course of 2 days. The Court detected no medical disability in his presentation of the case to the Court.




Addition to Tax Under Section 6651(a)(1) Determined With Respect to Petitioners' 1999 Return


The time for filing petitioners' 1999 return was extended to December 15, 2000. Petitioners filed their 1999 return on November 21, 2001, and, thus, they failed to file a timely return. Accordingly, respondent determined an addition to tax under section 6651(a)(1) of $23,674.83 in the notice of deficiency. We find that respondent satisfied his burdens of production under section 7491(c) with respect to the addition to tax under section 6651(a). See Higbee v. Commissioner, 116 T.C. 438, 446-447 (2001).



Petitioners argue that they are not liable for the addition to tax under section 6651(a)(1) because their failure to file a timely return for 1999 was due to reasonable cause and not due to willful neglect. See sec. 6651(a)(1). According to petitioners, reasonable cause for the late filing of their 1999 return is demonstrated by three points: First, Mr. Kopty's medical history, including his heart attack on March 3, 2000, and his related medical issues; second, the alleged fact that petitioners never received the Form 1099-R issued by Norwest for 1999 reporting the distributions from Mr. Kopty's IRA during the year totaling $331,500; and third, the fact that petitioners reported a loss on their 1999 return and did not believe that the filing of their 1999 return was an urgent matter, especially in light of Mr. Kopty's medical problems during that year.



Petitioners assert the late filing of their 1999 return was not due to willful neglect. According to petitioners, they were "proactive with the ESOP issue" in that they corresponded with J.D. Edwards & Co. through Mr. Kopty's letter dated February 9, 2000, and they communicated with the Internal Revenue Service through Mr. Kopty's letters dated April 15, 2000, May 27, 2000, and October 4, 2000, and Mr. Kopty's telephone call on September 26, 2000.



We do not believe that petitioners have shown that their failure to file a timely 1999 return was due to reasonable cause and not due to willful neglect. As stated above, we agree that Mr. Kopty's heart attack in March of 2000 and his related surgeries and medical care through June of 2000 were serious. Nevertheless, the record of Mr. Kopty's correspondence and other activities during the year fails to explain why petitioners did not file, or could not have filed, their return for 1999 on or before the due date, December 15, 2000. Indeed, notwithstanding Mr. Kopty's medical condition, petitioners filed their 1998 return on October 18, 2000. At that point, they had ample time before the due date of the 1999 return in which to file that return as well. Furthermore, we reject petitioners' assertion that they should be relieved of the addition to tax under section 6651(a)(1) because they did not receive the Form 1099-R from Norwest or because they did not think that the filing of that return was "an urgent matter".




Imposition of the Accuracy-Related Penalty Under Section 6662(a) With Respect to Petitioners' 1999 Return


Respondent determined petitioners' liability for the accuracy-related penalty under section 6662(a) to be $12,793.13. Respondent determined that a portion of the underpayment of tax required to be shown on petitioners' 1999 return is attributable to negligence or disregard of rules or regulations, or to a substantial understatement of income tax. See sec. 6662(b)(1) and (2). For this purpose, "the term 'negligence' includes any failure to make a reasonable attempt to comply with the provisions of this title, and the term 'disregard' includes any careless, reckless, or intentional disregard." Sec. 6662(c). An understatement of income tax is "substantial" if the amount of the understatement exceeds the greater of (a) 10 percent of the tax required to be shown on the return, or (b) $5,000. Sec. 6662(d)(1)(A).



We agree with respondent that the portion of the underpayment of tax on which respondent imposed the accuracy-related penalty is attributable to negligence or disregard of rules or regulations. Furthermore, we find that respondent has carried his burden of production with respect to the addition to tax under section 6662(a). See Higbee v. Commissioner, supra at 448-449.



Petitioners' return for 1998 reported the ESOP distribution of $467,817 and further reported the taxable amount of that distribution as "NONE". That return is consistent with the Form 5498 issued by Norwest for the year 1998 which shows rollover contributions of $411,629.63, and it is consistent with the Norwest statement for petitioner's IRA for the period ending August 31, 1998, showing a stock rollover into the account on August 24, 1998, consisting of 10,323 shares of J.D. Edwards & Co. stock. Petitioners' 1998 return was not filed until October 4, 2000, by which time almost all of the money in Mr. Kopty's IRA had been withdrawn. In filing their 1998 return claiming that the ESOP distribution was not taxable, petitioners knew, or should have known, that the distributions from Mr. Kopty's IRA during 1999 and 2000 were subject to tax under section 408(d). Accordingly, when they filed their return for 1999 on November 21, 2001, and reported none of the distributions as income, we agree with respondent that the portion of the underpayment of tax resulting therefrom is attributable to negligence or disregard of rules or regulations. Furthermore, petitioners not only failed to report the IRA distributions during 1999 as taxable income, but they also failed to report any of the dividend income in the amount of $6,093.21 earned by the IRA during 1999.



Petitioners assert that they are not liable for the accuracy-related penalty under section 6662(a) for three reasons. First, petitioners claim that, at the time they filed their 1999 return, they did not know whether the rollover in 1998 was valid because "respondents [sic] never answered their several assistance appeals" and petitioners had not received the Form 1099-R for 1999 from Norwest. Second, petitioners assert that respondent has determined their liability for the accuracy-related penalty "to hide their [sic] [respondent's] negligence of not responding to petitioners appeal for assistance with the ESOP transaction". Third, petitioners assert that they "exercised extreme duty of care towards to the ESOP transaction issue under severe circumstances of being abroad and seriously ill".



In summary, petitioners argue that, before they filed their 1999 return, they asked for advice from respondent concerning the validity of the rollover in 1998, and, when they received no response from their inquiries from respondent, they did the best they could under the circumstances of being abroad and with Mr. Kopty's health issues. Petitioners appear to invoke the reasonable cause exception under section 6664(c) which provides that no penalty shall be imposed with respect to any portion of an understatement if it is shown that there was a reasonable cause for such portion and the taxpayer acted in good faith with respect to such portion.



We agree that petitioners corresponded with representatives of the Internal Revenue Service prior to filing their 1999 return (Mr. Kopty's letter dated May 27, 2000, which was sent on June 6, 2000, and his transmittal letter dated October 4, 2000). We also agree that Mr. Kopty engaged in correspondence with Norwest and J.D. Edwards & Co. during 2000 regarding the distribution from the ESOP. That correspondence shows that Mr. Kopty was unhappy about the fact that his shares of J.D. Edwards & Co. stock were not sent until July 30, 1998, and were unregistered shares that could not be immediately sold. According to one of petitioner's letters to J.D. Edwards & Co., the "ESOP shares were supposed to have been received in April 'clear for sales' from J.D. Edwards." During the delay, the value of the shares decreased from $467,766.10, the value on July 15, 1998, to $336,022.08, the value of the shares on November 16, 1998, when they were sold. Petitioner was concerned by the fact that the Form 1099-R which he received from the ESOP was based upon the value of the shares on July 15, 1998, and showed the taxable amount of such distribution to be $42,695.14. When Mr. Kopty stated in his letter to the Internal Revenue Service dated May 27, 2000: "also we would like to request from you any suggestions that will help us resolve this matter", he was referring to this valuation issue. Similarly, petitioner's letter dated October 4, 2000, transmitting petitioners' 1998 tax return to the Internal Revenue Service, refers to the same error in the Form 1099-R. Petitioners' letter states: "under the circumstances I would like you to consider all of the above points while reviewing this situation and confirm to me your finding." Petitioner's letter was again asking the Internal Revenue Service to review the Form 1099-R issued by the ESOP on which petitioner's shares of J.D. Edwards & Co. stock were valued as of July 15, 1998, in the amount of $467,766.10, whereas the net proceeds from the sale of the stock on November 16, 1998, were $336,022.08.



In none of petitioner's correspondence with the Internal Revenue Service does he raise a question about the validity of the rollover of J.D. Edwards & Co. stock into his IRA or the Forms 1099-R issued to report the distributions from the IRA in 1999 and 2000. In fact, petitioners' opening brief states that they did not become aware "that the ESOP rollover was invalid in 1998 due to the 60 days rollover rule" until the audit of their 1999 and 2000 returns which took place between April and September of 2004. We reject any suggestion that petitioners raised with respondent, before the audit of their returns, an issue concerning the validity of the rollover contribution of J.D. Edwards & Co. stock to Mr. Kopty's IRA. In conclusion, we find that petitioners have not shown that there was reasonable cause for the understatement of tax required to be shown on their 1999 return or that they acted in good faith with respect thereto.




Computational Errors


In their posttrial brief, petitioners allege three "computational errors" for the first time in these proceedings. The first computational error involves the amount of the net operating loss for taxable 2000 that can be carried back to 1999. According to petitioners, respondent miscalculated the net operating loss by basing the calculation on adjusted gross income of -$5,522, rather than on -$15,522, the correct amount.



Petitioners failed to raise this issue in their petition, and it is not before the Court. We do not consider an issue that has not been pleaded. See, e.g., Frentz v. Commissioner, 44 T.C. 485, 491 (1965), affd. 375 F.2d (6th Cir. 1967); Sicanoff Vegetable Oil Corp. v. Commissioner, 27 T.C. 1056, 1066 (1957) (and the cases cited thereon), revd. on other grounds 251 F.2d 764 (7th Cir. 1958). This is particularly true in a case like this where the issue cannot be considered without surprise and prejudice to the other party. See Estate of Mandels v. Commissioner, 64 T.C. 61, 73 (1975). Furthermore, we note that the difference of $10,000, about which petitioners complain, is due to the inclusion in gross income of the distributions of $10,000 from Mr. Kopty's IRA during the year.



The second so-called computational error alleged by petitioners involves deductions for moving expenses under section 217(a). Apparently, during the audit of petitioners' returns, petitioners submitted a letter in which they claimed moving expenses in the amount of $5,770 for 1999 and $1,950 for 2000. In the notice of deficiency, respondent did not determine that petitioners were allowed moving expenses. Petitioners ask the Court "to order the moving expense correction."



Petitioners did not raise this matter in their petition. This is a new issue that was raised for the first time after trial. As stated above, we do not consider an issue that has not been pleaded. See, e.g., Frentz v. Commissioner, supra; Sicanoff Vegetable Oil Corp. v. Commissioner, supra. This is particularly true in a case like this where the issue cannot be considered without surprise and prejudice to the other party. See Estate of Mandels v. Commissioner, supra. Accordingly, we will not consider it.



Finally, petitioners argue that interest on underpayments under section 6601(a) should be computed from the date when the tax return was due, taking into consideration extensions of time to file, rather than from the original due date of the return. Petitioners ask the Court to rule that interest on any underpayment for taxable 1999 should begin on December 15, 2000, rather than on April 15, 2000.



Petitioners are correct when they state in their brief that this issue is not properly before the Court at this time. Moreover, we note that, pursuant to section 6601(a), interest begins to run on "the last date prescribed for payment" of the tax and, pursuant to section 6151(a), an extension of time for filing an income tax return does not extend the time for paying the tax due.



Based upon the foregoing,



Decision will be entered for respondent.

Offer in Compromise - IRC 7122 - IRC 6330 - no abuse of discretion to close CDP hearing


Mohammed Ali Gazi and Estate of Raees Iftekhar Gazi, Deceased, Mohammed Ali Gazi, Personal Representative v. Commissioner.

Dkt. No. 15014-06L , TC Memo. 2007-342, November 20, 2007.




[Code Sec. 6330]

Collection Due Process hearing: Abuse of discretion: Collection of tax. --
A taxpayer and his late wife's estate could not challenge the propriety of an underlying tax liability during a Collection Due Process (CDP) hearing because the issue was litigated in Tax Court and resolved against the taxpayers. Moreover, the IRS also did not abuse its discretion in proceeding with a levy because the taxpayers repeatedly delayed the proceedings and failed to remit the necessary financial information required for an installment agreement or offer in compromise to be considered.


[Code Sec. 7122]
Collection Due Process hearing: Abuse of discretion: Collection of tax: Offer in compromise (OIC). --
A taxpayer and his late wife's estate failed to establish that the IRS abused its discretion by refusing to grant them additional time to submit an Offer in Compromise (OIC). The Commissioner is not required to wait a certain length of time before proceeding with a levy. In addition, the taxpayers repeatedly delayed the proceedings and failed to remit the necessary financial information required for an installment agreement or offer in compromise to be considered. --CCH.





Sharon Reece, for petitioners; Karen Lynne Baker, for respondent.





MEMORANDUM OPINION



CHIECHI, Judge: This case is before the Court on respondent's motion for summary judgment (respondent's motion). We shall grant respondent's motion.





Background



The record establishes and/or the parties do not dispute the following.



At the time the petition was filed, petitioner Mohammed Ali Gazi (Mr. Gazi) resided in Pikesville, Maryland.



On January 30, 1998, respondent issued a notice of deficiency (notice) to Mr. Gazi and his wife, Raees Iftekhar Gazi (Ms. Gazi),1 with respect to their taxable years 1983 through 1989. (We shall refer to Mr. Gazi and Ms. Gazi collectively as the Gazis.) The Gazis filed a petition with the Court with respect to that notice and commenced the case at docket No. 7950-98. (We shall refer to the case at docket No. 7950-98 as the Gazis' Tax Court case.) At the time the Gazis filed the petition commencing the Gazis' Tax Court case, Jay E. Kauffman (Mr. Kauffman) represented them.



On June 30, 2003, the parties in the Gazis' Tax Court case submitted to the Court a stipulated decision document (stipulated decision document in the Gazis' Tax Court case) that Mr. Kauffman executed on behalf of the Gazis and that counsel for the Commissioner of Internal Revenue (Commissioner) executed on behalf of the Commissioner.



On July 8, 2003, pursuant to the agreement of the parties as reflected in the stipulated decision document in the Gazis' Tax Court case, the Court entered a decision (Gazis' Tax Court decision) in the Gazis' Tax Court case. That decision ordered and decided that for the Gazis' taxable years 1983 through 1989 the Gazis are liable for deficiencies in their Federal income tax (tax) totaling $219,723 and certain additions to tax totaling $376,041.33.



On November 10, 2003, respondent assessed tax, as well as additions to tax and interest as provided by law, for each of the Gazis' taxable years 1983 through 1989. (We shall refer to those unpaid assessed amounts, as well as interest as provided by law accrued after November 10, 2003, as the Gazis' unpaid liabilities for 1983 through 1989.)



On November 10, 2003, respondent issued to Mr. Gazi2 the notice and demand for payment required by section 6303(a)3 with respect to the Gazis' unpaid liabilities for 1983 through 1989.



On March 12, 2004, Mr. Gazi filed with the Court a motion for leave to file a motion to vacate final decision in the Gazis' Tax Court case and a motion to withdraw Mr. Kauffman as counsel in that case.4 On the same date, Caroline D. Ciraolo (Ms. Ciraolo) entered an appearance in the Gazis' Tax Court case. In the motion for leave to file a motion to vacate final decision in the Gazis' Tax Court case, Mr. Gazi argued that the Gazis' Tax Court decision resulted from the perpetration of fraud on the Court by Mr. Kauffman and counsel for the Commissioner. According to Mr. Gazi, the stipulated decision document in the Gazis' Tax Court case was executed without the Gazis' knowledge or authorization. On December 15, 2004, the Court granted the motion to withdraw Mr. Kauffman as counsel in the Gazis' Tax Court case.



On May 23, 2005, a revenue officer with respondent's collection division (revenue officer) contacted Ms. Ciraolo, the authorized representative of Mr. Gazi and Ms. Gazi's estate, and advised her that he was recommending that a notice of Federal tax lien be filed with respect to the Gazis' unpaid liabilities for 1983 through 1989. In response, Ms. Ciraolo requested a hearing under respondent's Collection Appeals Program (CAP).



On June 14, 2005, a settlement officer (CAP hearing settlement officer) held a CAP hearing with Ms. Ciraolo. The CAP hearing settlement officer determined to delay until after June 24, 2005, the filing of a notice of Federal tax lien with respect to the Gazis' unpaid liabilities for 1983 through 1989 in order to allow Mr. Gazi an opportunity to give the Internal Revenue Service a mortgage on certain property with respect to such liabilities in lieu of respondent's filing a notice of Federal tax lien.



On June 29, 2005, the revenue officer made the following entry in the "integrated collection system history transcript":



Received fax from POA [Ms. Ciraolo] with the property listings that they will use to secure the mortgage as an alternative to filing the NFTL. At this time they are working to obtain title searches and appraisals to determine the equity in each property. The date given by Appeals to get this done was 06/24/05 but this is not possible as the process will take some time. Extending time through July 10, 2005. [Reproduced literally.]



On July 20, 2005, the revenue officer spoke with Ms. Ciraolo and informed her that respondent had decided not to accept from Mr. Gazi a mortgage on certain property in lieu of respondent's filing a notice of Federal tax lien. During that conversation, the revenue officer also informed Ms. Ciraolo that respondent would consider an offer by Mr. Gazi to post a bond with respect to the Gazis' unpaid liabilities for 1983 through 1989 in lieu of filing a notice of Federal tax lien.



On July 28, 2005, the Court issued its Memorandum Findings of Fact and Opinion in the Gazis' Tax Court case (July 28, 2005 Opinion). All Cmty. Walk In Clinic v. Commissioner, T.C. Memo. 2005-190.5 In that Opinion, the Court rejected Mr. Gazi's argument that the Gazis' Tax Court decision resulted from the perpetration of fraud on the Court by Mr. Kauffman and counsel for the Commissioner. Id. Pursuant to the July 28, 2005 Opinion, on July 28, 2005, the Court issued an Order denying the motion for leave to file a motion to vacate final decision in the Gazis' Tax Court case.



On August 1, 2005, Ms. Ciraolo and the revenue officer had a telephonic discussion during which Ms. Ciraolo indicated that Mr. Gazi wanted to post a bond in lieu of respondent's filing a notice of Federal tax lien.



On August 30, 2005, Mr. Gazi and Ms. Gazi's estate filed with the Court a motion for reconsideration of the July 28, 2005 Opinion.



On August 30, 2005, Ms. Ciraolo informed the revenue officer that Mr. Gazi had not filed a bond and that the motion for reconsideration of the July 28, 2005 Opinion had been filed with the Court. Thereafter, in September 2005, a notice of Federal tax lien was filed with respect to each of the Gazis' taxable years 1983 through 1989.



On September 12, 2005, respondent issued to Mr. Gazi a notice of intent to levy and notice of your right to a hearing with respect to his taxable years 1983 through 1989 (notice of intent to levy).



On October 6, 2005, Ms. Ciraolo submitted to respondent on behalf of Mr. Gazi and Ms. Gazi's estate Form 12153, Request for a Collection Due Process Hearing (Form 12153), and requested a hearing with respondent's Appeals Office (Appeals Office). (For convenience, we shall refer to Form 12153 that Ms. Ciraolo submitted to respondent on behalf of Mr. Gazi and Ms. Gazi's estate as Mr. Gazi's Form 12153.) In Mr. Gazi's Form 12153, Mr. Gazi and Ms. Gazi's estate indicated disagreement with the notice of intent to levy. An attachment to Mr. Gazi's Form 12153 stated in pertinent part:



Grounds for Request:



1. Taxpayers dispute these liabilities, which are the result of a decision entered by the United States Tax Court on July 8, 2003. Mohammed A. Gazi and the Estate of Raees I. Gazi, Deceased, Mohammed A. Gazi, Personal Representative, Docket No. 7950-98. Taxpayers filed a motion to vacate this decision on March 12, 2004. The Court denied the motion and Taxpayers' moved to reconsider this decision on August 29, 2005. In response to Taxpayers' motion, this Court ordered the Service to respond on or before October 6, 2005.



If the Court ultimately rejects the motion, Taxpayers will appeal the Court's decision to the United States Court of Appeals. Taxpayers request that the Service withhold any enforcement action pending resolution of their motion and appeal. Attached hereto as Exhibit 2 are the Motion for Reconsideration and subsequent orders of the Tax Court.6



2. At this time, enforced collection activity is unnecessary and unwarranted. If the assessment against Taxpayers is ultimately sustained, Mr. Gazi will cooperate with the Service to consider reasonable collection alternatives, including, but not limited to, an installment agreement or an Offer in Compromise.



Conclusion:



Based on the foregoing, Mohammed A. Gazi and the Estate of Raees I. Gazi request a collection due process hearing. * * * [Reproduced literally.]



On October 31, 2005, while their motion for reconsideration of the July 28, 2005 Opinion was pending before the Court, Mr. Gazi and Ms. Gazi's estate filed a notice of appeal with the United States Court of Appeals for the Eleventh Circuit (Court of Appeals for the Eleventh Circuit).



On March 24, 2006, the settlement officer with the Appeals Office assigned to consider Mr. Gazi's Form 12153 (settlement officer) made the following pertinent entries in his "Case Activity Records":



Reviewed file. * * * A review of the file shows the assessments are all agreed audits that have been sustained by the court ruling. The POA [Ms. Ciraolo] has attempted to delay collection by several actions. It was previously agreed she would post a bond but did not. She had a CAP hearing for the FTL under the same issue and agreed to post a bond to avoid lien but did not and lien was filed. * * * POA is not asking for an alternative to collection action at this time, just a delay. * * * [Reproduced literally.]



On March 27, 2006, the settlement officer sent Mr. Gazi and Ms. Gazi's estate a letter (settlement officer's March 27, 2006 letter). That letter stated in pertinent part:



This letter is our acknowledgment that we received your request for a Collection Due Process (CDP) Hearing * * *



*******



I have scheduled a face to face conference for you on 04/25/2006 at 10:30 a.m. in my office. * * * This will be your CDP hearing. Please acknowledge this letter within five (5) days of the date on this letter.



If this time is not convenient for you or you would prefer your CDP hearing to be held by telephone conference please let me know within fourteen (14) days from the date of this letter.



*******



Regarding the liability you are raising:



You are not able to dispute the liability at this hearing because the liability has been established and is valid.



For me to consider alternative collection methods such as an installment agreement or offer in compromise, you must provide any items listed below. In addition, you must have filed all federal tax returns due.



--A completed Collection Information Statement (Form 433-A for individuals and/or Form 433-B for businesses.)



Please send me the items above within 14 days from the date of this letter. I cannot consider collection alternatives in your hearing without the information requested above. I am enclosing the applicable forms and a return envelope for your convenience.



Mr. Gazi and Ms. Gazi's estate did not submit Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals (Form 433-A), within 14 days of the date of the settlement officer's March 27, 2006 letter, i.e., by April 10, 2006.



On April 18, 2006, Ms. Ciraolo called the settlement officer to reschedule the Appeals Office hearing that the settlement officer offered Mr. Gazi and Ms. Gazi's estate in the settlement officer's March 27, 2006 letter. During that conversation, the settlement officer agreed to reschedule the Appeals Office hearing from April 25 to May 15, 2006.



On May 15, 2006, Ms. Ciraolo called the settlement officer. The settlement officer made the following pertinent entries in his "Case Activity Records" with respect to that call:



TC from POA [Ms. Ciraolo]. She said she did not have the 433A complete and would like to delay conference for at least another week. I advised that was not acceptable since we already delayed the conference once. She had no info to present. I advised her when she has her 433A completed she can submit it with a request for an IA thru Compliance. She then said their issue is the same, the money is not owed. I advised I will agree with the previous decision by the court the money is owed and the RO's action was correct. Since an alternative could not be agreed upon, I will issue a determination letter. [Reproduced literally.]



On May 17, 2006, the Court of Appeals for the Eleventh Circuit remanded the Gazis' Tax Court case to the Court for a ruling on the motion for reconsideration of the July 28, 2005 Opinion. On June 12, 2006, the Court issued an Order denying that motion.



On July 7, 2006, the Appeals Office issued to Mr. Gazi and Ms. Gazi's estate a notice of determination concerning collection action(s) under section 6320 and/or 6330 (notice of determination) with respect to the notice of intent to levy. That notice stated in pertinent part:



Summary of Determination



All required legal procedures were followed in issuing the Notice of Intent to Levy and advising you of your appeal rights. Levy action in this case balances the need for efficient collection of taxes with the legitimate concern that any collection action be no more intrusive than necessary. Since you failed to supply any information for the conference held 05/15/2006, an alternative to collection action could not be discussed. Further your challenge to the liability has been denied by the Tax Court, thus waiting for your appeal of that decision is not acceptable as an alternative to collection action without at least the financial information requested for review. The action by the Compliance Division will be fully sustained.



You are being notified of this determination in writing and your right to judicial review. [Reproduced literally.]



An attachment to the notice of determination stated in pertinent part:



Type of Taxes: 1040



Tax Period(s): 12/1983 12/1984 12/1985 12/1986 12/1987 12/1988 12/1989



*******





I. SUMMARY AND RECOMMENDATION



You, Mohamed Gazi, ("the taxpayer") requested a hearing before Appeals under the provisions of Internal Revenue Code ("IRC") Section 6330 for the tax periods listed above. On a letter attached to the form 12153 you stated in part: You dispute the liabilities which are the result of a decision by the United States Tax Court on July 8, 2003. You then detailed your appeals thru the tax court system and state an alternative will be requested when and if the assessments are sustained.



You appealed the notice of intent to levy 23 days after receiving letter 1058. It is a timely appeal.



We recommend your appeal regarding the notices of intent to levy be denied. All required legal procedures were followed in issuing the notice of intent to levy, and in advising you of your appeal rights. You failed to provide financial information and supporting documentation to the Settlement Officer in order to determine the appropriate collection alternative. You asked for and were granted a delay to supply the information and still did not have the information at the time of the rescheduled conference. You asked for another extension of time to finish the information, this was denied as a delaying tactic. Your alternate position that the tax is not owed and thus no action should take place is also denied. The Tax Court has held the taxes are legally due. Since an alternative could not be agreed upon, levy action in this case balances the need for efficient collection of taxes with the legitimate concern that any collection action be no more intrusive than necessary.





II. BRIEF BACKGROUND



You owe $1,678,803.28 for the above tax periods. You are in full compliance for all other years thru 2005.



The balance due is a result of a self assessed return with agreed audit assessments by the Service for all years. You are now challenging the liability in an attempt to have the Tax Court decision reverses.



On 03/27/2006 I issued a letter to you at your last known address, outlining the due process provisions and general Internal Revenue Manual guidelines regarding collection alternatives and offering you a face-to-face or telephone conference at the Appeal's Office in Baltimore, Md. on 04/25/2006.



On 04/18/2006 I received a request from your power of attorney to reschedule the conference to allow additional time to prepare the requested financial statement. We agreed to reschedule for 05/15/2006 at 10:30 a.m.



On 05/15/2006 I received a call from your power of attorney to request an additional delay to complete the financial statement, I denied this request. Your power of attorney stated she was not ready for the conference. I advised based on the delay at this conference and the previous delays, I would issue a determination letter to fully sustain the action by the Compliance Division. Your power of attorney then stated she wished to protest the liability based on the appeal filed in the Tax Court. I denied that request based on the Tax Court decision that the assessments are valid. Your power of attorney claimed I did not respond to her request for additional time from a message she left me last week. The voice mail message was left at 6:30 p.m. Sunday 05/14/2006. I received a fax after the conference from your power of attorney showing the Court of Appeals has requested the Tax Court to rule on the timely tolling motion for reconsideration of your motion. This does not change my determination to fully sustain the action by the Compliance Division. I advised your power of attorney, since you did not supply any financial information to review, I could not consider an alternative to collection action.



You are being advised of this determination to sustain the action by Compliance in full and your right to judicial review.





III. DISCUSSION AND ANALYSIS





1. VERIFICATION OF LEGAL AND PROCEDURAL REQUIREMENTS



From all available information, the compliance file indicates that the requirements of applicable law or administrative procedures have been met.



The assessment was made on the applicable CDP notice period per Internal Revenue Code ("IRC") Section 6201.



The notice and demand for payment letter was mailed to the taxpayer's last known address, within 60 days of the assessment, as required by IRC Section 6303. There was a balance due when the CDP notice was issued per IRC Section 6322 and 6331(a).



IRC Section 6331 authorizes the IRS to levy if he taxpayer neglects or refuses to pay with 10 days after notice and demand. IRC Section 6331(d) requires that IRS must notify a taxpayer at least 30 days before a notice of levy may be issued. The file shows the Service issued this notice for the period considered at this hearing.



A review of the file indicates there was a levy source present in accordance with IRM 5.11.1.2.2(3).



IRC Section 6330(a) provides that no levy may be made unless IRS notifies a taxpayer of the right to request a hearing before an Appeals Officer at least 30 days prior to serving the levy. The Revenue Officer mailed this notice, certified mail, to the last known address of the taxpayer on 09/12/2005. The taxpayer requested the hearing with the form 12153 hand delivered to the Revenue Officer on 10/06/2005. The applicable time periods were met in this appeal.



Section 6330© allows the taxpayer to raise any relevant issue relating to the unpaid tax or the notice of federal tax lien at the hearing.



Internal Revenue Manual ("IRM") 5.16.1.2.(4) States when the aggregate assessed liability exceeds $5,000 up to the maximum level of $100,000 follow these procedures to verify the Collection Information Statement ("CIS")...



There was no pending bankruptcy case at the time the CDP notice was sent.



This Settlement Officer has had no prior involvement with respect to these liabilities.





2. ISSUES RAISED BY THE TAXPAYER



The taxpayer stated in part on a letter attached to the Form 12153: You dispute the liabilities which are the result of a decision by the United States Tax Court on July 8, 2003. You then detailed your appeals thru the tax court system and state an alternative will be requested when and if the assessments are sustained.



These issues were addressed during the conference held 05/15/2006.



BALANCING THE NEED FOR EFFICIENT COLLECTION WITH TAXPAYER CONCERN THAT THE COLLECTION ACTION BE NO MORE INTRUSIVE THAN NECESSARY.



All required legal procedures were followed in issuing the notice of intent to levy, and advising the taxpayer of her appeal rights. The taxpayer was given the opportunity to raise any relevant issues relating to the unpaid tax. IRC Section 6330 requires that the Appeals Officer consider whether any collection action balances the need for efficient collection of taxes with the legitimate concern that any collection action be no more intrusive than necessary. The issue in this case is whether a levy against the taxpayer's assets is appropriate. The taxpayer failed to provide the financial information with supporting documentation for the conference. Levy action in this case balances the need for efficient collection of taxes with the legitimate concern that any collection action be no more intrusive than necessary. [Reproduced literally.]



On July 13, 2006, Mr. Gazi and Ms. Gazi's estate submitted to respondent Form 433-A and an offer-in-compromise.



On May 10, 2007, after Mr. Gazi and Ms. Gazi's estate filed the petition in the instant case, the Court of Appeals for the Eleventh Circuit affirmed the Gazis' Tax Court decision. All Cmty . Walk In Clinic v. Commissioner, 223 Fed. Appx. 949 (11th Cir. 2007).7





Discussion



The Court may grant summary judgment where there is no genuine issue of material fact and a decision may be rendered as a matter of law. Rule 121(b); Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), affd. 17 F.3d 965 (7th Cir. 1994). We conclude that there are no genuine issues of material fact regarding the questions raised in respondent's motion.



It is the position of Mr. Gazi and Ms. Gazi's estate that the Court should not sustain the determinations set forth in the notice of determination. In support of that position, Mr. Gazi and Ms. Gazi's estate argue that they are not liable for the Gazis' unpaid liabilities for 1983 through 1989 because the stipulated decision document in the Gazis' Tax Court case was executed without the Gazis' knowledge or authorization.8 In further support of their position that the Court should not sustain the determinations in the notice of determination, Mr. Gazi and Ms. Gazi's estate argue that respondent abused respondent's discretion in making those determinations because the settlement officer refused "to grant Petitioner additional time to submit an Offer in Compromise as a collection alternative in this matter."



We turn first to the argument of Mr. Gazi and Ms. Gazi's estate that they are not liable for the Gazis' unpaid liabilities for 1983 through 1989. A taxpayer may raise challenges to the existence or the amount of the taxpayer's underlying tax liability if the taxpayer did not receive a notice of deficiency or did not otherwise have an opportunity to dispute the tax liability. Sec. 6330(c)(2)(B). Respondent issued a notice of deficiency to the Gazis with respect to their taxable years 1983 through 1989. The Gazis filed a petition with the Court with respect to that notice. On July 8, 2003, the Court entered a decision in the Gazis' Tax Court case. That decision ordered and decided that for the Gazis' taxable years 1983 through 1989 the Gazis are liable for deficiencies in their tax totaling $219,723 and certain additions to tax totaling $376,041.33. On March 12, 2004, Mr. Gazi filed with the Court a motion for leave to file a motion to vacate final decision in the Gazis' Tax Court case. On July 28, 2005, the Court issued the July 28, 2005 Opinion and an Order denying that motion for leave. On August 30, 2005, Mr. Gazi and Ms. Gazi's estate filed a motion for reconsideration of the July 28, 2005 Opinion. On October 31, 2005, while their motion for reconsideration of the July 28, 2005 Opinion was pending before the Court, Mr. Gazi and Ms. Gazi's estate filed a notice of appeal with the Court of Appeals for the Eleventh Circuit. On May 17, 2006, the Court of Appeals for the Eleventh Circuit remanded the Gazis' Tax Court case to the Court for a ruling on the motion for reconsideration of the July 28, 2005 Opinion. On June 12, 2006, the Court issued an Order denying the motion for reconsideration of the July 28, 2005 Opinion. On May 10, 2007, the Court of Appeals for the Eleventh Circuit affirmed the Gazis' Tax Court decision. On the record before us, we find that Mr. Gazi and Ms. Gazi's estate may not challenge the existence or the amount of the underlying tax liability for each of their taxable years 1983 through 1989.



Where, as is the case here, the validity of the underlying tax liability is not properly placed at issue, the Court will review the determination of the Commissioner for abuse of discretion. Sego v. Commissioner, 114 T.C. 604, 610 (2000); Goza v. Commissioner, 114 T.C. 176, 181-182 (2000).



We turn now to the argument of Mr. Gazi and Ms. Gazi's estate that respondent abused respondent's discretion in making the determinations in the notice of determination because the settlement officer refused "to grant Petitioner additional time to submit an Offer in Compromise as a collection alternative in this matter." There is no requirement that the Commissioner wait a certain amount of time before making a determination as to a proposed levy. See sec. 301.6330-1(e)(3), Q&A-E9, Proced. & Admin. Regs.9 Section 301.6330-1(e)(3), Q&A-E9, Proced. & Admin. Regs., provides that there is no period of time within which the Appeals Office must conduct a hearing under section 6330 or issue a notice of determination under that section and that "Appeals will * * * attempt to conduct a * * * [hearing under section 6330] and issue a Notice of Determination as expeditiously as possible under the circumstances."



On the record before us, we find that the settlement officer's refusal (1) to reschedule the Appeals Office hearing from May 15, 2006, to at least one week later and (2) to consider further collection alternatives proposed by the taxpayer was reasonable in light of the circumstances presented. In the settlement officer's March 27, 2006 letter, the settlement officer offered Mr. Gazi and Ms. Gazi's estate the opportunity to have a face-to-face Appeals Office hearing on April 25, 2006, and requested that Mr. Gazi and Ms. Gazi's estate submit Form 433-A within 14 days of the date of that letter, i.e., by April 10, 2006. Mr. Gazi and Ms. Gazi's estate did not submit Form 433-A by April 10, 2006. On April 18, 2006, at the request of Ms. Ciraolo, the settlement officer agreed to reschedule the Appeals Office hearing from April 25 to May 15, 2006. On May 15, 2006, the day on which the rescheduled Appeals Office hearing was to be held, Ms. Ciraolo called the settlement officer to inform him that Mr. Gazi and Ms. Gazi's estate were still not ready to submit Form 433-A and to request that the Appeals Office hearing be rescheduled to at least one week later. The settlement officer refused to reschedule the Appeals Office hearing, but advised Ms. Ciraolo that, when Mr. Gazi and Ms. Gazi's estate were ready to submit Form 433-A, they could do so with a request for an installment agreement through respondent's compliance division. Mr. Gazi and Ms. Gazi's estate did not submit Form 433-A and their offer-in-compromise until July 13, 2006, almost two months after Ms. Ciraolo requested another rescheduling of the Appeals Office hearing from May 15, 2006, to at least one week later.



Based upon our examination of the entire record before us, we find that respondent did not abuse respondent's discretion in making the determinations in the notice of determination with respect to the notice of intent to levy. On that record, we sustain those determinations.



We have considered all of the contentions and arguments of Mr. Gazi and Ms. Gazi's estate that are not discussed herein, and we find them to be without merit, irrelevant, and/or moot.



On the record before us, we shall grant respondent's motion.



To reflect the foregoing,



An order granting respondent's motion and decision for respondent will be entered.


1 Ms. Gazi died on July 23, 2003.

2 See supra note 1.

3 All section references are to the Internal Revenue Code in effect at all relevant times. All Rule references are to the Tax Court Rules of Practice and Procedure.

4 Also on Mar. 12, 2004, a motion under Rule 63(a) to substitute the proper party for Ms. Gazi in the Gazis' Tax Court case and to amend the caption of that case was filed with the Court. Thereafter, the Court issued an Order granting that motion and, inter alia, changing the caption of the Gazis' Tax Court case to read "Mohammed A. Gazi and Estate of Raees I. Gazi, Deceased, Mohammed A. Gazi, Personal Representative, Petitioners v. Commissioner of Internal Revenue, Respondent". (We shall refer to the estate of Raees Iftekhar Gazi, deceased, Mohammed A. Gazi, personal representative, as Ms. Gazi's estate.)

5 For purposes of opinion only, the Gazis' Tax Court case was consolidated with another case. All Cmty. Walk In Clinic v. Commissioner, T.C. Memo. 2005-190.

6 The only Order attached to the copy of Mr. Gazi's Form 12153 that is in the record in the instant case is an Order in the Gazis' Tax Court case dated Sept. 8, 2005, in which the Court ordered the Commissioner to file by Sept. 22, 2005, a response to the motion for reconsideration of the July 28, 2005 Opinion.

7 See supra note 5.

8 In respondent's motion, respondent states respondent's understanding that Mr. Gazi and Ms. Gazi's estate are arguing (1) that the appeal to the Court of Appeals for the Eleventh Circuit operated as a stay of the collection of the Gazis' unpaid liabilities for 1983 through 1989 and (2) that therefore respondent abused respondent's discretion in making the determinations in the notice of determination. In response to that purported argument, respondent maintains that the record does not establish that Mr. Gazi and Ms. Gazi's estate filed a bond as required under sec. 7485(a) in order to stay the collection of those unpaid liabilities. In the response of Mr. Gazi and Ms. Gazi's estate to respondent's motion, Mr. Gazi and Ms. Gazi's estate state: "Respondent mischaracterizes Petitioner's first argument. In the petition filed August 4, 2006, Petitioner first contests the underlying tax liability. Petitioner does not aver that his motion for leave to file a motion to vacate operated as a stay of collection". Nor do we believe that Mr. Gazi and Ms. Gazi's estate are arguing that the appeal to the Court of Appeals for the Eleventh Circuit or the motion for reconsideration of the July 28, 2005 Opinion operated as a stay of the collection of the Gazis' unpaid liabilities for 1983 through 1989.

9 See also Clawson v. Commissioner, T.C. Memo. 2004-106.

Offer in Compromise - Section 7122 - section 6330

Robert E. Marshall, Plaintiff v. United States of America, Defendant.

U.S. District Court, Mid. Dist. Fla., Tampa Div.; 8:06-cv-1566-T-24 MAP, November 9, 2007.

[ Code Secs. 6330 and 7122]

Notice of levy: Collection Due Process hearing: Trust fund recovery penalties: Collection alternatives: Abuse of discretion. --
An Appeals officer's determination to reject an individual's offer in compromise and sustain a levy to collect trust fund recovery penalties was not an abuse of discretion. Because the IRS treated the taxpayer's Collection Due Process (CDP) request as though it related to the recent levy notice, not the older lien notice, the taxpayer was entitled to judicial review of the IRS's determination. However, the record established that the determination complied with all the requirements of the Internal Revenue Code and the Treasury Regulations. Moreover, the Appeals officer sustained the levy only after a complete review of the individual's financial information and after determining that the individual's offer in compromise was insufficient. The taxpayer conceded that IRS was not required to negotiate an acceptable offer in compromise. Back references: ¶38,184.108, ¶38,184.60 and ¶41,130.175.







ORDER


BUCKLEW, United States District Judge: This cause comes before the Court on Defendant's Motion for Summary Judgment. (Doc. No. 22.) Plaintiff has filed a response in opposition. (Doc. No. 31.)



I. Background

On December 20, 1999, and January 3, 2000, the Internal Revenue Service ("IRS") assessed trust fund recovery penalties against Plaintiff Robert E. Marshall ("Marshall"), pursuant to I.R.C. §6672 (2007). (Doc. No. 22-2.) The trust fund recovery penalties were assessed against Marshall because he was the responsible officer of his corporation, Marshall Electric Company, Inc., who failed to collect, account for, and pay over its employment taxes for the taxable quarters between January 1998 and September 1999. (Lee Decl. ¶2.)

On October 27, 2000, the IRS issued Marshall a "Final Notice - Notice of Intent to File a Notice of Federal Tax Lien" ("Final Lien Notice"). (Lee. Decl. ¶3, Exh. C-29.) The Final Lien Notice informed Marshall that he had until November 30, 2000 to seek administrative review of the lien through a collection due process ("CDP") hearing. (Lee Decl., Exh. C-29.) Marshall did not request a CDP Hearing within the time frame set forth in the Final Lien Notice.

On July 19, 2005, the IRS issued Marshall a "Final Notice of Intent to Levy and Notice of Your Right to a Hearing" ("Final Levy Notice"), informing Marshall of the IRS's intent to levy against Marshall's property to satisfy the unpaid trust fund recovery penalties, which then totaled $852,115.43. (Lee Decl. ¶3, Exh. C-26.) The Final Levy Notice also informed Marshall that he had thirty days within which he could request administrative review of the levy through a CDP hearing. (Lee Decl., Exh. C-26.) On August 15, 2005, Marshall's representative, Donald Devlin 1 , submitted to the IRS Marshall's request for a CDP hearing on the Final Levy Notice, but inadvertently checked that the request was for a CDP hearing on the Final Lien Notice issued in 2000. (Devlin Decl. ¶3, Exh. A; Doc. No. 31, p. 2.)

Notwithstanding the mistake in Marshall's request for a CDP hearing, the IRS scheduled a CDP hearing on the Final Levy Notice for March 1, 2006. (Lee Decl. ¶4, Exh. C-10.) On November 23, 2005, Marshall submitted an "Offer In Compromise" to the IRS, in which he offered to pay $16,000.00 in full satisfaction of the trust fund recovery penalties of $852,115.43. (Lee Decl. ¶5, Exh. B-11.) Along with the Offer In Compromise, Marshall provided the IRS other relevant financial information so that the Offer In Compromise could be fully evaluated. (Lee Decl., Exh. B-12, B-13, B-15, B-25, et al.)

On January 30, 2006, Marshall withdrew his request for a CDP hearing. (Lee Decl. ¶6, Exh. C-8 and C-9; Devlin Decl. ¶ ¶6 and 7, Exh. D and E.) Marshall states that this was only done at the request of the IRS Appeals Officer Darryl Lee ("Lee"), who was the IRS representative handling Marshall's case. (Devlin Decl. ¶6.) Marshall states that Lee asked Marshall to withdraw his request for a CDP hearing because the IRS records indicated a duplication of filing, and that the withdrawal was not submitted with the intent to actually withdraw the request. (Id.) Despite Marshall's withdrawal of his request for a CDP hearing, Marshall and Lee continued discussions regarding Marshall's CDP hearing and the Offer In Compromise. (Lee Decl. ¶7; Devlin Decl. ¶8.) During the course of these discussions, Marshall states that he indicated to Lee that he was willing to increase his Offer In Compromise amount, and that he and Lee continued to negotiate the "Reasonable Collection Potential" amount. 2 (Devlin Decl. ¶ ¶8 and 11.)

On July 20, 2006, Lee sent Marshall a schedule analyzing Marshall's Offer In Compromise and calculating Marshall's Reasonable Collection Potential. (Complaint ¶14; Devlin Decl. ¶10.) Marshall did not agree with Lee's calculations of his Reasonable Collection Potential. (Devlin Decl. ¶10.) Specifically, Marshall felt that Lee's calculation of his Reasonable Collection Potential did not accurately take into account the effect of an outstanding judgment lien against Marshall. (Id.) Marshall believed that this judgment would take priority over any federal tax lien or levy that would be imposed against him, thereby reducing his Reasonable Collection Potential to an amount less than what Lee had calculated. (Id.) Lee agreed to give Marshall until August 3, 2006 to further supplement the information he had already provided to Lee, and to respond to Lee's Reasonable Collection Potential calculation. (Devlin Decl. ¶11.)

However, on July 28, 2006, the IRS issued Marshall a Notice of Determination, informing Marshall of its decision to sustain the proposed levy. (Lee Decl. ¶7; Devlin Decl. ¶12.) As a result, on August 25, 2006, Marshall filed his complaint in the instant case (Doc. No. 1), alleging the following: (1) that the IRS continued to engage in collection activities while his Offer in Compromise was still pending 3 ; (2) that the IRS abused its discretion in not allowing Marshall to respond to Lee's Reasonable Collection Potential calculations before issuing the Notice of Determination; (3) that the IRS abused its discretion when it failed to consider all previously submitted financial information in calculating the Reasonable Collection Potential; and (4) that the IRS abused its discretion when it failed to negotiate an Offer in Compromise to settle Marshall's tax liability. In his complaint, Marshall requested that the Court set aside the Notice of Determination and direct the IRS to negotiate with him in processing his Offer In Compromise. On October 23, 2006, the United States of America filed its answer to Marshall's complaint. (Doc. No. 4.) On July 18, 2007, the United States of America filed this motion for summary judgment, and on August 9, 2007, Marshall filed his response thereto.



II. Standard of Review

Summary judgment is appropriate "if the pleadings, depositions, answers to interrogatories and admissions on file, together with the affidavits, if any, show that the moving party is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(c). The Court must draw all inferences from the evidence in the light most favorable to the non-movant and resolve all reasonable doubts in that party's favor. See Porter v. Ray, 461 F.3d 1315, 1320 (11th Cir. 2006)(citation omitted). The moving party bears the initial burden of showing the Court, by reference to materials on file, that there are no genuine issues of material fact that should be decided at trial. See id. (citation omitted). When a moving party has discharged its burden, the non-moving party must then go beyond the pleadings, and by its own affidavits, or by depositions, answers to interrogatories, and admissions on file, designate specific facts showing there is a genuine issue for trial. See id. (citation omitted).

"In a CDP case in which, as here, the amount of the underlying tax liability is not at issue, the trial court and the court of appeals review the determination of the IRS appeals officer for abuse of discretion." Olsen v. United States, 414 F.3d 144, 150 (1st Cir. 2005) (citing Living Care Alternatives of Utica, Inc. v. United States, 411 F.3d 621, 624-25 (6th Cir. 2005); Jones v. Comm'r, 338 F.3d 463, 466 (5th Cir. 2003)). The district court reviewing the determination of the IRS appeals officer generally conducts its review on the administrative record. 4 Camp v. Pitts, 411 U.S. 138, 142 (1973). Pursuant to Treasury Regulation §301.6330-1(e)(3)A-E1, the determination of an IRS appeals officer must take into consideration: (1) whether the IRS met the requirements of any applicable law or administrative procedure; (2) any issues appropriately raised by the taxpayer; (3) any appropriate spousal defenses raised by the taxpayer; (4) any challenges made by the taxpayer to the appropriateness of the proposed collection action; (5) any offers by the taxpayer for collection alternatives; and (6) whether any proposed collection action balances the need for the efficient collection of taxes, with the legitimate concern of the person that any collection action be no more intrusive than necessary.



III. Analysis

The United States makes the following arguments in support of its motion for summary judgment: (1) that this Court lacks jurisdiction to review the Notice of Determination regarding the Final Lien Notice; and (2) that the facts of this case clearly demonstrate that the IRS did not abuse its discretion in deciding to sustain the levy against Marshall. The Court will address each argument in turn.

The United States argues that the IRS' decision to sustain the Final Lien Notice is not reviewable by this Court. When Marshall requested a CDP hearing, he checked the box stating that he was challenging the Final Lien Notice. However, Marshall submitted his request for a CDP hearing request on August 15, 2005, and the deadline for such request was November 30, 2000. The IRS states that because Marshall's request for a CDP hearing was untimely, the IRS granted Marshall an "equivalent hearing" on the Final Lien Notice instead of a CDP hearing. Equivalent hearings are not appealable, and therefore, the United States contends that, to the extent that Marshall is challenging the IRS' decision to sustain the Final Lien Notice, this Court lacks jurisdiction to hear the issue. The Court does not disagree, but finds that Marshall is not challenging the IRS' decision to sustain the Final Lien Notice in this action, but rather its decision to sustain the Final Levy Notice. As such, the Court finds the issue of whether this Court lacks jurisdiction is moot.

As to the IRS' determination to sustain the Final Levy Notice, the United States contends that there was no abuse of discretion on the part of the IRS, and makes two arguments in support of this contention. The first argument is procedural. The United States again points out that Marshall never actually requested a CDP hearing on the Final Levy Notice, but only on the Final Lien Notice. Additionally, Marshall withdrew his request for a CDP hearing. The United States contends that the Final Levy Notice should be sustained based solely on these two facts. In response, Marshall states that his request for a CDP hearing contained a typographical error marking that he was requesting a CDP hearing on the Final Lien Notice, when he was actually requesting a CDP hearing on the Final Levy Notice. Marshall also points out that he only withdrew his request for the CDP hearing upon the express request of Lee, who informed Marshall that the IRS' records indicated that there had been a duplication of filing.

The Court notes that in response to Marshall's request for a CDP hearing, the IRS set a CDP hearing on the Final Levy Notice, indicating its acceptance that Marshall's request was really on the Final Levy Notice. (Lee Decl. ¶4, Exh. C-10.) The Court further notes that even after Marshall withdrew his request for a CDP hearing, Lee continued discussions with Marshall regarding the CDP hearing and his Offer In Compromise. (Lee Decl. ¶7; Devlin Decl. ¶8.) The Court finds the United States' argument to be disingenuous, in that it belies the reality of the way the IRS treated Marshall's initial request for a CDP hearing and subsequent withdrawal of it. The Court will not uphold the IRS' decision to sustain the Final Levy Notice based solely on the fact that Marshall never requested a CDP hearing as to the Final Levy Notice and that he subsequently withdrew his request for a CDP hearing.

The second argument that the United States advances goes to the merit of Lee's decision to issue the Notice of Determination sustaining the Final Levy Notice. The United States contends that in reaching his conclusion, Lee considered all relevant financial records submitted by Marshall for both himself and his corporation, as well as the IRS' records of Marshall's account. Additionally, the United States argues that Lee had no obligation to negotiate an Offer In Compromise with Marshall, and that Lee's only obligation was to consider Marshall's Offer In Compromise. The United States asserts that Lee complied with all of the requirements of the Internal Revenue Code and the Treasury Regulations in considering Marshall's Offer In Compromise, and that only after doing so found that his Offer In Compromise was insufficient and decided to sustain the levy. In sum, the United States argues that there is no genuine issue of material fact about whether the IRS abused its discretion by rejecting Marshall's Offer In Compromise and by sustaining the Final Levy Notice, and therefore, that the United States is entitled to judgment as a matter of law.

Marshall responds that the IRS decided to sustain the Final Levy Notice based on an erroneous assessment of the law and facts, and therefore, that the IRS abused its discretion. The IRS issued Marshall the Notice of Determination a full six days before August 3, 2006, the response date agreed to by Lee. Marshall contends that because he was unable to respond to Lee's Reasonable Collection Potential calculation, the IRS determined to sustain the levy based on an erroneous assessment of the law, in an abuse of its discretion. Specifically, Marshall argues that Lee erroneously assessed how the outstanding judgment lien against Marshall affected Marshall's Reasonable Collection Potential.

The Court notes that if Lee agreed to give Marshall until August 3, 2006 to provide supplemental information, the IRS should have waited until after August 3, 2006 to issue the Notice of Determination. However, the administrative file herein establishes that Lee reviewed all of Marshall's financial data, which includes information on the outstanding judgment lien against Marshall. Lee determined that Marshall's Offer In Compromise was insufficient and sustained the Final Levy Notice only after a complete review of Marshall's information. Marshall has not stated what the additional information he intended to supply Lee was that might have effected the IRS' decision with respect to the Final Levy Notice. Lee fully complied with the requirements of the Internal Revenue Code, the Treasury Regulations, and the Internal Revenue Manual. Marshall concedes that the IRS is not under an obligation to negotiate an acceptable Offer In Compromise with a taxpayer. Based on all of the foregoing, the Court finds that there is no question of material fact as to whether the IRS abused its discretion in deciding to sustain the levy against Marshall and issue the Notice of Determination.

Accordingly, it is ORDERED AND ADJUDGED that the United States' Motion for Summary Judgment is GRANTED . The Clerk is directed to enter judgment for the United States and close this case. The pretrial conference scheduled for November 13, 2007 is cancelled.

DONE AND ORDERED at Tampa, Florida, this 9th day of November, 2007.

1 On January 1, 2000, Marshall executed a power of attorney granting Donald Devlin, a certified public accountant, the power to represent him before the IRS regarding the trust fund recovery penalties. (Devlin Decl., Exh. A.) For purposes of this Order, the Court will not make a distinction between the acts of Donald Devlin and the acts of Marshall.

2 The "Reasonable Collection Potential" is the amount calculated by the IRS in determining how much Marshall could reasonably pay the IRS as a compromised amount in full satisfaction of the debt owed.

3 Marshall has since stated that he no longer believes the IRS engaged in collection activity while considering his Offer in Compromise. (Doc. No. 22-3, ¶2.) However, the Court notes that Marshall has not filed a notice of dismissal of this claim, and therefore, the claim still remains in this case.

4 The administrative record generally consists of "[t]he case file, including the taxpayer's request for hearing, any other written communications and information from the taxpayer or the taxpayer's authorized representative submitted in connection with the CDP hearing, notes made by an Appeals officer or employee of any oral communications with the taxpayer or the taxpayer's authorized representative, memoranda created by the Appeals officer or employee in connection with the CDP hearing, and any other documents or materials relied upon by the Appeals officer or employee in making the determination under section 6330(c)(3) . . .." Treas. Reg. §301.6330-1(f)(2)A-F4.

Tax Problem - Willful failure to file tax return can be treated as a felony under IRS 7203

United States of America, Plaintiff-Appellee v. Phil Loren Myers, Defendant-Appellant.

U.S. Court of Appeals, 5th Circuit; 06-11080, November 9, 2007.

Unpublished opinion affirming, per curiam, an unreported DC Texas decision.

[ Code Sec. 7203]

Crimes: Failure to file returns: Conviction: Evidence: Willfulness established. --
An individual's conviction on two counts of failure to file income tax returns was upheld. The evidence established the essential elements of the offense beyond a reasonable doubt and was sufficient to support the jury's determination that the individual had willfully failed to file tax returns. Although he testified that he believed that the income tax system was voluntary and that he was not required to file, the individual knew from previous experience that income derived from currency trading was taxable and took other actions to protect his property from the IRS. Further, he filed tax returns and paid taxes until he lost a dispute with the IRS over a tax shelter and threatened to take action against the IRS if it continued collection efforts.



Before: King, DeMoss and Benavides, Circuit Judges.

PER CURIAM: * Phil Loren Myers (Myers) appeals his convictions on two counts of willfully failing to file income tax returns. Myers does not dispute that he failed to file income tax returns for 2001 and 2002, when he realized substantial income from a currency trading venture, but he argues that the evidence was insufficient to prove that his failure to file was willful. Myers contends that he sincerely believed, based on his own research, that he was not required to file.

Because the issue was preserved, we review Myers's insufficiency argument to determine "whether, viewing all the evidence in the light most favorable to the verdict, a rational trier of fact could have found that the evidence establishes the essential elements of the offense beyond a reasonable doubt." United States v. Villarreal, 324 F.3d 319, 322 (5th Cir. 2003). "`[I]t is not necessary that the evidence exclude every reasonable hypothesis of innocence or be wholly inconsistent with every conclusion except that of guilt.' " United States v. Williams, 264 F.3d 561, 576 (5th Cir. 2001) (citation omitted).

The evidence showed that Myers filed income tax returns and paid taxes until he lost a dispute with the Internal Revenue Service (IRS) over a tax shelter. Although Myers testified that he believed that the income tax system was voluntary and that he was not required to file, he knew from previous experience that income derived from currency trading was taxable, and he put assets in his wife's name and took other actions designed to protect his property from the IRS. Myers also threatened to take action against the IRS if it continued collection efforts. The above evidence was sufficient to support the jury's determination that Myers willfully failed to file tax returns. See United States v. Cheek, 498 U.S. 192, 201 (1991); United States v. Shivers, 788 F.2d 1046, 1048-49 (5th Cir. 1986).

The judgment of the district court is AFFIRMED.

* Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not be published and is not precedent except under the limited circumstances set forth in 5TH CIR. R. 47.5.4.

Willful Failure to File Return, Supply Information, or Pay Tax: Willful failure to file returns

It was for the jury to decide whether the failure to file the returns was willful.

Knohl, DC, 55-1 USTC ¶9145, 126 FSupp 830.

Individuals were convicted of willful failure to file tax returns or their convictions were affirmed on appeal in the following cases.

F.L. Benus, CA-3, 62-2 USTC ¶9549, 305 F2d 821.

E.D. Burgin, CA-6, 62-1 USTC ¶9139, 297 F2d 63.

E. Barrett, CA-5, 61-2 USTC ¶9772, 296 F2d 309.

J.G. Ryan, CA-10, 63-1 USTC ¶9306, 314 F2d 306.

D.S. Fago, CA-2, 63-2 USTC ¶9576, 319 F2d 791. Cert. denied, 375 US 906.

M.F. Doelker, CA-6, 64-1 USTC ¶9236, 327 F2d 343.

C.L.O. Edwards, CA-9, 67-1 USTC ¶9356, 375 F2d 862.

R.E. Gorman, CA-7, 68-1 USTC ¶9312, 393 F2d 997.

S. MacCorkle, CA-4, 69-1 USTC ¶9365, 407 F2d 497.

L. Berkman, CA-2, 69-2 USTC ¶9696. Cert. denied, 396 US 1014.

G.E. Lazaroff, CA-2, 69-1 USTC ¶9337, 409 F2d 567. Cert. denied, 396 US 891.

D. MacLeod, CA-8, 71-1 USTC ¶9174, 436 F2d 947.

W.A. Egan, Jr., CA-2, 72-1 USTC ¶9403, 459 F2d 997. Cert. denied, 409 US 875.

H. Gurtner, CA-9, 73-1 USTC ¶9228, 474 F2d 297.

J. Brewer, CA-10, 73-2 USTC ¶9612, 486 F2d 507.

J.B. Sherman, CA-6, 74-1 USTC ¶9103, 486 F2d 1404.

O.H. Klee, CA-9, 74-1 USTC ¶9412, 494 F2d 394.

R.E. Hawk, CA-9, 74-1 USTC ¶9465, 497 F2d 365.

M.L. Cooley, CA-9, 74-2 USTC ¶9718, 501 F2d 1249.

G.R. Swanson, CA-8, 75-1 USTC ¶9191, 509 F2d 1205.

J.W. Greenlee, CA-3, 75-1 USTC ¶9488, 517 F2d 899. Cert. denied, 423 US 985.

K.R. Farris, CA-7, 75-1 USTC ¶9497, 517 F2d 227.

E.H. Moore, Jr., CA-6, 75-2 USTC ¶9548.

J.J. Duffy, Jr., CA-3, 75-2 USTC ¶9674.

P. Pandilidis, CA-6, 75-2 USTC ¶9785. Cert. denied, 424 US 933.

T.D. Oaks, CA-9, 76-1 USTC ¶9120, 527 F2d 937.

V.M. Sapere, CA-2, 76-1 USTC ¶9299, 531 F2d 63.

W.M. Gardiner, CA-9, 76-1 USTC ¶9300, 531 F2d 953.

N.L. Bianco, CA-2, 76-1 USTC ¶9351, 534 F2d 501.

M. Tecton, CA-4, 76-2 USTC ¶9479.

J.A. Pelose, CA-2, 76-2 USTC ¶9572, 538 F2d 41.

M. Dillon, CA-10, 78-1 USTC ¶9175, 566 F2d 702. Cert. denied, 98 SCt 1613.

M. Londe, DC, 78-2 USTC ¶9577, 449 FSupp 590. Aff'd, per curiam, CA-8, 78-2 USTC ¶9771, 587 F2d 18. Cert. denied, 439 US 1130.

N. Hayward, CA-8, 80-1 USTC ¶9296, 619 F2d 716.

G.A. Rickman, CA-10, 80-2 USTC ¶9788, 638 F2d 182.

J.E. Buras, CA-9, 81-1 USTC ¶9126, 633 F2d 1356.

M.P. Driscoll, CA-9, 80-2 USTC ¶9723, 612 F2d 1155.

E.L. Shields, CA-8, 81-1 USTC ¶9294, 642 F2d 230.

S.H. Merritt, CA-5, 81-1 USTC ¶9334, 639 F2d 254.

C.J. Civella, CA-8, 81-2 USTC ¶9809, 666 F2d 1122.

J.W. McCarty, CA-5, 82-1 USTC ¶9150, 665 F2d 596. Cert. denied, 456 US 991, 102 SCt 141.

D.L. Lewis, CA-7, 82-1 USTC ¶9236, 671 F2d 1025.

D.B. Wilber, CA-8, 83-1 USTC ¶9119, 696 F2d 79.

P.M. Drefke, CA-8, 83-1 USTC ¶9354, 707 F2d 978.

R.C. Kraeger, CA-2, 83-2 USTC ¶9453.

R.L. Turk, CA-9, 84-1 USTC ¶9115, 722 F2d 1439.

W.E. Richards, CA-8, 84-1 USTC ¶9130, 723 F2d 646.

S. Grumka, CA-6, 84-1 USTC ¶9273, 728 F2d 794.

F.H. Leidendeker, CA-9, 86-1 USTC ¶9154, 779 F2d 1417.

W.W. Shivers, Jr., CA-5, 86-1 USTC ¶9404.

J.R. Ferguson, CA-7, 86-1 USTC ¶9475, 793 F2d 828. Cert. denied, 11/3/86.

G.H. Upton, CA-8, 86-2 USTC ¶9694, 799 F2d 432.

L.L. Payne, CA-10, 86-2 USTC ¶9673, 800 F2d 227.

J.M. Grabinski, CA-8, 84-1 USTC ¶9201.

D. Thibodeaux, CA-7, 85-1 USTC ¶9308.

E. Witvoet, CA-7, 85-2 USTC ¶9530, 767 F2d 338.

J.Y. Sato, CA-7, 87-1 USTC ¶9226, 814 F2d 449. Cert. denied, 11/2/87.

R.D. Reed, CA-6, 87-1 USTC ¶9345, 821 F2d 322.

A.W. Kouba, CA-8, 87-2 USTC ¶9396, 822 F2d 768.

J.J. Birkenstock, CA-7, 87-2 USTC ¶9416, 823 F2d 1026.

J.C. Buckner, CA-7, 87-2 USTC ¶9591, 830 F2d 102.

C.L. Poschwatta, CA-9, 87-2 USTC ¶9565, 829 F2d 1477.

R.R. Johnson, CA-1, 90-1 USTC ¶50,066, 893 F2d 451.

D.L. Bowers, CA-4, 90-2 USTC ¶50,588, 920 F2d 220.

C.L. Bussey, Jr., CA-8, 91-2 USTC ¶50,402. Cert. denied, 5/18/92.

W. Willie, CA-10, 91-2 USTC ¶50,409.

R.W. Hicks, CA-9, 91-2 USTC ¶50,549, 947 F2d 1356.

S.W. Bentson, CA-9, 92-1 USTC ¶50,048, 947 F2d 1353.

L. Beall, CA-7, 92-2 USTC ¶50,417, 970 F2d 343.

W.P. Holden, Jr., CA-8, 92-2 USTC ¶50,321, 963 F2d 1114.

F.O. Becker, CA-7, 92-2 USTC ¶50,314, 965 F2d 383. Cert. denied, 113 SCt 1411.

T.E. Hauert, CA-7, 95-1 USTC ¶50,045, 40 F3d 197. Cert. denied, 5/1/95.

W.J. Benson, CA-7, 95-2 USTC ¶50,540, 67 F3d 641.

G.V. Dubin, CA-9 (unpublished opinion), 96-2 USTC ¶50,541. Cert. denied, 10/7/96. Rehearing denied, 1/21/97.

R.A. Valenti, CA-7, 97-2 USTC ¶50,629, 121 F3d 327.

S.J. Holland, CA-7, 98-2 USTC ¶50,898, 160 F3d 377.

M.L. Lindsay, CA-10, 99-2 USTC ¶50,648.

E.L. Kotmair, CA-4 (unpublished opinion), 2001-1 USTC ¶50,370, aff'g, per curiam, an unreported District Court decision.

E.F. Bradley, CA-6 (unpublished opinion), 2001-2 USTC ¶50,604, aff'g an unreported District Court decision.

D.G. Pflum, CA-10 (unpublished opinion), 2005-2 USTC ¶50,603, aff'g an unreported District Court decision.

G.P. Hayes, DC, 60-2 USTC ¶9783.

H.T. Fullerton, DC, 61-1 USTC ¶9145, 189 FSupp 211.

W.G. Haupt, DC, 63-1 USTC ¶9349.

J.R. Thompson, DC, 64-2 USTC ¶9500, 230 FSupp 530.

R.M. Sullivan, DC, 74-1 USTC ¶9292, 369 FSupp 568.

F.J. Ettorre, DC, 75-1 USTC ¶9420, 387 FSupp 582.

L.J. Trnka, DC, 75-2 USTC ¶9635.

J.N. Anderson, DC Conn., 86-2 USTC ¶9551, 637 FSupp 1106.

W.L. Parkinson, DC Ill., 87-1 USTC ¶9370.

G.M. House, DC Mich., 87-2 USTC ¶9561.

J.R. Crocker, DC Del., 92-1 USTC ¶50,008, 753 FSupp 1209.

J.F. O'Connor, DC Va., 2001-2 USTC ¶50,634.

The taxpayer's conviction on two counts of failure to file an income tax return was upheld. The taxpayer's contention that he did not have to file a return since he did not receive money as compensation because the checks he received could only be redeemed in federal reserve notes was found to be entirely without merit.

M.M. Wangrud, CA-9, 76-1 USTC ¶9358, 533 F2d 495. Cert. denied, 429 US 818.

A taxpayer who formed a corporation in 1968 was convicted by a District Court, as the responsible corporate officer, of willful failure to file corporate income tax returns for 1968 and 1969. The conviction for 1968 was reversed and remanded for a new trial. In light of the peculiarities of filing requirements for the first year of a newly-formed corporation, the District Court failed to properly instruct the jury that the government was obligated to prove that the taxpayer had a Code-imposed duty to file a calendar year return for the corporation on or before March 15, 1969. The conviction for 1969, however, was affirmed.

M. Bourque, CA-1, 76-2 USTC ¶9617, 541 F2d 290.

Taxpayer was found not guilty of willful failure to file returns.

G. Foster, DC, 62-1 USTC ¶9399.

J.A. Drost, Jr., DC, 75-1 USTC ¶9319.

Since the taxpayer was extremely neglectful of any responsibility involving record keeping, and was shown to be the type of individual who could lose his tax returns for several years without realizing it, he was acquitted as being not criminally liable for willfully failing to file timely returns. Mere carelessness or negligence falls short of the requisite intent.

S. Berg, DC, 75-1 USTC ¶9198.

Conviction on charge of failing to file an income tax return was reversed because the Commissioner failed to establish that the taxpayer received sufficient income to require filing a return.

J. Brewer, CA-10, 73-2 USTC ¶9612, 486 F2d 507.

A conviction for willful failure to file returns could not be overturned due to the IRS's failure to inform the taxpayer of specific criminal penalties for failure to file returns. Such notification is not required of the IRS under the Privacy Act. It is sufficient that IRS booklets notify taxpayers that failure to submit information may lead to intervention by the Justice Department.

D.H. Bell, CA-8, 84-1 USTC ¶9508, 734 F2d 1315.

Where the taxpayer was allegedly observed by government agents cashing in a racetrack ticket for the true owner and signing a Form 1099 in exchange for a commission, his conviction for tax evasion was reversed where the government failed to prove a tax deficiency against the true owner. Since the true owner was not permitted to continue his testimony by the court, there was a serious question that the "true owner" had, in fact, won the bet in question.

L. Petti, CA-3, 71-2 USTC ¶9653, 448 F2d 1257.

A case was remanded for a determination as to whether the taxpayer was able to pay the tax due and whether he believed that it was due.

W.T. Pinner, CA-5, 77-2 USTC ¶9706, 561 F2d 1203.

Similarly.

R.A. Aitken, CA-1, 85-1 USTC ¶9209, 755 F2d 188.

A return on which all zeroes were inserted in the spaces reserved for entering exemptions, income, tax, and tax withheld was a return and prosecution for willful failure to file returns was improper.

R.M. Long, CA-9, 80-2 USTC ¶9480, 618 F2d 74.

Returns filed that did not state the amount of income and that claimed the Fifth Amendment privilege against self-incrimination were not returns. R.M. Long, above, distinguished.

S.C. Muir, 41 TCM 1245, Dec. 37,821(M), TC Memo. 1981-171.

P.E. Horvath, Jr., CA-8, 84-1 USTC ¶9482.

A taxpayer, who attempted to avoid taxation by donating his wages to a church he established and using the income for his personal expenses, was found guilty of three counts of tax evasion. The taxpayer earned and spent his wages in his individual capacity and the imposition of tax did not violate the free exercise clause of the first amendment.

S.R. Washington, DC Pa., 88-1 USTC ¶9276.

An instruction concerning the individual's activities as a tax protestor as evidence of the willfulness element was not improper.

C.L. Eargle, Jr., CA-5, 91-1 USTC ¶50,046, 921 F2d 56. Cert. denied, 10/7/91.

Willfulness may be negated by a good-faith misunderstanding of the law or a good-faith belief that there is no violation regardless of whether the claim is objectively unreasonable.

J.L. Cheek, SCt, 91-1 USTC ¶50,012, 11 SCt 604.

The Seventh Circuit, on remand, reversed and remanded the unreported DC Ill. decision.

J.L. Cheek, CA-7, 91-1 USTC ¶50,232, 931 F2d 1206.

A pilot's contention that the trial court erred in not instructing the jury on the advice of counsel defense was not valid because the court's instructions treated the issues fairly and accurately. Moreover, the court's instructions as to willfulness encompassed any defense claiming a good faith belief of lawful conduct. Thus, the taxpayer's conviction and sentencing for tax evasion and failure to file returns on retrial were upheld, consistent with the U.S. Supreme Court's opinion in J.L. Cheek, SCt, 91-1 USTC ¶50,012.

J.L. Cheek, CA-7, 93-2 USTC ¶50,473, 3 F3d 1057. Cert. denied, 2/22/94.

Similarly.

J.C. Dunkel, SCt, 91-1 USTC ¶50,021, 111 SCt 747.

See also ¶41,318.169.

A jury instruction properly articulated the subjective standard.

G.W. Barnett, CA-5, 91-2 USTC ¶50,519.

No denial of the due process right to a fair trial occurred where an individual was able to submit to the jury the substance of his good-faith theory that he was not required to file a return, even though the contents of a book describing a successful civil case history of avoiding taxes were not admitted into evidence.

D.G. Fingado, CA-10, 91-2 USTC ¶50,528, 934 F2d 1163.

A conviction for willful failure to file tax returns was vacated and remanded because the trial court erroneously excluded evidence offered by the taxpayer to negate the element of willfulness.

R.G. Gaumer, CA-6, 92-2 USTC ¶50,444, 972 F2d 723.

An insurance agent who knew that he had a responsibility to timely file and to pay federal income taxes and who voluntarily and intentionally failed to file and pay those taxes was found to have willfully attempted to evade or defeat his tax liability. Therefore, the agent's tax liability was not dischargeable in bankruptcy. The Bankruptcy Court erred in applying the criminal definition of "willfully attempted to evade" to a civil bankruptcy discharge case under 11 U.S.C. §523(a)(1)(C). The civil definition --referring to a voluntary, intentional or conscious attempt to avoid or to fail to pay taxes --was the appropriate standard to apply.

E.W. Toti, CA-6, 94-1 USTC ¶50,235, 24 F3d 806. Cert. denied, 115 SCt 482.

The public protection provision of the Paperwork Reduction Act (PRA), which negates any penalty for failure to provide information solicited in an information collection request that does not bear a control number, did not shield the taxpayers from being criminally convicted on charges of failing to file their tax returns, despite the lack of Office of Management and Budget control numbers on the federal tax regulations and instructions to which the taxpayers would have referred had they filed tax returns.

D.W. Dawes, CA-10, 92-2 USTC ¶50,493, 951 F2d 1189.

A cement contractor's criminal conviction for tax evasion did not violate the Paperwork Reduction Act of 1980. Failure to display an expiration date on Form 1040 was not a violation of the Act. Regulations and instruction books promulgated by the IRS were not required to display control numbers because they were not within the scope of the Act.

R.A. Salberg, CA-7, 92-2 USTC ¶50,490, 969 F2d 379.

An individual's conviction for willful failure to file income tax returns was upheld. The trial court did not abuse its discretion in excluding evidence that the individual had suffered a stroke and could not complete his returns because the stroke occurred after the crimes had been completed.

G.D. Strong, CA-4 (unpublished opinion), 97-2 USTC ¶50,923, aff'g, per curiam, an unreported District Court decision.

A tax accountant and his wife were liable for willfully failing to file their tax returns. The accountant's contention that his failure to file was innocently inadvertent, rather than willful, because of his neurological disorder that caused him to sleep for all but four hours each day was rejected. There was sufficient proof that his disorder had not prevented him from achieving other professional and personal accomplishments and expert medical testimony indicated that his condition did not keep him from filing his taxes.

M.T. McCaffrey, CA-7, 99-2 USTC ¶50,634, 181 F3d 854.

The record supported an individual's convictions for willful failure to file his income tax returns for five years. His knowledge of his legal duty to file returns was proved by his admission that he had filed federal tax returns in prior years. His efforts to dissociate himself from his property and income by using his wife's bank account to maintain his anonymity proved intent.

E.A. McNeally, CA-8 (unpublished opinion), 2005-1 USTC ¶50,429, aff'g, per curiam, an unreported DC Neb. decision.

There was sufficient evidence to prove that an individual willfully failed to file tax returns and pay taxes. The individual signed and filed income tax returns in prior years. Moreover, she attended meetings with the IRS at which she was told that the law required her to file a tax return and that she could pay the tax owed and file a refund suit. Further, the individual failed to consult a tax professional about her position that her income was not taxable and that she did not have to file a return.

T.D. Rose, DC Pa., 2006-1 USTC ¶50,222.


Alvin S. Brown, Esq.
Tax attorney
703 425-1400

www.irstaxattorney.com

To provide IRS transparency, upload your IRS experiences to www.irsforum.org

Tax Attorney - section 162 and section 183 business expenses

Dennis L. and Margaret J. Knudsen v. Commissioner.

Dkt. No. 18246-04 , TC Memo. 2007-340, November 15, 2007.



[Code Sec. 183]

Itemized deductions: Hobby losses: Nonprofit activities: Exotic animal breeding. --

Jack D. Flesher and Brian A. Turney, for petitioners; Ann L. Darnold, for respondent.


MEMORANDUM FINDINGS OF FACT AND OPINION

MARVEL, Judge: Respondent determined deficiencies with respect to petitioners' Federal income tax of $183,774 for 2000 and $197,473 for 2001. The issues for decision are:

(1) Whether petitioners' exotic animal breeding activity for 2000 and 2001 constituted an activity engaged in for profit within the meaning of section 183;1 and

(2) if petitioners were engaged in an activity for profit, whether certain amounts claimed as deductions for 2000 and 2001 should be either disallowed for lack of substantiation or reclassified as capital expenditures.


FINDINGS OF FACT

The parties have stipulated some of the facts, which we incorporate in our findings by this reference. Petitioners resided in Liberal, Kansas, when the petition was filed.



Petitioners
At all relevant times, Dennis L. Knudsen (Dr. Knudsen) was a medical doctor, specializing in obstetrics/gynecology. Dr. Knudsen spent his spare time working in petitioners' exotic animal breeding operation called El Rancho Exotica (ERE).

Margaret J. Knudsen (Mrs. Knudsen) was the primary operator and manager of ERE. Mrs. Knudsen also helped part time in Dr. Knudsen's medical practice. Mrs. Knudsen completed 32 hours of business courses in college but does not hold a business degree. She has never received any formal training in animal care or zoo science.



Commencement of the Breeding Activity
In 1989, petitioners began breeding birds. Petitioners did not have any employment history or business experience in breeding or selling animals.2 Petitioners did not have a formal business plan, nor did they prepare any economic projections for their animal breeding operation.3

Dr. Knudsen became interested in breeding birds after learning that the United States had concluded treaties banning the importation of tropical birds. Because of the ban on importation, petitioners anticipated favorable market conditions for tropical birds. Petitioners hoped the bird breeding business would be a source of income after Dr. Knudsen retired from his medical practice.

Before acquiring any birds for breeding, Dr. Knudsen learned about an evolving practice of hand feeding parrots. According to the information he acquired, hand feeding the parrots made them more marketable as pets. Petitioners attended a bird breeding seminar in California on hand feeding and raising young parrots. Petitioners also began collecting books about bird breeding. Dr. Knudsen also read several publications, including Bird Talk magazine, about bird breeding.

Petitioners did not present any evidence that they consulted with a paid adviser about the operation or economics of a bird breeding business. Petitioners, however, did consult with several bird enthusiasts about bird breeding. In the mid-1980s, petitioners met a well-known bird breeder, Richard Shubot (Mr. Shubot), who was involved in bird conservation. Petitioners visited Mr. Shubot in Florida and spoke with him about his experiences with bird breeding. Mr. Shubot talked with petitioners about bird diets, temperature, and timing of eggs. Dr. Knudsen and Mr. Shubot kept in touch monthly for several years. In addition, Dr. Knudsen visited Dick Schroeder (Mr. Schroeder), a bird breeder, at his facility in California. Dr. Knudsen and Mr. Schroeder talked about setting up bird cages and pairing birds in cages. Dr. Knudsen occasionally talked to Gail Worth, head of the editorial board of Bird Talk magazine, about setting up his bird breeding operation. Dr. Knudsen also contacted a breeder in Minnesota about housing birds in an indoor facility with artificial light.

After purchasing a large tract of land for bird breeding, petitioners decided to expand their breeding activities to other animals. In 1992, petitioners began purchasing camels and llamas. Petitioners became interested in llamas because they helped eliminate sage and weeds, and they deterred coyotes by emitting a scent. Further, petitioners learned that llamas reduced stress in humans, and they experimented with the use of llamas in Dr. Knudsen's medical practice.

Before acquiring camels and llamas, petitioners visited several llama ranches, spoke with breeders over the telephone, and joined a local llama society. Petitioners also visited several breeders, including a llama breeder in Texas and a camel breeder in Colorado. In addition, Dr. Knudsen read books about camel breeding in the Middle East. Petitioners expected to recoup the expense of breeding the camels over approximately 10 years.

After purchasing camels and llamas, petitioners became interested in breeding Angora goats because the U.S. Government subsidized Angora goat wool. However, the United States phased out the subsidy shortly after petitioners acquired their Angora goats.

Petitioners continued to acquire more species of animals to breed, including, but not limited to, Watusi cattle, miniature donkeys, miniature horses, elk, reindeer, zebras, African antelope, kangaroos, Clydesdale horses, and primates.



Petitioners' Operational History
From 1989 through 2001, petitioners acquired around 50 or 60 species of birds and approximately 30 different species of other animals for breeding. From 1989 through 2001, petitioners spent more than $1 million on livestock.4

Petitioners purchased animals from dealer/brokers and zoos. Before purchasing an animal, petitioners often did not investigate the quality and breeding possibility of the animal. Mrs. Knudsen purchased two Clydesdale horses without knowing what the selling price of their offspring would be. She also purchased breeds that were not suitable for the Kansas climate. In addition, Mrs. Knudsen purchased animals without receiving any health information on them. For example, petitioners purchased from a zoo a bongo that had an implant, which prevented the animal from breeding.

Petitioners hired employees to help maintain the facilities. Two of petitioners' children also helped at ERE, although they did not always receive wages. Petitioners offered their full-time employees health insurance benefits. Petitioners withheld employment taxes and filed payroll tax returns with the Internal Revenue Service and the State of Kansas. Petitioners required their employees to clock in and out of work, and they maintained an employee training manual.

Employees mowed the grass, painted, and performed other upkeep at ERE. The employees generally did not help Mrs. Knudsen care for the animals. However, Mrs. Knudsen allowed one employee at a time to assist her in caring for the birds. Mrs. Knudsen typically trained each of these employees for approximately 2 weeks.

During the years in issue, insurance for their animals was available to petitioners. However, petitioners did not insure their animals because it was too costly.

Mrs. Knudsen acquired the following licenses on behalf of ERE: Captive-Bred Wildlife Registration --U.S. Department of Interior, Fish and Wildlife Service; Federal Fish and Wildlife Permit; Class B Dealer Permit Under the Animal Welfare Act --U.S. Department of Agriculture (USDA); Federal Fish and Wildlife Permit --Migratory Birds; Kansas Department of Wildlife and Parks Game Breeders Permit; Nursery Dealer License --Kansas Department of Agriculture; Kansas Rehabilitation Permit. Several of these licenses were required for petitioners to deal in certain animals.

In addition to the licenses held by ERE, Mrs. Knudsen joined the following organizations: International Society of Zooculturalists (ISZ), Exotic Wildlife Association (EWA), United Zoological Association, Clydesdale Breeders of the United States, American Miniature Donkey Registry, American Miniature Horse Association, North American Elk Breeders Association, International Lama Registry, World Watusi Association, American Quarter Horse Association, Reindeer Owners and Breeders Association, American Federation of Agriculture, American Pheasant and Waterfowl Society, and Ducks Unlimited.

During the operation of ERE, petitioners experienced several setbacks in their breeding activity, including:

! Petitioners lost many bird eggs and chicks after an employee brought her young child into the bird breeding facility.

! Wind storms caused eye problems for the Rocky Mountain goats, which affected their breeding.

! A drought in Kansas negatively affected the breeding of many animals.

! A very expensive bird escaped after an employee left the bird cage open.

! A heater failed on a very cold night, resulting in the deaths of two bongos.

! Two Clydesdale horses died in a barn fire.

! Several gemsbok crashed into a fence during the barn fire, and one of them was killed. Several others lost market value after breaking their horns.

! A coyote killed a Black Buck antelope.

! A mountain lion killed an East African crowned crane and its chick.

! A male addax died during a windstorm.

! A giraffe died after slipping on wet ground.

! A giraffe calf died as a result of the cold weather on the night of its birth.

Mrs. Knudsen testified that petitioners would eliminate breeding groups that were unsuccessful and expand breeding groups that were successful. However, petitioners did not base any decision on an analysis of the profitability of a breeding line.5 Petitioners eliminated a breeding group, for example, if a mother lost her young or did not take care of it. They also eliminated animals that required continuous bottle feedings.



Petitioners' Breeding Facilities
Petitioners tried several locations for their bird breeding activity. During the first year of breeding, petitioners kept the birds in a sunroom inside their home. After acquiring more birds, petitioners decided to build cages for the birds in a heated building. However, the cages were unsatisfactory. Petitioners then decided to construct a small metal building behind Dr. Knudsen's medical office building. The birds remained in this building for about 3 years.

As their bird breeding activity expanded, petitioners decided to purchase a 160-acre tract located about 10 miles north of Liberal, Kansas. At that time, petitioners named their operation ERE.

Before constructing any facilities on the land, petitioners attended seminars where they learned about suitable environments for housing the birds. In the early 1990s, petitioners constructed two buildings, an indoor-only building and an indoor/outdoor building.

Over time, petitioners made additional improvements at ERE. Petitioners built a rain forest structure, an aviary, camel and goat sheds, a llama breeding barn, a giraffe building, a chimpanzee building, a monkey cage, a gazebo, multiple fences, approximately 12 Morton buildings,6 and numerous other metal buildings. In addition, petitioners kept two mobile homes on the property. Petitioners also made substantial improvements to the landscape of ERE by planting trees and shrubs and installing sidewalks, driveways, rocks, a pond, and a deck. From 1990 through 2001, petitioners spent a total of $1,532,252 on improvements to the land.7 In addition, petitioners spent $261,348 on equipment used to maintain the property.

The USDA conducted two annual inspections of ERE's facilities. The USDA requires that exotic animal breeding facilities be constructed and maintained according to USDA regulations.8 To comply with USDA's requirements, petitioners incurred large expenses installing infrastructure on the property. For example, petitioners constructed metal and concrete buildings, maintained heat inside the buildings, and built walkways throughout the property. During the years at issue, ERE was in compliance with or received variances from all USDA requirements.9

In 2000, petitioners started building a home on the property. Petitioners decided to live on the property because Mrs. Knudsen often drove to the property alone at night to feed the animals, and petitioners wanted to keep better watch over ERE. In addition, petitioners installed a swimming pool with a sun room enclosure at their new home.



Petitioners' Record Keeping
Petitioners maintained financial and accounting records as well as operational records for ERE. Petitioners kept ERE's bank account and accounting records separate from their personal financial records.10 An employee/bookkeeper of Dr. Knudsen's medical practice maintained ERE's books of account using Quickbooks accounting software11 and was responsible for paying all of ERE's expenses, including taxes. Petitioners maintained a general ledger, cash receipts/disbursements journals, and financial statements for ERE. The record does not contain any evidence, however, that petitioners used their financial records for making business decisions.

Petitioners hired James W. Grimes (Mr. Grimes), a certified public accountant of Hay, Rice & Associates, to prepare ERE's income tax returns. Although Mr. Grimes's accounting firm offers business consulting to clients, petitioners did not introduce any evidence that Mr. Grimes, or any person from his firm, advised petitioners about business plans or ways to achieve profitability.

Petitioners kept a depreciation schedule for the animals purchased for breeding and the improvements made on the land. However, Mrs. Knudsen admitted that the depreciation schedule contained errors. For example, Mrs. Knudsen testified that petitioners owned two blue and gold macaws, but only one was included on the depreciation schedule.

In addition to their accounting records, petitioners kept some operational records for their breeding activity. Mrs. Knudsen maintained a daily journal, a calendar of bird breeding activity, and a large notebook of breeding records. The daily journal was a calendar that was kept near the entrance of the building, on which employees documented daily events such as weather temperatures, births, deaths, workers present, chores of the day, and deliveries of feed and fuel. The bird calendar was kept in petitioners' kitchen and included information on the bird breeding activity. The bird calendar helped petitioners determine when the birds would lay eggs and when the eggs would hatch.

The large notebook of breeding records contained information such as names of sellers, dates of purchase, purchase prices, and breeding information. The breeding records did not identify the species of animal, and many of the breeding records were incomplete. Petitioners did not maintain breeding records for all of their animals. For example, petitioners did not keep breeding records for the birds or the primates. Several animals had births during 2000 and 2001 for which petitioners did not provide breeding records.12

Mrs. Knudsen testified that she periodically transferred information on animal births and deaths from the journals and the bird calendar to computerized breeding records. However, the computer records introduced in evidence were incomplete and covered 2000 and 2001 only.

Petitioners kept other operational records. For animals born and raised at ERE, Mrs. Knudsen kept pediatric records detailing each animal's birth date, birth weight, and medications given at birth. The pediatric records also tracked feeding. Mrs. Knudsen also kept a record of microchip implantations,13 but this record was incomplete.

Petitioners did not regularly maintain a complete inventory of ERE's animals. They compiled a list only once a year for the USDA's annual inspection. At the time of trial, petitioners did not know and could not estimate the fair market value of ERE's animals.

Moreover, petitioners did not issue invoices or receipts to customers.14 A customer's only proof of purchase from ERE was a notation of the species on the canceled check. Although Mrs. Knudsen testified that petitioners kept a record of animal sales on Quickbooks, the record provides almost no details regarding petitioners' animal sales.



Petitioners' Marketing Activities
Petitioners conducted very little marketing and advertising for ERE. Petitioners reported advertising expenses during only 1 year of operation.15 Mrs. Knudsen was unable to explain why petitioners claimed advertising expenses in only 1 year. She testified that petitioners had advertising expenses in 2000 or 2001, but the record does not indicate that petitioners paid for advertising in those years.

Petitioners publicized their animals in trade journals and through animal breeding organizations. For example, Mrs. Knudsen listed ERE in the ISZ breeders' directory, and she made contacts in the exotic animal business through membership in EWA and by attending auctions. Although Mrs. Knudsen testified that she belongs to these organizations to help her establish a good reputation in the exotic animal business, petitioners did not present evidence that membership in these organizations increased the marketability of their animals.

In addition, Mrs. Knudsen ordered business cards for ERE and distributed them to potential business contacts. ERE's business card featured a description of its business as "conservation, preservation, rare and endangered species", a small picture of exotic animals, and Mrs. Knudsen's name and contact information. The business card did not indicate that ERE sold exotic animals.



Petitioners' Sales Activities
Petitioners sold animals to individuals, brokers, and zoos and through auctions. Petitioners initially sold birds locally but then decided to use a broker to send most of their birds to a pet shop in Denver. Petitioners determined the market prices for their animals from various journals, including Animal Finders' Guide and Rare Breeds Journal.

From 1995 through 2002, petitioners received $416,080 from animal sales. As stated above, the record provides little evidence regarding the details of petitioners' sales activities.



Petitioners' Time and Effort
Petitioners devoted substantial time and effort to ERE. Although Dr. Knudsen devoted most of his time to his medical practice, he spent around 15 or 20 hours per week working at ERE during the spring and summer months. Dr. Knudsen attended to the animals' health needs and was the primary caretaker of the landscaping at ERE. He testified that the landscaping created a natural environment for the animals to thrive.

Mrs. Knudsen was the primary operator of ERE and devoted a significant amount of time to it. Mrs. Knudsen also helped in Dr. Knudsen's medical practice and received wages for her services. At one time, petitioners employed a manager of ERE to help Mrs. Knudsen with the daily activities. After the manager left around 2000, Mrs. Knudsen assumed all responsibilities for the daily management of ERE.

Many of Mrs. Knudsen's duties were demanding. She hand or bottle fed baby animals several times a day. Mrs. Knudsen fed the primates and kangaroos every day and spent about 45 minutes a day feeding the birds in the breeder building. In addition, she fed the kangaroos and the giraffe fresh fruit and produce three times a week. During the winter, Mrs. Knudsen acclimated the primates to the cold weather by letting them out during the day and locking them up at night.

Mrs. Knudsen's work at ERE was not always pleasurable. She performed tasks such as cleaning stalls and cages, checking the heaters in the middle of a blizzard, hand feeding the birds grub worms, and disposing of animal carcasses. As a result of her duties at ERE, Mrs. Knudsen sustained several injuries. In 1999, she received a permanent scar on her left temple because of a bird attack. In 2000, Mrs. Knudsen had surgery on her right shoulder to repair damage caused by stacking hay and cleaning stalls. In 2001, she had surgery on a knee injury resulting from a chimpanzee attack.

In addition to her duties at ERE, Mrs. Knudsen spent time attending seminars on various animals. At one seminar, Mrs. Knudsen learned how to implant microchips in the animals. Petitioners attended seminars on hand feeding birds and on constructing bird breeding facilities. Mrs. Knudsen also dedicated a significant amount of time to her various membership organizations. She spoke at an ISZ-sponsored seminar at the Omaha Zoo and in 2000 hosted the ISZ convention.



Petitioners' Income Tax Returns
Most of petitioners' breeding activity losses resulted from depreciation of the animals, infrastructure, and improvements. On Schedules F, Profit or Loss From Farming, of their returns, petitioners reported gross income and expenses and net profit or loss for 1995 through 2002 relating to ERE, as shown in the following table:



Net profit or
Year Gross income Expenses (loss)

1995 $22,138 $376,943 ($354,805)

1996 49,011 342,794 (293,783)

1997 23,528 365,544 (342,016)

1998 69,639 355,230 (285,591)

1999 59,353 412,127 (352,774)

2000 50,423 481,386 (430,963)

2001 63,977 534,483 (470,506)

2002 104,671 436,478 (331,807)


The following table compares the adjusted gross income (AGI) that petitioners would have reported if they had not engaged in their breeding activity with the AGI that they actually reported on their Federal income tax returns for 1995 through 2002:



Year AGI without ERE AGI reported

1995 $553,075 $199,175

1996 716,359 428,485

1997 748,293 409,896

1998 688,703 413,584

1999 781,242 440,399

2000 1,003,786 586,239

2001 1,072,126 613,985

2002 886,312 555,856


The losses from ERE allowed petitioners to reduce their Federal income tax liability by $170,732 for 2000 and $184,507 for 2001.



Notice of Deficiency
Following an examination of petitioners' Federal income tax returns for 2000 and 2001, respondent issued a notice of deficiency in which he determined: (1) Petitioners' animal breeding activity in those years was an activity not engaged in for profit under section 183, and expense deductions claimed with respect to the breeding activity were disallowed, except as allowed by section 183(b), and (2) computational adjustments to petitioners' itemized deductions were required because of the preceding adjustments.


OPINION




I. Burden of Proof
Petitioners argue that the burden of proof should be shifted to respondent under section 7491(a) because petitioners produced credible evidence and satisfied the requirements of section 7491(a)(2).

Generally, the Commissioner's determinations are presumed correct, and the taxpayer bears the burden of proving that those determinations are erroneous. Rule 142(a)(1); Welch v. Helvering, 290 U.S. 111, 115 (1933). Section 7491 is applicable to court proceedings arising in connection with examinations commenced after July 22, 1998. Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L. 105-206, sec. 3001(c), 112 Stat. 727. Under section 7491(a)(1), the burden of proof shifts to the Commissioner, subject to certain limitations, where a taxpayer introduces credible evidence with respect to a factual issue relevant to ascertaining the taxpayer's tax liability if the taxpayer introduces credible evidence regarding the issue. See Ashley v. Commissioner, T.C. Memo. 2000-376. Section 7491(a)(1) applies with respect to a factual issue only if the requirements of section 7491(a)(2) are satisfied. Section 7491(a)(2) requires that a taxpayer have maintained all records required by the Internal Revenue Code, cooperated with reasonable requests by the Secretary for witnesses, information, documents, meetings, and interviews, and, if the taxpayer is a corporation, satisfied the net worth requirements of section 7430(c)(4)(A)(ii).

Respondent admits that petitioners have cooperated throughout the examination. However, respondent argues that petitioners have not provided substantiation for certain Schedule F expense deductions and that petitioners have not produced credible evidence with respect to whether their exotic animal breeding operation was an activity engaged in for profit.

We do not need to decide whether petitioners have met all of the requirements under section 7491 to shift the burden of proof to respondent. The outcome of this case is based on a preponderance of the evidence and thus is unaffected by section 7491. See Estate of Bongard v. Commissioner, 124 T.C. 95, 111 (2005) (citing Blodgett v. Commissioner, 394 F.3d 1030, 1035 (8th Cir. 2005), affg. T.C. Memo. 2003-212, and Estate of Stone v. Commissioner, T.C. Memo. 2003-309).



II. Section 183(a) Deductions
A. In General

Section 183(a) provides that if an activity is not engaged in for profit, no deduction attributable to the activity shall be allowed except as provided in section 183(b). Section 183(b)(1) authorizes a deduction for any expense that otherwise is allowable, regardless of profit objective. Section 183(b)(2) authorizes a deduction for expenses that would be allowable if the activity were engaged in for profit, but only to the extent that gross income attributable to the activity exceeds the deductions permitted by section 183(b)(1). Section 183(c) defines "activity not engaged in for profit" as "any activity other than one with respect to which deductions are allowable for the taxable year under section 162 or under paragraph (1) or (2) of section 212."

Section 162 authorizes a deduction for the expenses of carrying on an activity that constitutes a trade or business of the taxpayer. See sec. 162(a); sec. 1.183-2(a), Income Tax Regs. To be engaged in a trade or business with respect to which deductions are allowable under section 162, "the taxpayer must be involved in the activity with continuity and regularity", and "the taxpayer's primary purpose for engaging in the activity must be for income or profit." Commissioner v. Groetzinger, 480 U.S. 23, 35 (1987); see also Warden v. Commissioner, T.C. Memo. 1995-176, affd. without published opinion 111 F.3d 139 (9th Cir. 1997).

Absent a stipulation to the contrary, see sec. 7482(b)(2), this case is appealable to the Court of Appeals for the Tenth Circuit, which has applied the dominant or primary objective standard to test whether an alleged business activity is conducted for profit. Hildebrand v. Commissioner, 28 F.3d 1024, 1027 (10th Cir. 1994), affg. Krause v. Commissioner, 99 T.C. 132 (1992); Cannon v. Commissioner, 949 F.2d 345, 350 (10th Cir. 1991), affg. T.C. Memo. 1990-148;16 Oswandel v. Commissioner, T.C. Memo. 2007-183. Under the standard applied by the Court of Appeals for the Tenth Circuit, petitioners must prove that the dominant or primary objective of their exotic animal breeding activity was to earn a profit.

Section 1.183-2(b), Income Tax Regs., sets forth a nonexclusive list of factors to be considered in determining whether a taxpayer has the requisite profit objective. The factors are: (1) The manner in which the taxpayer carries on the activity; (2) the expertise of the taxpayer or his advisers; (3) the time and effort expended by the taxpayer in carrying on the activity; (4) the expectation that assets used in the activity may appreciate in value; (5) the success of the taxpayer in carrying on other similar or dissimilar activities; (6) the taxpayer's history of income or loss with respect to the activity; (7) the amount of occasional profits, if any, which are earned; (8) the financial status of the taxpayer; and (9) elements of personal pleasure or recreation. No single factor is determinative, and not all factors are applicable in every case. See Allen v. Commissioner, 72 T.C. 28, 34 (1979); sec. 1.183-2(b), Income Tax Regs.

In making our evaluation of the foregoing factors, we may consider evidence from years subsequent to the years in issue "to the extent it may create inferences regarding the existence of a profit motive in the earlier years." Hillman v. Commissioner, T.C. Memo. 1999-255 (citing Hoyle v. Commissioner, T.C. Memo. 1994-592). "[A]ctual profits or losses in those and subsequent years have probative, although not determinative, significance in such evaluation." Smith v. Commissioner, T.C. Memo. 1993-140.

B. Applying the Factors

1. The Manner in Which Petitioners Conducted the Activity

In deciding whether a taxpayer has conducted an activity in a businesslike manner, we consider whether complete and accurate books and records were maintained, whether the activity was conducted in a manner substantially similar to other activities of the same nature that were profitable, and whether changes in operating methods, adoption of new techniques, or abandonment of unprofitable methods was done in a manner consistent with an intent to improve profitability. See Engdahl v. Commissioner, 72 T.C. 659, 666-667 (1979); sec. 1.183-2(b)(1), Income Tax Regs.

a. Petitioners' Record Keeping

Petitioners' bookkeeper maintained books and records for ERE using Quickbooks software. The software produced financial reports, including a general ledger. Petitioners kept ERE's records separate from Dr. Knudsen's medical practice records and petitioners' personal records. Petitioners also maintained a separate bank account for ERE.

Although we are satisfied that petitioners kept financial records of their breeding activity, we are not convinced that petitioners' record keeping represented anything other than an effort to substantiate expenses claimed on their return. As we have held:

The purpose of maintaining books and records is more than to memorialize for tax purposes the existence of the subject transactions; it is to facilitate a means of periodically determining profitability and analyzing expenses such that proper cost saving measures might be implemented in a timely and efficient manner. * * * [Burger v. Commissioner, T.C. Memo. 1985-523 (citing Golanty v. Commissioner, 72 T.C. 411, 430 (1979), affd. without published opinion 647 F.2d 170 (9th Cir. 1981)), affd. 809 F.2d 355 (7th Cir. 1987).]

Petitioners presented no evidence that their books and records were used to review profitability or to implement cost-saving measures.

While a taxpayer need not maintain a sophisticated cost accounting system, the taxpayer should keep records that enable the taxpayer to make informed business decisions. See Burger v. Commissioner, 809 F.2d at 359. For a taxpayer's books and records to indicate a profit motive, the books and records should enable a taxpayer to cut expenses, increase profits, and evaluate the overall performance of the operation. See Abbene v. Commissioner, T.C. Memo. 1998-330.

Although petitioners kept extensive financial records, they were not used to review and reduce expenses or to enhance the possibility of generating income. For example, Mrs. Knudsen testified that a decision regarding termination of a breeding line was made by considering whether an animal was producing young and taking care of them. Petitioners did not introduce any evidence that they used their financial and breeding records to determine whether a specific breed was profitable. Further, petitioners did not maintain records of revenues and expenses associated with each animal or breed. See, e.g., Steele v. Commissioner, T.C. Memo. 1983-63 (failure to keep track of expenses for each animal implies lack of profit motive). Because petitioners failed to use the existing books and records to minimize their expenses or otherwise foster profitability, the fact that they maintained records does not indicate that the activity was carried on with a profit motive. See Sullivan v. Commissioner, T.C. Memo. 1998-367 (maintenance of records generally not indicative of profit motive where evidence did not show taxpayer used records to improve losing venture), affd. without published opinion 202 F.3d 264 (5th Cir. 1999).

Petitioners did not prove that their books and records were kept or used in a businesslike manner. In addition, petitioners did not maintain ERE's operational records in a businesslike manner. Petitioners could not make meaningful decisions regarding their breeding activities from the incomplete operational records they maintained.

b. Similarity to Other Activities of the Same Nature

Petitioners argue that the breeding of each species should be evaluated as a separate activity. They claim that each breeding activity was conducted in a similar manner to successful breeding activities. However, petitioners did not introduce credible evidence of which species were successfully bred and how successful breeding activities were conducted. See Wesinger v. Commissioner, T.C. Memo. 1999-372; Filios v. Commissioner, T.C. Memo. 1999-92, affd. 224 F.3d 16 (1st Cir. 2000); sec. 1.183-2(c), Example (4), Income Tax Regs. Thus, we are not in a position to evaluate whether petitioners' exotic animal breeding activity was conducted in a manner substantially similar to that of other profitable animal breeding operations.

c. Changes Made To Foster Profitability

Petitioners argue that several changes in operating methods support their claim of a businesslike operation. First, petitioners claim that they eliminated unprofitable breeding groups and expanded profitable breeding groups. Second, petitioners contend that they minimized the expenses of ERE by performing necessary duties themselves. For example, Mrs. Knudsen learned to perform microchip implantation, and Dr. Knudsen landscaped the property and attended to the animals' health needs. Finally, petitioners argue that they decreased expenses by rotating the grazing pastures to reduce the amount of hay purchased, by purchasing animals that could be housed in the existing facilities, and by purchasing feed in bulk.

Petitioners have not convinced us that the changes had a material impact on ERE's profitability. See Golanty v. Commissioner, supra at 428 (changes must be sufficient to alter materially the prospects of making a profit). The amounts of petitioners' losses did not decline despite petitioners' claims that they cut costs and eliminated unprofitable breeding groups. Petitioners' greatest losses were during 2000 and 2001, more than 10 years after starting their breeding activity. Further, petitioners did not expand or eliminate any breeding lines using an economic analysis of the individual breeds.

Finally, we note that petitioners' marketing and sales efforts have changed little since the inception of the activity. Relatively little has been spent on advertising. Cf. Burrow v. Commissioner, T.C. Memo. 1990-621. In fact, petitioners incurred advertising expenses during only 1 year of operation. Despite substantial losses each year, petitioners did not step up advertising efforts to increase revenue from animal sales.

d. Summary

Under the facts and circumstances of this case, petitioners did not conduct their exotic animal breeding activity in a businesslike manner.

This factor favors respondent's position.

2. The Expertise of Petitioners or Their Advisers

Preparation for an activity by extensive study of its accepted business, economic, and scientific practices or consultation with industry experts may indicate a profit motive where the taxpayer carries on the activity in accordance with such practices. See sec. 1.183-2(b)(2), Income Tax Regs. A taxpayer's efforts to gain experience and to follow expert advice may indicate a profit motive. See, e.g., Dworshak v. Commissioner, T.C. Memo. 2004-249.

Petitioners learned about exotic animal breeding by attending seminars and conferences, reading books and scientific journals, and consulting experienced breeders. However, petitioners did not present evidence that any of the experts they contacted were experts in the economics of the exotic animal breeding business or were successful in running such a business. In addition, petitioners offered no evidence that the seminars and conferences instructed them on how to run a successful animal breeding business. Petitioners did not consult a business adviser, prepare budgets, or implement a business plan. Petitioners may have become well educated in exotic animal breeding, but they did not establish an acquired expertise in operating a profitable animal breeding business.

On several occasions, petitioners failed to investigate the profitability of a breed before purchasing an animal. Mrs. Knudsen purchased two Clydesdale horses without knowing what the selling price of their offspring would be, and she purchased other animal breeds that were unfit for the Kansas climate. In addition, Mrs. Knudsen purchased animals without receiving any health information on them.

On balance, we conclude that petitioners did not have, and did not acquire from others, expertise in the economics of the exotic animal breeding business.

This factor favors respondent's position.

3. Petitioners' Time and Effort Devoted to the Activity

The fact that a taxpayer devotes personal time and effort to carry on an activity may indicate an intention to derive a profit, particularly where there are no substantial personal or recreational elements associated with the activity. See Daley v. Commissioner, T.C. Memo. 1996-259; sec. 1.183-2(b)(3), Income Tax Regs. A taxpayer's withdrawal from another occupation to devote most of his energies to the activity may be evidence that the activity was engaged in for profit. See sec. 1.183-2(b)(3), Income Tax Regs.

Respondent does not dispute that Mrs. Knudsen devoted a substantial amount of time and effort to petitioners' exotic animal breeding activity. However, respondent argues that Mrs. Knudsen gained personal satisfaction from spending time with the animals, and thus, the significant amount of time and effort she spent with them does not evidence a profit objective.

Although Mrs. Knudsen gained enjoyment from her animals, many of her duties were not personal or recreational. For example, Mrs. Knudsen cleaned stalls and cages, disposed of animal waste and carcasses, and cared for animals during the night. The fact that a taxpayer derives some personal satisfaction from a business does not turn it into a hobby. Jackson v. Commissioner, 59 T.C. 312, 317 (1972); Giles v. Commissioner, T.C. Memo. 2006-15; McKeever v. Commissioner, T.C. Memo. 2000-288.

Mrs. Knudsen operated and managed ERE.17 Although she worked part time in Dr. Knudsen's medical practice, Mrs. Knudsen devoted substantial amounts of her time to ERE. In addition to Mrs. Knudsen's labor, ERE hired several employees to help maintain the breeding operation. Petitioners employed two full-time workers at ERE and hired additional employees during the summer to help with the upkeep of the facilities. Because of the sensitive nature of the birds, Mrs. Knudsen was their primary caretaker. Generally, Mrs. Knudsen trained only one employee to help handle and feed the birds. ERE also used a bookkeeper to maintain ERE's accounting records, but Mrs. Knudsen was responsible for keeping ERE's operational records.

Along with her duties at ERE, Mrs. Knudsen devoted a significant amount of time to the various organizations to which ERE belonged. ERE, through Mrs. Knudsen, belonged to over 10 organizations dedicated to animal breeding. Mrs. Knudsen became active in several of these organizations.

Dr. Knudsen devoted most of his time to his medical practice. However, he spent about 15 to 20 hours per week during some months landscaping the property and handling the animals' health needs. Dr. Knudsen's participation in ERE was not immaterial.

The time and effort petitioners spent on their exotic animal breeding activity supports their contention of profit motivation. Although petitioners enjoyed breeding exotic animals, on balance we conclude that petitioners' time and effort favor their contention that the activity was engaged in for profit. See sec. 1.183-2(b)(3), Income Tax Regs.

This factor favors petitioners' position.

4. The Expectation That Assets Used in the Activity Would Appreciate in Value

The term "profit" encompasses revenue from operations and appreciation in the value of assets such as land. Sec. 1.183-2(b)(4), Income Tax Regs.

Thus, the taxpayer may intend to derive a profit from the operation of the activity, and may also intend that, even if no profit from current operations is derived, an overall profit will result when appreciation in the value of land used in the activity is realized since income from the activity together with the appreciation of land will exceed expenses of operation. * * * [Id. ]

Petitioners argue that their expectation of profit is evidenced by the fact that a gross profit will be produced upon the sale of a third offspring. This argument is not supported by credible evidence. For example, petitioners' depreciation schedule reflects that they purchased one blue and gold macaw for $750 in 1997. Yet, in 2000, petitioners sold three blue and gold macaws for $750.

Respondent claims that petitioners could not have expected ERE's assets to appreciate so much in value as to produce an overall profit because ERE's current operating expenses each year exceeded its gross receipts by a wide margin. Respondent points out that petitioners could not realize an overall profit even if ERE's property appreciated.

We agree with respondent. During 2000 and 2001, ERE's current operating expenses significantly exceeded its gross receipts. The cost to feed the animals alone exceeded the revenue from animal sales in the above years. Despite the rising costs, petitioners continued to acquire more animals, spending $97,797 on livestock purchases in 2000 and 2001. Petitioners could not have reasonably expected an overall profit from their breeding activity.

Moreover, petitioners could not have expected that any appreciation in ERE's land would offset the losses. According to petitioners' financial statement for 2000, ERE's assets had an adjusted basis of $1,353,009, and ERE's land and improvements had an appraised current value of $109,260.

Petitioners are correct that they need prove only a bona fide expectation of profit. However, ERE's enormous losses relative to its gross receipts lead us to conclude that petitioners could not have reasonably believed their breeding activity would result in an overall future profit.

This factor favors respondent's position.

5. Petitioners' Past Success in Other Activities

The fact that a taxpayer has engaged in similar activities and converted them from unprofitable to profitable enterprises may indicate that the taxpayer is engaged in the present activity for a profit, even though the activity is presently unprofitable. See sec. 1.183-2(b)(5), Income Tax Regs.

Petitioners presented no evidence of experience in the animal breeding business before ERE. However, petitioners argue that Dr. Knudsen's successful medical practice evidences petitioners' expectation that ERE could be successful.

Although Dr. Knudsen's medical practice was profitable, Dr. Knudsen's success relates to his extensive education and training in the medical profession. In addition, the record does not indicate whether Dr. Knudsen's medical practice was converted from an unprofitable to a profitable business. Thus, we are unable to conclude that petitioners' success with Dr. Knudsen's medical practice is probative of petitioners' profit motive with regard to ERE.

This factor is neutral.

6. Petitioners' History of Income or Loss From the Activity

A taxpayer's history of income or loss with respect to any activity may indicate the presence or absence of a profit objective. See Golanty v. Commissioner, 72 T.C. at 426; sec. 1.183-2(b)(6), Income Tax Regs. "[A] series of startup losses or losses sustained because of unforeseen circumstances beyond the control of the taxpayer may not indicate a lack of profit motive." Kahla v. Commissioner, T.C. Memo. 2000-127 (citing Engdahl v. Commissioner, 72 T.C. at 669, and sec. 1.183-2(b)(6), Income Tax Regs.), affd. without published opinion 273 F.3d 1096 (5th Cir. 2001).

Petitioners make several arguments to defend ERE's consistent losses. First, petitioners argue that in 2001 they were still in the "initial or start-up stages" of their business. We find petitioners' argument unconvincing. We have held that the initial startup phase for a horse breeding operation is 5 to 10 years. Engdahl v. Commissioner, supra at 669. Petitioners offered no evidence to support a finding that the startup phase for an exotic animal breeding operation was more than 5 to 10 years. The years at issue were petitioners' 11th and 12th years of operation and well beyond the startup phase of their breeding activity.

Second, petitioners argue that several unforeseen events occurred that magnified their losses, and they contend that the difficulties and uncertainties in the exotic animal breeding business explain their losses. However, the setbacks ERE experienced do not explain the significant losses incurred each year.

Petitioners' losses in comparison with their revenues were substantial. From 1995 to 2002, petitioners reported losses in 8 consecutive years, which total $2,862,245.18 During that same period, petitioners reported gross receipts of $442,740. The magnitude of petitioners' losses in comparison with their revenues is an indication that petitioners did not have a profit motive. See Dodge v. Commissioner, T.C. Memo. 1998-89 (citing Burger v. Commissioner, 809 F.2d at 360).

This factor favors respondent's position.

7. The Amount of Occasional Profits Generated by the Activity

The amount of profits earned in relation to the amount of losses incurred, the amount of the investment, and the value of the assets in use may indicate a profit objective. See sec. 1.183-2(b)(7), Income Tax Regs. The opportunity to earn substantial profits in a highly speculative venture may be sufficient to indicate that the activity is engaged in for profit even though only losses are produced. See id. In determining whether the taxpayer entered into the activity for profit, a small chance of making a large profit may indicate the requisite profit objective. See id.

Petitioners argue that the Court should consider the gross profits realized from the sales of animals. However, petitioners did not introduce evidence that the animals sales produced a profit before operational expenses of ERE were taken into account.19 Further, they introduced little evidence regarding the purchase prices of the animals or their adjusted bases in the animals. Petitioners also assert that many of ERE's animals were capable of yielding profits. However, a highly speculative profit potential does not outweigh the substantial losses incurred during the years of operation. See Giles v. Commissioner, T.C. Memo. 2006-15; McKeever v. Commissioner, T.C. Memo. 2000-288.

After 12 years of operation, petitioners' exotic animal breeding activity has never generated a net profit. Despite their extraordinary losses, petitioners continued to expand their operation and to increase their losses.20

This factor favors respondent's position.

8. Petitioners' Financial Status

The fact that a taxpayer does not have substantial income or capital from sources other than the activity in question may indicate that the activity is engaged in for profit. See sec. 1.183-2(b)(8), Income Tax Regs. Substantial income from sources other than the activity (especially if the losses from the activity generate substantial tax benefits) may indicate a lack of profit motive, particularly where there are elements of personal pleasure or recreation involved. See id.

Petitioners derived a substantial amount of income from Dr. Knudsen's medical practice. During 2000 and 2001, petitioners reported $1,710,626 in wages from Dr. Knudsen's medical practice. Although petitioners were able to reduce their taxable income by $355,239 in 2000 and 2001 because of their exotic animal breeding activity,21 this tax benefit resulting from the activity does not prove the absence of a profit motive. See Engdahl v. Commissioner, 72 T.C. at 670. It is, however, a factor to be considered. See Golanty v. Commissioner, 72 T.C. at 429.

Petitioners had sufficient financial means apart from ERE to continue their exotic animal breeding activity at a loss. Dr. Knudsen's medical practice provided the funds to continue ERE's operations. Many deposits into ERE's bank account consisted of checks drawn from Dr. Knudsen's medical practice.

Petitioners' substantial income from Dr. Knudsen's medical practice, which was offset by ERE's losses, supports a conclusion that petitioners lacked the required profit motive.

This factor favors respondent's position.

9. Elements of Personal Pleasure or Recreation

The existence of personal pleasure or recreation relating to the activity may indicate the absence of a profit objective. See sec. 1.183-2(b)(9), Income Tax Regs. An activity will not be treated as not engaged in for profit merely because the taxpayer has purposes or motivations other than to make a profit. Id.

Petitioners argue that although they derived some pleasure from operating ERE, many important duties were not for pleasure or recreation. Respondent argues that the improvements to ERE's facilities were lavish and made only for the enjoyment of petitioners. Respondent also points to the fact that Mrs. Knudsen treated the animals like house pets.

We agree with respondent that elements of personal pleasure and recreation were present in petitioners' exotic animal breeding activity. However, as we stated above, some component of personal pleasure does not negate a bona fide profit motive. "[A] business will not be turned into a hobby merely because the owner finds it pleasurable; suffering has never been made a prerequisite to deductibility. `Success in business is largely obtained by pleasurable interest therein.'" Jackson v. Commissioner, 59 T.C. at 317 (quoting Wilson v. Eisner, 282 F. 38, 42 (2d Cir. 1922)); see also sec. 1.183-2(b)(9), Income Tax Regs.

In addition to caring for the animals, petitioners spent a significant amount of time maintaining and improving ERE's facilities. Mrs. Knudsen regularly performed duties that were not pleasurable or recreational, such as cleaning animal cages and stalls and disposing of animal carcasses. As a result of her duties, she also suffered several physical injuries. Dr. Knudsen personally did most of the landscaping on the property to provide the animals with a natural habitat.

The record does not contain evidence that petitioners' facilities were extravagant or that they were not constructed for the benefit of the animals. Petitioners maintained their property in accordance with USDA regulations. In addition, petitioners constructed a home on the property, at least in part, to enable them to care for their animals.

Although petitioners derived some pleasure from their exotic animal breeding activity, we conclude that petitioners were not engaged in the activity solely for personal pleasure or recreation.

This factor is neutral.

C. Conclusion

After considering the factors listed in section 1.183-2(b), Income Tax Regs., all contentions presented by the parties, and the unique facts and circumstances of this case, we conclude that petitioners did not enter the exotic animal breeding activity with a primary objective of realizing a profit. We hold that petitioners' exotic animal breeding activity during the years in issue was not an activity engaged in for profit within the meaning of section 183.



III. Respondent's Alternative Position
Respondent argues that if we find that petitioners' exotic animal breeding activity was conducted for profit, petitioners' claimed Schedule F expense deductions on their 2000 and 2001 income tax returns should be reclassified as capital expenses and depreciated, and certain expenses should be disallowed for lack of substantiation. Because we find that petitioners' exotic animal breeding activity was not an activity engaged in for profit during 2000 and 2001, we need not address respondent's alternative position.

To reflect the foregoing,

Decision will be entered for respondent.

1 Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.

2 Dr. Knudsen testified that he had some limited experience in the breeding of small birds. The record does not reflect whether Dr. Knudsen ever sold any of these birds.

3 Dr. Knudsen testified that he was "very interested" in bird breeding, and "Whether or not it was economically feasible, * * * only time would tell."

4 During the years at issue, petitioners spent $97,797 on livestock purchases.

5 Petitioners did not keep complete breeding records that would have enabled them to make an economic analysis of each breed.

6 Morton buildings are steel buildings that can withstand strong winds and volatile weather.

7 The improvements to the land consisted of $1,119,478 for buildings and $412,774 for landscaping.

8 The USDA regulates the following: Housing, ventilation, lighting, interior surfaces, primary enclosures, sanitation, pest control, feeding and watering, outdoor shelter, compatibility of animals housed together, record keeping, adequate veterinary care, handling, and transportation.

9 In 2001, the USDA informed petitioners that they were not in compliance with a new USDA regulation. The new regulation required an 8-foot perimeter fence for potentially dangerous animals. Mrs. Knudsen applied for a variance from the new regulation, and the USDA granted Mrs. Knudsen's request because the existing structures were sufficient.

10 In 2000, over $300,000 of deposits into the bank account of ERE were cash from Dr. Knudsen's medical practice.

11 The employee also kept the books for petitioners' personal accounts.

12 Breeding records were unavailable for many animals, including: Aoudads, Watusi cattle, muntjac, Pere David's deer, chamois, sloths, coatis, kangaroos, caribous, and Black Bucks.

13 The microchips were useful for recovering stolen animals.

14 Petitioners issued a receipt to only one buyer.

15 In 1996, petitioners reported $4,030 in advertising expenses on their Federal income tax return.

16 In both Hildebrand v. Commissioner, 28 F.2d 1024, 1027 (10th Cir. 1994), affg. Krause v. Commissioner, 99 T.C. 132 (1992), and Cannon v. Commissioner, 949 F.2d 345, 350 (10th Cir. 1991), affg. T.C. Memo. 1990-148, the Court of Appeals for the Tenth Circuit applied the dominant or primary objective test at the partnership level in analyzing whether a partnership was engaged in an activity for profit under sec. 183.

17 During a brief period, ERE hired a manager to help Mrs. Knudsen manage ERE.

18 The record does not contain financial information for the years before 1995. Petitioners introduced no evidence of any net profit earned during 1989 through 1994.

19 Petitioners did not offer evidence enabling us to calculate the profit or loss from each sale or from the aggregate sales.

20 During 2000 and 2001, petitioners incurred losses totaling $901,469.

21 From 1995 to 2002, petitioners used their losses from ERE to reduce their Federal income tax liability by $1,145,944.




Alvin S. Brown, Esq.
Tax Attorney
703 425-1400 ex 106

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IRS penalties for appraisals

IRS Advice Memorandum AM 2007-0017

November 15, 2007

Code Sec. 6695A

Penalties: Gross valuation misstatements: Applicability to preparers of estate and gift tax appraisals: Period of limitations. --



Office of Chief Counsel



Internal Revenue Service



Memorandum



Number: AM 2007-0017



Release Date: 11/9/07



CC:PA:B02:MSCooper



POSTN-141190-07

UILC: 6695.00-00, 6696.02-00

date: October 31, 2007

to: Program Manager, Estate & Gift Tax Program, (Small Business/Self-Employed)

from: Associate Chief Counsel, (Procedure & Administration)

subject: Applicability of Section 6695A Penalty to Estate & Gift Appraisals

This memorandum addresses the applicability of the penalty under I.R.C. §6695A to appraisals used in connection with estate or gift tax returns and whether there is a period of limitations on assessment that applies to this penalty.



ISSUES

(1) Whether the section 6695A penalty may be assessed against an appraiser who prepared an appraisal used in connection with an estate or gift tax return or claim for refund that results in a substantial or gross valuation misstatement.

(2) What is the period of limitations applicable to assessment of the section 6695A penalty?



CONCLUSIONS

(1) The Service may assess a section 6695A penalty against an appraiser for appraisals prepared after May 25, 2007 that are used in connection with an estate or gift tax return or claim for refund or credit that results in a gross valuation misstatement.

(2) There is no period of limitations applicable to the assessment of a penalty under section 6695A. To the extent practicable, however, the Service should assess the section 6695A penalty within 3 years after the filing of the return or claim for refund on which the penalty is based in order to minimize the ability of an appraiser to argue that the assessment was not made on a timely basis.



LAW AND ANALYSIS

The Pension Protection Act of 2006, Pub. L. No. 109-280, 120 Stat. 780, was enacted on August 17, 2006. Section 1219(b)(1) of the PPA added section 6695A to the Code, which provides:


If (1) a person prepares an appraisal of the value of property and such person knows, or reasonably should have known, that the appraisal would be used in connection with a return or a claim for refund, and



(2) the claimed value of the property on a return or claim for refund which is based on such appraisal results in a substantial valuation misstatement under chapter 1 (within the meaning of section 6662(e)), or a gross valuation misstatement (within the meaning of section 6662(h)), with respect to such property, then such person shall pay a penalty in the amount determined under subsection (b).


Section 6695A(a).

The penalty is the greater of $1,000 or 10% of the amount of the underpayment attributable to the misstatement (but in no event more than 125% of the gross income received by the appraiser for preparing the appraisal). Section 6695A(b). The penalty does not apply if the appraiser establishes to the satisfaction of the Secretary that the value established in the appraisal was more likely than not the proper value. Section 6695A(c).

Section 1219(b)(2) of the PPA also amended section 6696, which contains rules regarding the application of sections 6694, 6695, and 6695A. Section 6696, as amended after the PPA, provides, in part:


(d) Periods of limitation.



(1) Assessment. The amount of any penalty under section 6694(a) or under section 6695 shall be assessed within 3 years after the return or claim for refund with respect to which the penalty is assessed was filed, and no proceeding in court without assessment for the collection of such tax shall be begun after the expiration of such period. In the case of any penalty under section 6694(b), the penalty may be assessed, or a proceeding in court for the collection of the penalty may be begun without assessment, at any time.



(2) Claim for refund. Except as provided in section 6694(d), any claim for refund of an overpayment of any penalty assessed under section 6694, 6695, or 6695A shall be filed within 3 years from the time the penalty was paid.



(e) Definitions. For purposes of sections 6694, 6695, and 6695A --



(1) Return. The term "return" means any return of any tax imposed by subtitle A.



(2) Claim for refund. The term "claim for refund" means a claim for refund of, or credit against, any tax imposed by subtitle A.


Section 6696(d) & (e).

Section 6695A is generally effective for appraisals prepared with respect to returns or submissions filed after August 17, 2006. If, however, the appraisal relates to a facade easement donation, the effective date is for returns filed after July 25, 2006. The Joint Committee Explanation describing the PPA states that "[t]he provision establishes a civil penalty on any person who prepares an appraisal that is to be used to support a tax position if such appraisal results in a substantial or gross valuation misstatement." Technical Explanation of H.R. 4, JCX-38-06 at 311 (August 3, 2006).

The Small Business and Work Opportunity Tax Act of 2007, Public Law 110-28, 121 Stat. 190, was enacted on May 25, 2007. Section 8246(a) of the SBWOTA amended several provisions of the Code, including section 6696(e), to extend the income tax return preparer penalties to all tax return preparers. Section 6696(e), as amended after the SBWOTA, now provides:


(e) Definitions. For purposes of sections 6694, 6695, and 6695A --



(1) Return. The term "return" means any return of any tax imposed by this title.



(2) Claim for refund. The term "claim for refund" means a claim for refund of, or credit against, any tax imposed by this title.


This amendment to section 6696(e) is applicable to returns prepared after May 25, 2007.



I. Applicability of Section 6695A to Estate and Gift Tax Cases

The statutory language in section 6695A(a) includes penalties for returns or claims for refund based on appraisals that result in gross valuation misstatements within the meaning of section 6662(h). Section 6662(h)(2)(C) defines gross valuation misstatement to include certain estate and gift tax valuation understatements, as well as certain valuation misstatements under chapter 1 and certain overstatements of pension liabilities. Prior to amendment by the SBWOTA, however, the PPA had amended section 6696(e) to define "return" and "claim for refund" for purposes of sections 6694, 6695, and 6695A to include only tax imposed by subtitle A, i.e., income taxes. The plain reading of former section 6696(e) meant that the section 6665A penalty was imposed only with respect to appraisals relating to returns or claims for refund of income taxes. The express language of former section 6696(e), therefore, does not give the Service the authority to assess the section 6695A penalty with respect to estate and gift tax appraisals prepared before May 25, 2007, the effective date of the amendments to section 6696(e) by the SBWOTA. Notwithstanding the inapplicability of section 6695A to these returns and refund claims, other civil and criminal penalties (including the section 6701 penalty for aiding and abetting understatement of tax liability) apply to false and fraudulent estate and gift tax appraisals that fall within this time frame.

The language of section 6696(e), as revised by the SBWOTA amendments, changes the definition of "return" and "claim for refund" for purposes of section 6695A to include returns and refund claims for any tax imposed by Title 26. As a result, under current law, the section 6695A penalty applies to an appraiser who prepares an appraisal used in connection with an estate or gift tax return or claim for refund or credit that results in a gross valuation misstatement.

This change is effective for "returns prepared after May 25, 2007." SBWOTA section 8346(c). The preparation of an appraisal to be used with a return which results in a gross valuation misstatement can be considered part of the preparation of the return itself. Cf. Treas. Reg. §301.7701-15(b)(1) ("A person who renders advice which is directly relevant to the determination of the existence, characterization, or amount of an entry on a return or claim for refund, will be regarded as having prepared that entry."). Thus, the Service should assess a section 6695A penalty against an appraiser only for appraisals prepared after May 25, 2007.



II. Period of Limitations on Assessment for Section 6695A

There is no period of limitations applicable to the assessment of a penalty under section 6695A. Section 6696 provides, in general, the rules applicable to sections 6694, 6695, and 6695A. Section 6696(d)(1) specifically provides a 3 year period of limitations on assessment of the section 6694(a) and 6695 penalties, but does not provide for a limitations period for section 6695A penalty. Section 6696(d)(2) specifically provides a 3 year period of limitations on a claim for refund of an overpayment of any penalty assessed under section 6694, 6695 or 6695A. The general period of limitations under section 6501(a), which provides that tax must be assessed within 3 years after the return was filed, does not apply to the section 6695A penalty. Section 6501 explicitly provides that the term "return" means the return required to be filed by the taxpayer. Section 6501(a). Because an appraiser is not required to file the return giving rise to the penalty, section 6501(a) does not apply. Cf. Sage v. United States, 908 F.2d 18, 25 (5th Cir. 1990) (holding that section 6501 does not apply to the assessment of penalties under sections 6700 and 6701 because no return is filed by the person subject to penalty.); Kuchan v. United States, 679 F. Supp. 764 (N.D. Ill. 1988) (same).

Accordingly, there is no period of limitations that applies to the assessment of penalties under section 6695A. The section 6695A penalty may be assessed at any time. In order to minimize the ability of an appraiser to argue that an assessment has not been made on a timely basis, however, the Service should assess the section 6695A penalty, to the extent practicable, within 3 years after the filing of the return or claim for refund on which the penalty is based.

Please call me at (202) 622-3400 if you have any further questions.

cc: Jan B. Geier

Special Counsel to Division Counsel

(Small Business/Self-Employed)



Alvin S. Brown, Esq.
Tax Attorney
703 425-1400
www.irstaxattorney.com

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Unlawful IRS levy - section 7426 of the Internal Revenue Code

EC Term of Years Trust, Petitioner v. United States.

Supreme Court of the United States; 05-1541, April 30, 2007, 127 SCt 1763.

Affirming CA-5, 2006-1 USTC ¶50,171.

On Writ of Certiorari to the United States Court of Appeals for the Fifth Circuit. April 30, 2007, 127 SCt 1763127 SCt 1763.

[ Code Sec. 7426]

Civil actions by nontaxpayers: Wrongful levy: Trustee: Statute of limitations. --
A trust that missed the Code Sec. 7426(a)(1) deadline for challenging a levy may not bring a challenge as a tax refund claim under the general tax refund jurisdiction of 28 USC §1346(a)(1). Congress specifically tailored Code Sec. 7426(a)(1) to provide the exclusive remedy for third-party wrongful levy claims. The precisely drawn, detailed statute pre-empted more general remedies. If third parties could avail themselves of §1346(a)(1)'s general tax refund jurisdiction, they could evade Code Sec. 7426(a)(1)'s much shorter limitations period. Further, even if the presumption against implied repeals applied, Code Sec. 7426(a)(1)'s nine-month limitations period could not be reconciled with the notion that the same challenge would be open under §1346(a)(1) for up to four years. Nor can the two statutory schemes be harmonized by construing Code Sec. 7426(a)(1)'s filing deadline to cover only those actions seeking predeprivation remedies unavailable under §1346(a)(1). On its face, Code Sec. 7426(a)(1) applies to predeprivation and postdeprivation claims alike.

.


Syllabus


Under 26 U. S. C. §7426(a)(1), if the Internal Revenue Service (IRS) levies upon a third party's property to collect taxes owed by another, the third party may bring a wrongful levy action against the United States, so long as such action is brought before "the expiration of 9 months from the date of the levy," §6532(c)(1). In contrast, the limitations period for a tax refund action under 28 U. S. C. §1346(a)(1) begins with an administrative claim that may be filed within at least two years, and may be brought to court within another two years after an administrative denial. The IRS levied on a bank account in which petitioner (Trust) had deposited funds because the IRS assumed that the Trust.s creators had transferred assets to the Trust to evade taxes. The bank responded with a check to the Treasury. Almost a year later, the Trust and others brought a §7426(a)(1) action claiming wrongful levies, but the District Court dismissed the complaint because it was filed after the 9-month limitations period had expired. After unsuccessfully pursing a tax refund at the administrative level, the Trust filed a refund action under §1346(a)(1). The District Court held that a wrongful levy claim under §7426(a)(1) was the sole remedy possible and dismissed, and the Fifth Circuit affirmed.

Held: The Trust missed §7426(a)(1)'s deadline for challenging a levy, and may not bring the challenge as a tax refund claim under §1346(a)(1). Section 7426(a)(1) provides the exclusive remedy for third-party wrongful levy claims. "[A] precisely drawn, detailed statute pre-empts more general remedies," Brown v. GSA, 425 U. S. 820, 834, and it braces the preemption claim when resort to a general remedy would effectively extend the limitations period for the specific one, see id., at 833. If third parties could avail themselves of §1346(a)(1).s general tax refund jurisdiction, they could effortlessly evade §7426(a)(1)'s much shorter limitations period. The Trust argues that, because United States v. Williams [ 95-1 USTC ¶50,218], 514 U. S. 527, construed §1346(a)(1).s general jurisdictional grant expansively enough to cover third parties. wrongful levy claims, treating §7426(a)(1) as the exclusive avenue for these claims would amount to a disfavored holding that §7426(a)(1) implicitly repealed §1346(a)(1)'s pre-existing jurisdictional grant. But this reads Williams too broadly. Williams involved a lien and was decided on the specific understanding that no other remedy was open to the plaintiff. Here, the Trust challenges a levy and could have made a timely claim under §7426(a)(1). Even if the presumption against implied repeals applied here, §7426(a)(1)'s 9-month limitations period cannot be reconciled with the notion that the same challenge would be open under §1346(a)(1) for up to four years. Nor can the two statutory schemes be harmonized by construing §7426(a)(1)'s filing deadline to cover only those actions seeking predeprivation remedies unavailable under §1346(a)(1). On its face, §7426(a)(1) applies to predeprivation and postdeprivation claims alike. Pp. 4.7.

[ 2006-1 USTC ¶50,171] 434 F. 3d 807, affirmed.

JUSTICE SOUTER delivered the opinion of the Court: This is a challenge to the Internal Revenue Service.s levy upon the property of a trust, to collect taxes owed by another, an action specifically authorized by 26 U. S. C. §7426(a)(1), but subject to a statutory filing deadline the trust missed. The question is whether the trust may still challenge the levy through an action for tax refund under 28 U. S. C. §1346(a)(1). We hold that it may not.


I


The Internal Revenue Code provides that "[i]f any person liable to pay any tax neglects or refuses to pay the same after demand, the amount...shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person." 26 U. S. C. §6321. "A federal tax lien, however, is not self executing," and the IRS must take "[a]ffirmative action...to enforce collection of the unpaid taxes." United States v. National Bank of Commerce [ 85-2 USTC ¶9482], 472 U. S. 713, 720 (1985). One of its "principal tools," ibid., is a levy, which is a "legally sanctioned seizure and sale of property," Black's Law Dictionary 926 (8th ed. 2004); see also §6331(b) ("The term `levy' as used in this title includes the power of distraint and seizure by any means").

To protect against a "`wrongful'" imposition upon "property which is not the taxpayer's," S. Rep. No. 1708, 89th Cong., 2d Sess., 30 (1966), the Federal Tax Lien Act of 1966 added §7426(a)(1), providing that "[i]f a levy has been made on property...any person (other than the person against whom is assessed the tax out of which such levy arose) who claims an interest in...such property and that such property was wrongfully levied upon may bring a civil action against the United States in a district court." 80 Stat. 1143. The action must, however, be brought before "the expiration of 9 months from the date of the levy". 1 §6532(c)(1). This short limitations period contrasts with its counterpart in a tax refund action under 28 U. S. C. §1346(a)(1), which begins with an administrative claim that may be filed within at least two years, and may be brought to court within another two after an administrative denial. 2 The demand for greater haste when a third party contests a levy is no accident; as the Government explained in the hearings before passage of the Act, "[s]ince after seizure of property for nonpayment of taxes [an IRS] district director is likely to suspend further collection activities against the taxpayer, it is essential that he be advised promptly if he has seized property which does not belong to the taxpayer". Hearings on H. R. 11256 and H. R. 11290 before the House Committee on Ways and Means, 89th Cong., 2d Sess., 57.58 (1966) (written statement of Stanley S. Surrey, Assistant Secretary of the Treasury); see also id., at 72 (statement of Laurens Williams, Chairman, Special Committee on Federal Liens, American Bar Association) ("A short (9 month) statute of limitations is provided, because it is important to get such controversies decided quickly so the Government may pursue the taxpayer.s own property if it made a mistake the first time").


II


After Elmer W. Cullers, Jr., and Dorothy Cullers established the EC Term of Years Trust in 1991, the IRS assessed federal tax liabilities against them for what the Government claimed (and the Trust does not dispute, see Tr. of Oral Arg. 7) were unwarranted income tax deductions in the 1980s. The Government assumed that the Cullerses had transferred assets to the Trust to evade taxes, and so filed a tax lien against the Trust in August 1999. The Trust denied any obligation, but for the sake of preventing disruptive collection efforts by the IRS, it deposited funds in a bank account, against which the IRS issued a notice of levy to the bank in September 1999. In October, the bank responded with a check for over $3 million to the United States Treasury.

Almost a year after that, the Trust (joined by several other trusts created by the Cullerses) brought a civil action under 26 U. S. C. §7426(a)(1) claiming wrongful levies, but the District Court dismissed it because the complaint was filed after the 9-month limitations period had expired, see §6532(c)(1). The court also noted that taxrefund claims under 28 U. S. C. §1346(a)(1) were not open to the plaintiff trusts because §7426 "`affords the exclusive remedy for an innocent third party whose property is confiscated by the IRS to satisfy another person.s tax liability.'" BSC Term of Years Trust v. United States, 2001-1 USTC ¶50,174, p. 87,237, n. 1, 87 AFTR 2d ¶2001. 390, p. 2001.547, n. 1 (WD Tex., 2000) (quoting Texas Comm. Bank Fort Worth, N. A. v. United States [ 90-1 USTC ¶50,155], 896 F. 2d 152, 156 (CA5 1990); emphasis deleted). At first the Trust sought review by the Court of Appeals for the Fifth Circuit, but then voluntarily dismissed its appeal. BSC Term of Years Trust v. United States [ 2001-1 USTC ¶50,174], 87 AFTR 2d ¶2001.1039, p. 2001.2532 (2001).

After unsuccessfully pursuing a tax refund at the administrative level, the Trust filed a second action, this one for a refund under §1346(a)(1). The District Court remained of the view that a claim for a wrongful levy under §7426(a)(1) had been the sole remedy possible and dismissed. 3 The Court of Appeals for the Fifth Circuit affirmed.

Because the Ninth Circuit, on the contrary, has held that §7426(a)(1) is not the exclusive remedy for third parties challenging a levy, see WWSM Investors v. United States [ 95-2 USTC ¶50,454], 64 F. 3d 456 (1995), we granted certiorari to resolve the conflict, 549 U.S ___ (2006). We affirm.


III


"In a variety of contexts the Court has held that a precisely drawn, detailed statute pre-empts more general remedies." Brown v. GSA, 425 U.S. 820, 834 (1976); see Block v. North Dakota ex rel. Board of Univ. and School Lands, 461 U.S. 273, 284.286 (1983) (adverse claimants to real property of the United States may not rely on "officer's suits" or on other general remedies because the Quiet Title Act of 1972 is their exclusive recourse); see also Stonite Products Co. v. Melvin Lloyd Co., 315 U.S. 561 (1942) (venue in patent infringement cases is governed by a statute dealing specifically with patents, not a general venue provision). It braces the preemption claim when resort to a general remedy would effectively extend the limitations period for the specific one. See Brown v. GSA, supra, at 833 (rejecting an interpretation that would "driv[e] out of currency" a narrowly aimed provision "with its rigorous...time limitations" by permitting "access to the courts under other, less demanding statutes"); see also Rancho Palos Verdes v. Abrams, 544 U.S. 113, 122.123 (2005) (concluding that 47 U. S. C. §332(c) precludes resort to the general cause of action under 42 U. S. C. §1983, in part because §332 "limits relief in ways that §1983 does not" by requiring judicial review to be sought within 30 days); 544 U.S., at 130, n. (STEVENS, J., concurring in judgment) (same).

Resisting the force of the better-fitted statute requires a good countervailing reason, and none appears here. Congress specifically tailored §7426(a)(1) to third party claims of wrongful levy, and if third parties could avail themselves of the general tax refund jurisdiction of §1346(a)(1), they could effortlessly evade the levy statute.s 9-month limitations period thought essential to the Government.s tax collection.

The Trust argues that in United States v. Williams [ 95-1 USTC ¶50,218], 514 U.S. 527 (1995), we construed the general jurisdictional grant of §1346(a)(1) expansively enough to cover third parties' wrongful levy claims. So, according to the Trust, treating §7426(a)(1) as the exclusive avenue for these claims would amount to a disfavored holding that §7426(a)(1) implicitly repealed the pre-existing jurisdictional grant of §1346(a)(1). See Radzanower v. Touche Ross & Co., 426 U.S. 148 (1976); Morton v. Mancari, 417 U.S. 535 (1974).

But the Trust reads Williams too broadly. Although we decided that §1346(a)(1) authorizes a tax-refund claim by a third party whose property was subjected to an allegedly wrongful tax lien, we so held on the specific understanding that no other remedy, not even a timely claim under §7426(a)(1), was open to the plaintiff in that case. See Williams, supra, at 536.538. Here, on the contrary, the Trust challenges a levy, not a lien, and could have made a timely claim under §7426(a)(1) for the relief it now seeks under §1346(a)(1). 4

And even if the canon against implied repeals applied here, the Trust still could not prevail. We simply cannot reconcile the 9-month limitations period for a wrongful levy claim under §7426(a)(1) with the notion that the same challenge would be open under §1346(a)(1) for up to four years. See Posadas v. National City Bank, 296 U.S. 497, 503 (1936) ("[W]here provisions in the two acts are in irreconcilable conflict, the later act to the extent of the conflict constitutes an implied repeal of the earlier one"). On this point, the Trust proposes that the two statutory schemes can be "harmonized" by construing the deadline for filing §7426(a)(1) claims to cover only those actions seeking "pre-deprivation" remedies unavailable under §1346(a)(1). See Reply Brief for Petitioner 6. But this reading would violate the clear text of §7426(a)(1), which on its face applies to pre-deprivation and post-deprivation claims alike. See 26 U. S. C. §7426(a)(1) ("Such action may be brought without regard to whether such property has been surrendered to or sold by the Secretary").


* * * *


The Trust missed the deadline for challenging a levy under §7426(a)(1), and may not bring the challenge as a tax refund claim under §1346(a)(1). The judgment of the Court of Appeals is accordingly affirmed.

It is so ordered.

1 This period can be extended for up to 12 months if the third party makes an administrative request for the return of the property wrongfully levied upon. See 26 U. S. C. §6532(c)(2).

2 Title 28 U. S. C. §1346(a)(1) gives district courts "jurisdiction, concurrent with the United States Court of Federal Claims," over "[a]ny civil action against the United States for the recovery of," among other things, "any internal-revenue tax alleged to have been erroneously or illegally assessed or collected". A taxpayer may bring such an action within two years after the IRS disallows the taxpayer's administrative refund claim. See 26 U. S. C. §§6532(a)(1)-(2); see also §7422(a) (requiring a taxpayer to file the administrative claim before seeking a refund in court). An administrative refund claim must, in turn, be filed within two years from the date the tax was paid or three years from the time the tax return was filed, whichever is later. See §6511(a).

3 The District Court declined to dismiss the Trust's claim on res judicata grounds, and the Government does not argue claim or issue preclusion in this Court, see Brief for United States 5, n. 2.

4 It has been commonly understood that Williams did not extend §1346(a)(1) to parties in the Trust.s position. See [ 2006-1 USTC ¶50,171] 434 F. 3d 807, 810 (CA5 2006) (case below) ( "To construe Williams to allow an alternative remedy under §1346, with its longer statute of limitations period, would undermine the surety provided by the clear avenue to recovery under §7426" (citation omitted)); Dahn v. United States [ 97-2 USTC ¶50,847], 127 F. 3d 1249, 1253 (CA10 1997) ( "[T]here were no tax levies involved in [Williams]. Thus, the Court was concerned solely with the reach of §1346 per se; the exclusivity of a concurrent §7426 claim was never in issue. Indeed, the Court specifically emphasized the inapplicability of §7426 (or any other meaningful remedy) to reinforce its broad reading of §1346"); WWSM Investors v. United States [ 95-2 USTC ¶50,454], 64 F. 3d 456, 459 (CA9 1995) (Brunetti, J., dissenting) ( "The Supreme Court recognized Williams as a refund, not a wrongful levy, case, and [did not] even hint that §7426 was not the exclusive remedy for a claimed wrongful levy"); Rev. Rul. 2005.49, 2005.2 Cum. Bull. 126 ( "The rationale in Williams is inapplicable to wrongful levy suits because Congress created an exclusive remedy under section 7426 for third persons claiming an interest in property levied upon by the [IRS]"); but see WWSM Investors, supra, at 459 (majority opinion) ( "[S]eizing money from WWSM.s bank account is functionally equivalent to what the IRS did in Williams -placing a lien on property in escrow under circumstances which compelled Mrs. Williams to pay the IRS and discharge the lien").EC Term of Years Trust, Petitioner v. United States.

Supreme Court of the United States; 05-1541, April 30, 2007, 127 SCt 1763.

Affirming CA-5, 2006-1 USTC ¶50,171.

On Writ of Certiorari to the United States Court of Appeals for the Fifth Circuit. April 30, 2007, 127 SCt 1763127 SCt 1763.

[ Code Sec. 7426]

Civil actions by nontaxpayers: Wrongful levy: Trustee: Statute of limitations. --
A trust that missed the Code Sec. 7426(a)(1) deadline for challenging a levy may not bring a challenge as a tax refund claim under the general tax refund jurisdiction of 28 USC §1346(a)(1). Congress specifically tailored Code Sec. 7426(a)(1) to provide the exclusive remedy for third-party wrongful levy claims. The precisely drawn, detailed statute pre-empted more general remedies. If third parties could avail themselves of §1346(a)(1)'s general tax refund jurisdiction, they could evade Code Sec. 7426(a)(1)'s much shorter limitations period. Further, even if the presumption against implied repeals applied, Code Sec. 7426(a)(1)'s nine-month limitations period could not be reconciled with the notion that the same challenge would be open under §1346(a)(1) for up to four years. Nor can the two statutory schemes be harmonized by construing Code Sec. 7426(a)(1)'s filing deadline to cover only those actions seeking predeprivation remedies unavailable under §1346(a)(1). On its face, Code Sec. 7426(a)(1) applies to predeprivation and postdeprivation claims alike. Back references: ¶41,713.42, ¶41,713.54 and ¶41,713.60

.


Syllabus


Under 26 U. S. C. §7426(a)(1), if the Internal Revenue Service (IRS) levies upon a third party's property to collect taxes owed by another, the third party may bring a wrongful levy action against the United States, so long as such action is brought before "the expiration of 9 months from the date of the levy," §6532(c)(1). In contrast, the limitations period for a tax refund action under 28 U. S. C. §1346(a)(1) begins with an administrative claim that may be filed within at least two years, and may be brought to court within another two years after an administrative denial. The IRS levied on a bank account in which petitioner (Trust) had deposited funds because the IRS assumed that the Trust.s creators had transferred assets to the Trust to evade taxes. The bank responded with a check to the Treasury. Almost a year later, the Trust and others brought a §7426(a)(1) action claiming wrongful levies, but the District Court dismissed the complaint because it was filed after the 9-month limitations period had expired. After unsuccessfully pursing a tax refund at the administrative level, the Trust filed a refund action under §1346(a)(1). The District Court held that a wrongful levy claim under §7426(a)(1) was the sole remedy possible and dismissed, and the Fifth Circuit affirmed.

Held: The Trust missed §7426(a)(1)'s deadline for challenging a levy, and may not bring the challenge as a tax refund claim under §1346(a)(1). Section 7426(a)(1) provides the exclusive remedy for third-party wrongful levy claims. "[A] precisely drawn, detailed statute pre-empts more general remedies," Brown v. GSA, 425 U. S. 820, 834, and it braces the preemption claim when resort to a general remedy would effectively extend the limitations period for the specific one, see id., at 833. If third parties could avail themselves of §1346(a)(1).s general tax refund jurisdiction, they could effortlessly evade §7426(a)(1)'s much shorter limitations period. The Trust argues that, because United States v. Williams [ 95-1 USTC ¶50,218], 514 U. S. 527, construed §1346(a)(1).s general jurisdictional grant expansively enough to cover third parties. wrongful levy claims, treating §7426(a)(1) as the exclusive avenue for these claims would amount to a disfavored holding that §7426(a)(1) implicitly repealed §1346(a)(1)'s pre-existing jurisdictional grant. But this reads Williams too broadly. Williams involved a lien and was decided on the specific understanding that no other remedy was open to the plaintiff. Here, the Trust challenges a levy and could have made a timely claim under §7426(a)(1). Even if the presumption against implied repeals applied here, §7426(a)(1)'s 9-month limitations period cannot be reconciled with the notion that the same challenge would be open under §1346(a)(1) for up to four years. Nor can the two statutory schemes be harmonized by construing §7426(a)(1)'s filing deadline to cover only those actions seeking predeprivation remedies unavailable under §1346(a)(1). On its face, §7426(a)(1) applies to predeprivation and postdeprivation claims alike. Pp. 4.7.

[ 2006-1 USTC ¶50,171] 434 F. 3d 807, affirmed.

JUSTICE SOUTER delivered the opinion of the Court: This is a challenge to the Internal Revenue Service.s levy upon the property of a trust, to collect taxes owed by another, an action specifically authorized by 26 U. S. C. §7426(a)(1), but subject to a statutory filing deadline the trust missed. The question is whether the trust may still challenge the levy through an action for tax refund under 28 U. S. C. §1346(a)(1). We hold that it may not.


I


The Internal Revenue Code provides that "[i]f any person liable to pay any tax neglects or refuses to pay the same after demand, the amount...shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person." 26 U. S. C. §6321. "A federal tax lien, however, is not self executing," and the IRS must take "[a]ffirmative action...to enforce collection of the unpaid taxes." United States v. National Bank of Commerce [ 85-2 USTC ¶9482], 472 U. S. 713, 720 (1985). One of its "principal tools," ibid., is a levy, which is a "legally sanctioned seizure and sale of property," Black's Law Dictionary 926 (8th ed. 2004); see also §6331(b) ("The term `levy' as used in this title includes the power of distraint and seizure by any means").

To protect against a "`wrongful'" imposition upon "property which is not the taxpayer's," S. Rep. No. 1708, 89th Cong., 2d Sess., 30 (1966), the Federal Tax Lien Act of 1966 added §7426(a)(1), providing that "[i]f a levy has been made on property...any person (other than the person against whom is assessed the tax out of which such levy arose) who claims an interest in...such property and that such property was wrongfully levied upon may bring a civil action against the United States in a district court." 80 Stat. 1143. The action must, however, be brought before "the expiration of 9 months from the date of the levy". 1 §6532(c)(1). This short limitations period contrasts with its counterpart in a tax refund action under 28 U. S. C. §1346(a)(1), which begins with an administrative claim that may be filed within at least two years, and may be brought to court within another two after an administrative denial. 2 The demand for greater haste when a third party contests a levy is no accident; as the Government explained in the hearings before passage of the Act, "[s]ince after seizure of property for nonpayment of taxes [an IRS] district director is likely to suspend further collection activities against the taxpayer, it is essential that he be advised promptly if he has seized property which does not belong to the taxpayer". Hearings on H. R. 11256 and H. R. 11290 before the House Committee on Ways and Means, 89th Cong., 2d Sess., 57.58 (1966) (written statement of Stanley S. Surrey, Assistant Secretary of the Treasury); see also id., at 72 (statement of Laurens Williams, Chairman, Special Committee on Federal Liens, American Bar Association) ("A short (9 month) statute of limitations is provided, because it is important to get such controversies decided quickly so the Government may pursue the taxpayer.s own property if it made a mistake the first time").


II


After Elmer W. Cullers, Jr., and Dorothy Cullers established the EC Term of Years Trust in 1991, the IRS assessed federal tax liabilities against them for what the Government claimed (and the Trust does not dispute, see Tr. of Oral Arg. 7) were unwarranted income tax deductions in the 1980s. The Government assumed that the Cullerses had transferred assets to the Trust to evade taxes, and so filed a tax lien against the Trust in August 1999. The Trust denied any obligation, but for the sake of preventing disruptive collection efforts by the IRS, it deposited funds in a bank account, against which the IRS issued a notice of levy to the bank in September 1999. In October, the bank responded with a check for over $3 million to the United States Treasury.

Almost a year after that, the Trust (joined by several other trusts created by the Cullerses) brought a civil action under 26 U. S. C. §7426(a)(1) claiming wrongful levies, but the District Court dismissed it because the complaint was filed after the 9-month limitations period had expired, see §6532(c)(1). The court also noted that taxrefund claims under 28 U. S. C. §1346(a)(1) were not open to the plaintiff trusts because §7426 "`affords the exclusive remedy for an innocent third party whose property is confiscated by the IRS to satisfy another person.s tax liability.'" BSC Term of Years Trust v. United States, 2001-1 USTC ¶50,174, p. 87,237, n. 1, 87 AFTR 2d ¶2001. 390, p. 2001.547, n. 1 (WD Tex., 2000) (quoting Texas Comm. Bank Fort Worth, N. A. v. United States [ 90-1 USTC ¶50,155], 896 F. 2d 152, 156 (CA5 1990); emphasis deleted). At first the Trust sought review by the Court of Appeals for the Fifth Circuit, but then voluntarily dismissed its appeal. BSC Term of Years Trust v. United States [ 2001-1 USTC ¶50,174], 87 AFTR 2d ¶2001.1039, p. 2001.2532 (2001).

After unsuccessfully pursuing a tax refund at the administrative level, the Trust filed a second action, this one for a refund under §1346(a)(1). The District Court remained of the view that a claim for a wrongful levy under §7426(a)(1) had been the sole remedy possible and dismissed. 3 The Court of Appeals for the Fifth Circuit affirmed.

Because the Ninth Circuit, on the contrary, has held that §7426(a)(1) is not the exclusive remedy for third parties challenging a levy, see WWSM Investors v. United States [ 95-2 USTC ¶50,454], 64 F. 3d 456 (1995), we granted certiorari to resolve the conflict, 549 U.S ___ (2006). We affirm.


III


"In a variety of contexts the Court has held that a precisely drawn, detailed statute pre-empts more general remedies." Brown v. GSA, 425 U.S. 820, 834 (1976); see Block v. North Dakota ex rel. Board of Univ. and School Lands, 461 U.S. 273, 284.286 (1983) (adverse claimants to real property of the United States may not rely on "officer's suits" or on other general remedies because the Quiet Title Act of 1972 is their exclusive recourse); see also Stonite Products Co. v. Melvin Lloyd Co., 315 U.S. 561 (1942) (venue in patent infringement cases is governed by a statute dealing specifically with patents, not a general venue provision). It braces the preemption claim when resort to a general remedy would effectively extend the limitations period for the specific one. See Brown v. GSA, supra, at 833 (rejecting an interpretation that would "driv[e] out of currency" a narrowly aimed provision "with its rigorous...time limitations" by permitting "access to the courts under other, less demanding statutes"); see also Rancho Palos Verdes v. Abrams, 544 U.S. 113, 122.123 (2005) (concluding that 47 U. S. C. §332(c) precludes resort to the general cause of action under 42 U. S. C. §1983, in part because §332 "limits relief in ways that §1983 does not" by requiring judicial review to be sought within 30 days); 544 U.S., at 130, n. (STEVENS, J., concurring in judgment) (same).

Resisting the force of the better-fitted statute requires a good countervailing reason, and none appears here. Congress specifically tailored §7426(a)(1) to third party claims of wrongful levy, and if third parties could avail themselves of the general tax refund jurisdiction of §1346(a)(1), they could effortlessly evade the levy statute.s 9-month limitations period thought essential to the Government.s tax collection.

The Trust argues that in United States v. Williams [ 95-1 USTC ¶50,218], 514 U.S. 527 (1995), we construed the general jurisdictional grant of §1346(a)(1) expansively enough to cover third parties' wrongful levy claims. So, according to the Trust, treating §7426(a)(1) as the exclusive avenue for these claims would amount to a disfavored holding that §7426(a)(1) implicitly repealed the pre-existing jurisdictional grant of §1346(a)(1). See Radzanower v. Touche Ross & Co., 426 U.S. 148 (1976); Morton v. Mancari, 417 U.S. 535 (1974).

But the Trust reads Williams too broadly. Although we decided that §1346(a)(1) authorizes a tax-refund claim by a third party whose property was subjected to an allegedly wrongful tax lien, we so held on the specific understanding that no other remedy, not even a timely claim under §7426(a)(1), was open to the plaintiff in that case. See Williams, supra, at 536.538. Here, on the contrary, the Trust challenges a levy, not a lien, and could have made a timely claim under §7426(a)(1) for the relief it now seeks under §1346(a)(1). 4

And even if the canon against implied repeals applied here, the Trust still could not prevail. We simply cannot reconcile the 9-month limitations period for a wrongful levy claim under §7426(a)(1) with the notion that the same challenge would be open under §1346(a)(1) for up to four years. See Posadas v. National City Bank, 296 U.S. 497, 503 (1936) ("[W]here provisions in the two acts are in irreconcilable conflict, the later act to the extent of the conflict constitutes an implied repeal of the earlier one"). On this point, the Trust proposes that the two statutory schemes can be "harmonized" by construing the deadline for filing §7426(a)(1) claims to cover only those actions seeking "pre-deprivation" remedies unavailable under §1346(a)(1). See Reply Brief for Petitioner 6. But this reading would violate the clear text of §7426(a)(1), which on its face applies to pre-deprivation and post-deprivation claims alike. See 26 U. S. C. §7426(a)(1) ("Such action may be brought without regard to whether such property has been surrendered to or sold by the Secretary").


* * * *


The Trust missed the deadline for challenging a levy under §7426(a)(1), and may not bring the challenge as a tax refund claim under §1346(a)(1). The judgment of the Court of Appeals is accordingly affirmed.

It is so ordered.

1 This period can be extended for up to 12 months if the third party makes an administrative request for the return of the property wrongfully levied upon. See 26 U. S. C. §6532(c)(2).

2 Title 28 U. S. C. §1346(a)(1) gives district courts "jurisdiction, concurrent with the United States Court of Federal Claims," over "[a]ny civil action against the United States for the recovery of," among other things, "any internal-revenue tax alleged to have been erroneously or illegally assessed or collected". A taxpayer may bring such an action within two years after the IRS disallows the taxpayer's administrative refund claim. See 26 U. S. C. §§6532(a)(1)-(2); see also §7422(a) (requiring a taxpayer to file the administrative claim before seeking a refund in court). An administrative refund claim must, in turn, be filed within two years from the date the tax was paid or three years from the time the tax return was filed, whichever is later. See §6511(a).

3 The District Court declined to dismiss the Trust's claim on res judicata grounds, and the Government does not argue claim or issue preclusion in this Court, see Brief for United States 5, n. 2.

4 It has been commonly understood that Williams did not extend §1346(a)(1) to parties in the Trust.s position. See [ 2006-1 USTC ¶50,171] 434 F. 3d 807, 810 (CA5 2006) (case below) ( "To construe Williams to allow an alternative remedy under §1346, with its longer statute of limitations period, would undermine the surety provided by the clear avenue to recovery under §7426" (citation omitted)); Dahn v. United States [ 97-2 USTC ¶50,847], 127 F. 3d 1249, 1253 (CA10 1997) ( "[T]here were no tax levies involved in [Williams]. Thus, the Court was concerned solely with the reach of §1346 per se; the exclusivity of a concurrent §7426 claim was never in issue. Indeed, the Court specifically emphasized the inapplicability of §7426 (or any other meaningful remedy) to reinforce its broad reading of §1346"); WWSM Investors v. United States [ 95-2 USTC ¶50,454], 64 F. 3d 456, 459 (CA9 1995) (Brunetti, J., dissenting) ( "The Supreme Court recognized Williams as a refund, not a wrongful levy, case, and [did not] even hint that §7426 was not the exclusive remedy for a claimed wrongful levy"); Rev. Rul. 2005.49, 2005.2 Cum. Bull. 126 ( "The rationale in Williams is inapplicable to wrongful levy suits because Congress created an exclusive remedy under section 7426 for third persons claiming an interest in property levied upon by the [IRS]"); but see WWSM Investors, supra, at 459 (majority opinion) ( "[S]eizing money from WWSM.s bank account is functionally equivalent to what the IRS did in Williams -placing a lien on property in escrow under circumstances which compelled Mrs. Williams to pay the IRS and discharge the lien").


Alvin S. Brown, Esq.
Tax attorney
703 425-1400
www.irstaxattorney.com

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Trust Fund Recovery Penalty - Section 6672 of the Code - reponsible person

Ronald C. Savona, Plaintiff v. United States of America, Defendant; United States of America, Counterclaim Plaintiff v. Ronald C. Savona and Keith M. Christian, Counterclaim Defendants.

U.S. District Court, So. Dist. Calif.; 06CV1365 IEG (WMc), October 15, 2007.

[ Code Sec. 6672]

Trust fund recovery penalties: Assessment of penalties: Validity: Statute of limitations: Unpaid withholding taxes: Willfulness: Responsible person. --
Trust fund recovery penalties assessed against two corporate officers for their failure to collect, account for and pay over the corporation's withheld income and FICA taxes were valid and timely. The IRS made the assessments within thirty days of the final administrative determination regarding their protest to the proposed assessments. Moreover, the chairman was a responsible person who willfully failed to pay the corporation's withheld income and employment taxes. The IRS's evidence showed that he had the ability to sign checks, to hire and fire employees, signed the corporation's tax returns, owned stock in the corporation, was ultimately responsible for making financial decisions, and paid the corporation's creditors. In addition, despite knowledge of the corporation's unpaid employment taxes, he failed to pay the taxes before any other creditor was paid. However, genuine issue of material fact existed as to whether the CEO had sufficient authority over the corporation's financial affairs to be considered a responsible person for the trust fund recovery penalties.




ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT/COUNTERCLAIM PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT. (Doc. No. 20, 21, 23, 28, 29, 30)


GONZALEZ, Chief Judge, United States District Court: Presently before the Court is Defendant/Counterclaim Plaintiff's motion for summary judgment. For the reasons set forth below, the Court GRANTS IN PART and DENIES IN PART Defendant/Counterclaim Plaintiff's motion.


BACKGROUND




A. Factual Background

This matter involves the assessment of civil tax penalties against Ronald C. Savona and Keith M. Christian pursuant to 26 U.S.C. § 6672.

In December 1992, Keith Christian was one of four shareholders that founded Eco Building Systems, Inc. ("Eco"). Eco operated out of Chula Vista, California from approximately 1999 until at least December 2002, manufacturing and selling prefabricated modular buildings, some of which could be used as school classrooms for public school districts and private colleges and universities.

Christian was an employee of the company and a shareholder until December 2002, serving as Chairman of the Board of Directors and President from 1999 until December 2002. He also served as the CEO from 1999 until December 2001. (Gov. Statement of Facts ISO Motion, Ex. 12, Christian Depo., at 20.) Christian's job duties from December 2001 until December 2002 involved sales, marketing, raising capital, working with lenders, and working in the accounting and human resources department. ( Id., at 21.) Christian was authorized to hire and fire employees within his own department. ( Id., at 62.)

Ronald Savona began working for Eco in the spring of 2000 as a Vice President of Manufacturing. Approximately 6-9 months after he started working at Eco, Savona was promoted to COO and, in December 2001, he became the CEO, replacing Christian. Throughout these various promotions and changes in job title, Savona's job duties essentially remained constant. His primary activities related to Eco's manufacturing and construction activities, specifically the manufacturing plant, including purchasing. He also assisted with sales. ( See Savona Statement of Facts ISO Motion, Ex. 6, Savona Depo., 17-22.) Like Christian, Savona had the power to hire and fire employees within his department. (Gov. Statement of Facts ISO Motion, Ex. 13, Savona Depo, at 41-42.) While Savona owned no stock in the company, he did hold stock options. ( Id., at 35)

From at least March 2001 forward, both Christian and Savona were authorized signatories on Eco's various bank accounts and were the only authorized signers on the operating account from which Eco's bills were paid. ( See Gov. Statement of Facts ISO Mot., Ex. 7; Ex. 12, at 49-51; Ex. 13, at 57.) With respect to the operating account, only one signature was required to issue a check and there were no formal restrictions on either Christian's or Savona's ability to write checks from that account. ( See id.) Christian was responsible for signing most payroll checks as well as the majority of checks to Eco creditors. ( See Gov. Statement of Facts ISO Mot., Ex. 12, Christian Depo., at 60.) Savona was less involved in check writing. He states he never had access to an Eco checkbook and further asserts that while he may have signed checks on an "emergency" occasion when Christian was not around, he never authorized the payment of Eco's bills and he lacked authority to direct such payments. ( See Savona Statement of Facts ISO Opp., Ex. 6, Savona Depo., at 61, 63, 92-94.)

Christian and Savona were both members of Eco's Board from the Fall of 2001 until December of 2002. (Gov. Statement of Facts ISO Mot., Ex. 13, Savona Depo., at 19, 26.) Between January 2001 and December 2002, Eco's Board held regular quarter meetings which Christian and Savona both attended. ( See id., Ex. 12, at 29, 32; Ex. 13, at 27.) As early as November 2001, and again on February 29, 2002, Eric Blackhall, a consultant who worked for Eco periodically between November 2000 and November 2002, informed the Board of Directors that Eco had outstanding federal payroll taxes that it had not paid. (Gov. Statement of Facts ISO Mot., ¶ 24.) Around the same time period, Debt Acquisition Company of America ("DACA"), one of Eco's creditors, sent a demand letter to the company threatening to foreclose if it did not receive payment. Additionally, Rich Werner --one of Eco's Board members --threatened foreclosure if the company did not pay a note he held against it. Facing pressure from both DACA and Werner, Eco's Board, including Christian and Savona, approved payments to these creditors instead of to the IRS during the first quarter of 2002, as well as in June 2002, and again in August of 2002. ( See id. ¶ 24-27.) Eco eventually defaulted on the payments of federal withholding taxes for the tax quarters ending May 31, 2001 (the first quarter of 2001), May 31, 2002 (the first quarter of 2002), and June 30, 2002 (the second quarter of 2002).

On October 13, 2005, a duly authorized delegate of the Secretary of the Treasury made an assessment of liability arising under 26 U.S.C. § 6672 against Savona, alleging a willful failure to collect, truthfully account for, and pay over the withheld income and FICA taxes of Eco. The IRS made three separate trust fund penalty assessments: (1) a $94,869.01 penalty for the quarter ending May 31, 2001; (2) a $319,777.24 penalty for the quarter ending May 31, 2002; and (3) a $221,258.50 penalty for the quarter ending June 30, 2002. These figures brought the total assessment to $635.905, plus accrued statutory interest and less any payments or credits. (Def. Mem. ISO Motion, Statement of Facts, ¶ 1.) On March 29, 2004, a duly authorized delegate of the Secretary of the Treasury made an identical assessment against Counterclaim Defendant Christian.

In January of 2006, Savona began to make some payments towards the liability for the above tax quarters. Later, in March of that year, Savona requested an abatement of the trust fund recovery assessment against him and the return of his 2006 tax refund, which had been withheld by the IRS in partial satisfaction of the debt. On or about May 8, 2006, the IRS issued a letter denying Savona's requests.



B. Procedural Background

On July 5, 2005, Savona filed his complaint. (Doc. No. 1.) The complaint asserted that the IRS's assessment of tax liability against him was improper since he was neither a responsible person nor willful within the meaning of 26 U.S.C. § 6672. Savona sought a refund of amounts paid and a full abatement of the assessment against him. The government filed its answer denying Savona's allegations that the assessment had been improper. (Doc. No. 4.) In addition, the government asserted counterclaims against Savona and included Christian as a counterclaim defendant for the balance of the tax assessments that remained unpaid. ( Id.) Savona and Christian answered, denying the validity of the government assessments and liability under 26 U.S.C. 6672. ( See Doc. No. 7, Savona Ans., ¶ ¶ 6-10; Doc. No. 12, Christian Ans. ¶ 6.)

On June 29, 2007, the government filed the present motion for summary judgment on its counterclaims against Savona and Christian. (Doc. No. 20.) On July 25, 2007, Savona filed an opposition. (Doc. No. 21.) On August 6, 2007, the government filed its reply. (Doc. No. 23.) Christian filed his opposition on September 7, 2007, and the government replied on September 11, 2007. (Doc. No. 28, 30.) The Court held oral argument on September 24, 2007.


LEGAL STANDARD


Summary judgment is appropriate when there is no genuine issue as to any material fact, and the moving party is entitled to judgment as a matter of law. See Fed. R. Civ. P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986); see also Klamath Water Users Protective Ass'n v. Patterson, 204 F.3d 1206, 1210 (9th Cir. 2000) (recognizing that where material facts are undisputed, the court only decides the application of relevant law). A dispute is "genuine" when "the evidence presented is such that a jury applying [the appropriate] evidentiary standard could reasonably find for either the plaintiff or the defendant." See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986).

A party seeking summary judgment always bears the initial burden of establishing the absence of a genuine issue of material fact. See Celotex, 477 U.S. at 323. The moving party can satisfy this burden in two ways: (1) by presenting evidence that negates an essential element of the non-moving party's case, or (2) by demonstrating that the non-moving party failed to make a showing sufficient to establish an element essential to that party's case on which that party will bear the burden of proof at trial. See id. at 322-23.

Once the moving party meets the requirement of Rule 56, the burden shifts to the party resisting the motion, who "must set forth specific facts showing that there is a genuine issue for trial." Anderson, 477 U.S. at 256. It is not enough for the party opposing a properly supported motion for summary judgment to "rest on mere allegations or denials of his pleadings." Id. Genuine factual issues must exist that "can be resolved only by a finder of fact because they may reasonably be resolved in favor of either party." Id. at 250. To make such a showing, the non-moving party must go beyond the pleadings to designate specific facts showing that there is a genuine issue for trial. Celotex, 477 U.S. at 325.


DISCUSSION




A. Liability Under 26 U.S.C. § 6672

The Internal Revenue Code requires employers such as Eco to withhold federal social security and income taxes from the wages of their employees. See 26 U.S.C. §§ 3102(a), 3402(a). Although an employer collects this money each salary period, payment to the federal government takes place on a quarterly basis. In the interim, the employer holds the collected taxes in "a special fund in trust for the United States." 26 U.S.C. § 7501(a). These taxes are known as "trust fund taxes." See Slodov v. United States, 436 U.S. 238, 243 (1978). If an employer fails to pay over collected trust fund taxes, "the officers or employees of the employer responsible for effectuating the collection and payment of trust fund taxes who willfully fail to do so are made personally liable to a 'penalty' equal to the amount of the delinquent taxes" under 26 U.S.C. § 6672. Id. at 244-45. Section 6672 provides, in relevant part:
Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax ... shall ... be liable to a penalty equal to the total amount of the tax ... not collected, or not accounted for and paid over.

26 U.S.C. § 6672. For the purposes of Section 6672, a "person" includes "an officer or employee of a corporation ... who ... is under a duty to perform the act in respect of which the violation occurs." 26 U.S.C. § 6671(b). Such a person --who by virtue of his status with and authority over a company has a duty to collect, account for, and pay the taxes --is termed a "responsible person." Alsheskie v. United States, 31 F.3d 837, 838 (9th Cir. 1994). Thus, an individual is liable for a penalty under Section 6672 if (1) he is a "responsible person"; and (2) if he acts willfully in failing to collect or pay over the withheld taxes. Davis v. United States, 961 F.2d 867, 869-70 (9th Cir.1992) (citation omitted).

In an action to collect a tax, the government bears the initial burden of proof. Jones v. United States, 60 F.3d 584, 589 (9th Cir. 1995). The government can satisfy its burden with the introduction of certificates of assessment and payments, which establish a prima facie case for the United States. Id.; United States v. Stonehill, 702 F.2d 1288, 1293 (9th Cir. 1983) (government can carry its initial burden of proof merely by introducing its assessment of tax due which are entitled to a presumption of correctness when supported by minimal evidentiary foundation). Next, an individual against whom an assessment is made "bears the burden of proving by a preponderance of the evidence that one or both of [the elements of responsibility and willfulness] is not present." United States v. Jones, 33 F.3d 1137, 1139 (9th Cir. 1994) (internal quotation and citation omitted) (alteration in original).



1. Validity of Assessments

Savona attacks the assessments in this case, arguing that there is a genuine issue of fact as to whether he was assessed a penalty for any of the taxes at issue within the time period allowed by statute. Specifically, Savona argues that because the assessment date of October 13, 2005 came more than 3 years after the end of each of the above payroll periods, 26 U.S.C. § 6501(a) bars recovery by the United States.

26 U.S.C. § 6501(a) requires that the tax imposed be assessed "within 3 years after the return was filed." If the IRS provides notice to the taxpayer in writing that the IRS will be imposing a penalty assessment within the three years statute of limitations, the period is tolled for the latter of (1) the date 90 days after the date on which such notice was mailed or delivered; or (2) if the taxpayer makes a timely protest of the proposed assessment, the date 30 days after the IRS makes a final decision regarding such protest. See 26 U.S.C. § 6672(b)(3).

As discussed above, the relevant tax periods here are: (1) the first quarter of 2001 --the payroll period ending March 31, 2001; (2) the first quarter of 2002 --the payroll tax period ending March 31, 2002, and (3) the second quarter of 2002 --the payroll period ending June 30, 2002. The United States made assessments against Savona with respect to these payroll periods on October 13, 2005 and filed a notice that it was imposing a penalty assessment. (Gov. Reply ISO Mot., Second Decl. of Jeremy N. Hendon, Ex. 1, pg. 2.) On December 26, 2003, Savona timely submitted his protest to the proposed assessments. Therefore, the limitations period would not have run until 30 days after the IRS made its final administrative determination. 26 U.S.C. § 6672 (b)(3)(B). Savona was notified of the Secretary of the Treasury's final determination on October 6, 2005. The assessments were made on October 13, 2005. Thus, because the assessments were made within 30 days of the October 6, 2005 notification, the assessments against Savona were timely. See 26 U.S.C. § 6672(b)(3).



2. The Responsibility Prong

Next, both Savona and Christian argue that they are not "responsible persons" under section 6672.

The Ninth Circuit has explained that a person is responsible for the payment of trust fund taxes for purposes of the section 6672 penalty if he had the "final word on which bills should or should not be paid." Maggy v. United States, 560 F.2d 1372, 1374 (9th Cir. 1997). "Final word" does not mean "final" but instead means "the authority required to exercise significant control over the corporation's financial affairs, regardless of whether the individual exercises such control in fact." Jones, 60 F.3d at 587 (internal citation and quotation omitted) (emphasis in original).

The government relies heavily on the Ninth Circuit's decision in Purcell v. United States, 1 F.3d 932 (9th Cir. 1993), for its position that both Savona and Christian are responsible persons. In that case, a company owner and president named Purcell hired a man named Hatchard to run his company while Purcell focused on non-management activities. Hatchard embezzled several hundred thousands from the company during his tenure, using a signature stamp bearing Purcell's signature to issue company checks payable to himself. Hatchard also failed to pay withheld taxes to the IRS for two quarters. After Hatchard had left the company, the IRS assessed Purcell with the amount of unpaid withholding taxes for 1981. Purcell brought an action against the government seeking a refund of amounts transferred to the IRS in partial settlement of this liability, arguing that because he had delegated full authority for handling the company's finances to Hatchard and took no active role in financial matters, he was not a "responsible person" for purposes of § 6672. The Ninth Circuit disagreed, noting that the delegation theory pressed by Purcell had been widely rejected. Instead, the court explained, an individual's responsibility stems primarily from his/her authority within the corporation:
[R]esponsibility is a matter of status, duty, and authority. Authority turns on the scope and nature of an individual's power to determine how the corporation conducts its financial affairs; the duty to ensure that withheld employment taxes are paid over flows from the authority that enables one to do so. That an individual's day-to-day function in a given enterprise is unconnected to financial decision making or tax matters is irrelevant where the individual has the authority to pay or to order the payment of delinquent taxes.

Id. (internal citations and quotations omitted) (emphasis added). Under this formulation, the court concluded that given Purcell's status as company president, sole shareholder, and sole authorized signatory on the company checking account, he qualified as a responsible person.

While the government contends Purcell's language extends liability to any individual who could theoretically write a check on behalf of a company, as the citations of the Purcell court make clear, the court was more concerned with an individual's "effective" power and his ability to make decisions on behalf of the company, not simply his ability to sign a check. See Purcell, 1 F.3d at 937 ("Authority turns on the scope and nature of an individual's power to determine how the corporation conducts its financial affairs") (citing the following cases: Raba v. United Sates, 977 F.2d 941, 943 (5th Cir. 1992) ("the crucial examination is whether a person had the 'effective power to pay taxes.'"); Bowlen v. United States, 956 F.2d 723, 728 (7th Cir. 1992) ("the key to liability under section 6672 is the power to control the decision-making process by which the employer corporation allocates funds"); O'Connor v. United States, 956 F.2d 48, 51 (4th Cir. 1992) (whether a person is responsible "is considered in light of the person's authority over an enterprise's finances or general decision making.").). Indeed the Ninth Circuit has explicitly refused to extend section 6672 liability merely on the basis of check writing ability. See United States v. Jones, 33 F.3d 1137 (9th Cir. 1994) (refusing to extend section 6672 liability to employee of a casino despite employee's check writing authority and his service as general manager, where employee served more in a ministerial capacity and was only authorized to pay creditors approved by his supervisor).

Instead, the court has recognized that several factors are relevant to the inquiry of whether an individual is a responsible person. Id. at 1140. Such factors include (1) the individual's duties as outlined in the corporate bylaws; (2) his ability to sign checks; (3) his status as an officer or director; (4) whether he could hire and fire employees; and (5) his discretion over which creditors to pay. Id. (citing Hochstein v. United States, 900 F.2d 543, 547 (2d. Cir. 1990). Other courts have identified additional factors, such as: (6) whether the individual held stock in the corporation, see Greenberg v. United States, 46 F.3d 239, 243 (3d Cir. 1994); and (7) whether the individual's signature is on the employer's federal quarterly and other tax returns. Id.



a. Are Savona and Christian "Responsible"?



i. Savona

Savona's employment exhibits many of the factors identified above: (1) he had check signing authority (factor 2); (2) he held an office in Eco (though not any stock) (factor 3); and (3) he had the ability to hire and fire employees in his department (factor 4).

However, the Court's review of the summary judgment evidence reveals a genuine and heated dispute on the ultimate issue of whether Savona had significant control over Eco's financial affairs, including a dispute over a key factor: his authority, if any, to direct payment to creditors of the company. In addition to his own deposition testimony, Savona has put forth evidence from three different Eco employees indicating that it was Christian and not he who had the significant, and in some respects exclusive, authority over financial matters. Specifically, Lisa Marie Parsons, who worked in Eco's accounts payable and payroll departments, testified that Christian "was the only one could make any decisions when it came to any kind of financial spending" and that he had explained to her that he was the only person that she would talk to regarding financial matters and purchases. ( See Savona Statement of Facts ISO Opp., Ex. 7, Parsons Depo., at 20-22.) Similarly Robert George Caronna, a manager of field operations at Eco, stated that Christian was the only person who he could go to about financial decisions at Eco. (Savona Statement of Facts ISO Opp., Ex. 8, Caronna Depo., at 17.) Significantly, Caronna described Savona as operations head, while describing Christian as "the owner in charge" and the person who "we went to [] for any financial needs or anything ..."). ( See id., at 16.) Finally, Gina Lee Florentino, a marketing and sales specialist with Eco, made similar representations, saying that Savona was not the one to ask about financial decisions, but that such decisions were to be directed at Christian. (Savona Statement of Facts ISO Opp., Ex. 9, Florentino Depo, at 20-26.) Even the consultant Blackhall, while asserting that he had seen some checks for creditors signed by Savona, confirmed that 90% of checks were signed by Christian and also testified that Eco's controller Patricia Foster (the one who prepared check, prepared invoices, and who made bank deposits) reported directly to Christian. Blackhall's testimony also supported Savona's claim that he would direct payment only in "crisis" situations. (Gov. Statement of Facts ISO Mot., Ex. 14, Blackhall Depo., at 18, 30.)

Viewing the evidence in the light most favorable to Savona, as is appropriate at this stage of the proceedings, there is a genuine issue of material fact as to whether Savona had the authority to exercise "significant" control over Eco's financial affairs. Cf Jones, 33 F.3d at 1141-2 (reversing district court's finding of liability under section 6672 where record did not show that employee had a role in picking certain creditors to pay or otherwise had authority to pay taxes).



ii. Christian

Of the factors identified in this circuit as typical of responsible persons, Christian also exhibits many of the significant factors associated with responsibility: (1) he had the ability to sign checks (factor 2); (2) he served as President and Chairman of the Board (factor 3); (3) he had authority to hire and fire employees (factor 4); (4) he owned stock in the corporation (factor 6); and (5) he signed Eco tax returns (factor 7). Further there is unchallenged testimony that Christian was ultimately responsible for making financial decisions and directing payment to Eco creditors (factor 5). Patricia Foster, the Eco employee actually responsible for printing out company checks, stated that it was Christian who selected which bills, out of all those due, which would be paid. ( See Gov. Statement of Facts ISO Mot., Ex. 15, Foster Depo., at 19.) Blackhall also stated that Christian directed and authorized the payment of bills and that he was the one responsible for the company's financial decisions. ( See id., Ex. 14, Blackhall Depo., at 30, 54.)

Christian has offered no significant evidence rebutting any of these statements and instead only attempts to distribute blame to the Board and Savona. This effort is unpersuasive. With respect to Christian's attempts to use the Board as a scapegoat, he ignores the obvious purpose of § 6672, which is to authorize the IRS to cut through corporate identities and to assess civil penalties directly against responsible corporate officers. As to Savona, Christian fails to recognize that, under § 6672, liability may extend to more than one corporate officer. USLIFE Title Ins. Co. of Dallas v. Harbison, 784 F.2d 1238, 1243 (5th Cir. 1986) ("The fact that more than one person is responsible for a particular delinquency does not relieve another responsible person of his or her personal liability, nor can a responsible person avoid collection against himself on te ground that the Government should first collect the tax from someone else."); Hartman v. United States, 538 F.2d 1336, 1340 (9th Cir. 1976) (two or more persons may be jointly and severally liable under section 6672).

Because he fails to point to specific facts refuting the evidence above, the Court finds Christian has failed to raise a genuine issue of material fact as to whether he had significant control over the financial affairs of Eco. The Court therefore deems Christian a "responsible" person under section 6672 with respect to the tax assessments issued to him on March 29, 2004.



3. The Wilfulness Prong

Willfulness, under § 6672, has long been defined as "a voluntary, conscious and intentional act to prefer other creditors over the United States." Purcell, 1 F.3d at 938 (quoting Davis, 961 F.2d at 871). Willfulness does not require the intent to defraud the government or any other bad motive. Davis, 961 F.2d at 871. "Once a responsible person gains knowledge of a payroll tax deficiency, he is liable for all periods during which he was a responsible party, regardless of whether those periods precede or follow the date he gained that knowledge." Schlicht v. United States, 2005 WL 2083103, *4 (D. Ariz. August 25, 2005) (citing Davis, 961 F.2d at 873). Accordingly, a deliberate decision to use corporate funds after receiving knowledge of a payroll tax deficiency "falls within the literal terms of this Circuit's definition of willfulness." Davis, 961 F.2d at 871; see also Thomsen v. United States, 887 F.2d 12 (1st Cir.1989) (holding that once a person is aware of the liability to government, that person has a duty to ensure that the taxes are paid before any payments are made to other creditors (citing Mazo v. United States, 591 F.2d 1151, 1157 (5th Cir.1979)).



a. Were Savona and Christian Willful?



i. Savona

Because the Court determines that there is a genuine issue as to whether Savona is a responsible person --i.e. whether he had authority to prefer certain creditors over the United States --the Court necessarily finds a genuine issue as to whether Savona willfully preferred such creditors.



ii. Christian

Christian argues that he did not act voluntarily when paying creditors instead of the government because it was the Board of Eco which ultimately authorized and directed payments, even though actual checks were issued by either him or Savona. Christian says that it was the Board that voted to prefer creditors over the IRS due to the strong influence of specific board members. He further asserts that his conduct cannot be deemed willful because he was under significant duress, since signing a check to the IRS instead of Eco creditors would have resulted in the loss of his home, his minority equity share, and the money he had loaned to Eco.

Christian was undisputably aware of the unpaid employment taxes when Eco used unencumbered funds to pay DACA in June 2002 and August 2002. Once Christian became aware of the tax deficiency, he failed to ensure payment in full of that deficiency before any other creditors were paid. The law is clear that such a failure is willful and subjects the responsible person to § 6672 penalties. See Schlicht, 2005 WL 2083103, at *4. Christian has presented this court with no authority for his assertion that liability does not attach where a Board directs a responsible corporate officer to prefer creditors to the IRS nor for his claim that economic pressure may his noncompliance.


CONCLUSION


Based on the foregoing, the Court DENIES the government's motion for summary judgment with respect to counterclaim defendant Savona. The Court GRANTS summary judgment with respect to counterclaim defendant Christian. The Court finds Christian liable for the balance of the total assessment, $635.905, plus accrued statutory interest and less any payments or credits.

IT IS SO ORDERED.



Alvin S. Brown, Esq.
Tax Attorney
www.irstaxattorney.com
703 425-1400

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Failure to Collect and Pay Over Tax, or Attempt to Evade or Defeat Tax: Assessment of Penalty: Statute of limitations

An IRS assessment of the trust fund recovery penalty against an individual was time barred because it was made more than three years after relevant returns were deemed to have been filed. The IRS's contention that no statute of limitations, including the three-year limitations period contained in Code Sec. 6501, applied to IRS assessments of the trust fund recovery penalty was rejected.

A.K. Lauckner, CA-3, 96-2 USTC ¶50,364. (Acq.).

The corporation of which the taxpayer was controlling shareholder filed withholding returns in 1964; so the statute of limitations barred 1972 assessments for failure to file and for the 100% penalty. Failure of IRS records to show that the returns were filed was insufficient to rebut the taxpayer's testimony that he mailed the returns.

A. Harzvi, DC, 73-2 USTC ¶9712.

A judgment against a responsible corporate officer for failure to collect and pay over tax was not barred by the statute of limitations. The officer did not offer proof to rebut the presumed correctness of a "Certificate of Assessments and Payments," offered in evidence, which showed that assessment was made within the formerly allowed six years before the commencement of this court proceeding.

L.A. Posner, DC, 76-1 USTC ¶9224, 405 FSupp 934.

Collection of assessed penalties was barred by the statute of limitations notwithstanding the taxpayer's execution of a waiver agreement because the waiver agreement, through a mistake admittedly made by the IRS, referred to a time period other than the one for which the assessment had been made.

W. Grabscheid, DC, 82-1 USTC ¶9382.

An assessment was timely in that it was imposed within three years after the trustee in bankruptcy filed the corrected returns. The purported mailings of returns, without evidence of actual deposit in U.S. mails, did not constitute a filing and did not trigger the running of the statute of limitations. It was also well settled that delivery of the returns to an investigating IRS agent did not constitute such filing as triggers the running of the statute of limitations, nor did the preparation and execution of substitute returns by the Secretary under Code Sec. 6020(b).

W. Kraus, DC N.Y., 85-1 USTC ¶9310.

The government's claim against a bankrupt husband and wife for the 100% penalty with regard to unpaid withholding taxes was barred because the government failed to make a proper assessment within the limitations period. The government's assessment was void ab initio because it violated the bankruptcy court's automatic stay then in effect. The government failed to make an assessment subsequent to the taxpayers' discharge from bankruptcy when the bankruptcy stay was lifted.

J.S. Anglemyer, DC Md., 90-2 USTC ¶50,391.

A motion to vacate a judgment barring a 100% penalty based on newly discovered evidence was denied since the outcome of the case would have been the same. Newly discovered attorney billing records allegedly established that the taxpayer carefully drafted and delayed filing court papers in order to obfuscate the reasoning behind his position that the penalty was barred by the statute of limitations. Estoppel would have been inapplicable because the taxpayer did not falsely represent any fact upon which the government, in ignorance, detrimentally relied. The taxpayer at all times had informed the government that he intended to rely on the statute of limitations as an affirmative defense. The taxpayer would not have been deemed to have waived his limitations defense had the billing evidence been discovered since his refusal to join in a penalty refund action brought by another potentially responsible person did not demonstrate a voluntary relinquishment of a right to raise his defense.

B.J. Hodgekins, DC Ind., 93-1 USTC ¶50,256.

The president, director and majority shareholder of two corporations and his wife were liable for the trust fund recovery penalty for failure to pay over employment taxes. The couple's challenges to the assessments against their joint income were without merit. A check mailed to the IRS that the couple attempted to connect to the assessments did not relate to any of the years at issue. Moreover, none of the assessments were barred by the statute of limitations because they were made well within the extended limitations period. Further, the suit was timely filed because an involuntary bankruptcy filed against the couple suspended the limitations period. The couple did not challenge the IRS's determinations or other factual matters, and, therefore, the IRS was granted summary judgment.

W.H. Garland, DC Ohio, 93-2 USTC ¶50,662.

A federal district court properly granted summary judgment to the treasurer of a plumbing company and dismissed the government's suit to impose the trust fund recovery penalty on him, because the statute of limitations had expired. The IRS withdrew its original assessment of the penalty against the treasurer on the condition that he extend the statute of limitations in his case (Form 2750), but subject to the proviso (written on the back of Form 2751) that the government could only reopen his case if it decided to "interplead" him in future litigation. The government admitted that the IRS mistakenly used the term "interplead" instead of "implead," but the court declined to ignore the plain language that the IRS incorporated into its own form. Therefore, the waiver of the limitations period was ineffective because the IRS had not interpled the treasurer into subsequent litigation and, instead, sued him outright.

B.J. Hodgekins, CA-7, 94-2 USTC ¶50,317.

An individual was not liable for the trust fund recovery penalty for unpaid employment taxes because the three-year statute of limitations period had expired before the penalty was assessed. Although the IRS argued that the three-year period did not apply to the trust fund recovery penalty, both case law and prior IRS interpretation held otherwise.

M.V. Howard, DC Calif., 95-1 USTC ¶50,116, 868 FSupp 1197.

The refund claim of a bankrupt married couple who waited six years to dispute their liability for the penalty for failure to pay withholding taxes was barred by the doctrine of laches. The couple did not offer any explanation as to why they waited six years to bring their claim. In addition, the IRS was prejudiced by the delay because it was unable to reassess the penalty after the expiration of the limitations period. The three-year statute of limitations applied to the assessment of the penalty because the IRS has historically acquiesced in this issue and has not indicated the initiation of formal procedures to change its position. Furthermore, the IRS's argument that no statute of limitations applied to the penalties was first raised on appeal.

A. Cooper, CA-6 (unpublished opinion), 95-2 USTC ¶50,521.

The trust fund recovery penalty was timely assessed against a corporate president for his failure to pay over withheld windfall profit taxes. Although the amount due was abated as the result of a clerical error, reimposition of the abated penalty assessment was not barred by the three-year period of limitations because no effective tax abatement ever occurred. The abatement was the result of an inadvertent processing error, and correction of the error was not subject to the statute of limitations.

S.E. Bugge, CA-5, 96-2 USTC ¶50,629.

The IRS's assessment of the trust fund recovery penalty against a responsible person was timely. The IRS sent the taxpayer a Form 2751, Proposed Assessment of 100 Percent Penalty, that properly identified the tax periods corresponding with the penalty assessment for statute of limitations purposes, and, although the form itself was not dated, it was accompanied by a dated letter. The IRS also complied with Reg. §301.6203-1 by assessing the penalty against the taxpayer. Since the Form 2751 sent to the taxpayer contained all of the required information, it constituted the supporting records necessary for a valid assessment.

D.C. Zeller, DC Ill., 97-1 USTC ¶50,116.

An administrative refund claim was dismissed because it was not filed within the two-year limitations period that began when the taxpayer paid a trust fund recovery penalty for nonpayment of his partnership's employment taxes. Even if Forms 941 constituted returns, they were filed more than three years earlier; thus, the taxpayer should have filed an administrative refund claim within two years after he made each penalty payment. Moreover, the limitations period did not begin on the date he made his last installment payment since the payment was late and the installment arrangement did not extend the last day for paying the penalty.

H.M. Pham, FedCl, 99-1 USTC ¶50,314, 42 FedCl 886.

Assessments made within the three-year statute of limitations were timely.

J. Watson, DC Tex., 99-2 USTC ¶50,806.

Similarly.

J.V. Stuart, CA-1, 2003-2 USTC ¶50,585, 337 F3d 31.

The three-year statute of limitations did not bar the assessment of the trust fund recovery penalty against the president and majority shareholder of a bankrupt corporation who was found to be a responsible person in a prior proceeding. The statute of limitations did not begin to run on the date the corporation filed its tax returns, but rather on April 15 of the year following the year at issue in accordance with Code Sec. 6051(b)(2).

E.D. Battles, BC-DC Ala., 2000-2 USTC ¶50,734.

The IRS's assessment of the trust fund recovery penalty against a corporate officer who was deemed to be a responsible person was timely absent evidence that contradicted Form 2866, Certificate of Official Record, offered by the IRS.

J.E. Bisbee, CA-8, 2001-1 USTC ¶50,359, 245 F3d 1001, aff'g an unreported District Court decision.

The Chief Counsel has determined that a responsible person is subject to the same assessment period that applies to the employer's returns, even when the IRS cannot prove fraud on the part of the responsible person. Assessment of the Code Sec. 6672 trust fund recovery penalty is subject to the limitations period provided in Code Sec. 6501(a). Thus, the filing of the employer's quarterly employment tax return starts the running of the three-year limitations period with respect to the responsible person's trust fund recovery penalty liability. Accordingly, if the limitations period is still open because of fraud, a willful attempt to evade tax, or the failure to file an employment tax return, the limitations period for the Code Sec. 6672 penalty that is based on the same employment tax return remains open as well.

CCA Letter Ruling 200532046, June 30, 2005.

A trust fund recovery penalty was timely assessed within 30 days after the IRS rejected a taxpayer's protest of the proposed penalty, even though the IRS could not produce his protest document. The IRS appeal file established that a protest had been in fact filed by the taxpayer. The file listed the dates he was informed of his protest rights, he requested an appeal and his request was received. It also noted that he was protesting the assessment for one tax year but not for two others, and recorded several contacts he had with IRS agents during the course of his appeal.

K.K. Haley, DC Md., 2006-1 USTC ¶50,179.

A waiver extending the statutory period for assessment of the trust fund penalty, executed during the statutory 90-day extension of the assessment period, was valid and enforceable to extend the assessment period. The IRS could secure an extension agreement at any time that the limitation period, with respect to a particular tax year, was open, even if the waiver was executed outside the assessment period provided by Code Sec. 6501(a).

CCA Letter Ruling 200637001, May 31, 2006.

The IRS's assessment of the trust fund recovery penalty against an individual was not void because it was made after a debtor's bankruptcy plan was confirmed so the debtor was no longer protected against collection by an automatic stay. Since the assessment was not void as a violation of the automatic stay and since it was made before the expiration of the statute of limitations, it was timely.

J.W. White, CA-11, 2006-2 USTC ¶50,559.

Failure to Collect and Pay Over Tax, or Attempt to Evade or Defeat Tax: Responsible Person: Responsible person determined

The treasurer of a bankrupt corporation was personally liable to the government for withheld taxes that were diverted to pay other creditors. The treasurer breached his duty to hold such collected taxes in trust until they are paid over to the government. Although the treasurer could not sign checks in excess of $1,000 without the signature of another officer, such a limitation on his authority did not protect him from liability as the person responsible for payment of taxes. Further, the government was not bound by a hold-harmless agreement executed in favor of the treasurer by the other corporate officers.

E.A. Cella, DC, 80-1 USTC ¶9369.

Taxpayer was not an officer, director or employee of a toy company financed by her father and therefore was not liable for unpaid employment taxes of the company.

S. Philipson, DC, 55-1 USTC ¶9466.

Although the claimant denied that he was a director, officer or shareholder of the corporation, the weight of the evidence showed that he (1) hired and controlled employees of the corporation, (2) controlled the financial and business aspects of the corporation, (3) signed IRS forms, (4) engaged in other activities tending to show his direction and control over corporate funds, and (5) had the corporation formed.

J. Labowitz, DC, 73-1 USTC ¶9155, 352 FSupp 202.

A district court reversed a bankruptcy court's finding that the chairman of the board of two corporations was not a responsible person with respect to the collection and paying over of withholding and social security taxes. Because the taxpayer had, at all times, the power to see that such taxes were paid, the bankruptcy court's decision was clearly erroneous. The bankruptcy court's finding that the taxpayer did not willfully fail or refuse to pay the taxes in question was also clearly erroneous. After she became aware that the taxes had not been paid, she paid other creditors in preference to the government.

T.L. Woodson, DC Mich, 83-1 USTC ¶9258, rev'g BC- DC, 81-2 USTC ¶9791, 15 BR 185.

The determination of the liability (a corporate officer) for the payment of withheld taxes is an issue to be decided on the facts of the case. Thus, the court was compelled to dismiss both the government's and the taxpayer's motions for summary judgment.

B.H. Hoeniger, DC, 76-1 USTC ¶9296.

A corporate officer who paid the corporate liability for FICA taxes under the mistaken assumption that he was personally liable for their payment was entitled to a refund of the taxes and penalties paid.

E.B. David, DC, 83-1 USTC ¶9259.

After he failed to appear at trial, a district court sustained a 100% penalty against a president and treasurer of a photographic equipment business for his failure to pay over or collect employment taxes. However, an individual who had acted as general manager was not jointly liable for the penalty, since there was not sufficient evidence to suggest that he either preferred other creditors over the government or that he had financial responsibility over corporate affairs beyond that of depositing funds in a corporate account. As a result, the court sustained the penalty assessed against the president, but it dismissed the government's claim against the general manager.

R. Sparkman, DC Calif., 84-2 USTC ¶9983.

In reversing the Claims Court, the court of appeals held that a corporation's chairman of the board was not liable for the 100-percent penalty for failure to collect and pay withholding taxes because (1) he was not a responsible person who had a duty to collect, account for, and pay over taxes, since there was no evidence that he had or exercised control over such functions and (2) he did not act willfully in failing to withhold taxes because there was no evidence that he had actual knowledge of the nonpayment of taxes due after the first two quarters of the year until the eve of the corporation's bankruptcy. Since the taxpayer was not a responsible person and did not fail willfully to execute a duty to collect and pay taxes, the part of the judgment relating to the IRS's allocation of certain tax payments was vacated as moot.

D.J. Godfrey, Jr., CA-FC, 84-2 USTC ¶9974, 748 F2d 1568, rev'g ClsCt, 83-2 USTC ¶9635.

For withholding tax purposes, an individual who acquired a company in bleak financial condition and assumed unpaid liabilities had control over such company and was a responsible person. The facts that (1) the list of liabilities assumed did not include reference to unpaid pre-acquisition withholding tax liabilities and (2) such individual subsequently entered into an agreement with a bank to handle receipts and payments were insufficient to relieve such individual of his status as a responsible party. However, a question of material fact existed regarding whether such individual intentionally failed to pay taxes due.

H. Bonnabel, DC N.J., 90-2 USTC ¶50,481.

Mere titular officers of a corporation were not responsible parties and, even if they were, there was no showing that they willfully failed to pay the taxes due.

R.E. Couture, DC, 74-2 USTC ¶9706.

The son of the president of a restaurant corporation was not liable for the unpaid employee withholding taxes of the corporation because he was not a responsible person obligated to withhold and pay over taxes. Even though he managed some of the company's restaurants and was authorized to sign checks, he could not disburse funds except in emergency situations, and he did not have authority to pay creditors. In addition, although he held the office of Secretary/Treasurer and technically owned 10 percent of the stock of the corporation, he did not control that interest, had no authority to sell the stock, and was completely accountable to his father. Finally, even if it had been determined that he was a responsible person, he lacked authority to pay the taxes and other debts of the corporation and, therefore, could not be found to have willfully failed to carry out that responsibility.

E.D. Goodick, DC La., 92-1 USTC ¶50,279.

Individual financial backers who loaned money and obtained lines of credit for a corporation were responsible persons and, therefore, were liable for penalties for failure to pay over withheld income taxes. The backers had the ability to decide where corporate funds were spent and, in fact, exerted this control at least once. They had check-writing authority and could pull their financial support at any time their wishes were not fulfilled. Moreover, the backers' failure to pay the taxes was willful because they knew of the corporation's obligation to pay the taxes. In addition, the corporate officer, who operated the company on a day-to-day basis, was also liable for the taxes as a responsible person. Even though the officer intended to pay the taxes in the long run, he preferred to use current cash flows to carry on the corporation's operations and not to pay over the withheld taxes.

C.D. Webster, DC Md., 94-1 USTC ¶50,008.

A corporation in bankruptcy that was in the business of providing security guards to its customers was the employer of these guards because it had control over the guards and the funds used to pay them. It was responsible for the payment of employment taxes regarding these employees, and this obligation could not be avoided by delegating that function to another. However, the government's tax claim for the penalty for the failure to pay over withheld taxes was disallowed with leave to file an amended claim, because it failed to identify a particular person as the responsible person liable for the corporation's FICA and FUTA obligations and did not specify whether the unpaid FICA amounts were attributable to the debtor's portion or the employees' share.

Professional Security Services, Inc., BC-DC Fla., 94-1 USTC ¶50,148.

Summary judgment was denied where material issues of fact existed as to whether a corporate officer should be classified as a responsible person. The corporate officer had authority to sign corporation checks and could be deemed a person responsible for paying withholding taxes. Further, there was evidence that the officer was aware that the corporation was delinquent in paying over withholding to the IRS.

J.P. Ladwig, DC Ill., 94-1 USTC ¶50,192.

Married individuals were not responsible persons during the time that a company's tax delinquency accrued and, therefore, were not required to pay over federal income taxes and social security taxes withheld from employees' wages. They lacked control over the decision-making process by which the corporation allocated funds to other creditors instead of paying its withholding tax obligations.

M.L. Michaud, FedCl, 97-2 USTC ¶50,972, 40 FedCl 1.

The president of a bankrupt company who willfully failed to pay over his company's payroll withholding taxes was a responsible person with respect to the trust fund recovery penalty. The president acknowledged that he was a responsible person under the statute. However, whether two other company officers were responsible persons was questionable. Although one of the officers served as chief financial officer and both had check-writing authority, the president exerted such command over the finances of the company that a reasonable fact-finder could conclude that neither officer had significant control over the company's finances.

R.S. Hudson, DC Pa., 99-2 USTC ¶50,914.

A bankrupt attorney who was the president and sole shareholder of his law corporation was liable for the trust fund recovery penalty in connection with the corporation's failure to collect and pay over employment taxes.

D.A. Smith, DC Hawaii, 99-2 USTC ¶50,998. Aff'g 99-1 USTC ¶50,278.

The president and vice president of a corporation who failed to remit withholding taxes to the IRS were determined to be "responsible persons" liable for the trust fund recovery penalty. In addition to being corporate directors and officers, the individuals owned stock in the corporation, were responsible for daily management operations, hired and fired employees, and had the authority to sign checks and pay the corporation's taxes.

D.C. Stull, DC Tex., 2000-1 USTC ¶50,168. Aff'd, per curium, CA-5 (unpublished opinion), 2001-1 USTC ¶50,333.

A corporate director who lacked control over the company's tax deposits and payments did not qualify as a responsible person liable for the trust fund recovery penalty. Although he made deposits and tax payments at a bank under the direction of the corporate president and was aware of the company's payroll tax delinquencies, he had no decision-making authority regarding the payment of creditors.

M.D. McGlaughlin, DC Md., 2000-1 USTC ¶50,183.

Questions of fact precluded summary judgment on the government's claim for the trust fund recovery penalty against the sole owner of a real estate appraisal business who was on maternity leave during the quarters at issue. Because her level of involvement with company during her maternity leave was in dispute, it could not be determined on summary judgment that she was a responsible party.

P. Ranson, DC Wash., 2001-1 USTC ¶50,161.

A federal district court applied improper legal standards to reach its determination that an individual was not a responsible person. The district court erroneously focused its inquiry on whether the taxpayer had knowledge of the unpaid taxes, the taxpayer's functional responsibility, and the fact that another individual had greater control of corporate affairs. That the taxpayer had significant control over the company's affairs was sufficient for him to qualify as a responsible person.

D.M. Chapman, CA-9 (unpublished opinion), 2001-1 USTC ¶50,380, rev'g and rem'g and unreported District Court decision.

The former owner of a plumbing business who transferred 80% of the ownership in the business to his children was deemed to be a responsible person for purposes of the trust fund recovery penalty. The individual was still a 20% owner in the business, had check-signing authority, was often asked to co-sign checks for the business and continued to work to determine the bids the company would make. Moreover, he loaned money to the company when it was in financial difficulty and had considerable influence over how his children ran the business.

M.E. Pitts, DC Ariz., 2001-1 USTC ¶50,419.

The president and CEO of two trucking corporations, who was assessed penalties for his failure to turn over withholding taxes, was a responsible person under Code Sec. 6672. The undisputed evidence established that he had the authority to instruct his manager to pay the taxing authorities, had significant control over the finances of the corporations, retained the authority to sign checks on behalf of the corporation, and possessed the authority to hire and discharge employees. The taxpayer's argument that he delegated these duties and did not have day-to-day financial responsibilities was unpersuasive.

R.C. Bolus, Sr., DC Pa., 2001-2 USTC ¶50,644.

An individual who was the sole shareholder of one credit bureau and the president and CEO of a second bureau, both of which failed to pay over withholding taxes, qualified as a responsible person who willfully failed to collect, account for, or remit the funds to the IRS. Thus, he was liable for the assessed trust fund recovery penalties. No triable issues of fact existed as to the individual's liability for the penalties.

W.K. Hankins, DC Ind., 2001-2 USTC ¶50,692.

A third-party defendant's motion for summary judgment in connection with the IRS's assessment of a trust fund recovery penalty against him due to a corporation's failure to pay over employment taxes was denied. He unsuccessfully contended that he was not a responsible person because he was not an employee, officer or shareholder of the corporation. However, he served as corporate counsel and as the entity's chief financial officer. He also directed the president to make payments to various creditors, including tax payments to the IRS, was involved in the preparation and filing of the company's payroll tax returns, prepared corporate tax returns and was responsible for ensuring that the payroll tax deposits were made.

D.K. Scheingold, DC N.J. (unpublished opinion), 2002-2 USTC ¶50,510.

The chairman of a corporation was liable for the trust fund recovery penalty in connection with the corporation's failure to pay over employment taxes. He qualified as a responsible person because he had the authority to sign checks, hire and fire employees, participate in management, determine corporate financial policy, and authorize the payment of bills. He also discussed corporate business with other company officers on a weekly basis and was the corporation's majority shareholder, a member of its board of directors, and a guarantor of corporate loans.

C.S. Perlman, DC Fla., 2002-1 USTC ¶50,346.

The founder and president of a corporation was a responsible person with liability to pay the IRS's assessment of unpaid employment and withholding taxes, plus interest and penalties, for one tax year. He held the position of president of the company and attended its board meetings, he was generally responsible for the operation of the company and possessed the authority to sign checks and approved the check signing of the only other company employee with checking signing authority. Furthermore his decision not to pay over or withhold the employment taxes was willful. He made the decision to pay other creditors in preference to the IRS knowing that taxes were due and he failed to take corrective actions.

G. Sutton,, DC Tex., 2002-2 USTC ¶50,552, 194 FSupp2d 559.

The president of a corporation was considered the responsible person with liability to pay the assessment of unpaid taxes, plus interest and penalties, for two tax years. He was the highest-ranking officer and had substantial authority to direct operations. Moreover, he signed the payroll tax returns and had signature authority on corporate accounts. He paid other creditors in preference to the IRS knowing that taxes were due and failed to take corrective actions. That he resigned from his position of president was meaningless as he exercised control in all relevant areas both before and after the purported resignation.

L.A. Mitchell, DC N.J. (unpublished opinion), 2002-2 USTC ¶50,537. Aff'd, CA-3 (unpublished opinion), 2004-1 USTC ¶50,113, 82 FedAppx 781.

The CFO of a bankrupt airline company was a "responsible person," who willfully failed to file quarterly excise tax returns and pay the accompanying tax to the government. The CFO held a corporate office, possessed control over the financial affairs of the airline company, possessed the authority to disburse corporate funds, and possessed the ability to pay the excise taxes without the approval of the company's Board. There was a material issue of genuine fact, however, as to whether the controller of the company had the requisite corporate decision making authority within the company to be considered a responsible person with regard to the delinquent excise taxes. Although the controller applied for credit on behalf of the company and signed promissory notes that bound the company, he was not in charge of the department that was responsible for tracking the excise taxes and he was not involved in overall day-to-day operations of the company.

D.R. Ferguson, DC Iowa, 2004-1 USTC ¶50,247, 317 FSupp2d 945.

The bankruptcy court erroneously held that the president and sole shareholder was not a responsible person for purposes of the trust fund recovery penalty. Although the taxpayer did not run the day-to-day operations of the corporation, she had sole authority to right checks for the company. The bankruptcy court's conclusion that the taxpayer was not a responsible person was strongly based on the lack of authority or power over daily management of the company. However, the taxpayer's status as president, sole shareholder and her authority to sign checks was sufficient to make her the responsible person.

E.L. Marino, DC Fla., 2004-1 USTC ¶50,262, 311 BR 111, rev'ing BC-DC Fla., 2004-1 USTC ¶50,261.

A president and fifty percent shareholder of an employee leasing company was liable for the trust fund recovery penalty in connection with his company's failure to pay employee withholding taxes. Evidence established that the taxpayer was a responsible person because he had check signing authority, even though he claimed that he did not often exercise such authority, and had the authority to manage and direct the employees of the company. The taxpayer also had the authority to hire and fire all levels of employees, which he displayed when he fired his business partner, who was also a fifty percent shareholder.

S. Farkas, FedCl, 2003-2 USTC ¶50,574.

A debtor who served as vice-president of a general contracting business was a responsible person as a matter of law. He had significant authority over the employees, as well as over the finances of the company during the tax periods in issue. Questions remained regarding whether he willfully failed to pay over the withholding taxes.

V.K. Pugh, BC-DC Nev., 2004-2 USTC ¶50,352, 315 BR 889.

A debtor's objection to the IRS's claim for the trust fund recovery penalty assessed against him was denied because he was determined to be a responsible person who willfully failed to pay over withheld taxes. The debtor stipulated that he was a responsible person and his failure to remit the withheld taxes was willful because he was aware of the company's employment tax deficiency yet chose to pay creditors other than the government. The fact that the debtor was told by the company's owner not to pay the taxes and that he might have been fired had he disobeyed orders did not excuse his liability for nonpayment.

L. Borman, BC-DC Fla., 2005-1 USTC ¶50,109.

An individual was liable for the trust fund recovery penalty, during the time he was no longer president of the corporation. The taxpayer admitted to being the chairman of the board, the sole director, vice president, secretary, and treasurer. Between himself, his spouse and his children, he controlled about 50 percent of all outstanding stock and he has controlling interest in the corporation. At all times, the interim president served at his will. Undoubtedly, the taxpayer was a "responsible person" liable to pay the trust fund taxes.

D.J. Frank, BC-DC N.C., 2005-1 USTC ¶50,222.

The manager of a casino was not a responsible person for purposes of the trust fund recovery penalty since he had no authority over payroll or tax matters. Although he supervised department managers and was otherwise responsible for the day-to-day operations of the casino, the manager did not have significant decision-making authority over the financial affairs of the company to be responsible for payroll taxes. Authority to decide which checks were to be written, and to whom, rested in the sole shareholder, director and corporate officer of the casino.

B.E. Dewing, DC Nev., 2005-1 USTC ¶50,275.

The chief financial officer of a bankrupt company was not a responsible person for purposes of imposition of the trust fund recovery penalty, despite have check-signing authority, because the company president had absolute control over all of the company funds. The company president reviewed the cash flow balance daily, authorized the creditors to be paid and even wired funds to another creditor to prevent the IRS from obtaining the funds after the CFO sent the IRS a check without the president's knowledge.

J.D. Salzillo, FedCl, 2005-1 USTC ¶50,324, 66 FedCl 23.

The sole owner and president of a corporation was a responsible person who willfully failed to pay the corporation's employment tax liabilities for purposes of imposing the trust fund recovery penalty. He signed Form 941 employment tax returns on behalf of the corporation, could independently sign checks on behalf of the corporation and signed a sworn statement that he was solely responsible for all tax debts incurred by the corporation. The taxpayer's failure to pay the taxes was willful because he knew of the tax liabilities, but chose to pay other expenses.

G. Kraljevich, DC Mich., 2005-1 USTC ¶50,372, 364 FSupp2d 655.

An individual was determined to be a responsible person with respect to unpaid employment taxes. The taxpayer, who was involved in the operation of two companies until the time a surety company assumed control, did not present any evidence contradicting that he was a responsible party for tax liability under Code Sec. 6672. Instead, the evidence reflected that the majority of the unpaid employment taxes accrued prior to the time the surety company assumed control. Furthermore, whether the surety was responsible for the unpaid employment taxes had no bearing on whether the taxpayer was a responsible person for purposes of tax liability.

J. Dowdy, DC Tex., 2005-2 USTC ¶50,517.

The IRS was granted summary judgment against the former president of a non-profit corporation for trust fund recovery penalties under Code Sec. 6672. The taxpayer had significant control of the corporation's finances, had check writing authority, and was responsible for ensuring that the company paid its trust fund taxes. Further, once the taxpayer became aware of the deficiency, he failed to ensure its payment before any other creditors were paid. Such a failure is willful and subjects the responsible person to trust fund recovery penalties under Code Sec. 6672.

Reverend R. W. Schlicht, DC Ariz., 2005-2 USTC ¶50,527.

An electrical contractor was liable for penalties under Code Sec. 6672 for failing to pay over federal employment taxes owed by two corporations that he formed. Despite having relinquished his management role to family members, he was a "responsible person" for purposes of Code Sec. 6672 liability because he kept the title of president and retained authority to control the company, even if he did not exercise that authority. Specifically, the taxpayer had full check writing authority, full access to company books and records, and the opportunity to exercise substantial financial control over company affairs.

J.F. Grillo, BC-DC N.J, 2005-2 USTC ¶50,625.

The founder, president and principal stockholder of a company was determined to be a responsible person with respect to unpaid employment taxes. The failure of the taxpayer's accountant and tax specialist to properly designate amounts paid to offset these liabilities did not mean that the IRS should be equitably estopped from collecting under Code Sec. 6672, as the taxpayer mistakenly argued. The trust fund recovery penalty is separate and distinct from the legal obligation imposed on the employer to collect and remit the trust fund taxes. Since the taxpayer did not present any evidence to the contrary, he was found to be a responsible person who willfully failed to pay the owed employment taxes.

J.A. Lencyk, DC Tex., 2005-2 USTC ¶50,630, 384 FSupp2d 1028.

A 100-percent trust fund penalty was reduced to judgment since the taxpayer was the responsible person even though he did not have day-to-day control of the company. Rather his status as CEO, president and sole shareholder gave him sufficient control to be the responsible person for trust fund purposes.

R. Sage, DC N.Y., 2006-1 USTC ¶50,175, 412 FSupp2d 406.

The president of a tax-exempt organization was not entitled to a refund of the federal employment and withholding taxes he paid from his personal funds. As president of the board of directors for almost 20 years, he had check-signing authority and control over the organization's financial affairs. Further, he exhibited a reckless disregard of a known risk that the organization was not making required trust fund payments to the IRS and he made no effort to ascertain the status of the organization's tax payments.

C.E. Jefferson, DC Ill., 2007-1 USTC ¶50,304, 459 FSupp2d 685.

A company's vice president of operations was denied a refund of a trust fund recovery penalty assessed against her for her employer's failure to pay backup withholding taxes. She was a responsible person because her own testimony about her duties and responsibilities and her undisputed check-writing authority established that she could have prevented the company from paying other creditors instead of paying the taxes. She enjoyed exclusive check-writing authority and was responsible for collecting, accounting for, and paying over the withheld taxes. She was in a position to use her ability to prioritize creditors and her check-signing authority to impede the flow of business to the extent necessary to ensure the payment of taxes and nothing in the company's business model prevented her from paying the taxes. In addition, the undisputed evidence clearly established that the willfulness requirement was met.

N.A. Cook, DC Ind., 2007-1 USTC ¶50,333.

A trust fund recovery penalty was correctly assessed against the chief financial officer of a bankrupt airline company because he was a responsible person who willfully failed to pay the company's excise taxes. The individual was authorized to sign checks and disburse corporate funds on behalf of the company and had the authority to pay the company's excise taxes without board or management approval. The board never explicitly instructed him to not pay the excise taxes but he chose not to do so in order to pay other company expenses.

R. Musal, DC Iowa, 2006-1 USTC ¶50,207, 421 FSupp2d 1153. Aff'd sub nom. D.R. Ferguson, CA-8, 2007-1 USTC ¶50,481, 484 F3d 1068..

The CEO and board chairman of a motorcycle company was not entitled to a refund of a portion of the trust fund recovery penalty he paid to the IRS in satisfaction of the company's unpaid payroll withholding taxes. Testimony of the CEO and the company's chief operating officer and financial director established that the CEO was a responsible person who willfully failed to pay the company's taxes. He had overall authority, including raising capital and hiring, was involved in the day-to-day management of the company, had the authority to issue checks, and determined which creditors to pay and when to pay them. Further, he instructed the company's financial director that bills pertaining to utilities were to be paid first; thus, checks were issued to other creditors but not to the government.

R.K. Hagen, DC Md., 2007-1 USTC ¶50,510, 485 FSupp2d 622.

The sole corporate officer of a construction company was a responsible person who willfully failed to pay over federal withholding taxes. The officer continued to write checks, sign returns and act on behalf of the corporation after the date he claimed an insurance company took over control under an indemnity agreement. However, the officer's wife was not liable for the unpaid taxes because there was no evidence that she was an officer or director of the construction company. Her involvement was limited to occasional business purchases and as a signatory with her husband on the indemnity agreement.

In re G. Hartman, BC-DC Pa., 2007-2USTC ¶50,747.

Tax attorney - request for IRS ruling on sale of house under Section 121(c)

IRS Letter Ruling 200745011

LTR Report Number 1602, November 14, 2007 IRS REF: Symbol: CC:ITA:B04-PLR-114443-07 [Code Sec. 121]

August 13, 2007

This letter responds to your request for a ruling under section 121(c) of the Internal Revenue Code. Specifically, you have requested that the gain on the sale of Residence 1 may be excluded under the reduced maximum exclusion in section 121(c).

Taxpayers were married and had one child when they purchased Residence 1 on Date 1. Residence 1 had three small bedrooms and one and one-half baths. Husband and Wife used one of the small bedrooms as an office. After the purchase of Residence 1, Wife became pregnant and gave birth to another child. Taxpayers' first child was age 10 at the time. Taxpayers tried, but failed, to make reasonable accommodations for the additional child in Residence 1. On Date 2, Taxpayers purchased Residence 2, which has 3 bedrooms, 2 full baths, and additional space used as their office.




LAW AND ANALYSIS


Section 121(a) provides that gain from the sale or exchange of property is not included in gross income if, during the 5-year period ending on the date of the sale or exchange, the taxpayer has owned and used the property as the taxpayer's principal residence for periods aggregating two years or more.

Section 121(b)(1) provides the general rule for the maximum exclusion of gain. Section 121(b)(3) provides that subsection (a) shall not apply to any sale if, during the 2-year period ending on the date of the sale, there was any other sale or exchange by the taxpayer to which subsection (a) applied.

Section 121(c) provides for a reduced maximum exclusion when a taxpayer fails to satisfy the ownership and use requirements of subsection (a) if the primary reason for the sale is the occurrence of unforeseen circumstances.

The reduced maximum exclusion is computed by multiplying the applicable maximum exclusion by a fraction. The numerator of the fraction is the shortest of the following periods: (1) the period of time that the taxpayer owned the property during the 5-year period ending on the date of the sale; (2) the period of time that the taxpayer used the property as the taxpayer's principal residence during the 5-year period ending on the date of the sale; or (3) the period of time between the date of a prior sale or exchange of property for which the taxpayer excluded gain under section 121 and the date of the current sale. The numerator of the fraction may be expressed in days or months. The denominator of the fraction is 730 days or 24 months (depending on the measure of time used in the numerator).

Section 1.121-3(b) of the Income Tax Regulations provides that all the facts and circumstances of a sale will determine whether the primary reason for the sale is the occurrence of unforeseen circumstances. Factors that may be relevant in determining the primary reason for a sale include the following: (1) the suitability of the property as the taxpayer's residence materially changes; (2) the circumstances giving rise to the sale are not reasonably foreseeable when the taxpayer begins using the property as the taxpayer's principal residence; and (3) the circumstances giving rise to the sale occur during the period of the taxpayer's ownership and use of the property as the taxpayer's principal residence.

Section 1.121-3(e)(1) provides that a sale is by reason of unforeseen circumstances if the primary reason for the sale is the occurrence of an event that the taxpayer could not reasonably have anticipated before purchasing and occupying the residence. Section 1.121-3(e)(3) states that the Commissioner may issue rulings addressed to specific taxpayers identifying events or situations as unforeseen circumstances with regard to those taxpayers.

In the present case, based on the facts, representations, and the relevant law, we conclude that the occurrence of unforeseen circumstances was the primary reason for the sale and that the suitability of Residence 1 as the Taxpayers' principal residence materially changed. Accordingly, the gain on the sale of Residence 1, which Taxpayers owned and used as a principal residence for less than two of the preceding five years, may be excluded under the reduced maximum exclusion of gain in section 121(c).




CAVEATS


Except as expressly provided, we express no opinion concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter.

This ruling is directed only to the taxpayers requesting it. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent.

A copy of this letter ruling must be attached to any income tax return to which it is relevant. Alternatively, if taxpayers file a return electronically, taxpayers may attach a statement to the return that provides the date and control number of the letter ruling.

The ruling contained in this letter is based upon information and representations submitted by the taxpayers and accompanied by a penalty of perjury statement executed by the taxpayers. While this office has not verified any of the material submitted in support of the request for a ruling, it is subject to verification on examination.

Sincerely, Donna Welsh, Senior Technician Reviewer, Branch 4 (Income Tax & Accounting).

Tax Shelter reportable transactions 26 U.S.C. §6707A.

United States of A26 U.S.C. §6707A. merica, Petitioner-Appellant, Cross-Appellee, v. BDO Seidman, LLP, regarding IRS examination of BDO Seidman, LLP, Respondent-Appellee, and, Robert S. Cuillo, et al., Intervenors-Appellees, Cross-Appellants.

U.S. Court of Appeals, 7th Circuit; 05-3260, 05-3518, July 2, 2007, 492 F3d 806.

Affirming DC Ill. decisions at 2004-2 USTC ¶50,288, 2005-1 USTC ¶50,273 and 2005-2 USTC ¶50,447; affirming in part and vacating and remanding in part 2005-1 USTC ¶50,264.

[ Code Secs. 6111, 6112, 7525 and 7602]

Examination of books and witnesses: Enforcement of IRS summons: Attorney-client privilege: Waiver: Common interest rule: Crime-fraud exception: Tax practitioner privilege: Tax-shelter exception. --
A national accounting firm that was being investigated for marketing potentially abusive tax shelters did not waive the attorney-client privilege when it faxed a memorandum written by one of its partners to an attorney at a law firm that was assisting the accounting firm in providing tax services to its clients. The common interest doctrine applied to extend the protection afforded by the attorney-client privilege to the memorandum. A customer-intervenor failed to rebut the evidence that Document A-40 came under the crime-fraud exception to the attorney-client privilege; therefore, the customer-intervenor could not invoke the privilege to prevent the disclosure of the document to the IRS pursuant to its civil subpoenas. There was no abuse of discretion by the district court in determining that the IRS provided sufficient evidence to support the conclusion that Document A-40 was a communication in furtherance of a crime or fraud; thus, the document fell within the crime-fraud exception to the attorney-client privilege. The district court record, however, was unclear as to whether the IRS provided sufficient facts to support a finding that the tax practitioner privilege, invoked by the intervenors, was eviscerated by the tax-shelter exception. The district court must re-examine the 266 documents at issue and determine which were covered by the attorney-client privilege, which by the tax practitioner privilege, and which by both. For those documents covered only by the tax practitioner privilege, the IRS must to provide sufficient evidence to show that the tax-shelter exception applies in order to avoid invocation of the privilege, which would keep the documents from being disclosed.

Before: Ripple, Kanne and Williams, Circuit Judges.

RIPPLE, Circuit Judge: This is the third appeal arising out of an effort by the Internal Revenue Service ("IRS") to enforce administrative summonses against BDO Seidman, LLP ("BDO"), an accounting firm that allegedly failed to disclose potentially abusive tax shelters that it promoted. See United States v. BDO Seidman [ 2003-2 USTC ¶50,582], 337 F.3d 802 (7th Cir. 2003) ( BDO II); United States v. BDO Seidman, Nos. 02-3914 & 02-3915, 2002 WL 32080709 (7th Cir. Dec. 18, 2002) ( BDO I). The IRS now appeals the district court's ruling that sustained BDO's claim of attorney-client privilege with respect to a memorandum written by one of BDO's employees. The IRS also appeals a separate ruling that sustained the tax practitioner and/or attorney-client privilege asserted by a number of BDO's clients ("Intervenors") with respect to 266 documents. The Intervenors cross-appeal the district court's ruling that one document, Document A-40, fell within the crime-fraud exception to the attorney-client and/or tax practitioner privilege. For the reasons set for forth in this opinion, we affirm in part and vacate and remand in part.


I BACKGROUND




A. The Enforcement Action

In September 2000, the IRS received information suggesting that BDO was promoting potentially abusive tax shelters without complying with the Internal Revenue Code's ("IRC") listing requirements for such tax shelters. See 26 U.S.C. §§6111(a), 6112(a) (2000); BDO II [ 2003-2 USTC ¶50,582], 337 F.3d at 806. Potentially abusive tax shelters included those transactions defined as "tax shelters" under §6111(c) and arrangements identified by regulation as potentially abusive under §6112(b). 1 Organizers of any potentially abusive tax shelter were required to maintain a list of persons to whom an interest in the shelter was sold. See 26 U.S.C. §6112(a) (2000). Additionally, organizers and sellers of §6111(c) tax shelters were required to register the tax shelter with the IRS. See id. §6111(a). Failure to follow these registration and list-keeping requirements was sanctionable by penalties. See id. §§6707, 6708. 2

The IRS commenced a compliance investigation into BDO's alleged violations. The IRS issued twenty summonses commanding production of documents, testimony relating to the transactions and information on the identity of the clients who had invested in the transactions. BDO II [ 2003-2 USTC ¶50,582], 337 F.3d at 805-06. When BDO resisted these summonses, the IRS petitioned the United States District Court for the Northern District of Illinois for enforcement. Id. at 806. BDO contended that the summonses could not be enforced because the investigation had no legitimate purpose. It also contended that the summonses were overbroad, issued in bad faith and sought information already in the IRS' possession. Lastly, BDO submitted that the information sought was irrelevant to the investigation. Id. at 806. BDO further asserted that a number of the documents were protected by the attorney-client privilege, the tax practitioner privilege under 26 U.S.C. §7525(a) or work product protection. BDO II [ 2003-2 USTC ¶50,582], 337 F.3d at 806. The district court ruled that the IRS had issued the summonses in good faith and that enforcement would not constitute an abuse of process. It ordered BDO to produce all responsive documents except for those previously listed on privilege logs and submitted to the court by BDO for in camera inspection. Id. at 806-07.

BDO then notified its clients that it intended to produce documents that would reveal their identities to the IRS. In response, a number of clients sought to intervene as of right in order to assert the tax practitioner privilege under 26 U.S.C. §7525(a). 3 The district court denied the motions to intervene, holding that the tax practitioner privilege would not prevent disclosure of the clients' names. See BDO II [ 2003-2 USTC ¶50,582], 337 F.3d at 807. The clients appealed this denial to this court.

On December 18, 2002, we entered an order remanding the case to the district court to permit it to undertake an in camera inspection of the documents for which the would-be anonymous intervenors asserted a privilege. See BDO I, 2002 WL 32080709, at *1. We ordered the district court to make more extensive findings with respect to the claim of tax practitioner privilege for each document, taking into account the totality of the circumstances. Id. After conducting this in camera review, the district court determined that the tax practitioner privilege did not prevent disclosure of the clients' identities. R.73 at 7-31. The clients again appealed, and we affirmed the district court's ruling on the question of privilege and its denial of the motions to intervene. BDO II [ 2003-2 USTC ¶50,582], 337 F.3d at 813.

After our decision affirming the district court's denial of the anonymous clients' motion to intervene, the Intervenors sought intervention as of right in order to assert a claim of privilege under the attorney-client privilege, tax practitioner privilege or work product doctrine with respect to 267 documents. The IRS filed a document titled "United States' Concurrence in Intervenors' Motions to Intervene and Challenge to Claims of Privilege" in which it argued that the district court should grant the motion, or, in the alternative, deny the claim of privilege. The IRS and the Intervenors also filed a joint motion in which the IRS consented to the intervention and the parties set forth a proposed briefing schedule. On July 15, 2004, the district court granted the Intervenors' motion.



B. Intervenors' Claims

The Intervenors asserted attorney-client privilege, tax practitioner privilege or work product protection with respect to 267 documents. The IRS submitted that the documents either were not covered by the tax practitioner privilege under the tax shelter exception found in 26 U.S.C. §7525(b), as it existed at the time of the communications, or that the documents fell within the crime-fraud exception to both the attorney-client and tax practitioner privileges.

According to the IRS, BDO, in conjunction with other firms, had engaged in the practice of selling prepackaged tax shelters, the sole purpose of which was the unlawful attempt to evade tax liability. The district court determined that the IRS had failed to make a prima facie showing of crime or fraud that would justify a blanket determination that all of the documents fell within the crime-fraud exception. R.178 at 16. The court noted that, just because the IRS characterized the transactions "as abusive and unlawful cookie cutter tax shelters," such a characterization did not make them so. Id. at 17. The court added that the question of whether BDO and the Intervenors had violated the IRC was the ultimate issue in the IRS' investigation and that a finding of fraud based solely on the IRS' allegations "would place the proverbial 'Cart before the Horse.' " Id. In a footnote, the district court added that, based on these same considerations, it could not hold that the Intervenors or BDO were engaged in tax shelters which would fall within the tax shelter exception to the tax practitioner privilege. Id. at n.6.

Although the district court was unwilling to apply the crime-fraud exception in blanket fashion, it proceeded to review each document in camera to determine whether individual documents fell within the crime-fraud exception. Id. at 18. In conducting the review, the district court looked to the totality of the circumstances to determine whether there was sufficient evidence of crime or fraud to bring a document within this exception. Id. at 23. To guide this evaluation, the district court identified eight non-exclusive, non-determinative "potential indicators of fraud" which it drew from arguments made by the IRS, from two other cases involving allegedly fraudulent practices by BDO and from an unrelated IRS enforcement action against another accounting firm. R.178 at 23. 4 Based on these cases and other factors that the IRS had submitted were indicative of fraud, the district court arrived at the following eight factors to guide its in camera review of each of the 267 documents:
(1) the marketing of pre-packaged transactions by BDO; (2) the communication by the Intervenors to BDO with the purpose of engaging in a pre-arranged transaction developed by BDO or [a] third party with the sole purpose of reducing taxable income; (3) BDO and/or the Intervenors attempting to conceal the true nature of the transaction; (4) knowledge by BDO, or a situation where BDO should have known, that the Intervenors lacked a legitimate business purpose for entering into the transaction; (5) vaguely worded consulting agreements; (6) failure by BDO to provide services under the consulting agreement yet receipt of payment; (7) mention of the COBRA transaction; and (8) use of boiler-plate documents.

R.178 at 23. The court further noted that the presence of these factors alone would not be sufficient to establish a prima facie case of fraud. See id. at 23-24. Rather, the potential indicators of fraud were intended to serve merely as guideposts. See id. at 24. The ultimate question of whether a prima facie showing of crime or fraud had been made with respect to a particular document was to be determined under the totality of circumstances.

Based on this review, the district court held that, with the exception of Document A-40, the IRS had failed to make a prima facie showing of a crime or fraud. Id. at 24. Thus, the district court upheld the Intervenors' claim of privilege with respect to 266 of the 267 documents, although it did not specify which privilege (attorney-client or tax practitioner) applied to each document. See id. at 13-14, 29.

After finding prima facie evidence that Document A-40 fell within the crime-fraud exception, the district court permitted the Intervenors to provide an explanation that would negate the evidence of crime or fraud. Id. at 24. The Intervenors provided their explanation to the court and the IRS responded. On May 17, 2005, after finding the Intervenors' explanation insufficient to rebut the prima facie evidence of crime or fraud, the district court ruled that Document A-40 fell within the crime-fraud exception to the tax practitioner or attorney-client privilege. R.190 at 10.

After the district court issued its final ruling with respect to Document A-40, the Court of Appeals for the Second Circuit reversed the decision of the United States District Court for the Southern District of New York in Denney v. Jenkens & Gilchrist, 340 F.Supp.2d 338 (S.D. N.Y. 2004). See Denney v. BDO Seidman, L.L.P., 412 F.3d 58, 66 (2d Cir. 2005). The Intervenors moved for reconsideration under Rule 60(b) of the Federal Rules of Civil Procedure, arguing that, because the district court had relied on Denney when establishing the factors that would guide its in camera review of each document, the court should reexamine its earlier ruling. R.210 at 2-3. The district court denied the motion, holding that the Second Circuit's decision did not affect the controlling law in this case. Id. at 3. The court added that its finding of prima facie evidence of crime or fraud was based on the totality of the circumstances, an inquiry guided, but not controlled, by the eight factors it previously had identified. Id. at 6.



C. BDO's Privilege Claims

While its clients were seeking to intervene to protect their claims of privilege, BDO asserted its own claims of attorney-client privilege and work product protection with respect to 110 documents. The IRS responded that the documents were neither protected attorney-client communications nor work product, and, even if they were, the documents fell within the crime-fraud exception. R.127 at 2. After conducting an in camera inspection of each document, the district court determined that 103 of the documents were within the attorney-client privilege and that one other document, though not covered by the attorney-client privilege, fell within the work product doctrine. Id. at 3-9. However, the court concluded that six documents, as submitted to the court in redacted form, were not within the attorney-client privilege and ordered their disclosure as so redacted. Id. at 7. Based on the same in camera review, the district court found no evidence that the communications in 104 documents protected by the attorney-client privilege or work product doctrine were made to further a crime or fraud. Id. at 10.

One of the 104 documents that the district court had found to fall within the attorney-client privilege was a memorandum written by Michael Kerekes ("Kerekes Memorandum"). Kerekes was a lawyer and partner at BDO. In August 2000, he wrote a memorandum to BDO's outside counsel, David Dreier, a tax attorney with the law firm of White & Case LLP, requesting legal advice on pending IRS regulations. In January 2001, Donna Guerin, an attorney at the law firm of Jenkens & Gilchrist, received a copy of the memorandum under circumstances that remain the subject of dispute. 5 At the time attorney Guerin received the Kerekes Memorandum, Jenkens & Gilchrist did not represent BDO, but these two entities, one an accounting firm and the other a law firm, serviced jointly clients on the same or related matters. According to attorney Guerin, she received the letter from BDO as input into an opinion letter regarding tax shelters that Jenkens & Gilchrist was preparing for both BDO and their common clients. Although BDO and Jenkens & Gilchrist subsequently were co-defendants in civil litigation, see, e.g., Denney v. Jenkens & Gilchrist, 340 F.Supp.2d 338, there was no litigation pending against BDO or Jenkens & Gilchrist at the time attorney Guerin received the Kerekes Memorandum.

After the district court's ruling on BDO's claim of privilege for the 110 documents, the IRS received the Kerekes Memorandum from Jenkens & Gilchrist in response to a subpoena. Upon viewing the memorandum, the IRS requested the court reconsider its privilege ruling with respect to the Kerekes Memorandum. The IRS asserted that the document fell within the crime-fraud exception to the attorney-client privilege or, alternatively, that the privilege had been waived. Based on its prior in camera review of the document, the district court rejected the IRS' claim that the Kerekes Memorandum fell within the crime-fraud exception. R.180 at 3-4. The court noted that, even though the contents of the Kerekes Memorandum were new to the IRS, they were not new to the court, and it had considered the arguments presented by the IRS in its prior in camera review of the Kerekes Memorandum. The district court further held that disclosure of the Kerekes Memorandum to attorney Guerin did not waive BDO's claim of privilege because the memorandum related to a common legal interest shared by BDO and Jenkens & Gilchrist and therefore fell within the common interest doctrine. Id. at 6. The district court added that it would reach the same conclusion even if the common interest doctrine did not apply because it had found ample precedent to sustain the privilege as an unintentional disclosure. Id.


II DISCUSSION


The IRS timely appealed the district court's ruling with respect to the Kerekes Memorandum. The IRS contends that BDO waived any claim of privilege with respect to the memorandum when it disclosed the document to attorney Guerin. The IRS submits that the common interest doctrine does not apply because the communication was not made in anticipation of litigation. It further contends that the disclosure was voluntary, and, therefore, BDO cannot claim that the privilege is preserved because any disclosure was inadvertent. Alternatively, the IRS contends that the district court erred by not reconsidering its ruling that there was no evidence of crime or fraud in connection with the Kerekes Memorandum after it found such evidence with respect to Document A-40.

The IRS also appeals the district court's ruling that the tax shelter exception to the tax practitioner privilege, 26 U.S.C. §7525(b) (2000), does not apply to the 267 documents for which the Intervenors claimed the privilege. The IRS contends that the burden was on the Intervenors to prove that the tax shelter exception did not apply, a burden the IRS claims the Intervenors did not meet.

The Intervenors cross-appeal the district court's finding of prima facie evidence of crime or fraud with respect to Document A-40. The Intervenors submit that the district court's finding was in error because the IRS failed to make a prima facie showing of each element of a particular crime or common law fraud.



A. The Kerekes Memorandum

We first shall address whether the district court erred in sustaining BDO's claim of attorney-client privilege under the common interest doctrine and in rejecting the IRS' position that the Kerekes Memorandum fell within the crime-fraud exception to the attorney-client privilege.

We review all necessary findings of fact and all applications of law to fact in connection with the district court's ruling on a privilege claim for clear error. See United States v. Frederick [ 99-1 USTC ¶50,465], 182 F.3d 496, 499 (7th Cir. 1999) (application of law to fact); United States v. Evans, 113 F.3d 1457, 1461 (7th Cir. 1997) (findings of fact). We shall reverse only if, on review of the entire evidence, we are "left with the definite and firm conviction that a mistake has been committed." Malachinski v. Comm'r [ 2001-2 USTC ¶50,695], 268 F.3d 497, 505 (7th Cir. 2001) (quoting Coleman v. Comm'r [ 94-1 USTC ¶50,090], 16 F.3d 821, 824 (7th Cir. 1994)) (internal quotation marks omitted). On the other hand, the scope of a privilege is a question of law that we review de novo. See BDO II [ 2003-2 USTC ¶50,582], 337 F.3d at 809. We review a district court's decision regarding the crime-fraud exception for an abuse of discretion. United States v. Al-Shahin, 474 F.3d 941, 946 (7th Cir. 2007).

In federal courts, except when state law supplies the applicable rule of law, the attorney-client privilege is "governed by the principles of the common law as [it] may be interpreted by the courts of the United States in the light of reason and experience." Fed. R. Evid. 501. Although it ultimately was not adopted by Congress, the rule of attorney-client privilege promulgated by the Supreme Court in 1972 as part of the Proposed Federal Rules of Evidence has been recognized "as a source of general guidance regarding federal common law principles." In re Grand Jury Investigation, 399 F.3d 527, 532 (2d Cir. 2005); see also 3 Jack B. Weinstein & Margaret A. Berger, Weinstein's Federal Evidence §503.02 (Joseph M. McLaughlin, ed., 2d ed. 2006). Proposed Rule 503 provided:
A client has a privilege to refuse to disclose and to prevent any other person from disclosing confidential communications made for the purpose of facilitating the rendition of professional legal services to the client, (1) between himself or his representative and his lawyer or his lawyer's representative, or (2) between his lawyer and the lawyer's representative, or (3) by him or his lawyer to a lawyer representing another in a matter of common interest, or (4) between representatives of the client or between the client and a representative of the client, or (5) between lawyers representing the client.

See Proposed Fed. R. Evid. 503(b), 56 F.R.D. 183, 236 (1972). Put simply, in order for the attorney-client privilege to attach, the communication in question must be made: (1) in confidence; (2) in connection with the provision of legal services; (3) to an attorney; and (4) in the context of an attorney-client relationship.

The purpose of the privilege is to "encourage full disclosure and to facilitate open communication between attorneys and their clients." BDO II [ 2003-2 USTC ¶50,582], 337 F.3d at 810. Open communication assists lawyers in rendering legal advice, not only to represent their clients in ongoing litigation, but also to prevent litigation by advising clients to conform their conduct to the law and by addressing legal concerns that may inhibit clients from engaging in otherwise lawful and socially beneficial activities. See Frederick [ 99-1 USTC ¶50,465], 182 F.3d at 500. The cost of these benefits is the withholding of relevant information from the courts. BDO II [ 2003-2 USTC ¶50,582], 337 F.3d at 811.

Recognizing the inherent tension between the beneficial goals of the attorney-client privilege and the courts' right to every person's evidence, the courts have articulated the following principles to inform our analysis of the scope of the common interest doctrine:
(1) "[C]ourts construe the privilege to apply only where necessary to achieve its purpose." Id.

(2) Only those communications which "reflect the lawyer's thinking [or] are made for the purpose of eliciting the lawyer's professional advice or other legal assistance" fall within the privilege. Frederick [ 99-1 USTC ¶50,465], 182 F.3d at 500.

(3) Because one of the objectives of the privilege is assisting clients in conforming their conduct to the law, litigation need not be pending for the communication to be made in connection to the provision of legal services. See United States v. Schwimmer, 892 F.2d 237, 243-44 (2d Cir. 1989).

(4) Because "the privilege is in derogation of the search for truth," any exceptions to the requirements of the attorney-client privilege "must be strictly confined." In re Grand Jury Proceedings (Thullen) [ 2000-2 USTC ¶50,598], 220 F.3d 568, 571 (7th Cir. 2000).

Although occasionally termed a privilege itself, the common interest doctrine is really an exception to the rule that no privilege attaches to communications between a client and an attorney in the presence of a third person. See Robinson v. Texas Auto. Dealers Ass'n, 214 F.R.D. 432, 443 (E.D. Tex. 2003). In effect, the common interest doctrine extends the attorney-client privilege to otherwise nonconfidential communications in limited circumstances. For that reason, the common interest doctrine only will apply where the parties undertake a joint effort with respect to a common legal interest, and the doctrine is limited strictly to those communications made to further an ongoing enterprise. See Evans, 113 F.3d at 1467. Other than these limits, however, the common defense doctrine does not contract the attorney-client privilege. Thus, communications need not be made in anticipation of litigation to fall within the common interest doctrine. 6 Applying the common interest doctrine to the full range of communications otherwise protected by the attorney-client privilege encourages parties with a shared legal interest to seek legal "assistance in order to meet legal requirements and to plan their conduct" accordingly. See In re Regents of the Univ. of California, 101 F.3d 1386, 1390-91 (Fed. Cir. 1996). This planning serves the public interest by advancing compliance with the law, "facilitating the administration of justice" and averting litigation. Id. at 1391. Reason and experience demonstrate that joint venturers, no less than individuals, benefit from planning their activities based on sound legal advice predicated upon open communication.

Having determined that BDO is not barred from asserting attorney-client privilege under the common interest doctrine simply because it was not shared under the threat of litigation, we next shall determine whether the district court's ruling on BDO's claim of privilege was clearly erroneous. The district court recognized that the scope of the common interest doctrine is limited to a common legal interest to which the parties formed a common strategy. See R.180 at 6. The district court concluded that BDO and Jenkens & Gilchrist, acting as joint venturers, shared a common legal interest "in ensuring compliance with the new regulation issued by the IRS," id., and in making sure that they could defend their product against potential IRS enforcement actions.

There was, moreover, sufficient evidence to support the district court's determination in this regard. The Kerekes Memorandum originally was addressed to BDO's outside counsel, White & Case, and it sought advice on a legal question. At the time attorney Guerin received the Kerekes Memorandum, BDO and Jenkens & Gilchrist jointly serviced a number of common clients with respect to certain tax products. According to Guerin, Robert Greisman, a partner at BDO, sent her the memorandum as part of BDO's effort to coordinate with Jenkens & Gilchrist a common legal position that BDO and Jenkens & Gilchrist would communicate later to these common clients. 7

Nonetheless, the IRS asserts that, because the purpose of the communication was to coordinate the content of the message to their common clients, the communication between BDO and Jenkens & Gilchrist was not made for the purpose of securing advice with respect to a common legal interest and, therefore, was not within the scope of the common interest doctrine. However, even if the ultimate reason for sharing the Kerekes Memorandum was to advance the joint interests of BDO and Jenkens & Gilchrist in their representations to their common clients, it does not follow that the communication itself was not made to secure legal advice with respect to a common legal interest. Communications do not cease to be for the purpose of receiving legal services just because the recipient intended to use the fruits of the legal services to guide its relations with customers. In essence, through the memorandum, two joint venturers, BDO and Jenkens & Gilchrist, undertook a consultation between their respective in-house counsel and BDO's outside counsel with respect to the legality of the proposed financial course of action they would recommend to their common clients. This effort, as the district court recognized, was clearly within the scope of the common interest doctrine.

The district court's findings do not leave us "with the definite and firm conviction that a mistake has been committed." Malachinski [ 2001-2 USTC ¶50,695], 268 F.3d at 505 (quoting Coleman [ 94-1 USTC ¶50,090], 16 F.3d at 824) (internal quotation marks omitted). The district court's finding that the communication of the Kerekes Memorandum to attorney Guerin was within the common interest doctrine was not clearly erroneous. Further, because the privileged status of communications falling within the common interest doctrine cannot be waived without the consent of all of the parties, Jenkens & Gilchrist's subsequent voluntary disclosure of the Kerekes Memorandum in response to the IRS' subpoena did not waive BDO's claim of privilege. See John Morrell & Co. v. Local Union 304A of the United Food & Commercial Workers, AFL-CIO, 913 F.2d 544, 556 (8th Cir. 1990); In re Grand Jury Subpoenas (89-3 & 89-4, John Doe 89-129), 902 F.2d 244, 248 (4th Cir. 1990); see also Advisory Committee's Note, Proposed Fed. R. Evid. 503(b), 56 F.R.D. 183, 239 (1972). 8 9



B. Document A-40

We now address whether the district court erred when it held that the Intervenors could not assert a privilege with respect to Document A-40 because the document fell within the crime-fraud exception to the attorney-client and tax practitioner privileges. We review a district court's decision regarding the crime-fraud exception for an abuse of discretion. Al-Shahin, 474 F.3d at 946.

The crime-fraud exception places communications made in furtherance of a crime or fraud outside the attorney-client privilege. United States v. Zolin [ 89-1 USTC ¶9380], 491 U.S. 554, 563 (1989). The exception is based on the recognition that the privilege necessarily will "protect the confidences of wrongdoers." Id. at 562. This cost is accepted as necessary to achieve the privilege's purpose of promoting the "broader public interests in the observance of law and the administration of justice." Id. (quoting Upjohn Co. v. United States [ 81-1 USTC ¶9138], 449 U.S. 383, 389 (1981)) (internal quotation marks omitted). However, when the advice sought relates "not to prior wrongdoing, but to future wrongdoing," the privilege goes beyond what is necessary to achieve its beneficial purposes. Id. at 562-63 (quoting 8 John Henry Wigmore, Evidence In Trials At Common Law §2298 (John T. McNaughton rev. 1961)) (internal quotation marks omitted) (emphasis in original).

To invoke the crime-fraud exception, the party seeking to abrogate the attorney-client privilege must present prima facie evidence that "gives colour to the charge" by showing "some foundation in fact." Al-Shahin, 474 F.3d at 946 (quoting Clark v. United States, 289 U.S. 1, 15 (1933)) (internal quotation marks omitted). The party seeking to abrogate the privilege meets its burden by bringing forth sufficient evidence to justify the district court in requiring the proponent of the privilege to come forward with an explanation for the evidence offered against it. See United States v. Davis, 1 F.3d 606, 609 (7th Cir. 1993). The privilege will remain "if the district court finds [the] explanation satisfactory." Id.

BDO and the Intervenors would require the party seeking to abrogate the attorney-client privilege to make out a prima facie case of each element of a particular crime or common law fraud to invoke the crime-fraud exception. Such a burden is inconsistent with our requirement that the party seeking to abrogate the privilege need only "give colour to the charge" by showing "some foundation in fact." Al-Shahin, 474 F.3d at 946 (quoting Clark, 289 U.S. at 15) (internal quotation marks omitted). The approach advocated by BDO and the Intervenors reflects the view of some circuits, which require enough evidence of crime or fraud to support a verdict in order to invoke the crime-fraud exception. See In re Feldberg, 862 F.2d 622, 625 (7th Cir. 1988). We expressly have rejected that approach. See id.

We therefore must determine whether the district court abused its discretion in determining that the IRS had come forward with sufficient evidence to give color to its charge that Document A-40 was a communication in furtherance of a crime or fraud. The district court engaged in a document-by-document, in camera inspection of all 267 documents for which the Intervenors claimed a privilege to determine whether they fell within the crime-fraud exception. R.178 at 18. In determining whether there was prima facie evidence of criminal or fraudulent activity, the court looked at the totality of the circumstances, including the eight "potential indicators of fraud" discussed above. 10 See id. at 23. Based on the totality of circumstances, the district court found no prima facie evidence of crime or fraud with respect to 266 of the documents, a ruling that the IRS does not challenge.

Applying the same totality of the circumstance approach, the district court found prima facie evidence of crime or fraud with respect to Document A-40 and instructed the Intervenors to come forward with an explanation that would rebut the evidence. Id. at 24. The Intervenors responded and the IRS provided further evidence to rebut the Intervenors' response. After considering all of the evidence, the district court concluded that the Intervenors had failed to rebut the prima facie showing of crime or fraud. R.190 at 10.

The Intervenors now challenge the district court's ruling. First, the Intervenors point to the decision of the United States Court of Appeals for the Second Circuit in Denney v. BDO Seidman, L.L.P., 412 F.3d 58 (2005), which reversed Denney v. Jenkens & Gilchrist, one of the cases from which the district court derived its potential indicators of fraud. 11 See Denney v. BDO Seidman, 412 F.3d at 66. The Second Circuit's decision in Denney v. BDO Seidman does not draw into question the district court's totality of the circumstances analysis in this case.

In Denney v. BDO Seidman, the Second Circuit held that the District Court for the Southern District of New York had erred when it concluded, without factual support in the record, that the parties had agreed that their agreements were mutually fraudulent. Denney v. BDO Seidman, 412 F.3d at 66. The Second Circuit's decision did not address whether facts such as mention of the COBRA transaction, vaguely worded consulting agreements or failure to provide services under the consulting agreements, i.e., the factors that the district court in the present case derived from Denney v. Jenkens & Gilchrist, would be indicative of fraud. Moreover, the district court in the present case did not place dispositive weight on any one of the "potential indicators of fraud," nor did the court limit its analysis to the eight potential indicators. R.190 at 5.

The remainder of the Intervenors' challenge asserts that the IRS could not defeat the Intervenors' claim of privilege under the crime-fraud exception because the IRS had failed to allege a particular offense or the elements of common law fraud, and, in any event, the Intervenors had come forward with rebuttal evidence showing a legitimate purpose underlying the transactions in question. As we already have noted, our case law does not require a party seeking to invoke the crime-fraud exception to allege a particular offense or to make a prima facie showing with respect to each element of common law fraud. The IRS only was required to present sufficient evidence to "give colour to the charge" that the communication was made in furtherance of a crime or fraud by showing "some foundation in fact." Al-Shahin, 474 F.3d at 946 (quoting Clark, 289 U.S. at 15) (internal quotation marks omitted).

After concluding that there had been a prima facie showing that Document A-40 was a communication made in furtherance of a crime or fraud, the district court gave the Intervenors the opportunity to explain the communication. The Intervenors offered an explanation, but the district court did not find it satisfactory. Nor was the district court required to find the explanation satisfactory. Thus, the district court did not abuse its discretion when it concluded that the IRS had made a prima facie showing of crime or fraud which the Intervenors failed to explain satisfactorily.



C. Tax Practitioner Privilege

We now shall address whether the district court correctly applied the tax practitioner privilege found in §7525 to the facts of this case. Prior to 2004, §7525 provided:
§7525. Confidentiality privileges relating to taxpayer communications

(a) Uniform application to taxpayer communications with federally authorized practitioners. --

(1) General rule. --With respect to tax advice, the same common law protections of confidentiality which apply to a communication between a taxpayer and an attorney shall also apply to a communication between a taxpayer and any federally authorized tax practitioner to the extent the communication would be considered a privileged communication if it were between a taxpayer and an attorney.

(2) Limitations. Paragraph (1) may only be asserted in --

(A) any noncriminal tax matter before the Internal Revenue Service; and

(B) any noncriminal tax proceeding in Federal court brought by or against the United States.

(3) Definitions. For purposes of this subsection --

(A) Federally authorized tax practitioner. The term "federally authorized tax practitioner" means any individual who is authorized under Federal law to practice before the Internal Revenue Service if such practice is subject to Federal regulation under section 330 of title 31, United States Code.

(B) Tax advice. The term "tax advice" means advice given by an individual with respect to a matter which is within the scope of the individual's authority to practice described in subparagraph (A).

(b) Section not to apply to communications regarding corporate tax shelters. The privilege under subsection (a) shall not apply to any written communication between a federally authorized tax practitioner and a director, shareholder, officer, or employee, agent, or representative of a corporation in connection with the promotion of the direct or indirect participation of such corporation in any tax shelter (as defined in section 6662(d)(2)(C)(iii)).

26 U.S.C. §7525 (2000). To determine whether the district court correctly applied §7525, we first must address: (1) the elements of the privilege and, specifically, whether the "exception" to the privilege for communications related to tax shelters is an element of the privilege or whether it is a true exception; and (2) the scope of the tax shelter exception.



1. Elements of the Tax Practitioner Privilege

As with all assertions of privilege, the proponent of the tax practitioner privilege must establish each element of the privilege. See BDO II [ 2003-2 USTC ¶50,582], 337 F.3d at 811. On the other hand, with respect to exceptions to the privilege, the burden rests on the party seeking to overcome an otherwise valid claim of privilege to prove preliminary facts that would support a finding that the claimed privilege falls within an exception. See Charles Alan Wright & Kenneth W. Graham, Jr., 24 Federal Practice & Procedure §5507, at 571 (1986).

The IRS submits that §7525(b)'s ("subsection (b)") tax shelter "exception" to the tax practitioner privilege is not an exception to the privilege, but an element of the privilege itself. Thus, under the IRS' theory, the party asserting the privilege must establish that the communication was not made, in the words of the statute, "in connection with the promotion of the direct or indirect participation ... in any tax shelter." 26 U.S.C. §7525(b) (2000). The Intervenors, on the other hand, contend that the tax shelter "exception" is a true exception to the tax practitioner privilege, and, consequently, the opponent of the privilege bears the burden of establishing that the communication falls within the exception.

Prior to the American Jobs Creation Act of 2004, Pub. L. No. 108-357, 118 Stat. 1418 (2004), 12 subsection (b) read:
The privilege under subsection (a) shall not apply to any written communication between a federally authorized tax practitioner and a director, shareholder, officer, or employee, agent, or representative of a corporation in connection with the promotion of the direct or indirect participation of such corporation in any tax shelter (as defined in section 6662(d)(2)(C)(iii)).

26 U.S.C. §7525(b) (2000). The plain wording of this subsection evinces a clear intent to treat the rule embodied in subsection (b) as an exception to the tax practitioner privilege. The first sentence of subsection (b) refers to "the privilege under subsection (a)." Id. The fact that the privilege does not apply to the class of communications described in subsection (b) presupposes the existence of an otherwise applicable privilege.

This conclusion is supported further by the structure of §7525 as a whole. Section 7525(a) ("subsection (a)") sets out a general rule, id. §7525(a)(1), specific limitations on the situations in which that rule may be asserted, id. §7525(a)(2), and defines key terms that further limit the scope of the rule, id. §7525(a)(3). By placing some specific limitations on the general rule together with the general rule in subsection (a) while placing other limitations on the general rule in subsection (b), the structure of the statute suggests that not all limitations to the privilege are of the same character. The most natural reading of the section as a whole is to consider those limitations to the scope of the general rule found in subsection (a) to constitute elements of the privilege and those limitations found in subsection (b) as exceptions to the application of that privilege.

The rationale underlying the tax shelter exception further supports this conclusion. Subsection (b) originally was added in conference committee. The report of the conference committee explained that "[t]he Conferees [did] not understand the promotion of tax shelters to be part of the routine relationship between a tax practitioner and a client." H.R. Rep. No. 105-599 at 269 (1998) (Conf. Rep.). This rationale is analogous to the rationale underlying the crime-fraud exception, i.e., advice given to further future crime or fraud goes beyond what is necessary to achieve the beneficial aims of the privilege. See Zolin [ 89-1 USTC ¶9380], 491 U.S. at 562. Thus, in both situations, the rationale underlying the limitation on the claimed privilege goes to the necessity of the communications to achieve the beneficial aims of the privilege.

Thus, based on the text, structure and purpose of subsection (b), it is clear that the tax shelter "exception" is a true exception to the tax practitioner privilege. As with any other exception to a claimed privilege, the burden rests on the opponent of the privilege to prove preliminary facts that would support a finding that the claimed privilege falls within an exception. Cf. Wright & Graham, 24 Federal Practice & Procedure §5507, at 571. As with the crime-fraud exception, the opponent meets this burden by bringing forth enough evidence to show "some foundation in fact" that the exception applies. Cf. Al-Shahin, 474 F.3d at 946 (quoting Clark, 289 U.S. at 15) (internal quotation marks omitted).



2. Scope of the Tax Shelter Exception

The Intervenors contend that the tax shelter exception found in subsection (b) applies only to tax shelters that shelter corporate taxes. The Intervenors rely on the subsection's heading and the legislative history of subsection (b) to support this contention. The IRS, on the other hand, submits that the tax shelter exception, as it existed in 2002, was not so limited. To support its position, the IRS relies on the text of the statute and the legislative history of subsection (b). The question thus becomes whether the tax shelter to which the communication relates must shelter corporate, as opposed to individual, taxes.

We begin with the text of the statute. "Only if the plain language of the statute is inconclusive or clearly contravenes expressed congressional intent do we look beyond the words themselves." Oneida Tribe of Indians v. Wisconsin, 951 F.2d 757, 761 (7th Cir. 1991). To discern the scope of the tax shelter exception, we must look to the elements of the exception. To fall within subsection (b), a communication must be: (1) written; (2) "between a federally authorized tax practitioner and a director, shareholder, officer, or employee, agent, or representative of a corporation"; and (3) made "in connection with the promotion of the direct or indirect participation of such corporation in any tax shelter" as defined by 26 U.S.C. §6662(d)(2)(C)(ii). 13 26 U.S.C. §7525(b) (2000). The plain text appears to apply to any tax shelter falling within the definition of a tax shelter found at 26 U.S.C. §6662(d)(2)(C)(ii), and at least one district court has found that the tax shelter exception applies to individuals when the tax shelter required the participation of a corporation. See Doe v. Wachovia Corp. [ 2003-2 USTC ¶50,558], 268 F.Supp.2d 627 (W.D. N.C. 2003).

The Intervenors contend that subsection (b)'s heading, which, prior to the 2004 amendments, read "[s]ection not to apply to communications regarding corporate tax shelters," see 26 U.S.C. §7525(b) (2000), demonstrated a clear congressional intent to limit subsection (b) to tax shelters for corporate income taxes. As a general rule, "[t]he title of a statute ... cannot limit the plain meaning of the text." Pennsylvania Dep't of Corr. v. Yeskey, 524 U.S. 206, 212 (1998) (quoting Bhd. of R.R. Trainmen v. Baltimore & Ohio R.R. Co., 331 U.S. 519, 528-29 (1943)) (internal quotation marks omitted) (omissions in original). A statute's heading is "of use only when [it] shed[s] light on some ambiguous word or phrase." Yeskey, 524 U.S. at 212 (quoting Bhd. of R.R. Trainmen, 331 U.S. at 529) (internal quotation marks omitted) (alterations in original). As noted above, subsection (b) is not ambiguous. If anything, the heading adds ambiguity to subsection (b). Absent this heading, the subsection would not seem limited to corporate tax shelters at all.

Although the section heading suggests that Congress had corporate tax shelters in mind, "the fact that a statute can be applied in situations not expressly anticipated by Congress" demonstrates breadth, not ambiguity. Yeskey, 524 U.S. at 212 (quoting Sedima, S.P.L.R. v. Imrex Co., 473 U.S. 479, 499 (1985)) (internal quotation marks omitted). The plain language of subsection (b) is certainly broad because it applies to "any written communication ... in connection with the promotion of the direct or indirect participation of such corporation in any tax shelter," 26 U.S.C. §7525(b) (2000) (emphasis added), but such breadth does not make the text ambiguous.

Further evidence of the intended breadth of the statute is found in its reference to the relatively broad "tax shelter" definition found in 26 U.S.C. §6662(d)(2)(C)(ii) as opposed to the narrower definitions found in the pre-2004 version of 26 U.S.C. §6111. 14 The definition of "tax shelter" found at 26 U.S.C. §6662(d)(2)(C)(ii) defines a "tax shelter" as any partnership, entity, plan or arrangement, a significant purpose of which is the avoidance or evasion of Federal income tax. 26 U.S.C. §6662(d)(2)(C)(ii). 15

Because subsection (b) is not ambiguous, we need not look to legislative history to determine its meaning. However, even if we were to consider legislative history, we would not find it useful because that history creates more ambiguity than it eliminates. Even the legislative history that the Intervenors cite in support of its argument that subsection (b) is limited to corporate taxes raises more questions than it answers. The Conference Report upon which the Intervenors rely states that the tax shelters to which subsection (b) applies "include, but are not limited to, those required to be registered as confidential corporate tax shelter arrangements under section 6111(d)." H.R. Rep. No. 105-599 at 269 (1998) (Conf. Rep.) (emphasis added). All this statement tells us is that the tax shelters referenced in subsection (b) reach a broader class of arrangements than the confidential corporate tax shelters then defined in §6111(d). It says nothing of how much broader the exception is intended to sweep.

The rest of the legislative history is equally unenlightening. Subsection (b) was added to the bill in conference committee and had not been part of the prior debate on the legislation. After subsection (b) was added, one of the key architects of the bill expressed concern that the privilege itself would lead to confusion and litigation. See 144 Cong. Rec. S7626 (daily ed. July 8, 1998) (statement of Sen. Moynihan). Confusion regarding the scope of the tax shelter exception was not limited to members of Congress; tax practitioners themselves expressed confusion as to the breadth of the tax shelter exception. See Sheryl Stratton, Accountant-Client Privilege: Unclear from the Start, 80 Tax Notes 7 (July 6, 1998).

Next, the Intervenors contend that the tax shelter exception applies only to communications "when the corporation is the taxpayer." Intervenor's Br. at 20 (italics in original). According to the Intervenors, communication between a federally authorized tax practitioner and an S corporation's officers or agents in connection with the S corporation's participation in a tax shelter therefore would not fall within the tax shelter exception. The Intervenors assert that S corporations are not taxpayers and that "corporation" in this context means a C corporation. 16 Id. at 20-21.

We cannot accept this argument. S corporations are both taxpayers and corporations under the IRC. 17 Although S corporations are not subject to taxes imposed by subtitle A, chapter 1 of the IRC, see id. §1363(a), this exception merely means that they do not pay directly income taxes. Section 1363 does not exempt S corporations from other taxes imposed by the IRC, such as employment taxes (subtitle C) and excise taxes (subtitles D and E). Notably, the IRC defines "taxpayers" as "any person subject to any internal revenue tax." Id. §7701(a)(14) (emphasis added). 18 This definition applies throughout the IRC, except when "otherwise distinctly expressed or manifestly incompatible" with the intent of the statute. Id. §7701(a). Section 7525 does not express distinctly any intent to define "taxpayer" only to include income tax payers, nor would it be "manifestly incompatible" with §7525 to extend the tax practitioner privilege to advice given in connection with taxes other than income taxes.

Additionally, S corporations must calculate their taxable income, id. §1363(b), and file a return, id. §6037(a). Further, the S corporation's taxable income is calculated in the same manner as an individual's, with certain exceptions which are not relevant here. Id. §1363(b). Indeed, apart from non-separately computed income or losses, which are not relevant here, the S corporation calculates the income or losses passed through to its shareholders by calculating the S corporation's gross income and subtracting "the deductions allowed to the corporation." Id. §1366(a)(2) (emphasis added).

The Intervenors provide no support for their argument that the term "corporation," as used in §7525(b) only means "C corporation." The IRC itself defines an S corporation as a "small business corporation for which an election under section 1362(a) is in effect," id. §1361(a)(1); it defines a C corporation as "a corporation which is not an S corporation," id. §1361(a)(2). This usage alone suggests that, when a particular section of the IRC is intended to apply only to C corporations, Congress will use that term, rather than the generic "corporation." Additionally, the IRC and implementing Treasury Regulations define "corporation" for federal tax purposes as "a business entity organized under a Federal or State statute ... if the statute describes or refers to the entity as incorporated or as a corporation." 26 C.F.R. §301.7701-2(b)(1).

The regulations relied upon by the Intervenors in support of their argument that "corporation," as used in subsection (b), means "C corporation" are inapposite. These regulations implement §6111, which, as we have noted above, applies to a much narrower definition of "tax shelter" than the one applied in subsection (b). Congress chose to define "tax shelter" for purposes of subsection (b) using a broader definition than that found in §6111. However narrowly the cited regulations may confine the application of §6111, they are of little relevance in defining the breadth of the definition found in 26 U.S.C. §6662(d)(2)(C)(ii). 19

Finally, we address the Intervenors' contention that application of the tax shelter exception to tax shelters that do not involve corporate income taxes would "consume[] the general rule" by destroying the privilege any time a corporation participates in a tax shelter. Intervenors' Br. at 20. The Intervenors submit that, if the tax shelter exception extends to individual income taxes, any time a corporation, such as a banking corporation or investment corporation, is involved in the tax shelter, the general rule of tax practitioner privilege will be negated.

A close look at the tax shelter exception makes clear that the Intervenors' submission overstates significantly the scope of that exception. First, the exception applied only to written communications. Second, the written communication must have been between a federally authorized tax practitioner and a director, shareholder, officer, or employee, agent, or representative of a corporation. Third, the written communication must have been "in connection with the promotion of the direct or indirect participation of such corporation in any tax shelter," as defined in §6662(d)(2)(C)(ii). 26 U.S.C. §7525(b) (2000).

Because the exception is limited to written communications, oral communications between a tax practitioner and the corporate agent remain within the general rule of privilege. Further, because the tax shelter exception applies only when the written communication relates to the corporation's direct or indirect participation in a particular type of tax shelter, i.e., one meeting the definition found in §6662(d)(2)(C)(ii), the tax shelter exception will not affect any otherwise privileged communication that does not relate to a transaction falling within that definition.

Most importantly, the tax shelter exception applies only to communications between the tax practitioner and the corporate agent. As noted earlier, the tax practitioner privilege is limited to communications that would be privileged if they had been made to an attorney. 20 The attorney-client privilege protects only those statements made by the client to the attorney in confidence. See Evans, 113 F.3d at 1462. A communication is not made in confidence when the client intends that the communication shall be disclosed to unprivileged third parties. See 2 Christopher B. Mueller & Laird C. Kirkpatrick, Federal Evidence §186, at 324 (2d ed. 1994); see also Proposed Fed. R. Evid. §503(a)(4), 56 F.R.D. 183, 236 (1972) ("A communication is 'confidential' if not intended to be disclosed to third persons other than those to whom disclosure is in furtherance of the rendition of professional legal services to the client or those reasonably necessary for the transmission of the communication."). However, an exception to this general rule permits disclosure of confidential communications by the attorney to an expert retained for the purpose of rendering legal services. 2 Mueller & Kirkpatrick, Federal Evidence §186, at 324.

The tax practitioner privilege protects those communications which would be privileged if made to an attorney. See 26 U.S.C. §7525(a). This protection is embodied both in the general rule regarding confidential communications and in the exception for disclosures to experts retained to assist the tax practitioner. With respect to individual income taxpayers, the tax shelter exception has the effect of taking communications intended to be passed along in written form to corporate agents in connection with the corporation's participation in a tax shelter out of the exception for communications to third party experts retained to assist the tax practitioner. Such communications are subject to the general rule that communications to third parties are not privileged. For all other confidential communications between the individual income tax payer and its tax practitioner, both the general rule and the exception for communications to a retained expert apply.

Thus, we cannot accept the Intervenors' prediction that application of the tax shelter exception to individual income tax payers, as it relates to communications made before October 21, 2004, would swallow the general rule of tax practitioner privilege any time a corporation was involved in the shelter.



3. The District Court's Decision

We turn now to the district court's ruling that the tax shelter exception did not apply to the Intervenors' documents. It is unclear what legal standard the district court applied in assessing the applicability of the tax shelter exception to the communications at issue. The district court disposed of the matter in a footnote, in which it stated that, for the same reasons it found that the IRS' characterization of the Intervernors' conduct as falling within the crime-fraud exception, it did not find that the Intervenors engaged in tax shelters. See R.178 at 17 n.6. However, the tax shelter exception requires no showing of crime or fraud. Further, the record is unclear regarding what evidence, if any, was produced by the IRS to support its contention that the documents fell within the tax shelter exception. The IRS did contend that a significant purpose of the financial products purchased by the Intervenors was to avoid or evade federal income tax and the record reflects that some of the Intervenors had purchased the financial product through a corporation. R.135 at 11. However, the district court's decision does not indicate how these allegations fell short of establishing the applicability of the tax shelter exception.

Additionally, the district court did not note which claims of privilege were sustained based on the attorney-client privilege and which were sustained based on the tax practitioner privilege. See R.178 at 13-14, 29. Because we cannot evaluate the legal standard employed by the district court, remand is necessary. In re Grand Jury Proceedings (Thullen) [ 2000-2 USTC ¶50,598], 220 F.3d at 572. Thus, we must vacate the district court's ruling with respect to the applicability of the tax shelter exception and remand for further consideration.

On remand, for each of the 266 documents that the district court concluded to fall within a valid claim of privilege, the court should first determine whether the document falls within the attorney-client privilege, the tax practitioner privilege or both privileges. For those documents that would fall within the attorney-client privilege or both the attorney-client and tax practitioner privilege, no further analysis is required, as the tax shelter exception applies only to the tax practitioner privilege. See 26 U.S.C. §7525(b) (2000). For those documents falling solely within the tax practitioner privilege, the burden rests upon the IRS to come forward with sufficient evidence to demonstrate some foundation in fact that a particular document falls within the tax shelter exception. To meet this burden, the IRS must bring forward evidence that: (1) the communication relates to a tax shelter, as defined by §6662(d)(2)(C)(ii); (2) the communication was made by a director, shareholder, officer, or employee, agent, or representative of the corporation; and (3) the communication was made in connection with the promotion of the direct or indirect participation of the corporation in such tax shelter.


Conclusion


For the forgoing reasons, the decision of the district court is affirmed in part and vacated and remanded in part.

Affirmed in part, Vacated and Remanded in part.

1 Sections 6111 and 6112 of the IRC were amended by the American Jobs Creation Act of 2004, Pub. L. No. 108-357, §815, 118 Stat. 1418, 1581-83 (2004). The Act eliminated the distinction between §6111(c) tax shelters and other arrangements identified by the Secretary under §6112(b)(2) by replacing the terms "tax shelter" and "potentially abusive tax shelter" with "reportable transaction." Reportable transactions are "any transaction[s] with respect to which information is required to be included with a return or statement because ... such transaction is of a type which the Secretary determines as having a potential for tax avoidance or evasion." 26 U.S.C. §6707A. All reportable transactions must be reported to the IRS, see id. §6111(a) (2000 & Supp. IV 2004), and must satisfy the IRC's list-keeping requirements, see id. §6112(a).

2 Sections 6707 and 6708 also were amended by the American Jobs Creation Act, see Pub. L. No. 108-357, §§816-817, 118 Stat. 1418, 1583-84 (2004), but they continue to provide penalties for failure to comply with the registration and list-keeping requirements of §§6111 and 6112. See 26 U.S.C. §§6707 & 6708 (2000 & Supp. IV 2004).

3 See John and Jane Does Emergency Motion to Intervene, R.38; Richard and Mary Roes Emergency Motion to Intervene, R.42.

4 The first case to which the district court looked in deriving its potential indicators of fraud was Denney v. Jenkens & Gilchrist, 340 F.Supp.2d 338 (S.D. N.Y. 2004). That case involved a civil RICO class action in which the plaintiffs alleged that Jenkens & Gilchrist had developed and BDO and others had marketed a tax shelter known as the Currency Options Bring Reward Alternatives ( "COBRA"). BDO sought to enforce an arbitration clause in its consulting agreements. Based on what it deemed to be admissions by the parties, the court in Denney concluded that BDO and its clients had engaged in mutual fraud in connection with the consulting agreements to conceal the true purpose of the agreements: providing the clients with tax shelters advice. Id. at 346. Because the contracts were the product of mutual fraud between BDO and its clients, the arbitration clause was unenforceable. Id. at 347. The court based its conclusion that the contracts were mutually fraudulent on the vague language in the consulting agreements and its findings that BDO did not provide any of the consulting services described in the agreements. Id. at 346-47.

The next case the district court looked to in developing its potential indicators of fraud was Miron v. BDO Seidman, LLP, 342 F.Supp.2d 324 (E.D. Pa. 2004). Like Denney, Miron involved the enforceability of an arbitration clause in one of BDO's consulting agreements and related to the COBRA transaction. See id. at 327. The district court in Miron noted the factors that led the court in Denney to find that the consulting agreements had been the product of mutual fraud, but concluded that the consulting agreements at issue were factually distinguishable. See id. at 329-30. In particular, the court found that BDO had provided the services described in its consulting agreements. Id. The court in Miron noted also that, unlike the consulting agreements in Denney, in which the only identified goal was expanding business operations, the consulting agreements at issue were intended to limit also the clients' financial exposure on those expansions. Id. at 329. Based on these differences, the court concluded that the consulting agreements were not similarly suggestive of fraud. Id.

The third case to which the district court looked in arriving at its potential indicators of fraud was United States v. KPMG LLP [ 2004-1 USTC ¶50,281], 316 F.Supp.2d 30 (D. D.C. 2004). Unlike Denney and Miron, KPMG did not involve BDO. KPMG involved an action brought by the IRS to enforce summonses it issued to the accounting firm of KPMG as part of its investigation into KPMG's alleged promotion of, and participation in, tax shelters. Id. at 31-32. The court in KPMG held that boilerplate opinion letters provided to KPMG clients by the law firm of Brown & Wood were not protected by the attorney-client privilege because they had been provided as a part of "KPMG's marketing machine" rather than as reasoned legal advice. Id. at 40. The district court in the present action found the findings of the court in KPMG consistent with the IRS' allegation that BDO had engaged in the promotion of prepackaged tax shelters rather than individualized tax advice. See R.178 at 23.

5 Guerin received the memorandum by fax. She asserts that the memorandum was sent to her by Robert Greisman, a partner with BDO. Greisman contends that he does not remember faxing the memorandum to Guerin and that on the day it was faxed to her he was at a meeting at a hotel in Los Angeles. There is no record of a fax having been sent from the hotel to Jenkens & Gilchrist on that day and the document itself does not display the phone number of the origin of the fax. Further, the memorandum was not received in a single transmission. The last three pages of the memorandum were sent at around 3:20 p.m., with the balance of the memorandum, that is, the first portion of the memorandum, being sent in a separate transmission at around 4:00 p.m. In addition to the memorandum being sent out of order in two transmissions, the fax heading indicates that those portions of the memorandum sent at around 3:20 p.m. began at the second page of the transmission. The fax heading of the transmission sent around 4:00 p.m. indicates that the portion of the memorandum sent at that time began at the eighth page of the transmission. The balance of both transmissions does not appear in the record.

6 The weight of authority favors our conclusion that litigation need not be actual or imminent for communications to be within the common interest doctrine. At least five of our sister circuits have recognized that the threat of litigation is not a prerequisite to the common interest doctrine. See In re Grand Jury Subpoena (Custodian of Records, Newparent, Inc.), 274 F.3d 563, 572 (1st Cir. 2001); In re Regents of the Univ. of California, 101 F.3d 1386, 1390-91 (Fed. Cir. 1996); United States v. Aramony, 88 F.3d 1369, 1392 (4th Cir. 1996); United States v. Schwimmer, 892 F.2d 237, 244 (2d Cir. 1989); United States v. Zolin [ 87-1 USTC ¶9234], 809 F.2d 1411, 1417 (9th Cir. 1987), aff'd in part and vacated in part on other grounds, United States v. Zolin [ 89-1 USTC ¶9380], 491 U.S. 554 (1989). We have found only one circuit that requires a "palpable threat of litigation at the time of the communication." United States v. Newell, 315 F.3d 510, 525 (5th Cir. 2002) (quoting In re Santa Fe Int'l Corp., 272 F.3d 705, 711 (5th Cir. 2001)). This position runs contrary to the "established [rule] that the attorney-client privilege is not limited to actions taken and advice obtained in the shadow of litigation." In re Regents of the Univ. of California, 101 F.3d at 1390.

7 There is no contention that the final communication from the joint venturers to their clients was privileged.

8 The district court held in the alternative that, even if the Kerekes Memorandum did not fall within the common interest doctrine, disclosure of the memorandum by BDO to attorney Guerin was inadvertent. The court concluded that, because the disclosure was inadvertent, BDO had not waived its claim of privilege for the memorandum. The IRS also challenges this alternative holding. Because the district court's application of the common interest doctrine was not clear error, we need not address this alternative ruling.

9 The IRS contends that, after the court found that Document A-40 fell within the crime-fraud exception, the district court should have revisited its conclusion that the crime-fraud exception to the attorney-client privilege did not vitiate the privilege with respect to the Kerekes Memorandum.

The IRS did challenge specifically the district court's earlier determination that the crime-fraud exception did not apply to the Kerekes Memorandum. See R.152 (sealed). This challenge pre-dated, however, the district court's determination with respect to Document A-40. Indeed, on the same day that the district court announced its initial conclusion that the IRS had made a prima facie showing that the communications in Document A-40 were made in furtherance of crime or fraud, the district court rejected the IRS' identical challenge to the Kerekes Memorandum. At no time after the district court stated that it had found prima facie evidence of crime or fraud with respect to Document A-40 did the IRS request the district court to re-evaluate its earlier ruling with respect to the Kerekes Memorandum. The IRS was not without opportunity to raise the issue. As discussed in greater detail in Part II.B, after concluding that there was prima facie evidence that Document A-40 fell within the crime-fraud exception, both the Intervenors and the IRS were permitted to submit additional arguments about the applicability of the crime-fraud exception to Document A-40. The IRS availed itself of this opportunity and filed additional memoranda with the court opposing the Intervenors' answer to the court's preliminary findings of crime or fraud with respect to Document A-40. Nowhere in these papers did the IRS request the district court revisit its earlier rulings on the Kerekes Memorandum.

Based on this record, we must conclude that the IRS has waived this issue. We have recognized that the waiver rule exists to provide the district court with the first opportunity to rule on a party's theories. Bailey v. Int'l Bhd. of Boilermakers, Iron Ship Builders, Blacksmiths, Forgers & Helpers, Local 374, 175 F.3d 526, 530 (7th Cir. 1999). This requirement assures that we shall not usurp the role of the district court by engaging in initial fact finding. Id. It also assures an adequate record for review, id., a particularly important function in cases such as this one, where the fact-specific nature of the inquiry lies within the trial court's particular expertise, see Frederick [ 99-1 USTC ¶50,465], 182 F.3d at 499. Because the issue the IRS presents on appeal was never before the district court, we are left with no basis to evaluate the district court's ruling on a particularly fact-bound issue. The issue is waived.

10 As noted above, the eight potential indicators of fraud identified by the district court were:

(1) the marketing of pre-packaged transactions by BDO; (2) the communication by the Intervenors to BDO with the purpose of engaging in a pre-arranged transaction developed by BDO or [a] third party with the sole purpose of reducing taxable income; (3) BDO and/or the Intervenors attempting to conceal the true nature of the transaction; (4) knowledge by BDO, or a situation where BDO should have known, that the Intervenors lacked a legitimate business purpose for entering into the transaction; (5) vaguely worded consulting agreements; (6) failure by BDO to provide services under the consulting agreement yet receipt of payment; (7) mention of the COBRA transaction; and (8) use of boiler-plate documents.

R.178 at 23.

11 The potential indicators of fraud the district court drew from Denney v. Jenkens & Gilchrist were mention of the COBRA transaction, vaguely worded consulting agreements and failure to provide services under the consulting agreements.

12 The American Jobs Creation Act of 2004, Pub. L. No. 108-357, 118 Stat. 1418 (2004), amended subsection (b) to read:

The privilege under subsection (a) shall not apply to any written communication which is --
(1) between a federally authorized tax practitioner and

(A) any person,

(B) any director, officer, employee, agent, or representative of the person, or

(C) any other person holding a capital or profits interest in the person, and

(2) in connection with the promotion of the direct or indirect participation of the person in any tax shelter (as defined in section 6662(d)(2)(C)(ii)).

26 U.S.C. §7525(b) (2000 & Supp. IV 2004). These changes applied only to communications made after October 24, 2004. See American Jobs Creation Act of 2004, Pub. L. No. 108-357, §813(b), 118 Stat. 1418, 1581 (2004). The Act did not amend the elements of the tax practitioner privilege set forth in §7525(a).

13 Prior to 2004, subsection (b) referred to the definition of "tax shelter" found at 26 U.S.C. §6662(d)(2)(C)(iii). As a result of amendments to §6662, that definition is found now at 26 U.S.C. §6662(d)(2)(C)(ii). For ease of analysis, we shall refer to the current code section.

14 See supra note 1. It is worth noting that the American Jobs Creation Act of 2004 left the definition of "tax shelter" found in §6662(d)(2)(C)(ii) unchanged.

15 Prior to the 2004 amendments to the section, 26 U.S.C. §6111 contained two definitions of "tax shelter" applicable only to §6111. One of these definitions defined a "tax shelter" as certain investments for which the representations made in connection with the sale of the investment would lead "any person" to believe that the investment would produce a "tax shelter ratio" over a threshold amount. 26 U.S.C. §6111(c)(1) (2000). The other definition of "tax shelter" previously found in §6111 defined "tax shelter" as any partnership, entity, plan or arrangement, a significant purpose of which is the avoidance or evasion of Federal income tax for a direct or indirect participant which is a corporation, that is offered under conditions of confidentiality, and for which the promoters receive commissions exceeding $100,000. Id. §6111(d)(1). In contrast, 26 U.S.C. §6662(d)(2)(C)(ii) makes no reference to dollar or "tax shelter ratio" thresholds, nor does it require the tax shelter to benefit a corporation.

16 A number of the Intervenors participated in BDO's programs through S corporations.

17 If S corporations were not taxpayers, then the tax shelter exception is irrelevant, as the tax practitioner privilege applies only to "communication[s] between a taxpayer and any federally authorized tax practitioner." 26 U.S.C. §7525(a)(1). If the S corporation is not a taxpayer, the S corporation has no privilege to assert with respect to communications between the S corporation's director, shareholder, officer, employee, agent or representative and a federally authorized tax practitioner.

18 A corporation is a person for purposes of the IRC. See 26 U.S.C. §7701(a)(1).

19 The regulation to which the Intervenors refer, 26 C.F.R. §301.6111-2, was promulgated prior to the 2004 amendments to §6111 (the Intervenors actually cite the temporary regulations, but those regulations have since become permanent; the definition of confidential corporate income tax shelter in the permanent regulations is the same as that in the temporary regulations). Section 6111 was and remains an anti-fraud statute, aimed at providing the IRS with records of financial products marketed for the purpose of reducing Federal income tax liability. The pre-2004 version of §6111 identified two types of transactions for special scrutiny as "tax shelters." See 26 U.S.C. §6111(c) & (d) (2000). The first sort of transaction defined tax shelters generally as investments offered for sale that, based on the representations in connection with the offering, would lead a reasonable person to infer that the investment would generate deductions and credits exceeding statutorily defined ratio of deductions and credits to the adjusted basis of the initial investment. See id. §6111(c). Further, the investment had to be a registered security or "substantial." Id. The second definition of "tax shelter" deemed confidential transactions, a significant purpose of which was the avoidance or evasion of corporate income taxes and for which the tax shelter's promoter may receive at least $100,000 in fees, to be tax shelters. Id. §6111(d). As is evident from the first definition of "tax shelter" found in the pre-2004 version of §6111, the section as a whole is not limited in its consideration to corporate tax shelters. The regulations the Intervenors cite implement the pre-2004 version of §6111 only with respect to the second definition of tax shelter, which was only one of the types of transactions identified by §6111 as requiring special scrutiny. The current regulations continue to identify confidential corporate income tax shelters for purposes of implementing §6111, even though §6111 no longer uses the term "tax shelter."

Section 6662, on the other hand, is concerned with distinct issues. Section 6662 deals with penalties for underpayment of a taxpayer's tax liability. When an understatement of income is "substantial," §6662 imposes a penalty of twenty percent of the amount of taxes underpaid. 26 U.S.C. §6662(a)-(b). However, §6662 provides that taxpayers may reduce the amount of an understatement, and hence the penalty imposed, by that portion of the understatement resulting from a position taken by the taxpayer for which there was substantial authority or, if the position is disclosed adequately on the tax return, for which there was a reasonable basis for such treatment. Id. §6662(d)(2)(B). As an exception to this general rule, however, §6662 provides that that portion of an understatement attributable to a tax shelter, i.e., a transaction into which the taxpayer enters, the substantial purpose of which is to avoid or evade income taxes, cannot be used to reduce the amount of the taxpayer's understatement, and hence the penalty imposed. Id. §6662(d)(2)(B)(i). Thus, §6662 reflects a congressional policy decision that understatements above a particular threshold, i.e., substantial understatements, merit penalties. It also has made the policy choice that certain positions taken on tax returns, i.e., those supported by substantial authority or, when properly disclosed, a rational basis, should not result in the taxpayer incurring penalties unless the position taken is the result of a transaction into which the taxpayer entered for the purpose of evading or avoiding taxes.

20 We have held previously that this limitation means that nonlawyer tax practitioners cannot claim the privilege when "doing other than lawyers' work." United States v. BDO Seidman [ 2003-2 USTC ¶50,582], 337 F.3d 802, 810 (7th Cir. 2003) (quoting United States v. Frederick [ 99-1 USTC ¶50,465], 182 F.3d 496, 502 (7th Cir. 1999)) (internal quotation marks omitted). This statement cannot be taken to mean that the tax practitioner privilege authorizes non-attorneys to engage in the practice of law when representing others before the IRS. By limiting the availability of the privilege to those individuals authorized to practice before the IRS subject to federal regulations and limiting the scope of the privilege to advice given within the individual's authority as a federally authorized tax practitioner, see 26 U.S.C. §7525(a)(1), (3), §7525 clearly is not intended to alter the scope of a federally authorized tax practitioner's authority to practice. Further, the regulations governing tax practitioners in activities before the IRS expressly state that nothing in the regulations shall "be construed as authorizing persons not members of the bar to practice law." 31 C.F.R. §10.32. Taken in context, our prior observations on the scope of the privilege recognize nothing more than communications, though technically within the scope of practice before the IRS, that would fall outside of the attorney-client privilege are also outside of the tax practitioner privilege.

Disclosure of Reportable Transactions: Privilege against disclosure

Code Sec. 7525(a)(1) did not preclude a bank's disclosure of the identities of investors in potentially abusive tax shelters pursuant to a summons issued under Temporary Reg. §301.6112-1T. The confidentiality privilege is limited to any noncriminal proceeding before the IRS or in federal court. However, there was no proceeding in which the government had appeared and the issuance of an administrative summons to a bank, as opposed to a taxpayer, did not appear to be a "tax proceeding" before the IRS. Moreover, the confidentiality privilege does not apply to any written communication between a federally authorized tax practitioner and director, shareholder, officer or employee, agent, or representative of a corporation in connection with the promotion of the direct or indirect participation in a tax shelter. The language of the tax opinion sold to the intervening plaintiffs in the case clearly showed that the transaction was designed to be a tax-advantaged structure and the transaction required the participation of a corporation.

John Doe #1, DC N.C., 2003-2 USTC ¶50,558, 268 FSupp2d 627.

Investors could not assert an identity privilege under Code Sec. 7525 to bar their public accounting and consulting firm from disclosing their identities under Code Sec. 6111 and Code Sec. 6112. The investors failed to demonstrate a colorable claim of privilege. Disclosure of the identities revealed only that the investors partcipated in the shelters. Because little was known about the interactions between the parties, the motive for seeking tax advice, as a confidential communication, could not be inferred. Moreover, participation in a potentially abusive tax shelter is subject to full disclosure under Code Sec. 6111 and Code Sec. 6112. The list-keeping requirements precluded an expectation of confidentiality in the communications with the firm.

BDO Seidman, CA-7, 2003-2 USTC¶50,582. Cert. denied, 2/24/2004.

A national accounting firm that was being investigated for marketing potentially abusive tax shelters did not waive the attorney-client privilege when it faxed a memorandum written by one of its partners to an attorney at a law firm that was assisting the accounting firm in providing tax services to its clients. The common interest doctrine applied to extend the protection afforded by the attorney-client privilege to the memorandum.

BDO Seidman, LLP, CA-7, 2007-2 USTC ¶50,530.

A customer-intervenor failed to rebut the evidence that Document A-40 came under the crime-fraud exception to the attorney-client privilege; therefore, the customer-intervenor could not invoke the privilege to prevent the disclosure of the document to the IRS pursuant to its civil subpoenas. There was no abuse of discretion by the district court in determining that the IRS provided sufficient evidence to support the conclusion that Document A-40 was a communication in furtherance of a crime or fraud; thus, the document fell within the crime-fraud exception to the attorney-client privilege. The district court record, however, was unclear as to whether the IRS provided sufficient facts to support a finding that the tax practitioner privilege, invoked by the intervenors, was eviscerated by the tax-shelter exception. The district court must re-examine the 266 documents at issue and determine which were covered by the attorney-client privilege, which by the tax practitioner privilege, and which by both. For those documents covered only by the tax practitioner privilege, the IRS must to provide sufficient evidence to show that the tax-shelter exception applies in order to avoid invocation of the privilege, which would keep the documents from being disclosed.

BDO Seidman, LLP, DC Ill., 2005-1 USTC ¶50,264, aff'd on this issue, vac'd and rem'd on another issue, CA-7, 2007-2 USTC ¶50,530.

The district court granted the government's motion to alter or amend the prior order in Arthur Andersen, L.L.P., 2003-1 USTC¶50,553, and held that identities of intervenors, who were participants in potentially abusive tax shelters, had to be revealed to the government. Given the Seventh Circuit's emphasis in BDO Seidman, CA-7, 2003-2 USTC ¶50,582, on the legislative intent underlying the Code Secs. 6111 and 6112 registration requirements and the regulatory context favoring transparency of all participants in potentially abusive tax shelters, the intervenors could not assert a privilege in their identities pursuant to Code Sec. 7525. The district court noted that it appeared that the Seventh Circuit intended in BDO Seidman to produce a generally applicable prohibition on the assertion of the identity privilege in IRS summons enforcement actions that was not altered by differing factual scenarios. Additionally, identities of other intervenors also had to be disclosed to the government because they did not timely intervene to assert an identity privilege and because they were not otherwise entitled to assert such a privilege.

Arthur Andersen, L.L.P., DC Ill., 2003-2 USTC ¶50,624.

Clients of a corporation that provided tax advice were not entitled to an injunction preventing the corporation from providing their names to the IRS pursuant to an administrative summons seeking those names, as well as documents pertaining to certain tax shelter transactions. Although the Code Sec. 7525 tax advisor confidentiality provision applied to communications between the clients and the corporation and revealing their names to the IRS would indicate their participation in the tax shelters, it would not reveal confidential communications made regarding those shelters. Moreover, the clients did not have a reasonable expectation that their identities or their participation in the shelter would be confidential.

J. Doe 1 v. KPMG, DC Tex., 2004-1 USTC ¶50,223, 325 FSupp2d 746.

Alvin S. Brown
Tax Attorney
703 425-1400 ex 106
www.irstaxattorney.com

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Mail fraud - indictment - section 7206 of the Code

Nicholas B. Blase, et al., Crimes: Filing false returns: Indictment: Sufficiency. --, (October 24, 2007)


United States of America v. Nicholas B. Blase, et al. U.S. District Court, No. Dist. Ill., East. Div.; 06 CR 421,

October 24, 2007.[ Code Sec. 7206]Crimes: Filing false returns: Indictment: Sufficiency. --
An indictment charging a mayor with mail fraud and willfully and knowingly filing false income tax returns for the years at issue was sufficient because the allegations contained in the indictment adequately apprised him of the charges against him. The indictment sufficiently alleged that he made material misstatements to conceal his kickback arrangement from the public, signed his tax returns under penalties of perjury, did not believe those returns were correct, and knew that his income was substantially in excess of that reported.
MEMORANDUM OPINION AND ORDER
ANDERSEN, District Judge: This matter is before the court on defendant Nicholas Blase's motion to dismiss the government's superseding indictment pursuant to Federal Rules of Criminal Procedure 7 and 12 or, alternatively, to strike Illinois state law related allegations contained within that indictment. For the following reasons, defendant's motion to dismiss is denied. The court refrains from ruling on defendant's arguments regarding references to Illinois state laws at this time.
BACKGROUND
In December, 2005, the Grand Jury returned an eleven-count superseding indictment (the "indictment") against defendant Nicholas Blase ("Blase") alleging that Blase misused his official government position for private gain in violation of the federal mail fraud statute and that Blase filed false federal income tax returns for the years 2000 through 2005. Specifically, the indictment alleges that from around 1974 to June 2006 Blase used his position as the Mayor of the Village of Niles, Illinois in a variety of ways to assist Ralph Weiner and Associates ("RWA"), an insurance broker once located in Niles and later relocated to Wheeling, Illinois, to obtain and keep Niles businesses as customers. In return, RWA allegedly took a percentage of the monies it received from these Niles businesses and paid that percentage as a kickback to Blase through S.M.P. Insurance Service, Inc. ("SMP"), which the indictment alleges was a sham corporation created and maintained for Blase's benefit. The indictment alleges that throughout this scheme, Blase failed to disclose his receipt of these payments to the public and, in fact, took numerous steps to conceal the true nature of his kickback arrangement with RWA. Counts one through five of the indictment charge Blase with violating the federal mail fraud statute, 18 U.S.C. §§1341, 1346, 2, by depriving the citizens of Niles of Blase's honest services as Mayor. Counts six through eleven charge Blase with willfully and knowingly filing false federal tax returns for the years 2000 to 2005 in violation of 26 U.S.C. §7206(1) by failing to report as "Other Income" the payments that Blase allegedly received from RWA. Blase has moved to dismiss the indictment in its entirety.
DISCUSSION
A. Standard of ReviewFederal Rule of Criminal Procedure 12(b)(2) provides that "[a] party may raise by pretrial motion any defense, objection, or request that the court can determine without a trial of the general issue." Fed. R. Crim. P. 12(b)(2). When considering a motion to dismiss under Rule 12(b)(2), a court assumes all facts in the indictment as true and must "view all facts in the light most favorable to the government." See United States v. Yashar, 166 F.3d 873, 880 (7th Cir. 1999). When viewed in that light, an indictment is sufficient if it satisfies three constitutionallymandated requirements. United States v. Anderson, 280 F.3d 1121, 1124 (7th Cir. 2002). First, the indictment must adequately state all of the elements of the crime charged; second, it must inform the defendant of the nature of the charges so that he may prepare a defense; and finally, the indictment must allow the defendant to plead the judgment as a bar to any future prosecution for the same offense. Id. Thus, indictments "need not exhaustively recount the facts surrounding the crime's commission." United States v. Agostino, 132 F.3d 1183, 1189 (7th Cir. 1997). Rather, "when determining the sufficiency of an indictment, [a court] look[s] at the contents of the subject indictment `on a practical basis and in [its] entirety, rather than in a hypertechnical manner.' " United States v. McLeczynsky, 296 F.3d 634, 636 (7th Cir. 2000) (quoting United States v. Smith, 230 F.3d 300, 305 (7th Cir. 2000)). An indictment, or a portion thereof, may be dismissed "if it is otherwise defective or subject to a defense that may be decided solely on issues of law." United States v. Black, 469 F. Supp. 2d 513, 518 (N.D. Ill. 2006).B. Counts One through Five Properly Allege Mail Fraud.1. The indictment adequately apprises Mr. Blase of the charges against him.Blase argues that counts one through five of the indictment should be dismissed because those counts contain merely vague and generic allegations that are insufficient for Blase to adequately prepare a defense in this case or establish a double jeopardy defense in the future. An indictment for mail fraud is sufficient if it includes allegations that the defendant (1) participated in a scheme or artifice to defraud; (2) acted with an intent to defraud; and (3) used the mail in furtherance of the fraudulent scheme. United States v. Hausmann, 345 F.3d 952, 956 (7th Cir. 2003); see also 18 U.S.C. §1341. Congress has defined "scheme or artifice to defraud" to include a scheme or artifice to deprive another of the intangible right of honest services. See 18 U.S.C. §1346 ("Section 1346"); United States v. Segal, 495 F.3d 826, 834 (7th Cir. 2007). An honest services charge under Section 1346 requires an allegation that a defendant misused his office or position in furtherance of the scheme or artifice to defraud. United States v. Bloom, 149 F.3d 649, 655 (7th Cir. 1998).Here, counts one through five of the indictment are factually sufficient to survive Blase's motion to dismiss. The indictment alleges that Blase entered into a scheme to defraud by using his official position as Mayor of Niles "to promote RWA and steer businesses to purchase insurance from RWA and, in return, [RWA] paid, and caused to be paid, a portion of RWA's commissions from Niles clients to SMP, a shell corporation controlled by defendant Blase." (Sup. Indict. P. 6). The indictment further identifies the key individuals and entities involved in the scheme, describes the actions and omissions allegedly taken by Blase, tracks the payments of alleged kickbacks received by Blase, including the manner in which the amounts were determined and directed to SMP, and alleges the precise dollar amount of the alleged kickbacks paid from 1997 to 2006. Counts one through five further allege that Blase knowingly used the mail in furtherance of his scheme. When read in the light most favorable to the government, these counts sufficiently allege that Blase misused his position as the Mayor of Niles for private gain in violation of the federal mail fraud statute and more than adequately apprise Blase of the charges against him.2. The indictment need not allege harm to the victims.Blase next argues that the mail fraud counts in the indictment should be dismissed because they fail to allege that Blase misused his office at someone's expense. Specifically, Blase argues that when, as here, the government presents a deprivation of honest services theory under the mail fraud statute the indictment must allege some harm or intended harm to the victims of the scheme to defraud. This argument, however, is legally flawed. Although Blase correctly notes that not every breach of fiduciary duty constitutes a deprivation of honest services in violation of the mail fraud statute, Bloom, 149 F.3d at 655-56, the Seventh Circuit has held that a breach of fiduciary duty can violate the mail fraud statute when that breach is accompanied by a misuse of office or position. Id. at 655. Further, the Seventh Circuit has repeatedly held that "[t]here is no requirement under the law...that a co-conspirator to a wire and mail fraud scheme contemplate actual or foreseeable harm to the victim." Hausmann, 345 F.3d at 959; accord United States v. Leahy, 464 F.3d 773, 786-87 (7th Cir. 2006); United States v. Fernandez, 282 F.3d 500, 507 (7th Cir. 2002). Here, as explained supra, the indictment sufficiently alleges that Blase misused his position as Mayor of Niles for private gain. Thus, under Seventh Circuit precedent, the indictment sufficiently alleges a violation of the mail fraud statute under an honest services theory even without any allegation of harm or contemplated harm to the victims of Blase's alleged scheme.Blase also makes the factual argument that counts one through five should be dismissed because there is no allegation that any of RWA's customers were harmed as a result of Blase's alleged scheme. Aside from being legally flawed because the government need not allege any such harm, this argument is also factually incorrect because it mistakenly assumes that the victims of Blase's alleged scheme are limited to RWA's customers. As the government correctly points out in its response to Blase's motion to dismiss, it is the entire citizenry of the Village of Niles, not just those businesses located within Niles, to whom Blase owed a duty of honest services. When viewed in the light most favorable to the government, the indictment alleges that Blase made decisions in his official capacity that affected the welfare of the citizens of Niles based upon Blase's own personal financial interests and not based on the public's welfare. Thus, the citizens of Niles were victimized by Blase's alleged scheme because their interests were not being exercised with their best interests in mind --they were being exercised with Blase's personal financial interests in mind. Accordingly, counts one through five are properly pleaded.3. The superseding indictment alleges a material misstatement.Blase argues that counts one through five should be dismissed because the indictment fails to allege that Blase made any material misstatements in connection with his alleged scheme to defraud. Specifically, Blase asserts that the indictment alludes to only one specific omission: that Blase failed to disclose in his Statements of Economic Interest the payments Blase allegedly received from RWA. The government counters that as a matter of law, failing to disclose kickbacks earned in one's fiduciary capacity meets the material misstatement or omission element of the mail fraud statute. The government further argues that Blase's failure to disclose the alleged kickbacks in Blase's Statements of Economic Interest is but one of several activities that Blase is alleged to have engaged in order to conceal the alleged kickback arrangement.To properly allege a violation of the mail fraud statute an indictment must include an allegation that the defendant made material misstatements or omissions as part of the scheme to defraud. Neder v. United States, 527 U.S. 1, 25 (1999). Although a mere failure to disclose, absent more, cannot constitute mail fraud, an omission coupled with an affirmative misrepresentation or breach of a duty to disclose may be actionable as mail fraud. Anderson v. Lincoln Ins. Agency, Inc., No. 02 C 6377, 2003 U.S. Dist. LEXIS 3811, at *5 (N.D. Ill. Feb. 14, 2003). Indeed, the Seventh Circuit has made clear that failing to disclose secret kickbacks earned in one's fiduciary capacity meets the material misstatement or omission element of the mail fraud statute. See Hausmann, 345 F.3d at 957; United States v. Bush, 522 F.2d 641, 647-48 (7th Cir. 1975). This is because failing to disclose such kickbacks converts "representations to [one's] clients into misrepresentations." Hausmann, 345 F.3d at 957.Here, the indictment sufficiently alleges that Blase made material misstatements or omissions by failing to disclose his kickback arrangement with RWA to the citizens of Niles. The indictment alleges that Blase, in his capacity as Mayor of Niles, owed a duty of honest services to the citizens of Niles, that under Illinois law he was prohibited from soliciting or knowingly accepting a fee or reward which he knew was not authorized by law, and that under Illinois law he was obligated to disclose any income received by any third party that he constructively controlled. The indictment further alleges that Blase constructively controlled SMP; the "sham" corporation to which the kickbacks from RWA were allegedly directed for Blase's benefit. Thus, the indictment sufficiently alleges the material misstatement or omission element of the mail fraud statute because it alleges both that Blase had a duty to disclose to the citizens of Niles any payments Blase received through SMP and that he failed to do so. Accordingly, counts one through five are properly pleaded.C. Constitutionality of Section 1346Blase next challenges counts one through five on constitutional grounds, arguing that those counts should be dismissed because Section 1346 is unconstitutionally vague. "A party may raise a vagueness challenge by arguing that either a statute is vague as applied to the case or that a statute is void on its face." United States v. Rezko, No. 05 CR 691, 2007 U.S. Dist. LEXIS 73515, at *20-21 (N.D. Ill. Oct. 2, 2007). Here, Blase challenges the constitutionality of Section 1346 on both grounds.Blase first challenges the constitutionality of Section 1346 on its face. When a statute does not implicate First Amendment interests, as is the case here, a court generally "must uphold a facial challenge only if the enactment is impermissibly vague in all of its applications." Fuller v. Decatur Pub. Sch. Bd. of Educ. Sch. Dist. 61, 251 F.3d 662, 667 (7th Cir. 2001). As Blase recognizes in his motion to dismiss, numerous courts, including this one, have found Section 1346 constitutional on its face. See United States v. Rybicki, 354 F.3d 124, 143 (2d Cir. 2003); United States v. Frost, 125 F.3d 346, 371 (6th Cir. 1997); Black, 469 F. Supp. 2d at 531, n.10. Blase has failed to cite any authority holding that Section 1346 is unconstitutionally vague on its face, and the court declines to reverse its prior holding.Blase also argues that Section 1346 is unconstitutionally vague as applied to this case because it provided no notice to Blase that he could be charged with federal mail fraud for allegedly "steering" Niles residents to use RWA for insurance purposes. In Hausmann, however, the Seventh Circuit held that its decision in Bloom placed the defendant on notice that the misuse of one's fiduciary position for personal gain may constitute a violation of the mail fraud statute under an honest services theory. Hausmann, 345 F.3d at 957. Here, the indictment alleges that Blase misused his official position as Mayor of Niles for personal gain by engaging in the alleged kickback scheme with RWA. Given the Seventh Circuit's rulings in Bloom and Hausmann, Blase was on notice at least as early as 1998 that misusing a fiduciary position for personal gain risks criminal liability. Thus, Blase's constitutional challenge as applied also fails.D. Section 1346 Does Not Create a Common Law Crime.Blase also argues that Section 1346 creates an unconstitutional common law crime and that the government alleges nothing more than violations of Illinois state laws. This argument is unavailing. As discussed supra, the indictment properly alleges that Blase violated the federal mail fraud statute. Further, Blase's argument that Section 1346 creates an unconstitutional common law crime has been repeatedly rejected by this court. See, e.g., Black, 468 F. Supp. 2d at 528 n.8 (citing Bloom, 149 F.3d at 655-57; United States v. Warner, No. 02 CR 506, 2004 U.S. Dist. LEXIS 15727, at *70 (N.D. Ill. Aug. 12, 2004)). Blase has failed to cite any authority holding that Section 1346 creates an unconstitutional common law crime, and this court declines to reverse its prior holdings rejecting that argument.E. Counts Six Through Eleven Properly Allege the Crime of Filing False Tax Returns.Blase argues that counts six through eleven should be dismissed because they fail to allege that Blase personally received funds from RWA or SMP and thus fail to allege a violation of 26 U.S.C. §7206(1) ("Section 7206(1)"), which prohibits filing materially false individual tax returns. To sufficiently plead a violation of Section 7206(1), the indictment must allege (1) that the defendant made or caused to be made a verified federal income tax return for the year in question; (2) that the tax return was false as to a material matter; (3) that the defendant signed the return willfully and knowing it was false; and (4) that the return contained a written declaration that it was made under the penalty of perjury. United States v. Peters, 153 F.3d 445, 461 (7th Cir. 1998). Here, counts six through eleven allege that for the years 2000 to 2005 Blase filed signed federal tax returns with the Internal Revenue Service in which Blase failed to report as "Other Income" the kickbacks that Blase allegedly received from RWA. The indictment further alleges that Blase verified those tax returns by written declarations that they were made under penalties of perjury, that Blase did not believe those returns to be true and correct as to every material matter, and that Blase knew that his income was substantially in excess of that reported for those years. Although Blase correctly asserts that the indictment does not allege that RWA paid Blase directly, the indictment does allege that RWA transferred money to SMP, which Blase allegedly constructively controlled, and that Blase then used that money to pay the salaries of his paralegals for their work at Blase's law firm. Those allegations are sufficient to allege that Blase received individual income that he failed to report on his federal tax returns for the years 2000 to 2005. Accordingly, counts six through eleven properly allege violations of Section 7206(1).F. References to Illinois State LawBlase argues that even if the court refuses to dismiss the indictment, references to the Illinois Governmental Ethics Act and the Illinois Insurance Code should be stricken from the indictment because those references are irrelevant and potentially prejudicial. We will discuss these issues with the parties during a pretrial conference.
CONCLUSION
For the foregoing reasons, defendant Nicholas Blase's motion to dismiss the superseding indictment [73] is denied. This court declines to rule on Blase's arguments regarding references to Illinois state law and will instead discuss these issues with the parties during a pretrial conference.It is so ordered.

Fraud and False Statements: IndictmentAn indictment for making false statement under penalty of perjury was not defective even though it included words of intent in addition to those of the statute, since proof of specific intent was a necessary element of the alleged crime. Furthermore, the requirement of proof in addition to the wording of the statute would be in the defendant's favor, forcing the government to establish something not necessitated by the language of the statute.E. Jaben, CA-8, 65-2 USTC ¶9624, 349 F2d 913.Indictment charging taxpayers with conspiring to deprive the government of essential tax information concerning their race track winnings by paying others to cash their winning tickets so that their names would not appear on Form 1099 was not invalid on procedural or constitutional grounds.J. Honer, DC, 66-2 USTC ¶9504.The taxpayers were not prejudiced by the fact that surplus language in the indictment was deleted without the convening of a new grand jury or by the fact that the prosecutor referred to this language during the trial.S. Cirami, CA-2, 75-1 USTC ¶9261, 510 F2d 69.The indictment was sufficient even though no deficiency was computed. Since the government is not required to produce evidence of a deficiency in order for a conviction of submission of false statements to be sustained, the complaint of such a charge does not have to include the computations.I.E. Miller, CA-5, 74-1 USTC ¶9307, 491 F2d 638.An indictment charging concealment of a taxpayer's assets with intent to defeat collection of tax was insufficient where alleged concealment occurred prior to any assessment, notice, demand or levy for taxes. Consequently, conviction of taxpayer's attorney was improper.R.L. Swarthout, CA-6, 70-1 USTC ¶9186, 420 F2d 831.The court granted the taxpayers' motion to dismiss an indictment against them in which they were charged with conspiracy to violate Federal income tax and labor laws, filing false and fraudulent corporate income tax returns, and failure to file certain reports required by Federal labor laws. The court held that the indictment did not sufficiently inform the taxpayers of the nature of the charges against them so that they could prepare defenses.W. Heinze, DC, 73-2 USTC ¶9756, 361 FSupp 46.The indictment was ruled to be sufficient.J. Escobar, CA-5, 68-1 USTC ¶9125, 388 F2d 661.S.A. Grayson, CA-5, 69-2 USTC ¶9639, 416 F2d 1073. Cert. denied, 396 US 1059.J.J. Marra, CA-6, 73-2 USTC ¶9578, 481 F2d 1196.N.C. Edwards, Jr., CA-11, 86-1 USTC ¶9110, 777 F2d 644.G.M. Bishop III, CA-5, 2001-2 USTC ¶50,762, 264 F3d 535. Cert. denied, 4/22/2002.J.J. Boone, DC Pa., 89-2 USTC ¶9412.P. Bouzanis, DC Ill., 2003-1 USTC ¶50,315.No substantial rights were affected by a variance between the indictment (on the counts for subscribing false returns) and the proof as to the reported professional receipts by the defendants, there being no question of double jeopardy.R.A. Buble, CA-9, 71-1 USTC ¶9469, 440 F2d 405. Cert. denied, 404 US 828.J.A. D'Anna, CA-2, 71-2 USTC ¶9705, 450 F2d 1201.The indictment did not fatally vary from the proof merely because the amounts set forth in the indictment as deductions differed in some cases from the actual deductions taken. In a prosecution charging the filing of false returns, the government is not obliged to prove the exact amount alleged in the indictment.D.W. Warden, CA-7, 76-2 USTC ¶9790, 545 F2d 32.Although an indictment may have been duplicitous, any objection was waived by not having been raised before the verdict.W.B. Droms, CA-2, 77-1 USTC ¶9260, 566 F2d 361.An individual was properly convicted of corruptly endeavoring to obstruct the administration of the tax laws and of filing false employment tax returns. His indictment on the two charges was not multiplicitous and presented no double jeopardy problems because each offense required proof of facts that the other did not.J. Swanson, III, CA-4 (unpublished opinion), 97-1 USTC ¶50,398, aff'g, per curiam, an unreported District Court decision.Taxpayer's exoneration as to one of two alleged falsely claimed charitable deductions, but conviction on the other, did not constitute a material variance from the indictment. No substantial rights of the accused were prejudiced since he was informed of the charges against him and thus was able to present his defense, and he was also protected against another prosecution for the same offense.C. Considine, CA-9, 74-2 USTC ¶9846.The taxpayers' motion to dismiss the indictment in a prosecution for making false statements on tax returns was denied. The source of one's income is a material matter which, if falsified, can support such an indictment. If the source of income could be falsely stated, it would be difficult for the government to compute the amount of tax due and to check on the accuracy of the return.J. Di Varco, DC, 72-1 USTC ¶9470, 342 FSupp 101.The taxpayer's motion to dismiss an indictment against him for filing false income tax returns was denied. The indictment was sufficient, since it notified the taxpayer that he was charged with failing to properly compute his gross profits by excluding substantial amounts of gross receipts from his 1969, 1970, and 1971 tax returns.H. Boxer, DC, 75-2 USTC ¶9822.In determining whether the taxpayer's immunized testimony was instrumental in a witness' decision to testify against the taxpayer, so that the government could obtain an indictment, the appellate court held that the witness' state of mind during negotiations with the government should have been relevant to the factual determination to be made by the District Court. If the taxpayer was lying while immunized, the proper remedy would be prosecution for perjury or contempt of court rather than forfeiture of immunity.H. Kurzer, CA-2, 76-1 USTC ¶9399, 534 F2d 511.An indictment was dismissed because the Watergate Special Prosecutor had promised the defendants that no indictment would be brought under the particular provision.Phillips Petroleum Co., DC, 77-2 USTC ¶9590, 435 FSupp 622.An indictment was dismissed because it represented the culmination of government efforts to force the defendant to relinquish his venue rights.F. DeMarco, Jr., CA-9, 77-1 USTC ¶9354, 550 F2d 1224. Cert. denied, 434 US 827.A taxpayer was denied a motion to dismiss his indictment. In rejecting the motion, the court noted that the taxpayer was aware through his attorney of the basic nature of the charges levied against him. Also, the Constitution does not provide a defendant the right to knowledge of the details of a governmental investigation prior to indictment.F. Cisco, DC, 82-2 USTC ¶9554.The lower court did not abuse its discretion in dismissing an indictment as a remedy for the government's breach of its agreement not to prosecute a corporation or its principal officers in return for their admission that they made illegal political campaign contributions.Minnesota Mining and Mfg. Co., CA-8, 77-1 USTC ¶9259, 551 F2d 1106.The taxpayer's claim that his proceedings were prejudiced by excessive pre-indictment delay was rejected because there was no evidence that a witness, who allegedly was unable to appear at the proceedings due to the delay, would present unique testimony or that memories of witnesses had faded. Also, inconsistent jury verdicts on a multi-count indictment were not grounds for reversing the taxpayer's conviction.B.N. Horowitz, CA-9, 85-1 USTC ¶9373, 756 F2d 1400.A federal grand jury in West Virginia improperly indicted an accountant for aiding or assisting in the filing of fraudulent tax documents in Massachusetts. A person who assists another in the filing of fraudulent tax returns is a principal and may only be indicted in the district where he acted.W.F. Griffin, Jr., CA-1, 87-1 USTC ¶9299, 814 F2d 806.An indictment against the taxpayer was sufficient where, assuming the truth of the allegations contained in the indictment, the taxpayer was engaged in promoting an illegal tax scheme, the illegality of which he had fair notice of.G.L. Schulman, CA-9, 87-1 USTC ¶9334, 817 F2d 1355. Cert. denied, 8/5/87.An indictment charging an individual with the crime of filing false returns in violation of Code Sec. 7206(1) was valid. The argument that such indictment was vague and violated other constitutional rights because the tax return indicated entries were made under penalties of perjury and Code Sec. 7206 permits the imposition of penalties different from those provided in the federal perjury statute was rejected. The language made under the penalties of perjury merely indicates what types of documents are covered by statute and provides a discernible limit to the application of Code Sec. 7206(1). Such phrase could not reasonably confuse an individual regarding the consequences of filing a false tax return, and the indictment sufficiently apprised him of the charges.D.F. Marrinson, DC Ill., 87-2 USTC ¶9376.An indictment charging that the defendants used fraudulent means to create fictitious trading losses and interest expenses which they passed on to participants in various limited partnerships was permitted to stand. Even assuming arguendo that losses from tax straddle transactions entered into with the express purpose of generating such losses were deductible, the court ruled that a jury could still determine that the defendants' commodities straddles were sham transactions. Further, the fact that the New York Statute of Frauds could prevent their agreements from being enforced was irrelevant to whether the agreements in fact existed and were accepted by the parties.C.A. Atkins, DC N.Y., 87-2 USTC ¶9552, 661 FSupp 491.A district court erred in dismissing an indictment against a promoter of limited partnership tax shelters for making false statements on tax returns. He made false statements to the IRS and to the prospective investors when he represented that loans to the partnerships could enable the limited partners to have certain tax benefits, when, in fact, the loans were sham transactions. Thus, the indictment was reinstated.E.H. Heller, CA-11, 89-1 USTC ¶9281, 866 F2d 1336, vac'g an unreported District Court decision.The conviction of a former IRS agent for various tax offenses in connection with an illegal tax investment scheme he devised and executed was affirmed. The indictment was not faulty. The former agent was convicted of the offense for which he was indicted. Four counts of a superseding indictment, which the former agent challenged, were duplicative of counts in the original indictment. Consequently, the statute of limitations was not violated.R.H. Pacheco, CA-9, 90-2 USTC ¶50,458, 912 F2d 297.An indictment for subscribing a false return was dismissed for failure to allege intent. The taxpayer claimed deductions for contributions to certain retirement plans on a return filed prior to the extended due date but did not actually make such contributions. Since two IRS rulings allowed the taxpayer to claim deductions for contributions to certain retirement plans that have not been made at the time of filing, provided that the taxpayer makes the contributions prior to the due date of the return, the indictment should have alleged that the taxpayer had no intention of making the contributions at the time the return was filed.L.A. Robinson, DC Miss., 93-1 USTC ¶50,213, 811 FSupp 1174.A police sergeant's felony conviction for willfully filing false individual income tax returns did not violate the Grand Jury clause of the Fifth Amendment or prejudice his opportunity to present a defense. The trial court's decision, which was based on the individual's failure to report net receipts from a side business, did not constructively amend the indictment, which charged the individual with failure to report gross receipts from the business. Also, the court's narrowing of the charges did not prejudice the sergeant's defense since his willful failure to report the net receipts was always a central part of the case.M. Thompson, CA-7, 94-1 USTC ¶50,231, 23 F3d 1225.An indictment for making a false statement on a return was not defective for failure to state the year of the return. The indictment cited the date that the false return was filed, and the individual was provided with a copy of the return.C.T. Wickersham, CA-5, 94-2 USTC ¶50,400, 29 F3d 191.A lawyer was properly indicted on the charge of subscribing to a false tax return, rather than on tax evasion. Although he paid amounts for referrals and reported them on his return, that did not mean that his reported figures were allowable deductions rather than a material misstatement of fact.R.M. Standard, CA-9 (unpublished opinion), 96-1 USTC ¶50,302. Cert. denied, 117 SCt 690.The general manager of a nonprofit farming cooperative who was convicted of filing a false tax return had sufficient notice from the indictment of the IRS's evidence at trial. Although the evidence given to the grand jury differed from that at trial, the charge of underreporting income under Code Sec. 7206(1) was the same.L.L. Worman, CA-10 (unpublished opinion), 2000-1 USTC ¶50,359, 210 F3d 391, aff'g an unreported District Court decision.The district court's denial of a new trial did not impermissibly expand the scope of the original indictment of an individual for filing false tax returns or expose the taxpayer to charges not in that indictment. A statement in the indictment that the taxpayer received income that he failed to report on line 22 of Form 1040 also included alternative grounds. That reference did not remove from its scope income that would have been reported on other lines, and it did not require the government to prove that the income was converted from the taxpayer's alleged partner; it only had to prove that the taxpayer failed to report taxes on his income.L.L. Worman, CA-10 (unpublished opinion), 2001-2 USTC ¶50,759, aff'g an unreported District Court decision.An indictment failed to sufficiently allege that a shareholder of a real estate S corporation committed a material falsehood or omission in not reporting a third-party's ownership interest in the entity. The indictment did not specifically indicate what made the omission criminal since there was no allegation that the third party was a shareholder. The shareholder was not adequately informed of the nature of the accusation against him, and that portion of the indictment was dismissed.A.J. Pirro Jr., CA-2, 2000-1 USTC ¶50,451, 212 F3d 1281, aff'g an unreported District Court decision.Sufficient evidence existed to support an individual's convictions for conspiracy to defraud the government and assisting in the preparation of false income tax returns. The taxpayer cycled his clients' income through offshore trusts and subsequently filed false income tax returns. The transactions were conducted to evade the clients' tax liability and the participants in the scheme retained control over the cycled funds. Moreover, the taxpayer advocated the use of the offshore trusts and assisted in their creation and operation.T.C. Gaskill, CA-9 (unpublished opinion), 2000-2 USTC ¶50,702, 232 F3d 897. Aff'g in part and rev'g and rem'g in part, an unreported District Court decision.Taxpayer was not entitled to conduct discovery in connection with an indictment based on the IRS's failure to establish his liabilities before proceeding with a criminal investigation. Suppression of evidence would be appropriate if the IRS used civil subpoenas to obtain evidence after having made an institutional commitment to recommend prosecution of the defendant but without establishing the probable cause necessary for a criminal case. However taxpayer did not establish a prima facie case that a hearing on the suppression issue was warranted.K.L. Utecht, CA-7, 2001-1 USTC ¶50,311, 238 F3d 882.An indictment under Code Sec. 7206 properly provided a basis for subject matter jurisdiction because it tracked the language of the charging statutes. It contained the elements of the offense charged, fairly informed the defendant of the charge against which he must defend and enabled him to plead an acquittal or conviction in bar of future prosecutions. Furthermore, both the original indictment and the superseding indictment were valid charging instruments because each contained the signature of the grand jury's foreperson.L. Molesworth, 2005-2 USTC ¶50,571, 383 FSupp2d 1251.An individual's contention that an indictment against him for tax evasion should be dismissed because the IRS presented illegally obtained evidence to the grand jury was rejected. Even if the jury had examined illegally obtained evidence, the indictment was valid on its face and could not be challenged.J.F. Greve, CA-7, 2007-2 USTC ¶50,547, 490 F3d 566.A tax preparer's indictment on several counts of willful preparation of fraudulent tax returns was sufficient. The indictment contained enough details to put the tax preparer on notice of the alleged charges and provided an opportunity to prepare a defense. R.M. Blackstock, CA-10 (unpublished opinion), 2007-2 USTC ¶50,646, aff'g an unreported DC Okla. decision.A taxpayer was properly indicted for filing false corporate tax returns because he aided the corporation to file a false return. The corporation, which was controlled by the taxpayer, had a substantial net operating loss (NOL) that it was carrying forward from year-to-year, and the taxpayer assigned his income from other sources so that it was paid directly to this corporation instead of him. This allowed the corporation, which produced little income, to have income against which to offset the NOL, while the taxpayer avoided having to report that income on his individual return. Further, the charges contained in the indictment referring to his employment by the IRS and to the underlying basis for the corporation's carried-forward NOL were admissible in evidence and could not be stricken as surplusage. The probative value of such evidence outweighed any minimal prejudice it could entail to the taxpayer. H. Willner, DC N.Y., 2007-2USTC ¶50,751.

Alvin S. Brown, Esq.
Tax Attorney
www.irstaxattorney.com
703 425-1400

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Trust fund penalty - Payroll Taxes - Section 6672 joint and several liability

Thomas McLaren and Rita McLaren, Plaintiffs v. IRS Appeals Office and Michael Jeka, Defendants.

U.S. District Court, Dist. Mont., Butte Div.; CV-06-53-BU-RFC, September 28, 2007.

[ Code Secs. 6330 and 6672]

Responsible person: Failure to collect tax: Failure to pay over tax: Trust fund recovery penalty: Joint and several liability. --

A married couple's complaint challenging a Collection Due Process (CDP) hearing determination that they were liable for unpaid employment taxes was dismissed for failure to state a claim upon which relief could be granted. The couple did not contest the assessed trust fund recovery penalty. Instead, they argued that another partner should share responsibility for the taxes owed. However, liability under Code Sec. 6672 is joint and several. Thus, the IRS was not required to seek payment from every possible responsible person but could assess the tax against one responsible person and not another.




ORDER ADOPTING FINDINGS AND RECOMMENDATION OF U.S. MAGISTRATE JUDGE


CEBULL, United States District Judge: On September 10, 2007, United States Magistrate Judge Carolyn S. Ostby entered her Findings and Recommendation on the United States' Motion to Dismiss. Doc. 16. Although the United States made several arguments for dismissal, Magistrate Judge Ostby recommends the motion be granted for two reasons: (1) pursuant to Local Rule of Procedure 7.1(i) because Plaintiffs failed to respond to the motion to dismiss and such failure to respond is deemed an admission that the motion is well-taken; and (2) pursuant to Fed.R.Civ.P. 12(b)(6) because the Complaint fails to state a claim upon which relief may be granted.

Upon service of a magistrate judge's findings and recommendation, a party has 10 days to file written objections. 28 U.S.C. § 636(b)(1). In this matter, no party filed objections to the Findings and Recommendations. Failure to object to a magistrate judge's findings and recommendation waives all objections to the findings of fact. Turner v. Duncan, 158 F.3d 449, 455 (9th Cir. 1999). However, failure to object does not relieve this Court of its burden to review de novo the magistrate judge's conclusions of law. Barilla v. Ervin, 886 F.2. 1514, 1518 (9th Cir. 1989).

In this case, Magistrate Judge Ostby correctly ruled that Liability under 26 U.S.C § 6672 is joint and several and that the IRS is not required to seek payment from every responsible person and may assess the tax against one responsible person and not another. 14 MERTENS LAW OF FED. INCOME TAX'N § 54;105 (Sept. 2007). for those reasons, this Court finds Magistrate Judge Ostby's Findings and Recommendation are well grounded in law and fact and HEREBY ORDERED they be adopted them in their entirety.

For those reasons, IT IS FURTHER ORDERED that Defendant's Motion to Dismiss ( Doc. 16) is GRANTED .

The Clerk of Court shall notify the parties of the entry of this Order and close this case.


FINDINGS AND RECOMMENDATION OF U.S. MAGISTRATE JUDGE


OSTBY, United States Magistrate Judge: Plaintiffs Thomas McLaren ("Mr. McLaren") and Rita McLaren ("Mrs. McLaren") (collectively "the McLarens") initiated this action against Defendants the Internal Revenue Service ("IRS") and IRS appeals officer Michael Jeka (collectively "Defendants") on July 26, 2006. Cmplt. (Court's Doc. No. 1) at 1. The McLarens challenge Defendants' determination of taxes due from Anaconda Ace Hardware LLP, and assessed against Mr. McLaren by the IRS. Id. The McLarens have attached to their Complaint as Exhibit 1 the IRS "Notice of Determination Concerning Collection Action(s) Under Section 6320 and/or 6330" and the IRS "Enclosure to Notice of Determination" addressed to Mr. McLaren. Cmplt. at Ex. 1.

Before the Court is the United States' Motion to Dismiss (Court's Doc. No. 16). Having reviewed the motion, Defendants' brief, and the record, it is recommended that Defendants' motion be granted for the reasons stated herein.



I. BACKGROUND

The McLarens allege in their Complaint, in relevant part, as follows:


III.

1. Jenka (sic) of the IRS Appeals office made a determination involving our due taxes from Anaconda Ace Hardware LLP - We believe that we are not responsible for the full amount because of our partnership. Another partner should share in the total amount owed but was dismissed by Mr. Jenka (sic) of responsibility for the taxes.


IV.

The relief we seek is that Mr. John Corrigan be added to the owed taxes and that the amount be reduced and/or the penalties reduced so we can afford to make payments or restitution.

Cmplt. at ¶¶III and IV.

On July 16, 2007, Defendants filed their Motion to Dismiss. They advance three primary arguments in support of their motion. Memorandum in Support of United States' Motion to Dismiss ("Defts' Br.") at 1-2.

First, Defendants argue that the Court lacks subject matter jurisdiction over Mrs. McLaren's claims because the outstanding tax liability is Mr. McLaren's. Thus, Defendants argue, Mrs. McLaren lacks standing, the Court lacks subject matter jurisdiction over her claims, and dismissal of her claims is appropriate under Rule 12(b)(1), Fed. R. Civ. P. 1 Id. at 1, 6-7.

Second, Defendants argue that the McLarens failed to serve the United States within 120 days of filing the complaint as required by Rule 4(m). 2 Thus, Defendants argue, dismissal is appropriate under Rule 12(b)(5) for insufficiency of service of process. Id. at 2.

Third, Defendants argue that the McLarens have failed to state a claim upon which relief can be granted. Thus, they argue, Rule 12(b)(6) mandates dismissal. Id. at 1, 8-13. The McLarens failed to respond to Defendants' motion to dismiss.



II. DISCUSSION

The Court has considered the record and the arguments presented. Having done so, the Court concludes that the motion to dismiss should be granted for two reasons.

First, under the Local Rules of this Court, the McLarens' failure to respond is a concession that the motion is well-taken. Rule 7.1(i) of the Local Rules of Procedure of the United States District Court for the District of Montana provides that the "[f]ailure to file a brief by the adverse party shall be deemed an admission that the motion is well taken." The McLarens' failure to respond to Defendants' motion indicates that they do not contest the motion and concede that it should be granted.

Second, the Court concludes that the McLarens' Complaint fails to state a claim upon which relief can be granted. Thus, the Court recommends that the Complaint be dismissed under Rule 12(b)(6).

Under Rule 12(b)(6), a reviewing court "`must construe the complaint in the light most favorable to the plaintiff and must accept all well-pleaded factual allegations as true.' " Syverson v. Int'l Bus. Machines Corp., 472 F.3d 1072, 1075 (9th Cir. 2007) (quoting Shwarz v. United States, 234 F.3d 428, 435 (9th Cir. 2000)). Dismissal is proper only when there is no cognizable legal theory or an absence of sufficient facts alleged to support a cognizable legal theory. Balistreri v. Pacifica Police Dep't, 901 F.2d 696, 699 (9th Cir. 1990).

In the case at hand, the IRS assessed Mr. McLaren with taxes under 26 U.S.C. §6672(a). Cmplt. at Ex. 1 (indicating "Tax Type/Form Number" as "IRC [Internal Revenue Code] 6672 / TFRP"); 26 U.S.C. §6672(a). The McLarens do not contest the assessed tax liability. Rather, they claim only that they "are not responsible for the full amount" and urge that "[a]nother partner should share in the total amount owed . . .." Cmplt. at ¶III.

Even if the Court, construing the facts of the Complaint in the light most favorable to the McLarens, determines that another person also may be liable, as the McLarens contend, the McLarens still are unable to prevail with this action under the law.

"Liability under Section 6672 is joint and several." 14 MERTENS LAW OF FED. INCOME TAX'N §54:105 (Sept. 2007) ("MERTENS") (citing Hartman v. U.S., 538 F.2d 1336, 1340 (8th Cir. 1976); see also Schultz v. U.S., 918 F.2d 164, 167 (Fed. Cir. 1990); Brown v. U.S., 591 F.2d 1136, 1142 (5th Cir. 1979); Savage v. U.S., 2006 WL 449117 *2 n.2 (E.D. Cal. 2006) (citing cases). Also, the IRS is not required to seek payment from every responsible person and may assess the tax against one responsible person and not another. 14 MERTENS §54:105 (citing Howard v. U.S., 711 F.2d 729, 735 (5th Cir. 1983)). Thus, even if some other person may share responsibility with Mr. McLaren for the tax that he admits is owed, the IRS has no obligation to pursue that individual and, under Section 6672, is permitted to pursue Mr. McLaren. Thus, he has failed to state a claim herein upon which relief can be granted. This, coupled with the fact that the McLarens did not respond to Defendants' motion to dismiss, convinces the Court that dismissal is appropriate. Because of this conclusion, the Court does not address Defendants' other arguments in support of their motion to dismiss.



III. CONCLUSION

Based on the foregoing,

IT IS RECOMMENDED that the United States' Motion to Dismiss (Court's Doc. No. 16) be GRANTED.

NOW, THEREFORE, IT IS ORDERED that the Clerk shall serve a copy of the Findings and Recommendations of the United States Magistrate Judge upon the parties. The parties are advised that pursuant to 28 U.S.C. §636, any objections to these findings must be filed with the Clerk of Court and copies served on opposing counsel within ten (10) days after receipt hereof, or objection is waived.

1 All references to Rules herein are to the Federal Rules of Civil Procedure unless indicated otherwise.

2 Defendants also argue that the United States is the only proper defendant for two reasons. First, they argue, the IRS is an agency of the United States and, as such, it enjoys sovereign immunity. Congress has not waived this immunity. Thus, they argue, the IRS is not an entity subject to suit and the United States is properly substituted in its place.

Second, Defendants argue that Jeka, an IRS Appeals Officer, is sued herein in his official, and not individual, capacity. Thus, Defendants argue, a claim against him is actually a claim against the United States. Consequently, the United States is the only proper defendant in this action. Id. at 3.

Failure to Collect and Pay Over Tax, or Attempt to Evade or Defeat Tax: Joint and Several Liability: Joint and several liability

Two corporate officers did not meet their burden of proving that their failure to collect and pay over employment taxes was not willful. Because liability under Code Sec. 6672 is joint and several, one officer's claim that the other officer had been directed to pay the tax but had embezzled the money was without merit. However, one officer was not liable for taxes that had accrued after he left the corporation.

H. Scott, DC Colo., 89-2 USTC ¶9445.

A jury found that both taxpayers, the president and a third party defendant, were responsible for paying over withheld income and social security taxes. Since both taxpayers bore the responsibility of truthfully accounting and paying over such taxes and the taxes were not paid over, the plaintiff-taxpayer was not entitled to recover amounts already paid, his suit was dismissed, and the third party defendant-taxpayer was also liable for an amount equal to taxes not paid over although the Government was limited to only one recovery.

M.B. Bagby, DC, 73-2 USTC ¶9485.

Although a corporation was operated by one of the owners, two other owners were held to be jointly and severally liable for unpaid employment taxes, where the two owners agreed to indemnify the managing owner for any liability arising from the operation of the corporation.

J.L. Barker, DC, 72-1 USTC ¶9225.

If two or more corporate officers have the responsibility and authority to cause the failure to collect and pay over the taxes, the taxpayer need be only one of the responsible persons in order for the government to assess the penalty. Therefore, this fact was not a valid defense where the taxpayer was one of the persons responsible.

J. Labowitz, DC, 73-1 USTC ¶9155, 352 FSupp 202.

F. Rizzo, DC, 73-1 USTC ¶9268.

Deering, DC, 73-1 USTC ¶9462.

A.M. Sinder, CA-6, 81-2 USTC ¶9612.

Similarly, except that a jury found that the taxpayer was not one of the responsible corporate officers.

P. Shinberg, DC, 73-1 USTC ¶9338.

In the following cases, it was held that two or more corporate officers were responsible for the failure to pay over withheld taxes.

M.C. Marker, Sr., DC, 73-2 USTC ¶9688.

J.L. Bernardi, DC, 74-1 USTC ¶9170. Aff'd, CA-7, 75-1 USTC ¶9133, 507 F2d 682. Cert. denied, 422 US 1042.

P. Kynell, DC, 74-1 USTC ¶9261.

J.F. Fortine, Sr., DC, 74-1 USTC ¶9297.

H. Miller, DC, 74-1 USTC ¶9343.

H.D. French, DC, 74-1 USTC ¶9367.

A.M. Pearson, DC, 74-2 USTC ¶9663.

H.E. Harrington, CA-1, 74-2 USTC ¶9772, 504 F2d 1306.

D.V. Adams, DC, 75-1 USTC ¶9104.

L.R. Ernce, DC, 75-1 USTC ¶9284.

S. Filis, DC, 75-1 USTC ¶9436. Aff'd, CA-5, (unpublished opinion 7/2/76).

K.P. Palmer, DC, 75-2 USTC ¶9649.

L. Friedman, DC, 77-1 USTC ¶9288.

V.T. Fletcher, DC, 81-1 USTC ¶9208.

J.E. Ronholt, DC Wash., 84-2 USTC ¶9678.

E.A. Kappas, DC, 83-2 USTC ¶9683, 578 FSupp 1435.

C.A. Rice, DC, 83-2 USTC ¶9717.

C.T. Huggins, DC, 84-1 USTC ¶9192.

M. Schlauch, DC Ohio, 84-1 USTC ¶9431.

R. Cantu, DC Wash., 84-1 USTC ¶9528.

C. Latimer, DC Ill., 84-2 USTC ¶9769, 593 FSupp 881.

E.W. Israel, DC Tex., 88-2 USTC ¶9449.

M.J. McCray, CA-5, 90-2 USTC ¶50,492.

The court granted the government's motion to file an amended answer, counterclaim and third-party complaint. It concluded that the third party might be liable to the government for all or part of the taxpayer's liability for the penalty assessed for unpaid withholding taxes. Thus, the liability of the taxpayer and the third party should be tried together.

W.R. Kasik, DC, 75-2 USTC ¶9525.

The district courts have permitted the government, as part of its counterclaim action for unpaid employment taxes, to join the officer bringing the refund suit and other company officials as third-party defendants.

Crompton-Richmond Co., Inc., Factors, DC, 67-2 USTC ¶9607, 273 FSupp 219.

B.A. Wilkie, DC, 68-1 USTC ¶9227, 279 FSupp 671.

W.R. Kasik, DC, 75-2 USTC ¶9525.

Similarly, even though the government did not join other parties whom the third-party officer defendant contended might be liable for the unpaid taxes.

J.P. Stiber, DC, 73-2 USTC ¶9755, 60 FRD 668.

The court dismissed complaints against fourth-party defendants who had been impleaded by third-party defendants who, the government had claimed in a refund suit, were or could be liable as responsible persons who had failed to pay over withholding tax. The third-party defendants alleged only that the fourth-party defendants might be liable to the government, not that they might be liable to them. Nor does Sec. 6672 provide for any right of contribution among all persons who might be liable for the penalty it imposes.

F.R. DiBenedetto, DC, 75-1 USTC ¶9503.

However, the taxpayer could not obtain, through discovery, certain internal IRS communications, nor could he obtain information from the IRS relating to the solvency of the cross-defendants.

T.P. Garity, DC, 81-2 USTC ¶9599.

A motion to dismiss, made by third-party defendants after the government compromised its claim of a one-hundred-percent penalty against the original plaintiff, was properly denied. It was in reality a motion for summary judgment, and a genuine issue of material fact remained as to whether the third-party defendants were liable as responsible persons for the failure of a corporation to pay over withholding taxes.

P.C. Lemieux, DC Conn., 84-2 USTC ¶9806.

Delinquent taxpayers' admissions to the propriety of 100 percent penalty assessments attributable to the individual failures to pay over withholding taxes effectively constituted an admission of joint and collective liability. Thus, tax liens upon real estate owned by a married couple as tenants by the entirety were valid prerequisites to the subsequent foreclosure action upon their residence. Under state law (Pennsylvania), the individual indebtedness of a husband and wife to a single creditor permits the treatment of the liability as joint liability for the purpose of attaching and foreclosing upon entireties property.

J.A. Eglinton, Jr., DC Pa., 90-1 USTC ¶50,322.

One of the taxpayer's claims that the IRS had entered into preferential settlements with the other taxpayers was dismissed since the IRS has the right to choose the taxpayers from whom the 100-percent penalty may be collected.

B.R. Neier, DC Kan., 91-1 USTC ¶50,234.

No right to indemnification or contribution existed for a taxpayer against whom the 100% penalty was sought for failure to collect and pay over tax or attempt to evade or defeat tax. Therefore, summary judgment was granted for the individual against whom the claim for indemnification was filed. The court determined that no statutory right to contribution exists under Code Sec. 6672. Further, the court rejected a decision from another federal district that an action for contribution or indemnity may be brought after the collection action is completed. That decision was based on the reasoning that the intent of Code Sec. 6672 is to ensure collection of tax. The court, however, stated that the intent of Code Sec. 6672 is to punish the taxpayer. Regardless, the indemnity action was brought before the collection action was completed. Also, because the allegation was not supported by affidavit, the court rejected the contention that another individual had agreed to pay the penalty with a pending loan.

D.W. Conley, DC Ind., 91-2 USTC ¶50,431, 773 FSupp 1176.

Principals of a corporation had no federal common law or statutory right of action for contribution or indemnity against others who also might be liable for penalties arising from their failure to collect, account for, and pay over the corporation's employment taxes. Further, an agreement releasing the principals from liability claims against the defunct corporation did not protect them from the penalty assessment. The penalty assessment was aimed at the personal liability of all individuals connected with the corporation who were responsible for collecting, accounting for, and paying over the corporation's employment taxes. To have allowed principals to recover from other responsible persons would have hindered the deterrent purpose of the statute.

T.A. Amerson, DC Mo., 92-2 USTC ¶50,460.

A motion to join a third person, who was not a responsible person, in order to seek contribution from him which was made by an alleged responsible person for failure to pay over withheld taxes was denied for lack of subject matter jurisdiction. No statutory right to contribution existed under Code Sec. 6672 and the claim would only frustrate Congress's goal of efficient tax collection proceedings. An alternative claim seeking joinder on the ground that the claim arose out of the same transaction due to a transfer of funds to the third party with the intention that the latter pay the disputed tax was rejected because it occurred in a later year.

J. Ringer, DC Tex., 94-2 USTC ¶50,585.

Although an officer left a corporation and entered into a settlement agreement with other shareholders in which those shareholders or the corporation would pay delinquent taxes, the agreement did not limit his personal liability. In addition, an installment agreement executed by the corporation with the IRS did not supplant the personal liability of the officer.

J.C. Lynch, BC-DC Ala., 95-2 USTC ¶50,410.

The taxpayers' burden of proving either that they were not responsible persons or that failure to pay the tax was not willful was not met by proof that another, such as the corporate employer, was in a position to pay the taxes.

W.C. Farrington, DC N.H., 96-1 USTC ¶50,094.

A corporate president qualified as a responsible person who acted willfully with respect to the entity's payroll tax delinquencies. His allegation that the IRS selectively enforced the trust fund recovery penalty by targeting him for prosecution despite the existence of other responsible persons was insufficient to warrant the dismissal of the case. The IRS, which presented credible evidence regarding his liability, was not required to prosecute all potential responsible persons.

W.W. Borland II, DC Mich., 2000-1 USTC ¶50,458. Aff'd, CA-6 (unpublished opinion), 2001-2 USTC ¶50,767.

A corporate treasurer's liability for the trust fund recovery penalty was not negated by the fact that there may be other individuals equally liable. The treasurer's was jointly and severally liable for the entire amount of the penalty.

J.A.P. Leiter, DC Kan., 2004-1 USTC ¶50,162.

The government was able to jointly recover the balance of unpaid employment taxes from the chairman of the board of a parochial school. As chairman, he had enough responsibility to be personally liable, he knew about the tax burden, and he signed several checks to some of the school's creditors instead of paying withheld taxes.

M.E. Holmes, DC Tex., 2004-2 USTC ¶50,301.

A company president, who was held liable for the trust fund recovery penalty at the summary judgment phase of a case, was relieved of liability for the IRS Certified Assessment amounts following the trial of the two other company officers for the same trust fund taxes. While, at the summary judgment phase, the president failed to carry his burden of proving the assessments against him were erroneous, the jury in the trial phase held that the assessments against the other officers were excessive and erroneous and determined that the actual assessment amounts were substantially less than the amounts determined by the IRS. An inherent unfairness to the president would result, considering the joint and several nature of the trust fund recovery penalty, if he were unable to obtain relief.

D.R. Ferguson, DC Iowa, 2005-1 USTC ¶50,119, 343 FSupp2d 787.

Failure to Collect and Pay Over Tax, or Attempt to Evade or Defeat Tax: Partners and partnerships

An agreement between one partner (who received all of the partnership assets upon dissolution of the partnership and assumed all of the partnership liabilities) and the IRS for installment payments of unpaid employment taxes of a dissolved partnership did not discharge the other partner from liability for such taxes under the Colorado partnership statute. The act of forbearance by the IRS concerning collection was not a material alteration in the nature or timing of the underlying overdue obligation. Moreover, the IRS reserved its rights against the other partner.

J.R. Hays, CA-10, 89-2 USTC ¶9570.

According to the lower court, subsequently reversed, a general partnership and the individual who executed a limited partnership agreement on behalf of the general partnership were not entitled to a refund of employment taxes, penalties, and interest. Under state (California) law, the general partnership was treated as a general partner because the taxpayers neither recorded a Certificate of Limited Partnership nor substantially complied in good faith with California law. The IRS could not have had clear notice of the partnership arrangements because the certificate was not recorded until two years after it was executed. The IRS was not required to rely on the taxpayer's failure to record in order to recover on the basis of general partnership liability.

Gamma Farms, DC Calif., 90-2 USTC ¶50,378. Rev'd and rem'd, CA-9 (unpublished opinion 3/9/92).

A partnership that handled the payroll functions of another company was a "responsible person" for purposes of the 100% penalty for willfully failing in its duty to withhold and pay social security and income taxes owed by the company. The partnership had the ultimate authority for the decision not to pay the taxes. Further, the partnership acted on its own behalf in its dealings related to the company that owed the taxes. As a result, a general partner who owned 30.85% of the partnership was liable for her share of the tax liability assessed against the partnership, despite the fact that she was a silent partner with no managerial responsibility or involvement in the partnership. Because this was a bankruptcy action, the IRS bore the burden of proving its tax claim against the general partner.

J. Elms, BC-DC La., 93-1 USTC ¶50,284.

An individual was jointly and severally liable, pursuant to state (New York) law, for tax liabilities attributable to a partnership's failure to remit withheld payroll taxes. Although the individual asserted that he never had any association with, or knowledge of, the partnership, he entered into an agreement with the other two partners, was identified by one of the other partners as a co-partner, and was identified in the partnership's federal return, by name and social security number, as a partner.

M. Carlin, DC N.Y., 97-1 USTC ¶50,302.

The general partner in a law firm was personally liable for the partnership's employment tax deficiency. State (Texas) law, which made individual partners personally liable for the partnership's debts, was not preempted by the trust fund recovery penalty rules under Code Sec. 6672 because those provisions did not provide an exclusive remedy against members of a partnership and were not intended by Congress to preempt state partnership law.

W.P. Remington, CA-5, 2000-1 USTC ¶50,369, 210 F3d 281. Aff'g DC Tex., 98-2 USTC ¶50,739.

The partner of a responsible person was jointly and severally liable for trust fund taxes. Because the taxes were a debt of the partnership and the taxpayer was a partner in the business, she was jointly and severally liable for the tax, whether or not she was a responsible person under Code Sec. 6672. Code Sec. 6672 does not set the exclusive standard for establishing individual liability of partners; it is intended to be used with Code Sec. 3403 and state law.

C.B. Mira, BC-DC Pa., 99-2 USTC ¶50,760.

The general partner of a theatrical production was properly found liable under state (New York) law for the partnership's unpaid withholding tax liabilities. The taxpayer's contention that she was not a partner and that Code Sec. 6672 was the appropriate body of law under which the government was required to proceed were rejected. A prior suit she instituted against an advertising agency for copyright violations rested on her status as a partner; thus, she was judicially estopped from asserting otherwise in the instant litigation. Consequently, the IRS was permitted to seek relief either under Code Sec. 6672 or pursuant to state partnership law.

West Productions, Ltd., DC N.Y., 2001-1 USTC ¶50,358.

The general partner of a partnership was not entitled to a refund of trust fund recovery penalties imposed in connection with the partnership's unpaid employment taxes. He signed a partnership agreement, shared in the profits of the partnership, held a right to control the business and never filed a certificate of limited partnership. The taxpayer remained liable under Code Sec. 6702 because the tax liability existed on the date of the partnership's dissolution.

J.P. Helland, FedCl (unpublished opinion), 2002-2 USTC ¶50,754

Alvin S. Brown, Esq.
Tax Attorney
www.irstaxattorney.com

703 25-1400

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Offer in Compromise - IRS tax lien filed during OIC


Kenneth Holten Black and Marie K. Morilus Black v. Commissioner.
Docket No. 8251-06S . Filed November 5, 2007.

[6330]

Tax Court: Summary opinion: Collection: Installment agreement: Offer in compromise: Discretion of hearing officer: Notice of federal tax lien. --

An IRS Appeals officer did not abuse his discretion by sustaining a notice of federal tax lien (NFTL) that was filed against a married couple while they were attempting to negotiate an installment agreement. The Appeals officer considered the taxpayers' collection alternative; however, the taxpayers did not qualify for an offer in compromise because they had the ability to pay the liability in full through an installment agreement. In addition, the Appeals officer balanced the need to collect the taxes with the taxpayers' concern over the NFTL's intrusiveness. --

[6325]Tax Court: Summary opinion: Collection: Discretion of hearing officer: Notice of federal tax lien: Withdrawal of tax lien. --

An IRS Appeals officer did not abuse his discretion by refusing to withdraw a notice of federal tax lien (NFTL). The NFTL was not filed prematurely; the taxpayers' tax liability was assessed, notice and demand for payment was sent and the taxpayers were provided with a Collection Due Process (CDP) hearing notice. Moreover, an installment agreement does not preclude the filing of a NFTL nor require withdrawal of the lien after the agreement becomes effective. Finally, the taxpayers failed to submit any evidence that withdrawal of the NFTL would facilitate collection or would be in both their best interests and that of the United States.


.
DEAN, Special Trial Judge: This case was heard pursuant to the provisions of section 7463(b), the decision to be entered is not reviewable by any other court, and this opinion shall not be treated as precedent for any other case. Unless otherwise indicated, subsequent section references are to the Internal Revenue Code in effect for the year in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.


Background

Some of the facts have been stipulated and are so found. The stipulation of facts and the exhibits received into evidence are incorporated herein by reference. At the time the petition was filed, petitioners resided in Williamsville, New York.

Petitioners filed a joint Form 1040, U.S. Individual Income Tax Return, for 2004. The Internal Revenue Service (IRS) assessed the $24,143 tax shown on the return. The IRS assessed the following additional amounts: (1) A $143 addition to tax for failure to pay estimated tax; (2) a $115.96 addition to tax for failure to pay timely; and (3) $86.09 in accrued interest. After the application of a $12,547 credit for withholding taxes, the additional assessments resulted in an $11,941.05 unpaid balance.

The IRS sent petitioners a notice and demand for payment within 60 days of the assessment. In response, petitioners submitted an offer-in-compromise (OIC) on September 13, 2005, which the IRS rejected, and petitioners appealed. While petitioners' appeal was pending, the IRS filed a Notice of Federal Tax Lien (NFTL) at the Erie County Clerk, Buffalo, New York, on October 20, 2005. The IRS issued to petitioners a Letter 3172(DO), Notice of Federal Tax Lien Filing and Your Right to a Hearing under IRC 6320, on October 21, 2005. In response, petitioners submitted a timely Form 12153, Request for a Collection Due Process Hearing, on November 9, 2005.

Petitioners' hearing was held on January 18, 2006. Pursuant to the parties' discussions, petitioners signed a Form 433-D, Installment Agreement, on February 10, 2006. Petitioners, via a letter dated February 9, 2006, requested that the NFTL be withdrawn because the lien's filing would adversely affect their credit rating and could cause them financial hardship. Additionally, petitioners expressed their concern that a lien could affect their ability to secure college loans on their son's behalf. In response, the IRS sent petitioners a Letter 3193, Notice of Determination Concerning Collection Action(s) Under The issues for decision are whether the Appeals officer abused his discretion in: (1) Sustaining the NFTL; and (2) determining that the NFTL should not be withdrawn.
Discussion
Sec. 6322. In order for the Federal tax lien to have priority over other liens or security interests, the IRS must file an NFTL. section 6320(a) states that the IRS must give the person against whom a Federal tax lien is filed written notice of the lien's filing within 5 days after the date of its filing. section 6330. 6330(d)(1). In reviewing the IRS's determination, the Court applies an abuse of discretion standard when the underlying tax liability is not at issue. Sego v. Commissioner, 114 T.C. 604, 610 (2000). Pursuant to this standard, petitioners must prove that the filing of the NFTL and the rejection of their withdrawal request was arbitrary, capricious, or without sound basis in fact or law. See Woodral v. Commissioner, 112 T.C. 19, 23 (1999).1. Filing of the NFTL
Petitioners contend that respondent's Appeals officer abused his discretion by sustaining the NFTL.
The applicable laws and administrative procedures were satisfied. The parties agree that petitioners received the required notice and demand for payment within the 60-day timeframe mandated by Finally, Form 656, Offer in Compromise, which petitioners signed, specifically states that an NFTL "may be filed at any time while your offer is being considered".
Therefore, the Court concludes that respondent's Appeals officer did not abuse his discretion in upholding the NFTL. Accordingly, respondent's determination is sustained.2. Withdrawal of the NFTL
In pertinent part, Petitioners contend that respondent's Appeals officer abused his discretion when he refused to withdraw the NFTL because: (1) The NFTL's filing was premature; (2) an installment agreement was subsequently agreed to; and (3) it would be in petitioners' and the United States' best interests to remove the NFTL due to the damage it would cause to petitioners' credit rating.
The NFTL was not filed prematurely. Petitioners' tax liability was assessed, and notice and demand for payment was mailed to petitioners within 60 days of the assessment. The IRS issued a Notice 504, Balance Due-Urgent; a Letter 1058, Final Notice of Intent to Levy; as well as A Notice of Federal Tax Lien and Your Right to a Hearing under IRC 6320. The lien's filing occurred after assessment and notice and demand; at each step, petitioners were properly notified.
Entering into an installment agreement does not preclude the filing of an NFTL, nor is the IRS required to withdraw an NFTL after an installment agreement has become effective. Section 6323(j)(1) is permissive: the IRS "may" withdraw an NFTL, but failure to do so is not an abuse of discretion. The Court concludes that respondent's Appeals officer did not abuse his discretion in refusing to withdraw the NFTL. Accordingly, respondent's determination is sustained.
To reflect the foregoing,
An appropriate decision will be entered.

IRS Tax Help - Material Advisor Disclosure Requirement - IRS section 6111

Notice 2007-85 , I.R.B. 2007-45, October 16, 2007.

[ Code Sec. 6111]

Material advisors: Form of disclosure statement:

Disclosures due October 31, 2007. --

Due to the unavailability of Form 8918, Material Advisor Disclosure Statement, a material advisor required to file a completed Form 8918 by October 31, 2007, may satisfy the disclosure requirement of Reg. §301.6111-3(d) by filing Form 8264, Application for Registration of a Tax Shelter, instead.

Reportable transactions disclosed on Form 8264 should be disclosed in the manner described in Notices 2004-80, 2004-2 CB 963, and 2005-22, 2005-1 CB 756. Form 8918 is expected to be published soon. In the event Form 8918 is published before the October 31 due date, advisors may use either Form 8918 or Form 8264. However, unless instructed otherwise by the IRS, material advisors must still use Form 8918 (or its successor) for disclosures required to be filed after October 31, 2007.

This notice provides guidance to material advisors required to file a disclosure statement by October 31, 2007, under §301.6111-3 of the Procedure and Administration Regulations.BACKGROUNDOn August 3, 2007, the Internal Revenue Service and Treasury Department published final regulations under §301.6111-3 in the Federal Register (72 FR 43157) providing the rules relating to the disclosure of reportable transactions by material advisors under section 6111 of the Internal Revenue Code. See T.D. 9351. In general, these regulations apply to transactions with respect to which a material advisor makes a tax statement on or after August 3, 2007. However, these regulations apply to transactions of interest entered into on or after November 2, 2006, with respect to which a material advisor makes a tax statement on or after November 2, 2006.

The regulations provide that each material advisor, with respect to any reportable transaction, must file a return as described in §301.6111-3(d). Section 301.6111-3(d) provides that each material advisor required to file a disclosure statement under §301.6111-3 must file a completed Form 8918 "Material Advisor Disclosure Statement" (or successor form). The Form 8918 must be filed with the Office of Tax Shelter Analysis (OTSA) by the last day of the calendar month that follows the end of the calendar quarter in which the advisor became a material advisor with respect to the reportable transaction or in which the circumstances necessitating an amended disclosure occur.Prior to the publication of the final regulations, material advisors were required to disclose reportable transactions on Form 8264 "Application for Registration of a Tax Shelter." Notice 2004-80, 2004-50 I.R.B. 963, and Notice 2005-22, 2005-12 I.R.B. 756, described the manner in which the Form 8264 was to be completed.INTERIM PROVISION

The next due date for disclosures by material advisors is October 31, 2007. As of the date of release of this notice, Form 8918 has not yet been published. The IRS anticipates that the Form 8918 will be published soon.Due to the unavailability of Form 8918, a material advisor required to file a completed Form 8918 by October 31, 2007, will be treated as satisfying the disclosure requirement of §301.6111-3(d) if the material advisor files Form 8264 instead. If Form 8918 is published on or before October 31, 2007, material advisors may choose to use either Form 8918 or Form 8264 for disclosures required to be filed by October 31, 2007. For disclosures required to be filed after October 31, 2007, material advisors must use Form 8918 (or successor form) unless instructed otherwise by the IRS. Reportable transactions disclosed on the Form 8264 should be disclosed in the manner described in Notice 2004-80 and Notice 2005-22.

EFFECTIVE DATE

This notice is effective October 16, 2007, the date this notice was released to the public.DRAFTING INFORMATIONThe principal author of this notice is Charles D. Wien of the Office of Associate Chief Counsel (Passthroughs & Special Industries). For further information regarding this notice contact Charles D. Wien at 202-622-3070 (not a toll-free call).

§301.6111-3. Disclosure of reportable transactions
(a) In general. --Each material advisor, as defined in paragraph (b) of this section, with respect to any reportable transaction, as defined in §1.6011-4(b) of this chapter, must file a return as described in paragraph (d) of this section by the date described in paragraph (e) of this section.

(b) Material advisor

(1) In general. --A person is a material advisor with respect to a transaction if the person provides any material aid, assistance, or advice with respect to organizing, managing, promoting, selling, implementing, insuring, or carrying out any reportable transaction, and directly or indirectly derives gross income in excess of the threshold amount as defined in paragraph (b)(3) of this section for the material aid, assistance, or advice. The term transaction includes all of the factual elements relevant to the expected tax treatment of any investment, entity, plan or arrangement, and includes any series of steps carried out as part of a plan.

(2) Material aid, assistance, or advice

(i) In general. --Except as provided in paragraph (b)(5) of this section, a person provides material aid, assistance, or advice with respect to organizing, managing, promoting, selling, implementing, insuring, or carrying out any transaction if the person makes or provides a tax statement to or for the benefit of --

(A) A taxpayer who either is required to disclose the transaction under §§1.6011-4, 20.6011-4, 25.6011-4, 31.6011-4, 53.6011-4, 54.6011-4, or 56.6011-4 of this chapter because the transaction is a listed transaction or a transaction of interest, or would have been required to disclose the transaction under §§1.6011-4, 20.6011-4, 25.6011-4, 31.6011-4, 53.6011-4, 54.6011-4, or 56.6011-4 of this chapter if the transaction had become a listed transaction or a transaction of interest within the period of limitations in §1.6011-4(e) of this chapter;

(B) A taxpayer who the potential material advisor knows is or reasonably expects to be required to disclose the transaction under §1.6011-4 of this chapter because the transaction is or is reasonably expected to become a transaction described in §1.6011-4(b)(3) through (5) or (7) of this chapter;

(C) A material advisor who is required to disclose the transaction under this section because it is a listed transaction or a transaction of interest; or

(D) A material advisor who the potential material advisor knows is or reasonably expects to be required to disclose the transaction under this section because the transaction is or is reasonably expected to become a transaction described in §1.6011-4(b)(3) through (5) or (7) of this chapter.

(ii) Tax statement

(A) In general. --A tax statement is any statement (including another person's statement), oral or written, that relates to a tax aspect of a transaction that causes the transaction to be a reportable transaction as defined in §1.6011-4(b)(2) through (7) of this chapter. A tax statement under this section includes tax result protection that insures some or all of the tax benefits of a reportable transaction.

(B) Confidential transactions. --A statement relates to a tax aspect of a transaction that causes it to be a confidential transaction if the statement concerns a tax benefit related to the transaction and either the taxpayer's disclosure of the tax treatment or tax structure of the transaction is limited in the manner described in §1.6011-4(b)(3) of this chapter by or for the benefit of the person making the statement, or the person making the statement knows the taxpayer's disclosure of the tax structure or tax aspects of the transaction is limited in the manner described in §1.6011-4(b)(3) of this chapter.

(C) Transactions with contractual protection. --A statement relates to a tax aspect of a transaction that causes it to be a transaction with contractual protection if the statement concerns a tax benefit related to the transaction and either --

(1) The taxpayer has the right to a full or partial refund of fees paid to the person making the statement or the fees are contingent in the manner described in §1.6011-4(b)(4) of this chapter; or

(2) The person making the statement knows or has reason to know that the taxpayer has the right to a full or partial refund of fees (described in §1.6011-4(b)(4)(ii) of this chapter) paid to another if all or part of the intended tax consequences from the transaction are not sustained or that fees (as described in §1.6011-4(b)(4)(ii) of this chapter) paid by the taxpayer to another are contingent on the taxpayer's realization of tax benefits from the transaction in the manner described in §1.6011-4(b)(4) of this chapter.

(D) Loss transactions. --A statement relates to a tax aspect of a transaction that causes it to be a loss transaction if the statement concerns an item that gives rise to a loss described in §1.6011-4(b)(5) of this chapter.

(E) [Reserved].

(iii) Special rules

(A) Capacity as an employee. --A material advisor generally does not include a person who makes a tax statement solely in the person's capacity as an employee, shareholder, partner or agent of another person. Any tax statement made by that person will be attributed to that person's employer, corporation, partnership or principal. However, a person shall be treated as a material advisor if that person forms or avails of an entity with the purpose of avoiding the rules of section 6111 or 6112 or the penalties under section 6707 or 6708.

(B) Post-filing advice. --A person will not be considered to be a material advisor with respect to a transaction if that person does not make or provide a tax statement regarding the transaction until after the first tax return reflecting tax benefit(s) of the transaction is filed with the IRS. However, this exception does not apply to a person who makes a tax statement with respect to the transaction if it is expected that the taxpayer will file a supplemental or amended return reflecting additional tax benefits from the transaction.

(C) Publicly filed statements. --A tax statement with respect to a transaction that includes only information about the transaction contained in publicly available documents filed with the Securities and Exchange Commission no later than the close of the transaction will not be considered a tax statement to or for the benefit of a person described in paragraph (b)(2) of this section.

(3) Gross income derived for material aid, assistance, or advice

(i) Threshold amount

(A) In general. --The threshold amount of gross income is $50,000 in the case of a reportable transaction substantially all of the tax benefits from which are provided to natural persons (looking through any partnerships, S corporations, or trusts). For all other transactions, the threshold amount is $250,000.

(B) Listed transactions and transactions of interest. --For listed transactions described in §§1.6011-4, 20.6011-4, 25.6011-4, 31.6011-4, 53.6011-4, 54.6011-4, or 56.6011-4 of this chapter, the threshold amounts in paragraph (b)(3)(i)(A) of this section are reduced from $50,000 to $10,000 and from $250,000 to $25,000. For transactions of interest described in §§1.6011-4, 20.6011-4, 25.6011-4, 31.6011-4, 53.6011-4, 54.6011-4, or 56.6011-4 of this chapter, the threshold amounts in paragraph (b)(3)(i)(A) of this section may be reduced as identified in the published guidance describing the transaction.

(C) [Reserved].

(D) Substantially all of the tax benefits. --For purposes of this section, the determination of whether substantially all of the tax benefits from a reportable transaction are provided to natural persons is made based on all the facts and circumstances. Generally, unless the facts and circumstances prove otherwise, if 70 percent or more of the tax benefits from a reportable transaction are provided to natural persons (looking through any partnerships, S corporations, or trusts) then substantially all of the tax benefits will be considered to be provided to natural persons.

(ii) Gross income derived directly or indirectly for the material aid, assistance, or advice. --In determining the amount of gross income a person derives directly or indirectly for material aid, assistance, or advice, all fees for a tax strategy or for services for advice (whether or not tax advice) or for the implementation of a reportable transaction are taken into account. Fees include consideration in whatever form paid, whether in cash or in kind, for services to analyze the transaction (whether or not related to the tax consequences of the transaction), for services to implement the transaction, for services to document the transaction, and for services to prepare tax returns to the extent return preparation fees are unreasonable in light of all of the facts and circumstances. A fee does not include amounts paid to a person, including an advisor, in that person's capacity as a party to the transaction. For example, a fee does not include reasonable charges for the use of capital or the sale or use of property. The IRS will scrutinize carefully all of the facts and circumstances in determining whether consideration received in connection with a reportable transaction constitutes gross income derived directly or indirectly for aid, assistance, or advice. For purposes of this section, the threshold amount must be met independently for each transaction that is a reportable transaction and aggregation of fees among transactions is not required.

(4) Date a person becomes a material advisor

(i) In general. --A person will be treated as becoming a material advisor when all of the following events have occurred (in no particular order) --

(A) The person provides material aid, assistance or advice as described in paragraph (b)(2) of this section;

(B) The person directly or indirectly derives gross income in excess of the threshold amount as described in paragraph (b)(3) of this section; and

(C) The transaction is entered into by the taxpayer to whom or for whose benefit the person provided the tax statement, or in the case of a tax statement provided to another material advisor, when the transaction is entered into by a taxpayer to whom or for whose benefit that material advisor provided a tax statement.

(ii) Determining if the taxpayer entered into the transaction. --Material advisors, including those who cease providing services before the time the transaction is entered into, must make reasonable and good faith efforts to determine whether the event described in paragraph (b)(4)(i)(C) of this section has occurred.

(iii) Listed transactions and transactions of interest. --If a transaction that was not a reportable transaction is identified as a listed transaction or a transaction of interest in published guidance after the occurrence of the events described in paragraph (b)(4)(i) of this section, the person will be treated as becoming a material advisor on the date the transaction is identified as a listed transaction or a transaction of interest.

(5) Other persons designated as material advisors. --Published guidance may identify other types or classes of persons as material advisors.

(c) Definitions. --For purposes of this section, the following definitions apply:

(1) Reportable transaction. --The term reportable transaction is defined in §1.6011-4(b)(1) of this chapter.

(2) Listed transaction. --The term listed transaction is defined in §1.6011-4(b)(2) of this chapter. See also §§20.6011-4(a), 25.6011-4(a), 31.6011-4(a), 53.6011-4(a), 54.6011-4(a), or 56.6011-4(a) of this chapter.

(3) Derive. --The term derive means receive or expect to receive.

(4) Person. --The term person means any person described in section 7701(a)(1), including an affiliated group of corporations that join in the filing of a consolidated return under section 1501.

(5) Substantially similar. --The term substantially similar is defined in §1.6011-4(c)(4) of this chapter.

(6) Tax. --The term tax means Federal tax.

(7) Tax benefit. --A tax benefit includes deductions, exclusions from gross income, nonrecognition of gain, tax credits, adjustments (or the absence of adjustments) to the basis of property, status as an entity exempt from Federal income taxation, and any other tax consequences that may reduce a taxpayer's Federal tax liability by affecting the amount, timing, character, or source of any item of income, gain, expense, loss, or credit.

(8) Tax return. --The term tax return means a Federal tax return and a Federal information return.

(9) Tax structure. --The tax structure of a transaction is any fact that may be relevant to understanding the purported or claimed Federal tax treatment of the transaction.

(10) Tax treatment. --The tax treatment of a transaction is the purported or claimed Federal tax treatment of the transaction.

(11) Taxpayer. --The term taxpayer is defined in §1.6011-4(c)(1) of this chapter.

(12) Tax result protection. --The term tax result protection includes insurance company and other third party products commonly described as tax result insurance.

(13) Transaction of interest. --The term transaction of interest is defined in §1.6011-4(b)(6) of this chapter. See also §§20.6011-4(a), 25.6011-4(a), 31.6011-4(a), 53.6011-4(a), 54.6011-4(a), or 56.6011-4(a) of this chapter.

(d) Form and content of material advisor's disclosure statement

(1) In general. --A material advisor required to file a disclosure statement under this section must file a completed Form 8918, "Material Advisor Disclosure Statement" (or successor form) in accordance with this paragraph (d) and the instructions to the form. To be considered complete, the information provided on the form must describe the expected tax treatment and all potential tax benefits expected to result from the transaction, describe any tax result protection with respect to the transaction, and identify and describe the transaction in sufficient detail for the IRS to be able to understand the tax structure of the reportable transaction and the identity of any material advisor(s) whom the material advisor knows or has reason to know acted as a material advisor as defined in paragraph (b) of this section with respect to the transaction. An incomplete form containing a statement that information will be provided upon request is not considered a complete disclosure statement. A material advisor may file a single form for substantially similar transactions. An amended form must be filed if information previously provided is no longer accurate, if additional information that was not disclosed becomes available, or if there are material changes to the transaction. A material advisor is not required to file an additional form for each additional taxpayer that enters into the same or substantially similar transaction. If the form is not completed in accordance with the provisions in this paragraph (d) and the instructions to the form, the material advisor will not be considered to have complied with the disclosure requirements of this section.

(2) Reportable transaction number. --The IRS will issue to a material advisor a reportable transaction number with respect to the disclosed reportable transaction. Receipt of a reportable transaction number does not indicate that the disclosure statement is complete, nor does it indicate that the transaction has been reviewed, examined, or approved by the IRS. Material advisors must provide the reportable transaction number to all taxpayers and material advisors for whom the material advisor acts as a material advisor as defined in paragraph (b) of this section. The reportable transaction number must be provided at the time the transaction is entered into, or, if the transaction is entered into prior to the material advisor receiving the reportable transaction number, within 60 calendar days from the date the reportable transaction number is mailed to the material advisor.

(e) Time of providing disclosure. --The material advisor's disclosure statement for a reportable transaction must be filed with the Office of Tax Shelter Analysis (OTSA) by the last day of the month that follows the end of the calendar quarter in which the advisor became a material advisor with respect to the reportable transaction or in which the circumstances necessitating an amended disclosure statement occur. The disclosure statement must be sent to OTSA at the address provided in the instructions for Form 8918 (or a successor form).

(f) Designation agreements. --If more than one material advisor is required to disclose a reportable transaction under this section, the material advisors may designate by written agreement a single material advisor to disclose the transaction. The transaction must be disclosed by the last day of the month following the end of the calendar quarter that includes the earliest date on which a material advisor who is a party to the agreement became a material advisor with respect to the transaction as described in paragraph (b)(4) of this section. The designation of one material advisor to disclose the transaction does not relieve the other material advisors of their obligation to disclose the transaction to the IRS in accordance with this section, if the designated material advisor fails to disclose the transaction to the IRS in a timely manner.

(g) Protective disclosures. --If a potential material advisor is uncertain whether a transaction must be disclosed under this section, the advisor may disclose the transaction in accordance with the requirements of this section and comply with all the provisions of this section, and indicate on the disclosure statement that the disclosure statement is being filed on a protective basis. The IRS will not treat disclosure statements filed on a protective basis any differently than other disclosure statements filed under this section. For a protective disclosure to be effective, the advisor must comply with the regulations under this section and §301.6112-1 by providing to the IRS all information requested by the IRS under these sections.

(h) Rulings. --If a potential material advisor requests a ruling as to whether a specific transaction is a reportable transaction on or before the date that disclosure would otherwise be required under this section, the Commissioner in his discretion may determine that the submission satisfies the disclosure rules under this section for that transaction if the request fully discloses all relevant facts relating to the transaction which would otherwise be required to be disclosed under this section. The potential obligation of the person to disclose the transaction under this section (or to maintain or furnish the list under §301.6112-1) will not be suspended during the period that the ruling request is pending.

(i) Effective/applicability date

(1) In general. --This section applies to transactions with respect to which a material advisor makes a tax statement on or after August 3, 2007. However, this section applies to transactions of interest entered into on or after November 2, 2006 with respect to which a material advisor makes a tax statement under §301.6111-3 on or after November 2, 2006. Paragraph (h) of this section applies to ruling requests received on or after November 1, 2006. Otherwise, the rules that apply with respect to transactions entered into before August 3, 2007 are contained in Notice 2004-80 (2004-50 IRB 963); Notice 2005-17 (2005-8 IRB 606); and Notice 2005-22 (2005-12 IRB 756)(see §601.601(d)(2)(ii)(b) in effect prior to August 3, 2007.

(2) [Reserved].

[Reg. §301.6111-3.]

 [T.D. 9351, 7-31-2007
of Reportable Transactions: Interim guidance, American Jobs Creation Act of 2004 (P.L. 108-357)The guidance contained in Notice 2005-22 will be superseded by Proposed Reg. §301.6111-3 (see ¶37,002.08.The IRS has provided additional interim guidance to material advisors who are required, with regard to any reportable transaction, to file Form 8264, Application for Registration of a Tax Shelter, with respect to that transaction. The interim guidance states that material advisors should not modify Form 8264 but should complete the form as if it had been modified as indicated in Notice 2004-80, I.R.B. 2004-50, 963. A person will be treated as becoming a material advisor when three events have taken place: (1) the material advisor makes a tax statement, (2) the material advisor receives, or expects to receive, the minimum fees with respect to the reportable transaction and (3) the transaction is entered into by the taxpayer. The guidance also extends the time for filing Form 8264 so that, for a person who becomes a material advisor after October 22, 2004, and on or before March 31, 2005, the form must be filed on or before April 30, 2005.

[Full Text-Notice 2005-22]

The purpose of this notice is to clarify and modify Notice 2004-80, 2004-50 I.R.B. 963, to provide additional guidance for material advisors who are required to comply with §§6111 and 6112 of the Internal Revenue Code, as amended, and to grant an extension of time for material advisors to comply with the new filing requirements under §6111.BACKGROUNDSection 6111, as amended by the American Jobs Creation Act of 2004, P.L. 108-357, 118 Stat. 1418 (the Act), requires that each material advisor with respect to any reportable transaction make a return setting forth information identifying and describing the transaction and any potential tax benefits expected to result from the transaction no later than the date specified by the Secretary. Notice 2004-80 announced that the Internal Revenue Service and the Treasury Department intend to issue regulations providing rules under §6111.Notice 2004-80 also provides interim rules implementing the requirements of §6111 until the Secretary prescribes regulations. Under Notice 2004-80, each material advisor with respect to a reportable transaction must file a return on Form 8264, Application for Registration of a Tax Shelter, within 30 days after the date on which the person becomes a material advisor. Notice 2004-80 also provides transitional relief in the case of a person who becomes a material advisor after October 22, 2004, and on or before December 31, 2004, that allows the material advisor to file the return before February 1, 2005. Notice 2005-17, 2005-8 I.R.B. 606, released on January 28, 2005, grants additional transitional relief allowing a person who becomes a material advisor after October 22, 2004, and on or before January 29, 2005, to file the return before March 1, 2005.Since the issuance of Notice 2004-80, questions have arisen regarding the application of the interim rules to material advisors. In addition, Notice 2005-17 states that the Service and Treasury intend to provide further guidance on the issue of the date on which a person becomes a material advisor with respect to a reportable transaction (including whether the obligation of a material advisor arises only when a reportable transaction is entered into by a taxpayer). This notice provides additional interim rules that will apply until further guidance is issued and grants additional transitional relief.ADDITIONAL INTERIM PROVISIONS1. Completion of Form 8264Notice 2004-80 provides that each material advisor required under §6111, as amended, to file a return with respect to a reportable transaction must complete Parts I (except item 1(b)), IV, and V of Form 8264. In completing Form 8264, the form and instructions are to be read to apply, by substituting: (1) "reportable transaction" each place "tax shelter" or "confidential corporate tax shelter" appears; (2) "material advisor" each place "organizer" or "principal organizer" appears; and (3) "Date the material advisor became a material advisor with respect to the reportable transaction" in place of "Date an interest in the tax shelter was first offered for sale" in Part I, line 7, of the form.Questions have arisen whether a material advisor is required to modify the Form 8264 by striking or replacing lines or fields. A material advisor may not make modifications to the Form 8264. A material advisor must simply complete the form as if it had been modified to read as described in Notice 2004-80.2. Material Advisors and Transitional ReliefNotice 2004-80 provides that a material advisor who is required to file a return under §6111 must file the return within 30 days after the date on which the person becomes a material advisor. Notice 2004-80 provides that a material advisor is defined in §301.6112-1(c)(2). Notice 2004-80 also provides that a material advisor may file a single Form 8264 for substantially similar transactions. A material advisor is required to supplement information disclosed on Form 8264 if the information provided is no longer accurate, or if additional information that was not disclosed on Form 8264 becomes available.Questions have arisen regarding when a person becomes a material advisor. Section 301.6112-1(c)(2) defines a material advisor as a person who makes a tax statement and receives or expects to receive a minimum fee with respect to a reportable transaction. Section 301.6112-1(c)(2)(B) provides that a material advisor includes a person who makes a tax statement to or for the benefit of a taxpayer who the potential material advisor (at the time the transaction is entered into) knows is or reasonably expects to be required to disclose the transaction under §1.6011-4.Until further guidance is issued, a material advisor will be treated as becoming a material advisor under §6111 when all of the following events have occurred: (1) the material advisor makes a tax statement, (2) the material advisor receives (or expects to receive) the minimum fees, and (3) the transaction is entered into by the taxpayer. Material advisors, including those who cease providing services prior to the time the transaction is entered into, must make reasonable and good faith efforts to determine whether the taxpayer entered into the transaction.Moreover, the time for providing disclosure as provided in Notice 2004-80 is amended by this notice. Until further guidance is issued, a material advisor will meet its return filing obligation under §6111 if the Form 8264 is filed by the last day of the month that follows the end of the calendar quarter in which the advisor became a material advisor. Also, the transitional relief provided in Notice 2004-80 and Notice 2005-17 for disclosure of a transaction under §6111 is extended. Accordingly, if a person becomes a material advisor after October 22, 2004, and on or before March 31, 2005, that material advisor must file the return on or before April 30, 2005.Once a material advisor has filed a Form 8264 with respect to a transaction, the material advisor is not required to file an additional Form 8264 for each additional taxpayer that subsequently enters into the same transaction or to file a Form 8264 for a separate transaction that is the same as or substantially similar to the transaction for which the material advisor has filed a Form 8264.Questions also have arisen regarding whether the tolling provisions of §1.6011-4(f) would apply to requests from a potential material advisor for a letter ruling. Until further guidance is issued, if the advisor submits a request for a letter ruling on or before the date the return under §6111 is due and fully discloses all relevant facts relating to the transaction, the obligation of the potential material advisor to disclose the transaction will be suspended as provided in §1.6011-4(f). However, a request for a letter ruling by a potential material advisor will not toll the disclosure provisions of §1.6011-4 for taxpayers who participate in the transaction. See §1.6011-4(f) for tolling provisions applicable to material advisors and taxpayers.Finally, questions have arisen regarding the nature of the statement relating to the financial accounting treatment of the item(s) giving rise to a significant book-tax difference described in §1.6011-4(b)(6). In addition, some practitioners have erroneously concluded that Notice 2004-80 was intended to exclude persons who do not provide accounting advice. The financial accounting statement described in Notice 2004-80 includes statements made by any material advisor, including accountants, lawyers, or investment advisors.3. Effective Date of Notice 2004-80Notice 2004-80 is effective for transactions with respect to which material aid, assistance, or advice is provided after October 22, 2004. Questions have arisen regarding the definition of material aid, assistance, or advice provided after October 22, 2004. For purposes of the disclosure required by §6111, disclosure is required for reportable transactions with respect to which a material advisor makes a tax statement (other than post-filing advice described in §301.6112-1(c)(2)(iv)(A)) after October 22, 2004, regardless of whether any portion of the fee was received before October 22, 2004, or whether the transaction was entered into before October 22, 2004. (For the timing of the disclosure, see Section 2 of this notice, above.)EFFECTIVE DATEThis notice is effective February 24, 2005, the date this notice was released to the public.EFFECT ON OTHER DOCUMENTSThis document clarifies and modifies Notice 2004-80 and Notice 2005-17.DRAFTING INFORMATIONThe principal author of this notice is Tara P. Volungis of the Office of the Associate Chief Counsel (Passthroughs & Special Industries). For further information regarding this notice contact Ms. Volungis at (202) 622-3080 (not a toll-free call).Notice 2005-22, I.R.B. 2005-12, 756, clarifying and modifying Notice 2005-17, I.R.B. 2005-8, 606 and Notice 2004-80, I.R.B. 2004-50, 963 (This guidance will be superseded by Proposed Reg. §301.6111-3 (see ¶37,002.08).Prior to Notice 2005-22, I.R.B. 2005-12, 756 above, the IRS extended the transitional relief in Notice 2004-80, I.R.B. 2004-50, 963, for filing Form 8264 in the case of a person who becomes a material advisor after October 22, 2004. A person who became a material advisor after October 22, 2004, and on or before January 29, 2005 was required to file Form 8264 before March 1, 2005.Notice 2005-17, I.R.B. 2005-8, 606, clarified and modified by Notice 2005-22, I.R.B. 2005-12, 756.Guidance is provided that reflects changes made by the American Jobs Creation Act of 2004 (P.L. 108-357) to the requirements for disclosure of reportable transactions by taxpayers and material advisors.

[Full Text-Notice 2004-80]

The purpose of this notice is to alert taxpayers to recent amendments to §§6111, 6112, and 6708 of the Internal Revenue Code. The notice announces that the Internal Revenue Service and the Treasury Department will issue regulations under §6111 and amend the regulations under §6112. The regulations under §6111 and §6112 will apply to transactions with respect to which material aid, assistance, or advice is provided after October 22, 2004. The Service and Treasury also will issue regulations under §6708 that will apply to written requests made after October 22, 2004, for investor lists required to be maintained under §6112. This notice provides guidance for material advisors who are required to comply with §§6111 and 6112, as amended, and who are potentially subject to penalty under §6708, as amended. This notice also invites comments from the public regarding rules and standards relating to §§6111, 6112, and 6708, as amended.BACKGROUND AND PRIOR LAWPrior to the recent amendments, §6111(a) required an organizer of a tax shelter to register the shelter with the Secretary not later than the day on which interests in the shelter were first offered for sale. Under former §6111(c), a tax shelter was defined as any investment with respect to which any person could reasonably infer from the representations made in connection with the offering for sale of interests that the tax shelter ratio for any investor as of the close of any of the first five years ending after the investment was offered for sale may have been greater than two to one and which was: (1) required to be registered under federal or state securities laws; (2) sold pursuant to an exemption from registration requiring the filing of a notice with a federal or state securities agency; or (3) a substantial investment (the aggregate amount which may have been offered for sale exceeded $250,000 and the expected involvement of at least five investors). Under former §6111(d), other entities, plans, arrangements or transactions could be treated as tax shelters for purposes of former §6111(a) if: (1) a significant purpose of the structure was the avoidance or evasion of federal income tax for a direct or indirect corporate participant; (2) the offer was made under conditions of confidentiality; and (3) the tax shelter promoter may have received fees in excess of $100,000 in the aggregate.THE AMERICAN JOBS CREATION ACT OF 2004The American Jobs Creation Act of 2004, P.L. 108-357, 118 Stat. 1418, (the Act) was enacted on October 22, 2004. Section 815 of the Act amended §6111 to require each material advisor with respect to any reportable transaction to make a return (in such form as the Secretary may prescribe) setting forth: (1) information identifying and describing the transaction; (2) information describing any potential tax benefits expected to result from the transaction; and (3) other information as the Secretary may prescribe. Section 6111(a), as amended, provides that the return must be filed not later than the date specified by the Secretary. Section 6111(b)(1) defines a material advisor and includes a requirement that the material advisor receive certain threshold amounts of gross income that the Secretary may prescribe.The amendments to §6111 authorize the Secretary to prescribe regulations that provide: (1) that only one person shall be required to meet the requirements of §6111(a) in cases in which two or more persons would otherwise be required to meet such requirements; (2) exemptions from the requirements of §6111; and (3) rules as may be necessary or appropriate to carry out the purposes of §6111.Section 815 of the Act also amended §6112 to provide that each material advisor (as defined in new §6111) with respect to any reportable transaction is required to maintain a list (in such manner as the Secretary may by regulations prescribe) identifying each person with respect to whom the advisor acted as a material advisor with respect to the transaction, and containing other information as the Secretary may by regulations require.Section 815 of the Act is effective for transactions with respect to which material aid, assistance, or advice is provided after October 22, 2004, the date of enactment of the Act.Section 817 of the Act amended §6708 to impose a penalty on a material advisor who fails to make available, within 20 business days after the date of a written request by the Secretary, a list required to be maintained under §6112(a). The new amount of the penalty is $10,000 for each day after the 20th day that the material advisor fails to provide the list. Section 6708(a)(2) provides a reasonable cause exception to the imposition of the penalty under §6708. Section 817 of the Act is effective for requests made after October 22, 2004, the date of the enactment of the Act.INTERIM PROVISIONSThe Service and Treasury intend to issue regulations providing rules under §§6111, 6112, and 6708, as amended. However, because the amendments to §§6111, 6112, and 6708 currently are effective, the Service and Treasury are providing the following interim rules implementing the requirements of §§6111, 6112, and 6708, as amended, until the Secretary prescribes regulations. The interim rules as adopted by this notice incorporate, in part, rules in the current regulations under §§6011, 6111, and 6112. These interim rules will apply until further guidance is issued.A. Disclosure by Material Advisors Under §6111 As indicated above, section 815 of the Act amended §6111 to require that each material advisor with respect to any reportable transaction make a return setting forth information identifying and describing the transaction and any potential tax benefits expected to result from the transaction no later than the date specified by the Secretary. Until further guidance is issued, the definition of a reportable transaction, the definition of a material advisor, and the requirements for filing a return under §6111 are as indicated below.1. Definition of Reportable TransactionFor purposes of new §6111(a), a "reportable transaction" is defined in §1.6011-4(b) of the Income Tax Regulations. In addition, the rules in §301.6112-1(b)(2) and (c)(2) (without regard to provisions relating to a transaction required to be registered under former §6111) will apply for purposes of determining whether a transaction is a reportable transaction with respect to a material advisor. Determinations made by public guidance pursuant to §1.6011-4(b)(8) that a transaction will not be considered a reportable transaction or will be excluded from a category of reportable transactions, including Rev. Proc. 2004-65 (relating to transactions with contractual protection), Rev. Proc. 2004-66 (relating to loss transactions), Rev. Proc. 2004-67 (relating to transactions with a significant book-tax difference), and Rev. Proc. 2004-68 (relating to transactions with a brief asset holding period) also will apply for purposes of new §§6111 and 6112.2. Definition of a Material AdvisorFor purposes of new §6111, a "material advisor" is defined in §301.6112-1(c)(2) of the Procedure and Administration Regulations. The existing rules under §301.6112-1(c)(2), (c)(3), and (d) (without regard to the provisions relating to a transaction required to be registered under former §6111), including the minimum fee amounts for listed transactions under §301.6112-1(c)(3)(ii), will apply for purposes of determining whether a person is a material advisor.In the case of a transaction with a significant book-tax difference described in §1.6011-4(b)(6), a person will be considered a material advisor with regard to the transaction for purposes of §§6111 and 6112 only if the person who makes a tax statement described in §301.6112-1(c)(2)(iii)(E) also makes a statement, oral or written, that relates to the financial accounting treatment of the item(s) that gives rise to a significant book-tax difference described in §1.6011-4(b)(6).3. Filing of Return Under §6111Until Form 8264, Application for Registration of a Tax Shelter, is revised, or a successor form is issued, for purposes of new §6111(a), a material advisor required to file a return with respect to a reportable transaction must complete Form 8264 in the following manner. A material advisor is required to complete only Parts I (except item 1(b)), IV, and V of Form 8264. In completing Form 8264, the form and instructions are to be read to apply, by substituting: (1) "reportable transaction" each place "tax shelter" or "confidential corporate tax shelter" appears; (2) "material advisor" each place "organizer" or "principal organizer" appears; and (3) "Date the material advisor became a material advisor with respect to the reportable transaction" in place of "Date an interest in the tax shelter was first offered for sale" in Part I, line 7, of the form. In Part IV, fees must be determined by applying the rules in §301.6112-1(c)(3)(iii) instead of the instructions. In Part V, the material advisor must identify the type of reportable transaction under §1.6011-4(b) that is being disclosed, and describe the facts of the transaction and the potential tax benefits expected to result from the transaction. Form 8264 must be signed under penalties of perjury. The form must be sent to the Internal Revenue Service Center, Ogden, UT 84201.A material advisor may file a single Form 8264 for substantially similar transactions. A material advisor is required to supplement information disclosed on Form 8264 if the information provided is no longer accurate, or if additional information that was not disclosed on Form 8264 becomes available.In addition, the following rules contained in §301.6111-1T will apply: (1) Q&A-3 and 50 regarding representations made to investors about disclosures under §6111; (2) Q&A-38 and 39 regarding designation agreements; (3) Q&A 49 regarding timely mailing; and (4) Q&A-51 through 57 regarding the furnishing of registration numbers and the reporting requirement on Form 8271, Investor Reporting of Tax Shelter Registration Number, or any successor form.4. Due Date of Return Under §6111Section 6111(a), as amended, provides that the Secretary may specify the date the return must be filed by a material advisor. A material advisor, as defined in §301.6112-1(c)(2), who is required to file a return under §6111 must file the return within 30 days after the date on which the person becomes a material advisor. However, if a person becomes a material advisor after October 22, 2004, and on or before December 31, 2004, that material advisor must file the return before February 1, 2005. If a person is required to disclose a reportable transaction under the provisions of §6111, as amended, and the person has registered the transaction under former §6111 prior to October 22, 2004, that registration will satisfy the disclosure requirements for the new provisions in §6111, provided that the material advisor amends the previous registration to reflect any information required under this notice.B. Maintenance of Lists by Material Advisors Under §6112 Section 815 of the Act amended §6112 to provide that each material advisor (as defined in new §6111(b)) with respect to any reportable transaction is required to maintain a list identifying each person with respect to whom the advisor acted as a material advisor with respect to the transaction. Section 817 of the Act amended §6708 to impose a penalty on a material advisor who fails to make a list available upon written request within 20 business days after the date of the request.For purposes of new §6112, the existing rules under §301.6112-1 (without regard to the provisions relating to a transaction required to be registered under former §6111) relating to the preparation, maintenance, retention, and furnishing of lists will apply to material advisors required to maintain lists with respect to a reportable transaction.For purposes of former §6112, §301.6112-1 will continue to apply to organizers and sellers (defined as material advisors in §301.6112-1(c)(2)) who are required to maintain lists under former §6112. Consequently, an organizer or seller under former §6112 must continue to maintain any list described in §301.6112-1(e) for the seven-year period described in §301.6112-1(f) even if such period expires after October 22, 2004.For purposes of §6708, the 20 business-day period within which a person must provide the list required to be maintained under §6112 shall begin on the first business day following the earlier of the date that the IRS: (1) mails a request for the list by certified or registered mail to the last known address of the material advisor required to maintain the list or (2) hand-delivers the written request in person. Business days include every calendar day other than Saturdays, Sundays, or legal holidays. For purposes of this notice, "legal holiday" shall have the same meaning provided in §7503.REQUEST FOR COMMENTSThe Service and Treasury intend to issue regulations implementing the requirements of §§6111, 6112, and 6708, as amended. The Service and Treasury continue to balance the benefits to the government of early and complete disclosure with the burden imposed on taxpayers and their representatives. The Service and Treasury invite interested persons to submit comments regarding the requirements of §§6111, 6112, and 6708, including comments on the definition of material advisor and comments on ways to reduce taxpayer burden and to improve disclosure. Comments on guidance under §§6111, 6112, or 6708, may be submitted to: CC:PA:LPD:PR (NOT-155984-04), Room 5203, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044. Submissions also may be hand delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR (NOT-155984-04), Couriers Desk, Internal Revenue Service, 1111 Constitution Avenue NW., Washington, DC. Alternatively, taxpayers may submit electronic comments directly to the IRS e-mail address: notice.comments@irscounsel.treas.gov.

EFFECTIVE DATE

This notice is effective for transactions with respect to which material aid, assistance, or advice is provided after October 22, 2004. This notice is also effective for written requests made after October 22, 2004, for investor lists required to be maintained under §6112.DRAFTING INFORMATIONThe principal author of this notice is Tara P. Volungis of the Office of the Associate Chief Counsel (Passthroughs & Special Industries). For further information regarding this notice contact Ms. Volungis at (202) 622-3080 (not a toll free call).Notice 2004-80, I.R.B. 2004-50, 963, clarified and modified by Notice 2005-17, I.R.B. 2005-8, 606 and Notice 2005-22, I.R.B. 2005-12, 756.A material advisor required to file a completed Form 8918 by October 31, 2007, may satisfy the disclosure requirement of Reg. §301.6111-3(d) by filing Form 8264, Application for Registration of a Tax Shelter, instead. Reportable transactions disclosed on Form 8264 should be disclosed in the manner described in Notices 2004-80, 2004-2 CB 963, and 2005-22, 2005-1 CB 756. In the event Form 8918 is published before the October 31 due date, advisors may use either Form 8918 or Form 8264. However, unless instructed otherwise by the IRS, material advisors must still use Form 8918 (or its successor) for disclosures required to be filed after October 31, 2007.Notice 2007-85, I.R.B. 2007-45.


Alvin S. Brown, Esq.
Tax Attorney
703 425-1400
www.irstaxattorney.com

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Offer in Compromise - IRS abused its discretion - section 6330 collection due process appeal


Judy Hedrick Blosser v. Commissioner.

Dkt. No. 9350-06L , TC Memo. 2007-323, October 29, 2007.[Appealable, barring stipulation to the contrary, to CA-4. --CCH.][Code Sec. 6330]Notice of Levy and Right to Hearing: Issues raised at hearing : Abuse of discretion. --

The IRS Appeals office abused its discretion by failing to consider issues raised by the taxpayer at the collection due process (CDP) hearing. Although the taxpayer did not submit a new collection information statement (CIS) prior to the scheduled telephonic hearing, she explained at the time of the hearing that she was unable to do so due to a recent tragedy in her family. Moreover, the settlement officer did not discuss changes in the taxpayer's financial status, despite the fact that the taxpayer claimed that she had lost her full-time job and obtained a part-time job after she submitted the original CIS. There was also no indication that the settlement officer considered the taxpayer's statement that she was incarcerated during the tax years at issue or that he made any determination that her incarceration was sufficient verification that the taxpayer had no filing obligations for those years.

MEMORANDUM OPINION

GOEKE, Judge: This matter is before the Court on the parties' cross-motions for summary judgment pursuant to Rule 121.1 The issue in this collection case is whether respondent's Appeals Office abused its discretion in sustaining respondent's proposed levy action against petitioner to collect income tax liabilities for the taxable years 1994, 1995, and 1996 and denying petitioner's request for alternative collection methods. We conclude that there are no genuine issues as to any material facts, a decision may be rendered as a matter of law, and the Appeals Office abused its discretion.
Background

At the time she filed her petition, petitioner resided in Harrisonburg, Virginia.

Petitioner did not file Federal income tax returns for taxable year 1994, 1995, or 1996. Respondent issued notices of deficiency for those years and determined tax deficiencies of $2,892, $6,368, and $2,937, respectively.

On November 22, 2005, respondent mailed to petitioner a Letter L-1058, Final Notice of Intent to Levy and Notice of Your Right to a Hearing, informing petitioner that respondent proposed to levy on her property to collect Federal income taxes owed for 1994, 1995, and 1996. After assessing penalties and interest and applying withholding credits, respondent determined that petitioner owed a total of $26,011.04.

On December 9, 2005, petitioner timely filed a Form 12153, Request for a Collection Due Process Hearing, regarding the proposed levy. Petitioner claimed that she could not afford to pay the income tax owed, and as evidence of her financial situation she attached a Form 433-F, Collection Information Statement, dated September 22, 2005. The Form 433-F detailed petitioner's income, expenses, and assets at that time. Petitioner also stated that she anticipated having to find a new job in January of 2006.

By letter dated February 28, 2006, an Appeals Office settlement officer notified petitioner that she had scheduled a telephone hearing for April 6, 2006. The letter requested petitioner to submit within 14 days a completed Form 433-A, Collection Information Statement For Wage Earners and Self-Employed Individuals, a completed offer in compromise package, and signed Federal income tax returns for taxable years 1999 through 2003 so that the Appeals Office could consider collection alternatives in a collection hearing. Petitioner did not send any of the requested information.

According to the administrative record, during the telephone hearing petitioner told the settlement officer that she had lost her full-time job and had acquired a part-time job. Petitioner stated that she was unable to make a payment at that time and thought that she would be granted currently not collectible (CNC) status because she had sent a Form 433-F to another Internal Revenue Service officer. The settlement officer told petitioner that her account had been on CNC status but was removed from said status in September of 2005. The settlement officer inquired why petitioner had not provided another collection information statement (CIS). Petitioner explained that she had not been able to because of a family tragedy. Petitioner also explained that she did not file tax returns for 1999 through 2003 because she was incarcerated during those years. The settlement officer told petitioner that she could not consider collection alternatives at that time because petitioner had failed to provide current financial information, file tax returns for the specified years, or provide verification as to why she did not file the requested returns. The settlement officer also told petitioner that she would be receiving a notice of determination and had the right to challenge the Appeals Office's determination in this Court. Petitioner told the settlement officer that she intended to prepare current financial information in order to request reinstatement of CNC status.

On April 20, 2006, respondent mailed petitioner a Notice of Determination Concerning Collection Action(s) Under Section 6320 and/or 6330 (notice of determination), sustaining the proposed levy action. The Appeals Office determined that petitioner (1) did not provide current financial information, (2) failed to file the requested tax returns, and (3) failed to provide any reason why she did not file the requested returns.

Petitioner timely petitioned this Court for review of respondent's determination pursuant to section 6330(d). Petitioner submitted with her posttrial brief records indicating that she had been incarcerated from 1999 to 2003.
Discussion

Summary judgment may be granted where there is no genuine issue of any material fact and a decision may be rendered as a matter of law. Rule 121(a) and (b); Beery v. Commissioner [Dec. 55,553], 122 T.C. 184, 187 (2004). The moving party bears the burden of proving that there is no genuine issue of material fact, and factual inferences will be viewed in the manner most favorable to the nonmoving party. Dahlstrom v. Commissioner [Dec. 42,486], 85 T.C. 812, 821 (1985). In this case, there is no apparent disagreement as to the material facts and circumstances. Accordingly, this case is ripe for resolution by means of summary judgment.

Section 6330(a)(1) gives a taxpayer the right to a hearing with the Appeals Office before the Secretary can levy on the taxpayer's property. Under section 6330(d)(1), where a taxpayer's underlying tax liability is not at issue, we generally review the Appeals Office's determination following the hearing for an abuse of discretion. Goza v. Commissioner [Dec. 53,803], 114 T.C. 176, 181-182 (2000). An abuse of discretion occurs if the Appeals Office exercises its discretion arbitrarily, capriciously, or without sound basis in fact or law. Woodral v. Commissioner [Dec. 53,206], 112 T.C. 19, 23 (1999). Because petitioner does not dispute her underlying tax liability, we apply the abuse of discretion standard.

Under section 6330(c)(3), in making a determination the Appeals Office must (1) verify that the requirements of applicable law and administrative procedures have been met, (2) consider the issues the taxpayer raised at the hearing, including collection alternatives, and (3) determine whether any proposed collection action balances the need for the efficient collection of taxes with the legitimate concern of the person that any collection be no more intrusive than necessary. Petitioner argues only that the Appeals Office abused its discretion by failing to consider the collection alternative she proposed during the telephone hearing.

The Internal Revenue Manual states that settlement officers may not consider collection alternatives unless the taxpayer has provided adequate financial information, such as the filing of a current CIS, and has filed all required tax returns. See 2 Administration, Internal Revenue Manual (CCH), sec. 5.16.1.2.9(1), at 17,810; sec. 5.15.1.1, at 17,653. Petitioner does not object to this policy, and we have found it to be reasonable. See Estate of Atkinson v. Commissioner [Dec. 56,900(M)], T.C. Memo. 2007-89. It is also the policy of the Appeals Office to request a new CIS if the taxpayer's financial condition changes after the submission of an earlier statement, and we have upheld determinations based on this policy. Etkin v. Commissioner [Dec. 56,174(M)], T.C. Memo. 2005-245; 2 Administration, Internal Revenue Manual (CCH), sec. 5.15.1.1(8), at 17,654.

Respondent argues that when a settlement officer follows the prescribed guidelines in determining whether a collection alternative is acceptable, the settlement officer's conclusion will be considered reasonable and not an abuse of discretion. In support of this argument, respondent cites Moorhous v. Commissioner [Dec. 55,198(M)], T.C. Memo. 2003-183, Rodriguez v. Commissioner [Dec. 55,168(M)], T.C. Memo. 2003-153, and Schenkel v. Commissioner [Dec. 55,043(M)], T.C. Memo. 2003-37.

Petitioner correctly points out that these cases address whether the Appeals Office abused its discretion by refusing offers-in-compromise (OICs). Petitioner did not make an OIC but requested a collection alternative --that her account be placed on CNC status. However, we disagree that these cases are distinguishable, although sections 7122(e) and 6159(e) specifically require the Secretary to establish procedures for administrative review of rejections of OICs and terminations of installment agreements, while there is no statutory mandate for establishing procedures for placing a taxpayer's account on CNC status. We see no reason, however, to hold the Appeals Office to a higher standard when considering collection alternatives from a taxpayer who is seeking complete relief from her undisputed tax liability than when considering a taxpayer who is offering to pay part of her tax liability, particularly when the procedural prerequisites are essentially the same in both situations, and we agree with respondent to that extent. However, this policy does not excuse the Appeals Office for disregarding a taxpayer's attempts to provide current financial information.

Petitioner argues that even if following its established policies would have shielded the Appeals Office, it still abused its discretion in denying her CNC status because she provided the requested information. In particular, petitioner argues that the Appeals Office erred (1) by claiming that she had not provided current financial information despite the facts that she had provided the Appeals Office with a CIS before the hearing and further explained the changes in her financial situation during the hearing, and (2) by refusing to consider her statement that she was incarcerated from 1999 to 2003 as verification of her assertion that she earned no income, and therefore had no filing obligation, for those years, or by failing to ask for additional verification.

Respondent argues that our review is limited to the administrative record, and there is nothing in the administrative record indicating that the Appeals Office abused its discretion. Indeed, there is little that petitioner offers for us to consider apart from the information contained in the administrative file. Nevertheless, this case is a good example of the problems created by the lack of a transcript or actual record of the discussions between the taxpayer and the settlement officer. The only record of the April 6, 2006, telephone conversation between petitioner and the settlement officer is the entry made by the settlement officer in her log for this case. This telephone conversation was the only "hearing" that petitioner received, and the settlement officer's entry is very abbreviated. We are forced to make certain inferences from the information that is known.

According to the settlement officer's entry, petitioner submitted a CIS when she requested a collection hearing, and the settlement officer knew this. Petitioner told the settlement officer that she lost her full-time job and gained a part-time job after she had submitted the CIS. Petitioner explained that she was unable to provide a new CIS because her family had recently experienced a tragedy. She also explained that she did not file Federal tax returns for 1999 to 2003 because she was incarcerated during those years. After hearing this information, the settlement officer told petitioner that respondent would be sending her a notice of determination. There is no indication in the administrative record that the settlement officer discussed the particulars of the changes in petitioner's financial information from the time she completed the CIS in September 2005, despite the fact that petitioner claimed in her request for a collection hearing that she could not pay the underlying tax liability and that her financial status became worse after she completed the original CIS. There is also no indication that the settlement officer considered petitioner's statement that she was incarcerated from 1999 to 2003 or made any determination whether this was sufficient verification that she had no filing obligations during those years. Had the settlement officer asked for verification, petitioner would have been able to provide it just as she provided this Court with records confirming her incarceration. Given the undisputed facts, we find that the abrupt decision by the settlement officer indicates she did not consider the issues petitioner raised during the hearing as required by section 6330(c)(3)(B) before deciding to issue the notice of determination, which was an abuse of her discretion. If section 6330(b) is to be given any force, the Appeals Office must make its determination after the taxpayer has had the opportunity to be heard at a fair hearing and after giving adequate consideration to all meritorious issues the taxpayer has raised during the hearing.

Accordingly, because we conclude that respondent abused his discretion by not considering the issues petitioner raised at the hearing, and no genuine issue of material fact exists requiring trial, we shall grant petitioner's motion for summary judgment and deny respondent's motion for summary judgment.

To reflect the foregoing,

An appropriate order and decision will be entered.
1 Unless otherwise indicated, all Rule references are to the Tax Court Rules of Practice and Procedure, and all section references are to the Internal Revenue Code of 1986, as amended.


Alvin S. Brown, Esq.
Tax Attorney
703 425-1400
www.irstaxattorney.com

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Offer in Compromise - section 7122 - levy of a retirement account


[T.C. Summary Opinion 2007-187]

Wayne Smith v. Commissioner.Docket No. 16263-05S .

Filed November 1, 2007.[Code Sec. 72]

Tax Court: Summary opinion: Levies on retirement funds. --

A Code Sec. 6331 levy on an individual retirement account (IRA) will not trigger the recapture tax of Code Sec. 72(t)(4)(A). The exception to recapture for non-voluntary withdrawals under Code Sec. 72(t)(2)(A)(vii) applies.

[Code Sec. 6331]Tax Court: Summary opinion: Levies on retirement funds. --
The IRS's rejection of an offer in compromise and levy on a taxpayer's individual retirement account (IRA) for unpaid taxes was not an abuse of discretion. The taxpayer would not suffer under the recapture provisions of Code Sec. 72(t)(4)(A) (the basis of the claimed abuse of discretion) because the exception of Code Sec. 72(t)(2)(A)(vii) to recapture for levies pursuant to Code Sec. 6331 would apply. In addition, the taxpayer's claims that other general hardships imposed by the levy showed abuse of discretion were rejected. --

PURSUANT TO INTERNAL REVENUE CODE SECTION 7463(b),THIS OPINION MAY NOT BE TREATED AS PRECEDENT FOR ANY OTHER CASE.

Frank M. Schuler and Tara Jensen, for petitioner. Vicki L. Miller, for respondent.

GOLDBERG, Special Trial Judge: This matter was heard pursuant to the provisions of section 7463 of the Internal Revenue Code in effect at the time the petition was filed. Pursuant to section 7463(b), the decision to be entered is not reviewable by any other court, and this opinion shall not be treated as precedent for any other case. Unless otherwise indicated, all Rule references are to the Tax Court Rules of Practice and Procedure, and all section references are to the Internal Revenue Code, as amended.

This matter is before us under Rule 121 on the parties' cross-motions for summary judgment.

Respondent issued a notice of determination concerning collection action(s) under section 6320 and/or 6330 sustaining a levy on petitioner's property to collect unpaid taxes for taxable years 2000, 2001, and 2002. The underlying issue for decision in this matter is whether respondent's Appeals Office abused its discretion by rejecting offers-in-compromise made on petitioner's behalf, thus sustaining respondent's proposed levy action against petitioner's Individual Retirement Account (IRA).
Background

For purposes of addressing the parties' cross-motions for summary judgment, the record in this matter consists of the pleadings, the parties' cross-motions for summary judgment, and the relevant documents attached thereto. The underlying facts in this case are not in dispute.

In order to collect unpaid Federal income taxes and related additions to tax and interest for 2000, 2001, and 2002 respondent seeks to levy on petitioner's IRA for the taxes owed as follows: $1,636.51 for 2000; $27,368.92 for 2001; and $5,800.83 for 2002.

Filing of Federal Income Tax Returns

Petitioner delinquently filed his Federal income tax return for taxable year 2000 on October 22, 2002. On his 2000 return, he reported tax in the amount of $13,825, less withholding credits of $12,502. He did not remit the $1,323 owed when he filed his return. Petitioner later made three payments, totaling $557, towards the amount owed for 2000.

Petitioner delinquently filed his Federal income tax return for taxable year 2001 on January 28, 2003. On his 2001 return, he reported tax in the amount of $22,511, less withholding credits of $5,099. He did not remit the $17,412 owed when he filed his return.

Petitioner delinquently filed his 2002 Federal income tax return on May 1, 2003. On his 2002 return, he reported tax in the amount of $6,227, less withholding credits of $1,700. He did not remit the $4,672 owed when he filed his return.

Request for Collections Due Process Hearing

On August 7, 2004, respondent mailed to petitioner a Final Notice of Intent to Levy and Notice of Your Right to a Hearing Under Section 6330/6331, which stated that respondent intended to levy on petitioner's IRA account in 30 days. In response, petitioner timely filed a request for a collection due process (CDP) hearing with respondent's Appeals Office. Petitioner's request for a hearing indicated his disagreement with respondent's Notice of Intent to Levy on the grounds that the "collection by levy is inappropriate as [I] intend to submit an offer in compromise to resolve the tax liability soon."

Offer-In-Compromise

As contemplated in his request for a hearing, an offer-incompromise (OIC) was submitted on petitioner's behalf by the Kansas City Tax Clinic on September 30, 2004. Petitioner offered to pay a total of $9,407.60 in 24 monthly payments of $391.98, to compromise his outstanding total tax liabilities, including any interest, penalties, and additions to tax with respect to the taxable years at issue.

A document entitled "Explanation of Special Circumstances" (Explanation) was attached to petitioner's OIC. In this Explanation, petitioner stated that when he was retired from AT&T in 1998 as the result of a corporate downsizing, his pension account with Bank of America had a value of approximately $400,000. At some time after his separation from AT&T, petitioner bifurcated this pension account, placing about one-half of its total value into a new, separate retirement account, also with Bank of America. The Explanation also stated that a combination of his taking several distributions from both of his Bank of America accounts, along with poor market factors, had resulted in a total depletion of one of the two Bank of America accounts.

The record reflects that at the time of his separation from AT&T, petitioner started receiving a series of substantially equal periodic payments, pursuant to section 72(t)(4), from one of the two Bank of America accounts in the form of a monthly distribution in the amount of $1,931. Petitioner was still receiving this monthly amount at the time the present motions were heard by the Court.

Petitioner's financial statements, which are included as part of the record, contain the following information regarding petitioner's IRA accounts:



Amount Issued to
Year Amount Held in IRA Petitioner

(Form 5498) (Form 1099-R)

1998 $805,349 $428,899

1999 538,390 83,373

2000 383,631 61,178

2001 222,290 80,077

2002 159,406 38,606

2003 145,155 23,177


With respect to the establishment and value of petitioner's bifurcated accounts, and the amounts withdrawn on each, the record contains only one bank statement from the Bank of America accounts, dated January 1-31, 2001. This statement contains the following information:



Account Number Portfolio Detail Total Value

* * * 1315 Mutual funds $289,802.65

* * * 1323 Cash/mutual funds 86,848.52


The Kansas City Tax Clinic, in letters to respondent dated May 5, 2005, and May 10, 2005, explained that petitioner's withdrawals from the Bank of America accounts were due to his inability to work as a result of general downsizing in the telecommunications market, his considerable personal expenses, and his gambling addiction. The May 5, 2005, letter contained a Bank of America statement dated February 27 through March 28, 2001, showing that in the course of 1 month, petitioner withdrew nearly $4,000 from ATMs which the Kansas City Tax Clinic describes as either "at the Woodlands racetrack," or "the Argosy Casino."

Petitioner attached to his OIC Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, on which he listed the following as his monthly income and expenses:


During the taxable years in issue through the time that the present motions were heard, petitioner resided with his mother in her home. The record contains a letter dated August 24, 2004, and signed "Linora Smith" which states: "Wayne Smith has paid $300 a month rent in cash for approximately the past three-andone-half years."

With respect to the substantiation of the above expenses, the record contains voided photocopies of personal money orders drafted on an account held with Central Communications Credit Union dated January through March of 2005. The "Pay to the Order of" line on each of these money orders has been filled in by hand, and neither the amounts reflected in these orders nor their payees correspond exactly to the expenses listed above.

Finally, and with respect to additional, "special" circumstances, the Explanation attached to the original OIC states that petitioner, at 56 years old, "is unable to find any worthwhile work", and that he previously underwent "two angioplasty procedures."

Collections Due Process Hearing

A CDP hearing occurred between petitioner's representative and the Internal Revenue Service (IRS) on May 11, 2005. At that hearing, petitioner's representative restated the OIC in the amount of $9,407.60, and also proposed a second, alternative OIC, whereby the IRS could levy on petitioner's then-existing accounts to collect the full payment for the periods covered by the hearing, provided that the IRS would both waive all penalties1 associated with the account withdrawal, and compromise any liability stemming from petitioner's 2005 taxable year on the amounts withdrawn on the account for $1.00. The Appeals Office rejected both the original OIC and the newly proposed OIC on the grounds that they were unacceptable and not viable collection alternatives. The Appeals Office also stated that the proposed levy would not deplete petitioner's remaining IRA account, and that petitioner had neither alleged nor proven that he was disabled or unable to work.

On July 27, 2005, respondent mailed to petitioner a Notice of Determination Concerning Collection Action(s) Under Section 6320 and/or 6330 in which respondent's Appeals Office sustained respondent's proposed levy action.

The petition alleges that respondent's Appeals Office abused its discretion in denying petitioner's OIC because it did not appreciate the effect that the recapture penalty under section 72(t)(4)(A) would have on petitioner as a result of a levy on petitioner's Bank of America account. The petition also lists as grounds for relief that the proposed levy is more intrusive than necessary, and that petitioner has shown special hardship circumstances which demand a settlement of a lesser amount than that of the full assessment.

Discussion

Summary judgment is intended to expedite litigation and avoid unnecessary and expensive trials. Fla. Peach Corp. v. Commissioner, 90 T.C. 678, 681 (1988). Summary judgment may be granted where there is no genuine issue of any material fact and a decision may be rendered as a matter of law. Rule 121(a) and (b); see Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), affd. 17 F.3d 965 (7th Cir. 1994).

The moving party bears the burden of proving that there is no genuine issue of material fact, and factual inferences will be read in a manner most favorable to the party opposing summary judgment. Dahlstrom v. Commissioner, 85 T.C. 812, 821 (1985). A party opposing a motion for summary judgment "may not rest upon the mere allegations or denials of such party's pleading," but the objecting party's response "must set forth specific facts showing that there is a genuine issue for trial." Rule 121(d); Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986).

The petition was filed pursuant to section 6330(d), which provides for Tax Court review of the Commissioner's administrative determinations to proceed with the collection of tax liabilities via levies on property. Where the validity of the underlying tax liability is at issue, the Court will review that matter de novo. Davis v. Commissioner, 115 T.C. 35, 39 (2000). Where, as here, the underlying liability is not at issue, the Court will review the determinations made by respondent's Appeals Office with respect to the proposed collections action under the abuse of discretion standard. Goza v. Commissioner, 114 T.C. 176 (2000). Under this standard, the Court shall consider whether the actions of the Appeals Office in rejecting petitioner's OIC and thus, sustaining respondent's proposed collections action, were arbitrary, capricious, or without sound basis in law. See Sego v. Commissioner, 114 T.C. 604, 610 (2000); Woodral v. Commissioner, 112 T.C. 19, 23 (1999).

Petitioner argues that respondent's Appeals Office abused its discretion in rejecting both proposed OICs because it did not consider that a levy upon petitioner's remaining IRA, a periodic payments account structured under section 72(t)(4), would trigger the recapture tax in such a manner that petitioner would be essentially left with little or no assets to live on until the time that he would be eligible to receive Social Security. Moreover, petitioner argues that respondent's Appeals Office ignored evidence that he was unable to work, and that his offers were reasonable in the light of his considerable and necessary monthly expenses.

Generally, amounts distributed from an IRA are includable in gross income as provided in section 72. Sec. 408(d)(1). Section 72(t)(1) further provides: "If any taxpayer receives any amount from a qualified retirement plan * * * the taxpayer's tax under this chapter for the taxable year in which such amount is received shall be increased by an amount equal to 10 percent of the portion of such amount which is includable in gross income." Section 72(t)(2) further provides:

Paragraph [72(t)(1) shall not apply to any of the following distributions:

(A) * * * Distributions which are --

(iv) part of a series of substantially equal periodic payments * * * or

*******

(vii) made on account of a levy under section 6331 on the qualified retirement plan.

Section 72(t)(4) provides:

(A) In general. If --

(i) paragraph (1) does not apply to a distribution by reason of paragraph (2)(A)(iv), and

(ii) the series of payments under such paragraph are subsequently modified (other than by reason of death or disability)-

(I) before the close of the 5-year period beginning with the date of the first payment and after the employee attains age 59-1/2, or

(II) before the employee attains age 59-1/2, the taxpayer's tax for the 1st taxable year in which such modification occurs shall be increased by an amount, determined under regulation, equal to the tax which (but for paragraph (2)(A)(iv)) would have been imposed, plus interest for the deferral period.

Petitioner's argument is premised on his belief that section 72(t)(4)(A), which applies the aforementioned recapture tax when a taxpayer modifies an existing series of substantially equal payments, supersedes the exception to the 10-percent additional tax provided in section 72(t)(2)(A)(vii), in cases where the distribution from a qualified plan is made as a result of a levy action under section 6331. As we cannot point to authoritative case law, we accordingly begin our analysis with the relevant legislative history and intent behind the enactment of clause (vii) of section 72(t)(2)(A).

Section 72(t)(2)(A)(vii) was enacted as an amendment to section 72(t) as part of the IRS Restructuring and Reform Act of 1998, Pub. L. 105-206, 112 Stat. 685. As reasoning for the addition of clause (vii), the Senate report states:

the imposition of the 10-percent early withdrawal tax on amounts distributed from employer-sponsored retirement plans or IRAs on account of an IRS levy may impose significant hardships on taxpayers. Accordingly, the Committee believes such distributions should be exempt from the 10-percent early withdrawal tax. [S. Rept. 105-174, at 83 (1998), 1998-3 C.B. 537, 619.]

Notably, in further explanation of clause (vii), the Senate report emphasizes that the exception provided in clause (vii) shall only apply if "the plan or IRA is levied; it does not apply, for example, if the taxpayer withdrawals funds to pay taxes in the absence of a levy, [or] in order to release a levy on other interests." Id.

Therefore, the distinction that gives section 72(t)(2)(A)(vii) precedence over the recapture tax clause in section 72(t)(4)(A) is the concept of voluntariness; namely, that clause (vii) is intended to apply where the action that caused a distribution to be made did not originate with the taxpayer and/or did not occur at the discretion or direction of the taxpayer.

This concept of voluntariness is also echoed in Arnold v. Commissioner, 111 T.C. 250 (1998), concerning the recapture tax provision under section 74(t)(4), and United States v. Novak, 476 F.3d 1041 (9th Cir. 2007), addressing section 72(t)(2)(A)(vii). In Arnold, the taxpayer elected to receive a series of substantially equal payments from an IRA pursuant to section 72(t)(4)(A) when he retired from his own company at age 55. Four years later, when he sold the business for less profit than he anticipated, he received an additional distribution from his account to compensate him for his loss of anticipated revenue. This Court held that petitioner's receipt of an additional distribution did not fall within one of the exceptions provided in section 72(t)(2)(A) and was an impermissible modification to the prior series of substantially equal periodic payments, thus triggering the recapture tax under section 72(t)(4). Arnold v. Commissioner, supra at 255-256.

In Novak, the Court of Appeals for the Ninth Circuit examined whether the IRS possessed the power to levy upon an ERISA account to compensate the victims of the defendant's crimes,2 and where the defendant's right to access the account without incurring a penalty for Federal income tax purposes had not yet commenced. As to the latter consideration, the Court of Appeals held:

under the "steps into the taxpayer's shoes" principle, see Nat'l Bank of Commerce, 472 U.S. 713, 725, a tax levy can demand (1) that a retirement plan directly pay to the IRS any post-retirement payments that otherwise would have automatically gone to the taxpayer; and (2) if the plan allows the participant to demand payment before retirement or at a different rate --including immediate payment of the entire present value of benefits --the full amount that the participant could presently demand. Retirement plan distributions to satisfy [such] a tax levy are not subject to the ten-percent penalty tax.

Other circuits have held that the IRS has the authority to demand annuity and retirement funds when the beneficiary has the contractual right immediately to withdraw the money sought. See Kane v. Capital Guardian Trust Co., 145 F.3d 1218, 1223 (10th Cir. 1998) ("[Taxpayer's] right to liquidate his IRA and withdraw the funds therefrom (even if subject to some interest penalty) undoubtedly constituted a 'right to property' subject to the IRS' administrative levy power under [26 U.S.C. sec. 6331(a).] Upon [the plan's] receipt of the notice of levy, the IRS stepped into [the taxpayer's] shoes and acquired all his rights in the IRA, including his right to liquidate the mutual fund shares in his IRA and withdraw the cash proceeds."

United States v. Novak, 476 F.3d 1041, 1062 (9th Cir. 2007).

Accordingly, for purposes of determining whether the recapture provision under section 72(t)(4)(A) applies in the light of a levy action commenced under section 6330, if the levy on the property occurs as the result of the IRS's "stepping into the shoes of the taxpayer," then that action should be treated as nonvoluntary on the part of the taxpayer and accordingly, not subject to either the 10-percent additional tax under section 72(t) or the recapture tax pursuant to section 72(t)(4)(A). If, however, the taxpayer has a right to access the funds, and does so in an effort to alleviate his tax liability, or does so in a manner (such as in Arnold v. Commissioner, supra) that modifies the series of substantially equal payments under section 72(t)(4)(A) for his personal gain, then that voluntary action should trigger the recapture penalty under section 74(t)(4)(A).

Based on the foregoing, we reject petitioner's argument that the recapture penalty under section 72(t)(4)(A) supersedes the levy exception provision under section 72(t)(2)(A)(vii). In doing so, we conclude that respondent's Appeals Office did not act in an arbitrary or capricious manner in disregarding petitioner's position that a levy upon his IRA account would result in not only a significant withdrawal from his account, but an unduly and overly intrusive depletion of most of the account as a result of the application of the recapture tax.

As to petitioner's argument that respondent's Appeals Office did not consider petitioner's position that the proposed levy is unfair in the light of his inability to work and medical conditions, we are unpersuaded that any issue of fact exists. Petitioner presented no evidence at the time of the hearing that he was unable to work. He merely stated that due to a tight job market in the telecommunications industry he was unable to find "worthwhile" work. Although petitioner did include mention in his Explanation (attached to the original OIC) that he had undergone "two angioplasty procedures", he offered no additional evidence to show how these procedures, or the effects therefrom, had rendered him medically unable to work. Accordingly, we hold that respondent's Appeals Office did not act in an arbitrary or capricious manner in sustaining the proposed levy action as there was no evidence presented whereby the Appeals Office could determine that the levy was unduly burdensome given petitioner's medical status.

With respect to petitioner's argument that respondent's Appeals Office failed to appreciate fully petitioner's monthly expenses in the light of the monthly amount he was receiving from his IRA, we are again unpersuaded by the lack of evidence produced by petitioner in support of this claim. First, petitioner only provided a scant, 3-month record vis-a-vis photocopies of money orders, all of which appear to be notated to correspond to the expenses as listed on his OIC Form 433-A in anticipation of trial, none of which correspond in amount to the amounts listed on Form 433-A. Second, we are unconvinced by the letter purportedly written by petitioner's mother that he had been renting space in her home for the past 3 years and paying her $300 per month in rent. Petitioner produced no receipts or bank records to corroborate this claim. Moreover, while we are convinced that petitioner did, in fact, live with his mother, we are not persuaded that he was required to spend more than one-half of his monthly income on rent, food, and clothing. Accordingly, we hold that respondent's Appeals Office did not act in an arbitrary or capricious manner in rejecting petitioner's OICs, which were largely premised on his position that he could not afford to make a larger payment.

Finally, we note that the IRS Manual on Notice in Levy Cases provides that in deciding whether to levy on a retirement account, the Commissioner's Appeals Office should determine "whether the taxpayer's conduct has been flagrant [, with] * * * some examples of flagrant conduct [being] * * * Taxpayers who have placed other assets beyond the reach of the government [by] * * * dissipating them." Administration, Internal Revenue Manual (CCH), Notice to Levy, sec. 5.11.6.2(5) at 16,719. In this case, the Kansas City Tax Clinic candidly shared with respondent the details of petitioner's gambling addiction. We are convinced, based on this evidence, and our examination of both petitioner's financial statements and the rapidly declining IRA balances as previously detailed in this report, that a large portion of the $660,194 withdrawn from petitioner's IRA accounts between 1998 and 2003 went to fund his gambling addiction.

We are further convinced by our examination of the Bank of America statements that detail petitioner's account balances as of January 2001, that at the time that petitioner would have been required to pay his Federal income tax owing for all of the years in issue he could have done so, but elected not to for the benefit of his proclivity for racetracks and casinos. Finally, we are convinced, in the light of the above IRS Manual guidance, and the unfortunate, yet convincing, facts presented with respect to petitioner's gambling habit, that respondent's Appeals officer did not act in an arbitrary or capricious manner in rejecting either of petitioner's OICs and, in doing so, sustaining the proposed levy action.

Accordingly, without any evidence to create a question of fact whether respondent's Appeals Office abused its discretion, respondent's motion for summary judgment will be granted, and petitioner's cross-motion for summary judgment will be denied.

An appropriate order and decision will be entered.
1 Namely, the recapture penalty under sec. 72(t)(4)(A).2 Notably, in Murillo v. Commissioner, T.C. Memo. 1998-13 (1998), affd. without published opinion 166 F.3d 1201 (2d Cir. 1998), the Court held that a taxpayer's forfeit of his retirement plan as part of his criminal plea would also not trigger application of the 10-percent additional tax under sec. 72(t)(1).
Levy and Distraint: Synopsis - property subject to levy: notices and other procedural requirementsThe IRS may levy upon (i.e, seize) a taxpayer's property and rights to property if a taxpayer fails to pay a tax liability. (See ¶38,225.01 et seq. for exemptions for certain property.) The first step in the levy process is to provide a taxpayer with a written "Notice and Demand" for payment. A notice and demand is a notice which states that the tax has been assessed and demands that payment be made (Code Sec. 6303). If the taxpayer fails to pay the tax within 10 days after receipt of the "Notice and Demand," the IRS may seize a taxpayer's property, but no sooner than 30 days after sending the taxpayer a second notice, called a "Final Notice of Intent to Levy" (Code Sec. 6331(d)). The two notices, however, may be sent at the same time (Reg. §301.6331-2(a)(1)).In addition, the IRS is required to send the taxpayer a pre-levy Collection Due Process Hearing Notice (pre-levy CDP notice) at least 30 days prior to levying. The taxpayer may suspend the levy action by requesting a Collection Due Process hearing within 30 days after the date shown on the CDP notice (Code Sec. 6330). See ¶38,187.022.The IRS has indicated in the preamble to T.D. 8809 (1999-1 CB 478), under which Code Sec. 6330 regulations for collection due process actions were issued, that a taxpayer who fails to pay tax within 10 days after receiving a Notice and Demand for payment may be sent an "Urgent Notice." The Urgent Notice will inform the taxpayer that the IRS may levy upon a taxpayer's state tax refund after 30 days from the date of that notice. The Urgent Notice will include all information required under Code Sec. 6331(d) (described below) with respect to a Final Notice of Intent to Levy and will constitute the notice required under that section. As in the case of a Final Notice of Intent to Levy, an Urgent Notice will begin the ten-day period that leads to the doubling (from .5 percent to 1 percent per month) of the penalty for failure to pay tax imposed by Code Sec. 6651. See ¶39,475.022.The Code permits the immediate seizure of a delinquent taxpayer's property or rights to property without regard to the 10-day waiting period if the IRS makes a determination that the collection of the tax is in jeopardy and the delinquent taxpayer fails to pay the tax after receipt of the "Notice and Demand" (Code Sec. 6331(a)). A "Final Notice of Intent to Levy" is not required where the tax is in jeopardy (Code Sec. 6331(d)(3)).The Final Notice of Intent to Levy must be a brief statement written in simple and nontechnical terms. It must include a description of (1) the statutory provisions relating to the levy and sale of property, (2) the procedures applicable to the levy and sale of property, (3) the administrative appeals available to the taxpayer with respect to the levy and sale and the procedures relating to those appeals, (4) the alternatives available to taxpayers that could prevent levy on the property (including installment agreements), (5) the statutory provisions relating to redemption of property and the release of liens on property, and (6) the procedures applicable to the redemption of property and the release of a lien on property (Code Sec. 6331(d)(4)).The Final Notice of Intent to Levy must be given in person, left at the dwelling or usual place of business of the taxpayer, or sent by registered or certified mail to the taxpayer's last known address (Code Sec. 6331(d)(2); Reg. §301.6331-2(a)(1)).No levy may be made on the property of any person on a day when that person is required to appear in response to a summons issued by the Secretary of the Treasury for the purpose of collecting any underpayment of tax. This protection extends to any officer or employee of the person (Reg. §301.6331-2(c)). However, this provision will not apply if the collection of tax is found to be in jeopardy (Reg. §301.6331-2(d)).Also, no levy can be made on property if the estimated amount of the expenses that would be incurred with respect to the levy and sale of the property exceeds its fair market value at the time of the levy (Code Sec. 6331(f); Reg. §301.6331-2(b)).Levy is also prohibited during the consideration or pendency of an offer in compromise or an installment agreement (Code Sec. 6331(k); see ¶38,187.027).Under Code Sec. 6331(b), the term "levy" includes the power of distraint and seizure by any means (Code Sec. 6331(b)). The power of distraint and seizure by any means does not refer to warrantless intrusions into privacy. Such an intrusion is not justifiable merely because it occurs pursuant to a tax investigation. See GM Leasing Corp., SCt, 77-1 USTC ¶9140, at ¶38,187.175.A levy proceeding may be carried on against real property without first proceeding against personal property


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Tax Attorney
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Levy and Distraint: Synopsis - property subject to levy: notices and other procedural requirementsThe IRS may levy upon (i.e, seize) a taxpayer's property and rights to property if a taxpayer fails to pay a tax liability. (See ¶38,225.01 et seq. for exemptions for certain property.) The first step in the levy process is to provide a taxpayer with a written "Notice and Demand" for payment. A notice and demand is a notice which states that the tax has been assessed and demands that payment be made (Code Sec. 6303). If the taxpayer fails to pay the tax within 10 days after receipt of the "Notice and Demand," the IRS may seize a taxpayer's property, but no sooner than 30 days after sending the taxpayer a second notice, called a "Final Notice of Intent to Levy" (Code Sec. 6331(d)). The two notices, however, may be sent at the same time (Reg. §301.6331-2(a)(1)).In addition, the IRS is required to send the taxpayer a pre-levy Collection Due Process Hearing Notice (pre-levy CDP notice) at least 30 days prior to levying. The taxpayer may suspend the levy action by requesting a Collection Due Process hearing within 30 days after the date shown on the CDP notice (Code Sec. 6330). See ¶38,187.022.

The IRS has indicated in the preamble to T.D. 8809 (1999-1 CB 478), under which Code Sec. 6330 regulations for collection due process actions were issued, that a taxpayer who fails to pay tax within 10 days after receiving a Notice and Demand for payment may be sent an "Urgent Notice." The Urgent Notice will inform the taxpayer that the IRS may levy upon a taxpayer's state tax refund after 30 days from the date of that notice. The Urgent Notice will include all information required under Code Sec. 6331(d) (described below) with respect to a Final Notice of Intent to Levy and will constitute the notice required under that section. As in the case of a Final Notice of Intent to Levy, an Urgent Notice will begin the ten-day period that leads to the doubling (from .5 percent to 1 percent per month) of the penalty for failure to pay tax imposed by Code Sec. 6651. See ¶39,475.022.The Code permits the immediate seizure of a delinquent taxpayer's property or rights to property without regard to the 10-day waiting period if the IRS makes a determination that the collection of the tax is in jeopardy and the delinquent taxpayer fails to pay the tax after receipt of the "Notice and Demand" (Code Sec. 6331(a)).

A "Final Notice of Intent to Levy" is not required where the tax is in jeopardy (Code Sec. 6331(d)(3)).The Final Notice of Intent to Levy must be a brief statement written in simple and nontechnical terms. It must include a description of (1) the statutory provisions relating to the levy and sale of property, (2) the procedures applicable to the levy and sale of property, (3) the administrative appeals available to the taxpayer with respect to the levy and sale and the procedures relating to those appeals, (4) the alternatives available to taxpayers that could prevent levy on the property (including installment agreements), (5) the statutory provisions relating to redemption of property and the release of liens on property, and (6) the procedures applicable to the redemption of property and the release of a lien on property (Code Sec. 6331(d)(4)).The Final Notice of Intent to Levy must be given in person, left at the dwelling or usual place of business of the taxpayer, or sent by registered or certified mail to the taxpayer's last known address (Code Sec. 6331(d)(2); Reg. §301.6331-2(a)(1)).No levy may be made on the property of any person on a day when that person is required to appear in response to a summons issued by the Secretary of the Treasury for the purpose of collecting any underpayment of tax. This protection extends to any officer or employee of the person (Reg. §301.6331-2(c)). However, this provision will not apply if the collection of tax is found to be in jeopardy (Reg. §301.6331-2(d)).Also, no levy can be made on property if the estimated amount of the expenses that would be incurred with respect to the levy and sale of the property exceeds its fair market value at the time of the levy (Code Sec. 6331(f); Reg. §301.6331-2(b)).Levy is also prohibited during the consideration or pendency of an offer in compromise or an installment agreement (Code Sec. 6331(k); see ¶38,187.027).Under Code Sec. 6331(b), the term "levy" includes the power of distraint and seizure by any means (Code Sec. 6331(b)). The power of distraint and seizure by any means does not refer to warrantless intrusions into privacy. Such an intrusion is not justifiable merely because it occurs pursuant to a tax investigation. See GM Leasing Corp., SCt, 77-1 USTC ¶9140, at ¶38,187.175.A levy proceeding may be carried on against real property without first proceeding against personal property

Offer in Compromise – section 7122 - IRS must consider taxpayer bankruptcy IRM sec. 5.8.10.2.2(1),


Carl Klein v. Commissioner.Dkt. Nos. 7162-06L ; 7163-06L , TC Memo. 2007-325, October 30, 2007.

[Code Sec. 6651]

Penalties, civil: Failure to file: Failure to pay: Reasonable cause. --
A taxpayer was liable for additions to tax as determined by the IRS for failure to file tax returns and pay taxes for all tax years at issue. The taxpayer was an attorney and was fully aware of his obligation to file returns and that he had unpaid tax liabilities. In spite of personal adversity that he encountered, including a divorce and the collapse of his employer, he succeeded in generating substantial income. Consequently, his personal obstacles did not rise to a level amounting to reasonable cause for failure to file his return or pay the tax liabilities.
[Code Sec. 7122]

Offer-in-compromise: Allowable living standards: Bankruptcy. --
The IRS did not abuse its discretion in rejecting a taxpayer's offer-in-compromise of his outstanding tax liabilities. In evaluating his reasonable collection potential, the taxpayer argued that the IRS failed to make an allowance for his basis living expenses greater than provided in published guidance and that the IRS failed to take into consideration his option to file for bankruptcy and potentially discharge some of the tax liabilities. However, the taxpayer had not disclosed any special circumstances that would warrant allowing him a standard of living more lavish that the standard for the area where he lived. The evidence also indicated that the IRS did consider the possibility that the taxpayer might file for bankruptcy; however, in light of the changes to the bankruptcy law, the IRS believed that the taxpayer would not be able to avoid paying the total tax liability by filing for bankruptcy..
.
MEMORANDUM OPINION

JACOBS, Judge:1 The petitions in these consolidated cases were each filed in response to a Notice of Determination Concerning Collection Action(s) Under Section 6320 and/or 6330(notice of determination).2 Pursuant to section 6330(d), petitioner seeks our review of respondent's determination upholding the proposed use of a levy to collect petitioner's income tax liabilities for tax years 1997, 1998, 1999, and 2000. The issue for decision is whether respondent's proposed levy actions may proceed.
Background

These consolidated cases were submitted fully stipulated pursuant to Rule 122. The case at docket No. 7163-06L pertains to tax years 1997 and 1998. The case at docket No. 7162-06L pertains to tax years 1999 and 2000. The stipulations of fact and the attached exhibits are incorporated herein by this reference. At the time he filed the petitions, petitioner resided in Chicago, Illinois.

Petitioner, who was born in 1946, is an attorney who practiced law with various Chicago law firms at different times during the years at issue. Petitioner filed income tax returns for the years at issue as follows:



Adjusted
Gross
Date Return Income Income Self-Employment
Due (After Date Return per Tax per Tax per
Year Extensions) Filed Return Return Return

Oct. 15, July 25,
1997 1998 2001 $163,286 $25,692 $15,431

Oct. 15, Aug. 15,
1998 1999 2001 213,864 40,918 16,684

Aug. 15, Apr. 15,
1999 2000 2003 102,994 47,963 19,208

Aug. 15, Aug. 28,
2000 2001 2002 151,475 28,949 17,792


Respondent assessed the tax for each year and demanded payment for the unpaid balances.3 When petitioner failed to pay the balances, respondent determined that enforced collection action would be required. On November 12, 2003, respondent mailed petitioner a Letter 1058, Final Notice of Intent to Levy and Notice of Your Right to a Hearing for 1997 and 1998, and a separate such notice for 1999 and 2000.4 According to respondent's notices of levy, petitioner's total unpaid tax liability, including additions to tax and interest, exceeded $200,000.5 In response to each notice of levy, petitioner, by means of a Form 12153, Request For a Collection Due Process Hearing, timely requested a hearing under section 6330. In his requests for a hearing, petitioner claimed: (1) He was entitled to abatement of the "penalties"6 assessed against him because he had reasonable cause for his failure to pay the taxes; (2) the Internal Revenue Service (IRS) should have accepted his offer-incompromise based on doubt as to collectibility because of the possibility of discharge of his taxes in the event he filed for bankruptcy; and (3) alternatively, in the event his offer-incompromise was not accepted, the IRS should have allowed him to pay his tax liability in installments.

Petitioner's section 6330 hearing was conducted by means of a face-to-face meeting, correspondence, and telephone conversations with a settlement officer in respondent's Appeals Office (the settlement officer). On November 2, 2004, the IRS received petitioner's offer to compromise his total tax liability for 1997, 1998, 1999, 2000, and 2001 for $70,000.7 On December 8, 2005, following petitioner's submission of additional information in response to requests by respondent, the settlement officer advised petitioner that petitioner was ineligible for an offer-in-compromise because petitioner had the ability to fully pay his income tax liability over 48 months. On December 22, 2005, the settlement officer wrote a letter to petitioner explaining, among other things: (1) That petitioner had not as yet provided any verification of reasonable cause for abatement of additions to tax and that respondent would assume that there was none unless such was provided within the next 15 days; (2) that consideration of petitioner's bankruptcy assertion must be made in the light of the new bankruptcy laws which take "a harder look at future income than the old law did". The settlement officer noted that "You have significant income potential, as you have displayed through past performance, and I do not think that you would avoid paying all the taxes if you file [for bankruptcy]"; and (3) that if petitioner wished to enter into an installment agreement, he should, through his representatives, contact respondent within 15 days.

Petitioner responded to the settlement officer's December 22, 2005, letter by reiterating his position that respondent had not given adequate consideration to his potential bankruptcy because respondent had not considered that his future earnings were uncertain because petitioner was aging and was at that time practicing law without associates and without a formal office or support staff. In addition, petitioner contested the settlement officer's calculation of petitioner's realizable collection potential, claiming that increased allowances should have been made for petitioner's basic living expenses. Petitioner did not attempt to enter into an installment agreement and did not respond to the invitation to submit verification of reasonable cause for abatement of the additions to tax. The settlement officer ultimately recommended rejection of petitioner's offer-in-compromise, and on March 15, 2006, respondent's Appeals Office issued notices of determination sustaining the levy actions for the tax years in issue.

Petitioner timely filed his petitions, in which he seeks review of respondent's determinations. Petitioner contends that respondent acted impermissibly: (1) In denying petitioner's requests for abatement of additions to tax, (2) in rejecting petitioner's offer-in-compromise, and (3) in sustaining the proposed levy actions.
Discussion

The parties are not at odds regarding the technical provisions of section 6330. Further, petitioner does not claim that respondent failed to satisfy any of the mechanical or procedural obligations contemplated by that statute. Nor does petitioner contest the propriety of the assessments of tax as a procedural matter. Consequently, we immediately turn our attention to petitioner's complaints and begin with his first contention that respondent acted impermissibly in denying petitioner's requests for abatement of additions to tax due to reasonable cause. We construe petitioner's position in this regard to be that he should not be held liable for the additions to tax.

Section 6330(c)(2)(B) provides that a person may challenge "the existence or amount of the underlying tax liability for any tax period if the person did not receive any statutory notice of deficiency for such tax liability or did not otherwise have an opportunity to dispute such tax liability." Petitioner did not receive a notice of deficiency for 1998 or for 1999 or otherwise have an opportunity to dispute those additions. Therefore, petitioner is entitled to challenge the existence or amount of the tax liabilities with respect to those returns, which he did in his section 6330 hearing. See Montgomery v. Commissioner [Dec. 55,501], 122 T.C. 1 (2004). We review de novo respondent's determinations with respect to 1998 and 1999. See Davis v. Commissioner [Dec. 53,969], 115 T.C. 35, 39 (2000); Goza v. Commissioner [Dec. 53,803], 114 T.C. 176, 181 (2000).

The record is not entirely clear as to whether petitioner received a statutory notice of deficiency for 1997 or for 2000, and if he did, the extent to which additions to tax were determined therein. Assuming they are subject to review, and regardless of which standard we use to review respondent's determinations (de novo or for an abuse of discretion), we find no basis on which to relieve petitioner from liability for any of the additions to tax.

The Commissioner bears the burden of production regarding the additions to tax. Sec. 7491(c); Higbee v. Commissioner [Dec. 54,356], 116 T.C. 438 (2001). In order to meet this burden, the Commissioner must produce sufficient evidence indicating that it is appropriate to impose an addition to tax. Higbee v. Commissioner, supra at 446. Once the Commissioner has met this burden, the taxpayer must come forward with evidence sufficient to persuade the Court that the Commissioner's determination is incorrect or an exception applies. Id. at 447.

As relevant here, in general, section 6651(a)(1) provides for an addition to tax that can amount to 25 percent of the tax (net amount) required to be shown on the return if the return is filed more than 4 months after the due date of the return, including extensions.8 See sec. 6651(b). Section 6651(a)(2), in general, provides for an addition to tax that can amount to 25 percent of the unpaid portion of the tax shown on a return if the unpaid portion remains unpaid for more than 49 months after the tax is due to be paid. A taxpayer can be absolved of liability from the aforementioned additions to tax if the taxpayer demonstrates that the failure to file, or the failure to pay, as appropriate, is due to reasonable cause and not due to willful neglect. Sec. 6651(a); Higbee v. Commissioner, supra.

Reasonable cause for the failure to file a return may be shown where the taxpayer has made a satisfactory showing that he exercised ordinary business care and prudence but nevertheless was unable to file the return within the prescribed time. Reasonable cause for the failure to pay the tax may be shown where the taxpayer has made a satisfactory showing that he exercised ordinary business care and prudence in providing for payment of his tax liability and was nevertheless either unable to pay the tax or would suffer an undue hardship if he paid on the due date. Sec. 301.6651-1(c)(1), Proced. & Admin. Regs.

Petitioner does not dispute that he filed his returns late and that the taxes shown on the returns remained unpaid as reflected in respondent's records. Petitioner contends that his failure to file returns timely and timely pay taxes was due to personal circumstances during the years at issue and that these circumstances constituted reasonable cause for purposes of section 6651(a). Specifically, petitioner claims that his

marriage was ending, the firms he was associated with were collapsing around him, or not following through on promised remuneration, and he was in the midst of a significantly over-budget rehabilitation project on a dream home that almost immediately upon completion he was forced to sell due to the divorce. This occurred all while trying to assure his family's needs were met.

The record shows that petitioner requested extensions of time to file in each of the tax years at issue. Thus, there is no doubt but that petitioner knew of his obligation to file returns and knew the dates on which they were due. Moreover, he knew that he had an unpaid tax liability.

In spite of the personal adversity he encountered, petitioner succeeded in generating substantial income for the years at issue and apparently chose to spend this income to maintain an elevated lifestyle and to "assure his family needs were met"9 as opposed to paying his taxes. Petitioner is an attorney and obviously knew he had an obligation to obey the tax laws, including the obligation to file timely returns and pay the taxes when due. The obstacles petitioner describes simply do not rise to a level amounting to reasonable cause. After reviewing the record and applying the de novo standard of review for all years at issue, we hold that petitioner is liable for the additions to tax under section 6651(a)(1) and (2) for all of the years at issue.

Section 6654(a) imposes an addition to tax for failure to pay estimated income tax where prepayments of such tax, either through withholding or by making estimated quarterly tax payments during the course of the year, do not equal the percentage of total liability required under the statute. The amount required to be paid through each such estimated quarterly payment is 25 percent of the required annual payment. Sec. 6654(d)(1)(A). The required annual payment is, in turn, the lesser of 90 percent of the tax shown on the return for that taxable year or 100 percent of the tax shown on the return for the preceding taxable year (or a greater percent for individuals with adjusted gross income exceeding $150,000). Sec. 6654(d)(1)(B) and (C). There is no broadly applicable reasonable cause exception to the section 6654 addition to tax.

The record shows that petitioner did not make sufficient estimated tax payments for 1997, 1998, or 1999, the years for which respondent seeks to impose the section 6654 addition. None of the statutory exceptions to imposition of the addition applies. We conclude that respondent has met his burden of production under section 7491(c) regarding petitioner's liability for the additions to tax under section 6654 and that petitioner is liable for those additions.10

Petitioner's second contention is that respondent abused his discretion in rejecting petitioner's offer-in-compromise on the basis of doubt as to its collectibility.

Section 7122(a) authorizes the Secretary to compromise any civil case arising under the internal revenue laws and requires him to prescribe guidelines for officers and employees of the IRS to determine whether an offer-in-compromise is adequate and should be accepted to resolve a dispute. Sec. 7122(a), (c)(1).

The contemplated guidelines and schedules pertaining to evaluating offers-in-compromise on the basis of collectibility have been published in the regulations interpreting section 7122. See sec. 301.7122-1(c)(2), Proced. & Admin. Regs.; 1 Administration, Internal Revenue Manual (CCH), sec. 5.8.4.4 at 16,306. Under this administrative guidance, the Secretary will generally compromise a liability on the basis of doubt as to collectibility only if the liability exceeds the taxpayer's reasonable collection potential. Cf. Murphy v. Commissioner [Dec. 56,232], 125 T.C. 301, 308-310 (2005), affd. [2007-1 USTC ¶50,115] 469 F.3d 27 (1st Cir. 2006). A taxpayer's reasonable collection potential is determined, in part, using the published guidelines for certain national and local allowances for basic living expenses and essentially treating income and assets in excess of those needed for basic living expenses as available to satisfy Federal income tax liabilities. See 2 Administration, Internal Revenue Manual (CCH), exh. 5.15.1-3 at 17,668, exh. 5.15.1-8 at 17,686, exh. 5.15.1-9 at 17,742. Application of the standard allowances for housing and utility expenses (rather than the taxpayer's actual expenses) is not an abuse of discretion where use of the standard allowances does not result in the taxpayer's not having adequate means to provide for basic living expenses. See McDonough v. Commissioner [Dec. 56,665(M)], T.C. Memo. 2006-234.

The foregoing formulaic approach is disregarded, however, upon a showing by the taxpayer of special circumstances that may cause an offer to be accepted notwithstanding that it is for less than the taxpayer's reasonable collection potential (e.g., the taxpayer is incapable of earning a living because of a long-term illness, and it is reasonably foreseeable that the taxpayer's financial resources will be exhausted providing for care and support during the course of the condition). Sec. 301.7122-1(b)(3), (c)(3), Proced. & Admin. Regs.; 1 Administration, Internal Revenue Manual (CCH), sec. 5.8.11.2.1 at 16,375, sec. 5.8.11.2.2 at 16,377. Petitioner does not allege, and it does not appear, that any such special circumstances are present.

According to petitioner, respondent did not properly apply the published guidelines because he failed to make an allowance for petitioner's basic living expenses which were greater than that indicated in the published guidelines. Petitioner contends that a greater amount should have been allowed to reflect the cost of his living in the downtown Chicago area because of his need to entertain clients in his home. Further, petitioner claims that respondent failed to evaluate petitioner's option to file for bankruptcy and the potential discharge of some of the taxes that respondent seeks to collect by levy.

Respondent, in applying the published guidelines, allowed petitioner $2,474 per month for basic living expenses, which petitioner agrees was substantially the same as the amount provided for under the published guidelines.11 When subtracted from the $22,000 gross monthly income that petitioner disclosed in his offer-in-compromise, and in the light of respondent's records which showed that petitioner had $302,400 in wages and $13,400 in nonemployee compensation for tax year 2004,12 respondent concluded that petitioner would be able to pay his by-then $252,462 tax liability in full over 48 months.

We agree with respondent that petitioner had sufficient income to meet his basic living expenses as well as to pay his tax liability in full. Petitioner basically wants the Government to permit him to use his current and expected future earnings to maintain a lifestyle more lavish than the standard for the Chicago area (petitioner's living expenses are more than twice those of the average national and local standards) plus $4,000 per month for "business expenses" without having to fully satisfy his past due tax obligations. The record does not disclose any special circumstances that warrant acceptance of petitioner's offer-in-compromise ($70,000 to extinguish a tax liability over $200,000).

As for the impact that petitioner's bankruptcy might have had on respondent's considerations, respondent contends that he applied the provisions of the Internal Revenue Manual, which advises:

When a taxpayer threatens bankruptcy, the impact of bankruptcy on the Service's ability to collect must be considered. If the Offer Investigator believes, based upon factual information, that the taxpayer is seriously considering filing bankruptcy, the employee should discuss the benefits of filing an administrative offer instead. Internal Revenue Manual , sec. 5.8.10.2.2(1),

The record shows that respondent considered the possibility that petitioner might file a petition in bankruptcy. Respondent's correspondence to petitioner is specific in explaining that petitioner had the ability to pay his total tax liability in full and "in light of the recently passed bankruptcy law which takes more into consideration an individual's income production", respondent did not believe that petitioner would be able to avoid paying the total tax liability by filing for bankruptcy. In other words, respondent believed that the impact of petitioner's filing for bankruptcy on respondent's ability to collect petitioner's unpaid tax would be minimal. We are not prepared to find that respondent's rejection of petitioner's offer-in-compromise was arbitrary, capricious, or without sound basis in fact or law.

On the basis of this record, we conclude that petitioner is liable for the additions to tax as determined by respondent for all years at issue and that respondent did not abuse his discretion in rejecting petitioner's offer-in-compromise. Respondent's determination that the Federal tax levies were appropriate in these cases is sustained.

To reflect the foregoing,

Decisions will be entered for respondent.
1 These cases were assigned to Judge Julian I. Jacobs for disposition by order of the Chief Judge on August 20, 2007.2 Unless otherwise indicated, all section references are to the Internal Revenue Code (Code) as amended, and all Rule references are to the Tax Court Rules of Practice and Procedure.3 Respondent assessed $1,337 of additional tax for 1997 in May of 2003 and $1,927 of additional tax for 2000 in December of 2003. By the time he filed the petitions, petitioner had paid approximately $30,700 of his tax liability for the 4 years in issue.4 On or about Nov. 14, 2003, a Federal tax lien was obtained on petitioner's property with respect to all tax years at issue. Petitioner does not contest the propriety of the tax lien filing.5 The income tax assessments include additions to tax under sec. 6651(a)(1) and (2) for all tax years at issue and under sec. 6654 for 1997, 1998, and 1999.6 References to penalties in various places in the record actually are to additions to tax under sec. 6651(a)(1) and (2) and sec. 6654. References in this opinion to additions to tax relate to one or more, as appropriate. Petitioner does not seek abatement of interest.7 Tax year 2001 is not at issue herein.8 Where the sec. 6651(a)(2) addition also applies, the sec. 6651(a)(2) addition is reduced as provided in sec. 6651(c)(1).9 In response to a question on Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, requesting a list of "the dependents you can claim on your tax return", petitioner listed his son aged 24 and his daughter aged 22, neither of whom lived with him. Petitioner signed and dated the Form 433-A on Oct. 25, 2004. In petitioner's 2003 tax return, dated Oct. 14, 2004, neither child (or anyone else) had been claimed as a dependent.10 The parties stipulated that "petitioner filed an income tax return for 1996, reporting tax liability in the amount of $29,980." In addition, for 1996, petitioner reported self-employment tax of $15,430.11 Respondent allowed $194 per month for transportation; it appears that the published guidelines allow $329, or a similar amount, for ownership of one car in Chicago. Petitioner contends that he should be allowed "the actual expense for his car loan ($870 per month)" instead.12 The record shows that respondent did not consider the value of dissipated assets in evaluating petitioner's offer-incompromise, although respondent was concerned that such consideration might have been warranted. See 1 Administration, Internal Revenue Manual (CCH), sec. 5.8.5.4. at 16,339-6.

Compromises: BankruptcyThe IRS did not violate 11 U.S.C. §525 when it returned a corporation's offer in compromise (OIC) as nonprocessable during the pendency of its chapter 11 bankruptcy proceeding. IRS policy and procedures provided that, because the corporation was in bankruptcy, processing its OIC was not in the government's best interest. Moreover, mandamus relief was not available to the corporation as an alternative means to compel the government to consider its OIC. The IRS owed no clear duty to the corporation to act as required for mandamus relief. Its discretion to compromise carried with it the discretion not to exercise that discretion.1900 M Restaurant Associates, Inc., 2007-1 USTC ¶50,116; aff'g, BC-DC D.C., 2005-1 USTC ¶50,313, 319 BR 302.The IRS was not required to process an offer-in-compromise submitted by debtors in bankruptcy. That type of requirement would be a remedy in the nature of mandamus and that remedy was not appropriate. The IRS owed no clear duty to the debtors and its decision to not process offers-in-compromise submitted by debtors in bankruptcy was solely within its discretion. The plan confirmation process was an adequate alternative remedy to obtain a compromised tax liability from the IRS. Requiring the IRS to negotiate with the debtors outside of the plan confirmation process would not further the provisions of the Internal Revenue Code nor would it foster the ultimate goal of achieving a confirmed plan. The reasoning of 1900 M Restaurant Associates, Inc., BC-DC D.C., 2005-1 USTC ¶50,313, was adopted.W. Uzialko, BC-DC Pa., 2006-1 USTC ¶50,297.The District Court affirmed a Bankruptcy Court order requiring the IRS to consider an offer in compromise made by an individual in bankruptcy. The Bankruptcy Court had jurisdiction to make such an order under 11 U.S.C. §105, which states that a bankruptcy court can issue any order necessary to carry out the provisions of the Bankruptcy Code. W.K. Holmes, DC Ga., 2005-1 USTC ¶50,230.The IRS was ordered to process and consider an offer in compromise submitted by a debtor despite the agency's published policy of not considering offers in compromise from taxpayers who have filed for bankruptcy. The IRS position of not accepting less than what is required to be paid by a Chapter 13 reorganization plan, as set forth in Rev. Proc. 2003-71, was not required by the Tax Code or Treasury Regulations and did not carry the force and effect of law. Also, the IRS determination not to entertain offers in compromise from those in bankruptcy was not exempt from judicial review as an "agency action."C. Peterson, BC-DC Neb., 2005-1 USTC ¶50,142, 317 BR 532.A federal district court upheld a bankruptcy court order compelling the IRS to consider an individual debtor's offer in compromise. The bankruptcy court properly reasoned that the IRS could not dismiss the debtor's offer without processing and considering it, as the IRS does with non-debtor offers. The court reasoned that the offer was not submitted as a request for a discharge of taxes, but rather as a reflection of what the debtor was able to pay. The IRS's policy of mechanically disregarding the debtor's offer in compromise did not allow a "fresh start", as generally promoted by the Bankruptcy laws. Moreover, the rejection of such offers contradicted the IRS's general practice of being flexible in negotiating with debtors. The court rejected the government's claim that the order exceeded the bankruptcy court's jurisdiction pursuant to Bankruptcy Code sections 1129(a)(9) and 1129(a)(7). It was determined that Congress only intended to bar consideration of offers during Chapter 11 proceedings where a debtor did not agree to different treatment of his claim. Finally, the court was not persuaded that the order violated the Anti-Injunction Act. R.H. Macher, DC Va., 2004-1 USTC ¶50,114, aff'g BC-DC Va., 2003-2 USTC ¶50,537.The IRS has announced its nonacquiescence with respect to In re Macher, in which a federal district court upheld a bankruptcy court's order compelling the IRS to consider an individual debtor's offer in compromise. The district court found that the IRS's policy of mechanically rejecting a debtor's offer in compromise did not allow the "fresh start," generally promoted by the bankruptcy laws. The district court also found that the IRS's rejection of such offers contradicted the IRS's general practice of being flexible in negotiating with debtors.Nonacquiescence Announcement, I.R.B. 2004-32, August 9, 2004.The Chief Counsel has recommended nonacquiescence with respect to In re Macher. In Macher a federal district court upheld a bankruptcy court's order compelling the IRS to consider an individual debtor's offer in compromise. The district court found that the IRS's policy of mechanically rejecting a debtor's offer in compromise did not allow the "fresh start," generally promoted by the bankruptcy laws. The district court also found that the IRS's rejection of such offers contradicted the IRS's general practice of being flexible in negotiating with debtors.AOD 2004-03, August 5, 2004.An individual failed to prove that he entered into a contract with the IRS to release a federal tax lien on his real property. Since an IRS agent lacked statutory authority to release the lien prior to the taxpayer's discharge in bankruptcy, he could not accept the taxpayer's offer to release the lien for payment and, thus, there was no mutual assent to a settlement agreement. Moreover, even if a contract had been formed, the existence of a material misrepresentation on the part of the taxpayer would have made the contract voidable.G.J. Buesing, FedCl, 2000-2 USTC ¶50,724, 228 FSupp2d 908.An IRS policy not to consider offers in compromise from taxpayers who had filed for bankruptcy was impermissibly discriminatory because it was based solely on the bankruptcy status of the taxpayer and not on the merits of the offer. Failure to consider offers in compromise made by bankruptcy debtors denied the debtors access to procedures set forth in Code Sec. 7122 that were available to all other taxpayers. Further, investigation of offers in compromise did not violate the automatic stay. It was also irrelevant that a bankruptcy filing might transfer the IRS's authority to accept a compromise offer to the Department of Justice. Therefore, married taxpayers who had filed for bankruptcy were entitled to have their offer in compromise considered by the IRS under the same standards as non-debtor taxpayers.G.E. Chapman, BC-DC W.Va., 99-2 USTC ¶50,690.Similarly.D.A. Mills, BC-DC W.Va., 2000-1 USTC ¶50,103, 240 BR 689.The IRS has issued the 2007 allowable living expense standards. Allowable living expense standards, also known as collection financial standards, are used to determine the ability of a taxpayer to pay a delinquent tax liability. The standards are effective October 1, 2007. For bankruptcy purposes, the effective date for the standards will be January 1, 2008.IRS News Release, IR-2007-163, October 1, 2007.

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