RIA Special Study: Hiring and Business Stimulus Provisions in the HIRE Act of 2010
The Hiring Incentives to Restore Employment Act (HIRE Act, P.L. 111-147 ) was signed into law by the President on Mar. 18, 2010, one day after it passed Congress. This Special Study explains how the HIRE Act encourages companies to hire (and retain) unemployed workers by creating an employer “payroll tax holiday” of sorts for hiring unemployed workers in 2010 and an employer tax credit if these new hires are retained for at least one year. It also explains how the Act boosts expensing for 2010 and permits certain bond issuers to elect to receive a payment in lieu of providing a tax credit to the bondholders. For a Special Study on the Act's new anti-offshore tax abuse measures, and other revenue raising provisions, see ¶ 2 .
Payroll Tax Holiday in 2010 for Hiring Unemployed Workers
The Federal Insurance Contributions Act (FICA) imposes two taxes, the Old Age, Survivors and Disability Insurance (OASDI) tax and the Medicare Hospital Insurance (HI) tax. These taxes are imposed on employers for wages paid with respect to employment and on employees for wages received with respect to employment. The OASDI tax rate is 6.2% on wages up to an annually-adjusted “wage base” ($106,800 for 2010). The HI tax rate is 1.45% on all wages, regardless of amount. Under pre-Act law, the Social Security payroll tax wasn't forgiven for employers who hired the unemployed.
Employers who hire members of certain targeted groups before Sept. 2011 may claim a work opportunity credit (WOTC) equal to a percentage of up to $6,000 of first-year wages per employee, $12,000 for qualified veterans, and $3,000 for qualified summer youth employees. If the employee is a long-term family assistance recipient, the credit is a percentage of first- and second-year wages, up to $10,000 per employee.
New law. The Act provides relief from the employer share of OASDI taxes for employers that hire unemployed workers. The relief applies to wages paid beginning on Mar. 19, 2010 (the day after the enactment date) and ending on Dec. 31, 2010. ( Code Sec. 3111(d) , as amended by Act Sec. 101(a))
More specifically, the OASDI tax on employers doesn't apply to wages paid by a qualified employer with respect to employment during the period beginning on Mar. 19, 2010 and ending on Dec. 31, 2010, of any qualified individual for services performed:
... in a trade or business of the qualified employer; or
... for a qualified employer that is tax-exempt under Code Sec. 501(a) , in furtherance of the activities related to the purpose or function on which the employer's exemption is based. ( Code Sec. 3111(d)(1) , as amended by Act Sec. 101(a))
RIA observation: The payroll tax holiday applies only to the 6.2% OASDI portion of the employer's tax. It doesn't apply to the 1.45% Medicare (HI) portion of the employer's tax, nor to any part of the employee's tax. It also doesn't affect the self-employment tax paid by self-employed individuals.
RIA observation: The amount of tax forgiven per employee can't exceed $6,621.60, because the OASDI tax applies to only the first $106,800 of wages paid in 2010 ($106,800 × 6.2% = $6,621.60).
RIA observation: An employee need not work for a minimum number of hours in order for the employer to qualify for the payroll tax holiday.
Qualified employer defined. A qualified employer is any employer other than the U.S., a state, or a political subdivision of a state (i.e., a local government, or an instrumentality). ( Code Sec. 3111(d)(2)(A) ) However, a public institution of higher education is a qualified employer even though it is a government instrumentality. ( Code Sec. 3111(d)(2)(B) )
RIA observation: Thus, the payroll tax holiday applies to employers in the private and not-for-profit sectors. It doesn't apply to public-sector employers other than public institutions of higher education.
Qualified individuals defined. A qualified individual is anyone who:
(1) Begins employment with a qualified employer after Feb. 3, 2010, and before Jan. 1, 2011.
RIA observation: Although a qualified employee who begins work after Feb. 3, 2010 can be eligible for the payroll tax holiday, only the employer's portion of OASDI on his wages paid with respect to employment after Mar. 18, 2010 (the enactment date) will be forgiven.
(2) Certifies by signed affidavit, under penalties of perjury, that he hasn't been employed for more than 40 hours during the 60-day period ending on the date the individual begins employment with the qualified employer.
(3) Isn't employed to replace another employee of the qualified employer unless that other employee separated from employment voluntarily or for cause.
(4) Isn't related to the qualified employer in a way that would disqualify him for the WOTC under Code Sec. 51(i)(1) . ( Code Sec. 3111(d)(3) )
The Committee Report says an employer may qualify for the payroll tax holiday when it hires an otherwise qualified individual to replace one who was terminated for cause or due to other facts and circumstances, such as where a factory is closed due to lack of demand. When the factory reopens, the payroll tax holiday can be claimed both for rehiring old workers and hiring new workers. However, an employer who terminates an employee without cause in order to claim the payroll tax holiday for hiring the same or another employee doesn't qualify.
RIA observation: Under item (4), above, there's no payroll tax holiday for hiring a relative such as the qualified employer's child or descendant of a child; a stepchild; sibling, stepbrother, or stepsister; parent or stepparent; niece, nephew, uncle or aunt; or in-laws.
If the qualified employer is:
... a corporation, an individual standing in any of the above relationships to anyone who owns, directly or indirectly, more than 50% in value of its outstanding stock, after applying the Code Sec. 267(c) attribution rules, won't qualify.
... a noncorporate entity, an individual standing in any of the above relationships to anyone who owns, directly or indirectly, more than 50% of the capital and profits interests in the entity attribution rules, won't qualify.
... an estate or trust, a grantor, beneficiary, or fiduciary of the estate or trust, or an individual having any of the familial relationships described above to a grantor, beneficiary, or fiduciary of the estate or trust, won't qualify.
An individual unrelated to the qualified employer who is the employer's dependent because he has the same principal place of abode and is a member of the employer's household won't qualify. If the qualified employer is a corporation, an individual who is a dependent of anyone who owns, directly or indirectly, more than 50% in value of the outstanding stock, won't qualify. A dependent of a grantor, beneficiary, or fiduciary of an estate or trust that is a qualified employer won't qualify.
Special rule for first calendar quarter of 2010. The payroll tax holiday doesn't apply for wages paid during the first calendar quarter of 2010. Instead, the amount by which the qualified employer's OASDI tax for wages paid during the first calendar quarter of 2010 would have been reduced if the payroll tax holiday had been in effect for that quarter is treated as a payment against the qualified employer's OASDI tax for the second calendar quarter of 2010. ( Code Sec. 3111(d)(5)(B) ) The payment is treated as made on the date when the employer's second-quarter OASDI tax is due.
RIA observation: Most employers report employment taxes quarterly on Form 941 (Employer's Quarterly Federal Tax Return). The rule providing that the payroll tax holiday doesn't apply for wages paid during the first quarter will give IRS time to issue guidance about the payroll tax holiday and will give employers time to adjust their payroll systems accordingly. Employers won't lose out, because the amount of first-quarter wages that would have been forgiven will be allowed as a credit for the second quarter.
Election out; coordination of payroll holiday with WOTC. A qualified employer may elect, in the manner that IRS requires, not to have the payroll tax holiday apply. ( Code Sec. 3111(d)(4) ) Unless the employer elects out of the payroll holiday, wages paid or incurred to a qualified individual won't qualify for the WOTC during the one-year period beginning on the date that the qualified employer hired the individual. ( Code Sec. 51(c)(5) ) The Committee Report indicates that the election can be made on an employee-by-employee basis.
RIA observation: The WOTC is in many cases more valuable than the payroll tax holiday, especially for low-wage employees, because it is generally 40% of “qualified first-year wages” of up to $6,000, for maximum credit of $2,400 per worker. The payroll tax holiday is equal to 6.2% of wages, and applies only to wages paid through Dec. 31, 2010. However, the WOTC is harder to qualify for, because the employee must be certified by an agency as belonging to a targeted group. The main qualification for payroll tax holiday is that the employee have been unemployed for 60 days, and the employee's affidavit is sufficient for this purpose.
Railroad retirement tax holiday. Effective for compensation paid after Mar. 18, 2010, the Act provides a railroad retirement tax holiday that is similar in many respects to the OASDI tax holiday. ( Code Sec. 3221(c) , as amended by Act Sec. 101(d))
New Up-to-$1,000 Credit for Each “Retained Worker”
For any tax year ending after Mar. 18, 2010, the Act provides an up-to-$1,000 credit for “retained workers.” (Act Sec. 102) A retained worker is defined as any qualified individual, as defined for purposes of the payroll tax holiday (see above):
(1) who was employed by the taxpayer on any date during the tax year,
(2) who was so employed by the taxpayer for a period of not less than 52 consecutive weeks, and
(3) whose wages (as defined in Code Sec. 3401(a) ) for that employment during the last 26 weeks of the period (described in item (2) above) equaled at least 80% of the wages for the first 26 weeks of that period. (Act Sec. 102(b))
RIA observation: The definition of wages for withholding purposes in Code Sec. 3401(a) generally includes all remuneration (other than fees paid to a public official) for services performed by an employee for his employer, including the cash value of all remuneration (including benefits) paid in any medium other than cash. Thus, compensation that isn't subject to withholding, such as certain fringe benefits, wouldn't be included as wages for purposes of the up-to-$1,000 credit for retained workers. Also, wages paid to certain types of employees that are exempt from income tax withholding under Code Sec. 3401(a) wouldn't qualify as wages for purposes of the up-to-$1,000 credit. The exemptions from withholding provided in Code Sec. 3401(a) include wages paid to certain agricultural labor, domestics working in private homes, certain employees working in foreign countries (if the employer is required to withhold on the wages under foreign law), etc.
Amount of the credit. Under Act Sec. 102(a), for any tax year ending after Mar. 18, 2010, the current year business credit determined under Code Sec. 38(b) for the tax year is increased, for each retained worker (as defined above) with respect to which the 52-consecutive-week requirement in (2), above, is first satisfied during the tax year, by the lesser of:
... $1,000; or
... 6.2% of the wages (as defined for income tax withholding in Code Sec. 3401(a) ) paid by the taxpayer to the retained worker during the 52-consecutive-week-period. (Act Sec. 102(a))
RIA observation: If a retained worker's wages during the 52-consecutive-week-period exceed $16,129.03, the increase to the current year business credit for that retained worker will be $1,000.
RIA observation: Since the increase to the current year business credit under the above rules applies in the tax year in which the 52-consecutive-week test is first satisfied, the increase to the current year business credit with respect to each retained employee only occurs in one tax year (i.e., the tax year in which the 52-consecutive-week test is first satisfied by a particular employee).
RIA observation: For an employer using the calendar year as its tax year, the increase to the current year business credit will be claimed on the employer's 2011 tax return.
RIA illustration 1: ABC Corp., a taxpayer using the calendar year as its tax year, hires Earl, a retained worker, on Feb. 15, 2010. The 52-consecutive-week requirement is first satisfied in the 2011 tax year if Earl works for ABC until Feb. 14, 2011. His wages for the 52-consecutive-week period are $30,000. In that case, on its 2011 tax return, ABC's current year business credit will be increased by $1,000 for Earl.
RIA observation: Certain fiscal year taxpayers may have to claim the increase to the current year business credit on tax returns for two tax years on an employee-by-employee basis.
RIA illustration 2: The facts are the same as in illustration (1) except that ABC Corp. uses a fiscal year beginning on Dec. 1 and ending on Nov. 30 as its tax year. ABC Corp. also hires Carol (a retained worker) on Dec. 31, 2010, and she is still working for ABC on Dec. 30, 2011. Carol's wages for the 52-consecutive-week-period are $52,000.
The 52-consecutive-week requirement is first satisfied with respect to Earl on Feb. 14, 2011, and with respect to Carol on Dec. 30, 2011. Thus, ABC can claim the $1,000 increase to the current year business credit for Earl on its tax return for the fiscal year ending on Nov. 30, 2011 and the $1,000 increase for Carol on its tax return for the fiscal year ending on Nov. 30, 2012.
RIA illustration 3: The facts are the same as in illustration (2) except that Earl quits working for ABC on Jan. 30, 2011. Since he only worked for ABC for 50 consecutive weeks, the 52-consecutive-week requirement isn't satisfied for Earl, and ABC can't claim the up-to-$1,000 credit for him.
RIA observation: Presumably, IRS will soon issue a form for claiming the $1,000 increase to the current year business credit for the retention of certain newly hired employees as it has for other employee retention credits such as the Midwestern Disaster Area employee retention credit that is claimed on Form 5884-A and on Form 3800.
RIA caution: An employer will need to keep careful records with respect to each employee hired after Feb. 3, 2010 and before Jan. 1, 2011 so that it can prove that each employee for which it claims the up-to-$1,000 increase to the current year business credit meets the definition of a retained worker.
RIA observation: Presumably, the increase to the current year business credit under Act Sec. 102 occurs before the application of any of the limitations under Code Sec. 38(c) that apply to the general business credit as determined under Code Sec. 38(a)(2) . Thus, the up to $1,000 increase to the current year business credit is subject to the rules that, under Code Sec. 38 , can prevent some taxpayers from enjoying full use of the credit to reduce their tax liabilities in the tax year that the credit is claimed. For example, the increase to the current year business credit under Act Sec. 102 won't be allowed to offset any of a taxpayer's alternative minimum tax (AMT), and will be limited in its offset of a taxpayer's regular income tax.
Carryback limit on the $1,000 increase per retained worker. No portion of the unused business credit under Code Sec. 38 for any tax year that is attributable to the up-to-$1,000 increase in the current year business credit under Act Sec. 102 can be carried to a tax year beginning before Mar. 18, 2010. (Act Sec. 102(c))
RIA observation: A one-year carryback generally applies to unused business credits under Code Sec. 39(a)(1) . However, Act Sec. 102(c) prevents a taxpayer from carrying back any portion of an unused business credit that is attributable to the up-to-$1,000 increase of the current year business credit to a tax year beginning before Mar. 18, 2010. Since a taxpayer using the calendar year as its tax year is only entitled to the up-to-$1,000 increase to the current year business credit in 2011 (see above), the effect of the rule in Act Sec. 102(c) is that a calendar year taxpayer can't carry back any portion of the unused business credit that is attributable to the up-to-$1,000 increase to 2010 (a tax year that began before Mar. 18, 2010). Thus, a calendar year taxpayer isn't allowed the one-year carryback (that would be allowed under Code Sec. 39(a)(1)(A) but for the rule in Act Sec. 102(c)) of any portion of any unused business credit that is attributable to the up-to-$1,000 increase to the current year business credit under Act Sec. 102.
RIA observation: The transitional rule in Act Sec. 102(c) was necessary because the transitional rule in Code Sec. 39(d) (generally providing that no part of any unused current business credit attributable to a component credit can be carried back to any tax year before the first tax year that the component credit was allowable) is limited to the credits listed under Code Sec. 38(b) ), and the increase to the current year business credit under Act Sec. 102 isn't listed in Code Sec. 38(b) .
RIA observation: There are no special carryforward provisions that apply to the up-to-$1,000 increase to the current year business credit for retained workers. Thus, presumably, any portion of the general business credit that is attributable to the increase to the current year business credit will be subject to the 20-year carryforward limitations applicable to current year unused business credits.
U.S. possessions. The Act provides comparable rules relating to the application of the up to $1,000 increase to the current year business credit to employers in U.S. possessions. For this purpose, a U.S. possession includes Puerto Rico and the Northern Mariana Islands. (Act Sec. 102(d)(3)(A))
Expensing Limits Boosted For 2010
Generally, taxpayers can elect to treat the cost of any Code Sec. 179 property placed in service during the tax year as an expense which is not chargeable to capital account, and any cost so treated is allowed as a deduction for the tax year in which the section 179 property is placed in service.
For tax years beginning in 2008 and 2009, the maximum amount that could be expensed under Code Sec. 179 was $250,000, and the maximum deductible expense was reduced (i.e., phased out, but not below zero) by the amount by which the cost of Code Sec. 179 property placed in service during tax year 2008 or 2009 exceeded $800,000. The $250,000 and $800,000 amounts were not adjusted for inflation.
Under pre-Act law, for tax years beginning in 2010, the maximum amount that could be expensed under Code Sec. 179 , was $134,000, and the maximum deductible expense had to be reduced (i.e., phased out, but not below zero) by the amount by which the cost of Code Sec. 179 property placed in service during the 2010 tax year exceeded $530,000 (i.e., the beginning-of-phaseout amount). The 2010 amounts reflected statutory inflation adjustments.
For tax years beginning after 2010, the maximum expensing amount under Code Sec. 179 is $25,000, the beginning-of-phaseout amount is $200,000, and neither amount is adjusted for inflation.
Qualifying property for purposes of the Code Sec. 179 expensing election is depreciable tangible personal property purchased for use in the active conduct of a trade or business, including “off-the-shelf” computer software placed in service in tax years beginning before 2011.
New law. For tax years beginning after 2007 and before 2011, the Act provides that:
... the dollar limitation on the Code Sec. 179 expensing deduction is $250,000,
... the reduction in the dollar limitation (beginning-of-phaseout amount) starts to take effect when property placed in service in a tax year exceeds $800,000, and
... neither the dollar limitation nor the beginning-of-phaseout amount is adjusted for inflation. ( Code Sec. 179(b) , as amended by Act Sec. 201(a)).
Additionally, the increase in dollar limitation amounts and no-inflation-adjustment rule for 2008 and 2009 are removed. (Act Sec. 201(a)(3))
Thus, the Act increases for one year (2010) the amount a taxpayer can expense under Code Sec. 179 . The maximum amount a taxpayer can expense for a tax year beginning in 2010 is $250,000 of the cost of qualifying property placed in service for that tax year. The $250,000 amount is reduced (but not below zero) by the amount by which the cost of qualifying property placed in service during 2010 exceeds $800,000.
RIA observation: Since the $250,000 and $800,000 limitation amounts and no-inflation-adjustment rule applied under pre-Act law for tax years beginning in 2008 and 2009, the Act both extends those limitation and phaseout amounts to tax years beginning in 2010 and eliminates the inflation-adjustment rule which applied for tax years beginning in 2010 under pre-Act law.
RIA illustration : In 2010, Midcorp, a calendar-year taxpayer, places into service Code Sec. 179 property with a cost of $660,000. It can elect to expense $250,000 of the cost (there's no phaseout because the cost of Code Sec. 179 property placed in service during the year does not exceed $800,000, the beginning-of-phaseout amount for 2010).
RIA observation: For property placed in service in tax years beginning in 2010, the Code Sec. 179 expensing deduction phases out completely only when the cost of the property exceeds $1,050,000 ($800,000 (beginning-of-phaseout amount) + $250,000 (dollar limitation)). This is the same limit that applied under pre-Act law for property placed in service in 2008 or 2009.
Issuers of Certain Tax Credit Bonds Can Elect to Receive Direct Payment In Lieu of a Tax Credit to the Bondholder
As an alternative to traditional tax-exempt bonds, state and local governments may issue qualified tax credit bonds. Qualified tax credit bonds allow the bondholder (i.e., investor) to claim a nonrefundable tax credit in lieu of receiving interest. Qualified tax credit bonds include:
... new clean renewable energy bonds (New CREBs)—i.e., certain bonds issued to finance capital expenditures for qualified renewable energy facilities;
... qualified energy conservation bonds (QECBs)—i.e., certain bonds issued for a “qualified energy conservation purpose” such as initiatives for reducing greenhouse emissions;
... qualified zone academy bonds (QZABs)—i.e., certain bonds issued to finance certain academic programs operated by public schools in cooperation with businesses in economically disadvantaged areas; and
... qualified school construction bonds (QSCBs)—i.e., certain bonds issued to finance the construction, rehabilitation, or repair of, or the acquisition of land for, public school facilities.
Build America Bonds (BABs), which are otherwise tax-exempt bonds issued to finance capital projects for which the issuer (i.e., a state or local government) irrevocably elects to treat as taxable bonds, entitle the holder to a nonrefundable tax credit. For BABs that are “qualified bonds”—certain BABs issued before 2011 for which the issuer irrevocably elects, on or before the issue date of the bonds, to have the refundable tax credit rules of Code Sec. 6431 apply—the issuer may elect to claim a refundable tax credit (the so-called “direct payment” option) in lieu of the tax credit to the bondholder.
New law. For bonds originally issued after Mar. 18, 2010, the Act allows an issuer of New CREBS, QECs, QZABs, or QSCBs to make an irrevocable election on or before the issue date of the bonds to receive a payment in lieu of providing a tax credit to the holder of the bonds. Thus, these “specified tax credit bonds” are treated as “qualified bonds” under Code Sec. 6431 , and the issuer is entitled to receive a direct payment from IRS. ( Code Sec. 6431(f) , as amended by Act Sec. 301(a))
RIA observation: Qualified forestry conservation bonds (another type of tax credit bond) aren't “specified tax credit bonds,” qualifying for the direct payment option.
Interest paid to the holder of the bond is includible in the holder's gross income. ( Code Sec. 6431(f)(1)(D) ) The issuer's direct payment option for qualified tax credit bonds is in lieu of the credit for the holder, and the bondholder can't claim the tax credit that otherwise would be available under the qualified tax credit bond rules. ( Code Sec. 6431(f)(1)(E) )
For specified tax credit bonds, the amount that IRS will pay to the issuer (or to any person making interest payments on the issuer's behalf) for any interest payment due under the bond is equal to the lesser of:
(1) the amount of interest payable under the bond on that date ( Code Sec. 6431(f)(1)(C)(i) ), or
(2) the amount of interest that would have been payable under the bond on that date if the interest were determined at the applicable credit rate determined under Code Sec. 54A(b)(3) . ( Code Sec. 6431(f)(1)(C)(ii) )
Thus, the amount of the payment to the issuer of a specified tax credit bond that is a New CREB, QECB, QZAB, or QSCB is a function of the market-determined interest rate on the bond and not a rate set by IRS. (Committee Report)
Under a special rule, for any New CREB or QECB, the amount of the credit determined under Code Sec. 6431(f)(1)(C)(ii) is 70% of the amount otherwise determined, without regard to this rule, Code Sec. 54C(b) (new CREB annual credit is 70% of the amount otherwise allowed), and Code Sec. 54D(b) (QECB annual credit is 70% of the amount otherwise allowed). ( Code Sec. 6431(f)(2) )
The income tax deduction otherwise allowed to the issuer of a qualified bond that is a New CREB, QECB, QZAB, or QSCB for interest paid on the bond is reduced by the amount of the payment made under Code Sec. 6431 for the interest. ( Code Sec. 6431(f)(1)(G) )
RIA observation: The issuer of a New CREB, QECB, QZAB, or QSCB that elects the direct payment option for the bond must make regular interest payments to the bond holders. The deduction otherwise allowed to the issuer for these interest payments must be reduced by the amounts the issuer receives from IRS.
New CREBs, QECBs, QZABs, and QSCBs for which the election is made count against the national limitation for such bonds in the same way that they would if no election were made. (Committee Report)
An issuer can elect the direct payment option for qualified bonds that are New CREBs, QECBs, QZABs, or QSCBs even if the bonds aren't issued before 2011. ( Code Sec. 6431(f)(1)(B) )
RIA observation: However, due to a “zero” national bond volume limitation that is prescribed for both QZABs and QSCBs for years after 2010, they can be issued after 2010 only if unused national bond volume limitations for pre-2011 years can be carried forward. For carryforward for QSCBs, see below.
In a technical correction, the Act also provides that for bonds issued after Feb. 17, 2009—i.e., as if it were originally included in American Recovery and Reinvestment Act §1521—the Code Sec. 54F(e) rule allowing the carryover of unused QSCB limitation by a State or Indian tribal government applies to the 40% of QSCB limitation that is allocated among the largest school districts. It also provides that the limitation amount allocated to a State is to be allocated to QSCBs issuers within the State by the State education agency (or such other agency as is authorized under State law to make the allocation). ( Code Sec. 54F , as amended by Act Sec. 301(b))

STADNYK v. COMM., Cite as 105 AFTR 2d 2010-XXXX, 02/26/2010
________________________________________
DANIEL J. STADNYK and BRENDA J. STADNYK, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
Case Information:
Code Sec(s):
Court Name: UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT,
Docket No.: No. 09-1485,
Date Decided: 02/26/2010.
Disposition:
HEADNOTE
.
Reference(s):
OPINION
UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT,
BEFORE: GUY, CLAY, and KETHLEDGE, Circuit Judges.
ON APPEAL FROM THE UNITED STATES TAX COURT
Judge: CLAY, Circuit Judge.
NOT RECOMMENDED FOR FULL-TEXT PUBLICATION
File Name: 10a0128n.06
Petitioners Daniel and Brenda Stadnyk appeal from the order entered by the United States Tax Court denying their petition for redetermination of a deficiency. For the reasons set forth below, we AFFIRM the Tax Court's order.
BACKGROUND
On December 11, 1996, Petitioners purchased a used 1990 Geo Storm from Nicholasville Road Auto Sales, Inc. (“Nicholasville Auto”) for $3,430.00. Brenda Stadnyk tendered two checks to Nicholasville Auto as partial payment, check number 1080 for $100 and check number 1087 for $1,100, from a checking account with Bank One, Kentucky, N.A. (“Bank One”). After Petitioners drove approximately seven miles from the dealership, the car broke down. Petitioners spent $479.78 to repair the car. They attempted to call Nicholasville Auto about the Geo Storm, but their calls were ignored, placed on hold for long periods of time, and not returned.
Because of their dissatisfaction with the car, Mrs. Stadnyk contacted Bank One to place a stop payment order on check number 1087 for $1,100. Bank One's record of the stop payment order indicates “dissatisfied purchase” as the reason for the stop payment. However, Bank One incorrectly stamped the check “NSF” for insufficient funds and returned it to Nicholasville Auto. On February 4, 1997, Nicholasville Auto filed a criminal complaint against Mrs. Stadnyk for issuing and passing a worthless check in the amount of $1,100.
At approximately 6:00 p.m. on February 23, 1997, officers of the Fayette County Sheriff's Department arrested Mrs. Stadnyk at her home in the presence of her husband, her daughter, and a family friend, and transported her to the Fayette County Detention Center. She arrived at the detention center at approximately 6:30 p.m., and she was handcuffed, photographed, and confined to a holding area. At approximately 11:00 p.m., Mrs. Stadnyk was transferred to Jessamine County Jail, where she was searched via pat-down and use of an electric wand. Mrs. Stadnyk was required to undress to her undergarments, remove her brassiere in the presence of officers, and put on an orange jumpsuit. She was released on bail at approximately 2:00 a.m. on February 24, 1997. On April 23, 1997, Mrs. Stadnyk was indicted for “theft by deception over $300.00” based on the returned check marked for insufficient funds. These charges were later dropped.
Mrs. Stadnyk testified that she did not suffer any physical injury as a result of her arrest and detention. According to Mrs. Stadnyk, nobody put their hands on her, grabbed her, jerked her around, bruised her, or hurt her. As a result of the incident, Mrs. Stadnyk visited a psychologist every 1.5 to two weeks for approximately eight sessions. The cost of these sessions was covered by Mrs. Stadnyk's insurance and employer. Mrs. Stadnyk did not pay any out-of-pocket medical expenses for physical injury or mental distress as a result of the arrest and detention.
On August 25, 1999, Mrs. Stadnyk filed a Complaint against J.R. Maze, the owner of Nicholasville Auto, Nicholasville Auto, and Bank One. On July 5, 2000, she filed a First Amended Complaint, alleging that Bank One breached its fiduciary duty of care by improperly and negligently marking her check “NSF” for insufficient funds. Mrs. Stadnyk's First Amended Complaint also included the following claims against J.R. Maze and Nicholasville Auto: malicious prosecution, abuse of process, false imprisonment, defamation, and outrageous conduct. The First Amended Complaint repeated and incorporated by reference these allegations against Bank One.
On March 7, 2002, Mrs. Stadnyk entered into a mediation agreement with Bank One, under which Bank One agreed to pay Mrs. Stadnyk $49,000 to settle her claims and provide her with a letter of apology. In return, Mrs. Stadnyk agreed to dismiss her complaint against Bank One. The mediation agreement form stated that “Bank One shall pay the total sum of $49,000, by 3/15/02, by official check” and that “[t]he suit shall be dismissed with prejudice with each party to pay their own costs & fees.” (App. at 206). It contained no language indicating the purpose for which the settlement was paid. On March 14, 2002, Bank One issued a check to Mrs. Stadnyk for $49,000, and on May 3, 2002, Mrs. Stadnyk's complaint against Bank One was dismissed with prejudice. 1
During the trial before the Tax Court, Mrs. Stadnyk testified that her attorney, the attorney for Bank One, and the mediator all advised her that the settlement proceeds would not be subject to income tax. Based on this advice, the Stadnyks did not report the $49,000 settlement on their 2002 Form 1040 income tax return, although Bank One issued Mrs. Stadnyk a Form 1099-MISC reporting the payment of the $49,000 settlement. On March 14, 2005, Respondent issued a notice of deficiency to Petitioners, after determining that Petitioners were liable for a tax deficiency of $13,119.00 and an accuracy-related penalty of $2,624.00 under Internal Revenue Code (“I.R.C.”) § 6662(a). Petitioners timely appealed to the Tax Court. On January 12, 2009, the Tax Court ruled in favor of Respondent with respect to the deficiency and in favor of Petitioners with respect to the penalty. On April 15, 2009, Petitioners filed a timely notice of appeal.

DISCUSSION

I. Standard of Review

We review the Tax Court's conclusions of law de novo and its findings of facts for clear error.Limited, Inc. v. Comm'r , 286 F.3d 324, 331 [89 AFTR 2d 2002-1924] (6th Cir. 2002). We will conclude that a factual finding is clearly erroneous only if, upon review of the entire record, we are ““left with the definite and firm conviction that a mistake has been committed.”” Zack v. Comm'r, 291 F.3d 407, 412 [89 AFTR 2d 2002-2578] (6th Cir. 2002) (quoting Sanford v. Harvard Indus., Inc., 262 F.3d 590, 595 (6th Cir. 2001)).
II. The Definition of Income Under I.R.C. § 61(a)
Under I.R.C. § 61(a), taxpayers are liable for all gross income, which is defined as “all income from whatever source derived.” 26 U.S.C. § 61(a). The Supreme Court has instructed that § 61 “be construed liberally “in recognition of the intention of Congress to tax all gains except those specifically exempted.”” Greer v. United States, 207 F.3d 322, 326 [85 AFTR 2d 2000-1876] (6th Cir. 2000) (quotingComm'r v. Glenshaw Glass Co. , 348 U.S. 426, 430 [47 AFTR 162], 75 S. Ct. 473, 99 L. Ed. 483 (1955)). Nevertheless, the I.R.C. provides for a number of exclusions from income.
Petitioners argue that the $49,000 settlement award Mrs. Stadnyk received from Bank One does not classify as income under I.R.C. § 61(a) because Mrs. Stadnyk was made whole—not enriched—by the compensatory damages. Petitioners cite toGlenshaw for the proposition that the term “income” for tax purposes is commonly defined as all “accessions to wealth, clearly realized, and over which the taxpayers have complete dominion.” 348 U.S. at 431. According to Petitioners, because Mrs. Stadnyk's award was compensation for something she had lost, not an “accession to wealth,” her settlement award does not classify as income under § 61(a).
However, Petitioners' reliance on Glenshaw for the proposition that income does not include compensatory damages awards is misplaced. In Glenshaw, the Supreme Court observed that it “has given a liberal construction to this broad phraseology [of income] in recognition of the intention of Congress to tax all gains except those specifically exempted.” Id. at 430 (internal citations omitted). On multiple subsequent occasions, the Supreme Court has reaffirmed the “sweeping scope” of I.R.C. § 61(a).See Comm'r v. Schleier , 515 U.S. 323, 327 [75 AFTR 2d 95-2675], 115 S. Ct. 2159, 2167, 132 L. Ed. 2d 294 (1995). See also United States v. Burke, 504 U.S. 229, 233 [69 AFTR 2d 92-1293], 112 S. Ct. 1867, 119 L. Ed. 2d 34 (1992) (noting that I.R.C. § 61(a) “sweeps broadly” and includes all income “subject only to the exclusions specifically enumerated elsewhere in the Code”); Comm'r v. Banks, 543 U.S. 426, 433 [95 AFTR 2d 2005-659], 125 S. Ct. 826, 160 L. Ed.2d 859 (2005) (“Banks II”) (noting that the definition of gross income “extends broadly to all economic gains not otherwise exempted”). Consistent with interpreting the definition of income broadly, the Supreme Court has “also emphasized the corollary to § 61(a)'s broad construction, namely, the “default rule of statutory interpretation that exclusions from income must be narrowly construed.”” Schleier, 515 U.S. at 328 (quoting Burke, 504 U.S. at 248 (Souter, J. concurring in judgment)). The Supreme Court's instructions to interpret § 61(a) broadly and exceptions narrowly have led courts to the conclusion that “subject to certain exemptions, which are to be construed narrowly, § 61(a) applies to all income, including settlement payments.”Polone v. Comm'r , 505 F.3d 966, 969 [100 AFTR 2d 2007-6277] (9th Cir. 2007).
The fact that the damages award is compensatory does not make it nontaxable. The Supreme Court has found compensatory settlement awards that are not otherwise excluded to be taxable as gross income under I.R.C. § 61(a). See, e.g., Burke, 504 U.S. at 233 (“[t]here is no dispute that the settlement awards in this case would constitute gross income within the reach of § 61(a)”);Schleier , 515 U.S. at 328 (“[r]espondent recognizes § 61(a)'s “sweeping” definition and concedes that his settlement constitutes gross income unless it is expressly excepted by another provision in the Tax Code”). While the Supreme Court has never explicitly ruled that compensation received for personal injury is income pursuant to § 61(a), nothing in the Court's analysis of the scope of § 61(a) supports Petitioners' argument that the Court would come to a different conclusion in the context of personal injury awards than in the context of backpay. Settlement awards for back pay, like settlement awards for personal injury, are compensatory in nature because they make the recipient whole.
Furthermore, if damages awards received on account of personal injury were not income, there would be no need for the exclusion laid out in § 104(a)(2), which exempts from income taxation any damages received on account of personal physical injuries or physical sickness. See Lukhard v. Reed, 481 U.S. 368, 376 (1987) (rejecting the argument “that personal injury awards are [generally] not treated as income under the Internal Revenue Code” and noting that “in each of these instances [where personal injury awards are excluded from § 61(a)] there is an express provision that personal injury awards are not to be treated as income—which causes them not only to fail to support the proposition that the term “income” automatically excludes personal injury awards, but to support the opposite proposition that absent express exclusion it embraces them”). See also Murphy v. I.R.S., 493 F.3d 170, 180 [100 AFTR 2d 2007-5075] (D.C. Cir. 2007) (holding that money received in compensation for emotional injuries is taxable income pursuant to § 61 (a) because the 1996 amendments to § 104(a)(2) would make little sense if § 61(a) did not include compensation for personal injuries).
Accordingly, Mrs. Stadnyk's $49,000 settlement classifies as gross income under § 61(a), and Petitioners can only avoid paying taxes on the damages award if it falls under an exclusion.
III. The Exclusion in I.R.C. § 104(a)(2)
The exclusion from § 61(a) at issue in the instant case is contained in § 104(a)(2), which permits taxpayers to exclude from income “the amount of any damages received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal physical injuries or physical sickness.” 26 U.S.C. § 104(a)(2).
The Supreme Court has held that a taxpayer must meet two independent requirements before a recovery may be excluded under § 104(a)(2). “First, the taxpayer must demonstrate that the underlying cause of action giving rise to the recovery is based upon tort or tort type rights; and second, the taxpayer must show that the damages were received on account of personal injuries or sickness.” Schleier, 515 U.S. at 337 (internal quotations omitted). To satisfy the second prong, the taxpayer must present “concrete evidence demonstrating the precise causal connection” between the taxpayer's asserted personal injuries and the settlement she received. Banks v. Comm'r, 345 F.3d 373, 378–79 [92 AFTR 2d 2003-6298] (6th Cir. 2003) (“Banks I”) (overruled on other grounds byBanks II ) (citing Greer, 207 F.3d at 334).
In 1996, I.R.C. § 104(a)(2) was amended to add the word “physical” to the phrase “personal injuries or sickness.” See Small Business Job Protection Act of 1996, Pub. L. No. 104-188, § 1605(a), 110 Stat. 1755, 1838. Prior to the amendment, I.R.C. § 104(a)(2) encompassed damages compensating all personal injuries, including non-physical injuries. See Burke, 504 U.S. at 235 n.6. However, the amendment to I.R.C. § 104(a)(2) expressly limits the type of damages excludable from income to those received “on account of personal physical injuries or physical sickness,” and expressly states that emotional distress does not constitute a physical injury or sickness. Pub. L. No. 104-188, § 1605(a), 110 Stat. 1755, 1838.
Petitioners argue that their settlement award satisfies the two-part test laid out in Schleier, and, thus, may be excluded from taxation under § 104(a)(2).
A. Prong One: Tort or Tort Type Right
Under the first prong, the question is whether Mrs. Stadnyk's claims against Bank One giving rise to her recovery are based upon tort or tort type rights. The mediation agreement between Mrs. Stadnyk and Bank One did not state what claims provided the basis for the settlement award, nor does the remainder of the record surrounding the settlement provide any insight. Thus, we must look to the complaint to shed light on what claims gave rise to the award. In Mrs. Stadnyk's First Amended Complaint, she alleged a number of tort claims against J.R. Maze and Nicholasville Auto, including malicious prosecution, abuse of process, false imprisonment, defamation, and outrageous conduct, and she repeated, realleged, and incorporated these claims by reference against Bank One. By incorporating these claims by reference, Mrs. Stadnyk raised these tort claims against Bank One.
In addition, Mrs. Stadnyk alleged in her First Amended Complaint that Bank One breached its fiduciary duty of care by improperly and negligently marking her check “NSF” for insufficient funds. Kentucky's banking statutes recognize elements of both contract and tort law in the bank-depositor relationship. Under Kentucky law, banks are required to exercise good faith and ordinary care in the handling of customer accounts, thereby incorporating common law rules of negligence.See Bullitt County Bank v. Publisher's Printing Co. , 684 S.W.2d 289, 291–92 (Ky. Ct. App. 1984);Pulliam v. Pulliam , 738 S.W.2d 846, 849 (Ky. Ct. App. 1987); American Nat'l Bank v. Morey, 69 S.W. 759, 760 (Ky. 1902) (recognizing that a bank customer may have a tort claim against a bank for the wrongful dishonor of a check). Furthermore, under Kentucky law, arrest is a reasonably foreseeable consequence of a bank's wrongful dishonor, and a bank customer may sue for damages resulting from an arrest over such an error. See Ky. Rev. Stat. § 355.4-402 (“A payor bank is liable to its customers for damages proximately caused by the wrongful dishonor of an item. Liability is limited to actual damages proved and may include damages for an arrest or prosecution of the customer or other consequential damages.”).
Based on these Kentucky banking laws and the circumstances of this case, the Tax Court found that Mrs. Stadnyk's independent claims against Bank One sounded in tort:
It is incorrect to characterize [Mrs. Stadnyk's] complaint against Bank One as a contract claim or merely a dispute over the wrongful dishonor of a check. Rather, [Mrs. Stadnyk] decided to sue Bank One because of the ordeal she suffered as a result of her arrest and detention. [Mrs. Stadnyk] did not suffer an economic loss from Bank One's alleged mishandling of her check. She did not sue Bank One to recover on economic rights arising from a contract with Bank One. [Mrs. Stadnyk] sought damages against Bank One that resulted from her arrest, detention, and indictment.
(App. at 85–86.) We agree with the Tax Court's analysis. Based on the finding that Mrs. Stadnyk alleged tort claims against Bank One in her complaint, we conclude that Mrs. Stadnyk's settlement with Bank One was based on tort or tort type rights.
B. Prong Two: “On Account of Personal Physical Injuries”
Having satisfied the first prong, to obtain an exclusion under § 104(a)(2), Mrs. Stadnyk must show that she sustained the damages on account of personal physical injuries or sickness. Under the 1996 Amendment, I.R.C. § 104(a)(2) expressly limits the type of damages excludable from income to personalphysical injuries or physical sickness and expressly states that emotional distress does not constitute a physical injury or sickness. Pub. L. No. 104-188, § 1605(a), 110 Stat. 1755, 1838. Kentucky courts have defined false imprisonment as “any deprivation of the liberty of one person by another or detention for however short a time without such person's consent and against his will, whether done by actual violence, threats or otherwise.” Grayson Variety Store, Inc. v. Shaffer, 402 S.W.2d 424, 425 (Ky. 1966). The tort of false imprisonment protects personal interest in freedom from physical restraint; the interest is “in a sense a mental one” and the injury is “in large part a mental one.”Banks v. Fritsch , 39 S.W.3d 474, 479 (Ky. Ct. App. 2001).
During her deposition, Mrs. Stadnyk testified that she did not suffer any physical injury as a result of her arrest and detention. According to Mrs. Stadnyk, nobody carrying out her arrest or detention put their hands on her, grabbed her, jerked her around, bruised her, or hurt her. Petitioners' brief concedes that the actions of the police were proper and that Mrs. Stadnyk presumes that she was treated in the same manner as anyone else arrested for passing a bad check. Nothing in the record suggests that Mrs. Stadnyk suffered physical, as opposed to emotional, injuries as a result of Bank One's actions.
The Tax Court correctly noted that “[t]he damages sought by [Mrs. Stadnyk] against Bank One are stated in terms of recovery for nonphysical personal injuries: [e]motional distress, mortification, humiliation, mental anguish, and damage to reputation.” (App. at 88). These are all emotional injuries, and are thus not excludable under § 104(a)(2). See Sanford v. Comm'r, 95 T.C.M. (CCH) 1618 [TC Memo 2008-158] (2008) (settlement award for emotional distress relating to sexual harassment and discrimination claims is not excludable); Polone v. Comm'r, 86 T.C.M. (CCH) 698 [TC Memo 2003-339] (2003) (settlement award for defamation claim is not excludable),aff'd 505 F.3d 966 [100 AFTR 2d 2007-6277] (9th Cir. 2007); Venable v. Comm'r, 86 T.C.M. (CCH) 254 [TC Memo 2003-240] (2003) (settlement payment for mental anguish and loss of reputation relating to malicious prosecution claim is not excludable), aff'd 110 Fed. App'x 421 [94 AFTR 2d 2004-6408] (5th Cir. 2004).
However, despite Mrs. Stadnyk's testimony, Petitioners argue that Mrs. Stadnyk suffered a physical injury because “[p]hysical restraint and detention and the resulting deprivation of [Mrs. Stadnyk's] personal liberty is [itself] a physical injury ... that Mrs. Stadnyk endured for an eight hour period.” (Pets.' Br. at 15.) Petitioners further argue that Mrs. Stadnyk suffered physical damages in addition to emotional damages because “to be falsely imprisoned, the person must first be physically restrained or held against their will” and “[t]hus the damages received from false imprisonment arise from the person's physical loss of their freedom and the mental suffering and humiliation that accompany this deprivation.” (Pets.' Br. at 15.)
In other words, Petitioners are asking the Court to create aper se rule that every false imprisonment claim necessarily involves a physical injury, even though physical injury is not a required element of false imprisonment under Kentucky law. To be sure, a false imprisonment claim may cause a physical injury, such as an injured wrist as a result of being handcuffed. But the mere fact that false imprisonment involves a physical act—restraining the victim's freedom—does not mean that the victim is necessarily physically injured as a result of that physical act. In the instant case, Mrs. Stadnyk unequivocally testified that she suffered no physical injuries as a result of her physical restraint. Thus, Petitioners have failed to establish that Mrs. Stadnyk suffered from personal physical injuries or physical sickness.
In addition, the Supreme Court has construed the “on account of” phrase to require a direct causal link between the physical injury and the damages recovery in order to qualify for the income exclusion. See Schleier, 515 U.S. at 329–31. This direct causal connection must be more than a “but for” link, because a “but for” analysis would “bring virtually all personal injury lawsuit damages within the scope of the provision, since: but for the personal injury, there would be no lawsuit, and but for the lawsuit, there would be no damages.” O'Gilvie v. United States, 519 U.S. 79, 82 [78 AFTR 2d 96-7454], 117 S.Ct. 452, 136 L. Ed. 2d 454 (1996) (internal quotation marks omitted). Rather, the “on account of” phrase requires that the damages be awarded by reason of, or because of, a personal physical injury. Id. at 83.See also Greer , 207 F.3d at 327 (requiring that “the agreement was executed “in lieu” of the prosecution of the tort claim and “on account of” the personal injury”). Petitioners bear the burden of “present[ing] concrete evidence demonstrating the precise causal connection” between the personal physical injuries and the settlement payment. Id. at 334.
The settlement agreement does not include any express language of purpose. It only provides that “Bank One shall pay the total sum of $49,000” and that the “suit shall be dismissed with prejudice.” (App. at 206). Petitioners' only evidence arguably supporting the purpose necessary for exclusion under § 104(a)(2) is Mrs. Stadnyk's testimony that her attorney, the attorney for Bank One, and the mediator all advised her that the settlement proceeds would not be subject to income tax. However, even assuming the attorneys did give her this advice, there is no evidence concerning the basis for the advice. The attorneys may have advised Mrs. Stadnyk based on any number of incorrect beliefs, such as the belief that all personal injury awards are excludable from income, as Petitioner argues here, or the belief that a physical injury was unnecessary. Given that the settlement agreement included no indication that Bank One paid the settlement on account of any physical injury and that all of Mrs. Stadnyk's damages were stated in terms of emotional distress, Petitioners have failed to offer any concrete evidence demonstrating a causal connection between any physical injury and the settlement award.
Thus, Petitioner's settlement award may not be excluded from taxation under § 104(a)(2).
IV. The Constitutionality of I.R.C. § 104(a)(2)
Petitioners argue that § 104(a)(2), as amended by Congress in 1996, violates the Sixteenth Amendment to any extent that it purports to subject compensation for personal injuries to income tax. According to Petitioners, the Sixteenth Amendment only allows Congress to impose a tax on “incomes,” and a personal injury recovery is not income because it is not an accession to wealth. In arguing that Congress cannot comply with the Sixteenth Amendment by subjecting a personal injury recovery to income tax, Petitioners have recycled their argument that a personal injury award does not classify as income because it is compensatory rather than an accession to wealth. Thus, given our conclusion that a personal injury award is income under § 61(a), we must also reject Petitioner's related constitutional argument. See Murphy, 493 F.3d at 186.
In the alternative, Petitioners argue in the last two sentences of their brief that § 104(a)(2) is unconstitutional because it is a direct tax and is nonapportioned. Because Petitioners did not raise thus argument below, it is waived. Armstrong v. City of Melvindale, 432 F.3d 695, 700 (6th Cir. 2006). Furthermore, Petitioner's conclusory assertion is not enough to raise the issue now. Leary v. Livingston County, 528 F.3d 438, 449 (6th Cir. 2008) (“It is a settled appellate rule that issues averred in a perfunctory manner, unaccompanied by some effort at developed argumentation, are deemed waived.”).
However, assuming Petitioners have properly presented this argument, it is meritless. Even if the Court were to find that the damages award is not income within the meaning of the I.R.C. § 61(a) and the Sixteenth Amendment, a tax on Mrs. Stadnyk's settlement award would only be unconstitutional if it were a direct tax requiring apportionment or not uniform.See U.S. Const. art. I, § 8 (“all duties, imposts, and excises shall be uniform throughout the United States”); U.S. Const. art. I, § 9 (“No capitation, or other direct, tax shall be laid, unless in proportion to the census or enumeration herein before directed to be taken.”).
The tax on Petitioner's damages award is not a direct tax. Only three taxes are definitively known to be direct: (1) a capitation, (2) a tax upon real property, and (3) a tax upon personal property. See Murphy, 493 F.3d at 181. However, a tax on damages sustained on account of personal injury is not a tax on property; rather, it is a tax on thereceipt of a damages award. Id. at 184 (“it does not appear that this tax is upon ownership; rather, as the Government points out, [the taxpayer] is taxed only after she receives a compensatory award, which makes the tax seem to be laid upon a transaction”). Thus, it need not be apportioned. See Tyler v. United States, 281 U.S. 497, 502 [8 AFTR 10912], 50 S. Ct. 356, 4 L. Ed. 991 (1930) (“A tax laid upon the happening of an event, as distinguished from its tangible fruits, is an indirect tax which Congress ... undoubtably may impose.”).
Moreover, so long as Congress has the power to levy the tax, it is irrelevant whether it was proper for the tax to be labeled income tax or collected pursuant to § 61(a). See Penn Mut. Indemn. Co. v. Comm'r , 277 F.2d 16, 20 [5 AFTR 2d 1171] (3d Cir. 1960) (“[i]t is not necessary to uphold the validity of the tax imposed by the United States that the tax itself bear an accurate label”); Simmons v. United States, 308 F.2d 160, 166 [10 AFTR 2d 5523] n.21 (4th Cir. 1962) (“if Congress has the power to impose the tax in question, it is not material that it call the tax one on income, for it has been clearly established that the labels used do not determine the extent of the taxing power”).
Finally, even assuming the tax in this case is an excise subject to the uniformity requirement, the tax in this case meets this standard. See United States v. Ptasynski, 462 U.S. 74, 82 [52 AFTR 2d 83-6495], 103 S. Ct. 2239, 76 L. Ed. 2d 427 (1983) (“tax is uniform when it operates with the same force and effect in every place where the subject of it is found”) (internal citations and quotations omitted).
Thus, the Tax Court did not err by concluding that I.R.C. § 104(a)(2) does not violate the Constitution.
CONCLUSION
Because the Tax Court properly found that Petitioners owe income taxes on the damages award received pursuant to their settlement with Bank One and that I.R.C. § 104(a)(2) does not violate the Constitution, we AFFIRM the Tax's Court's order.
________________________________________
1
Mrs. Stadnyk's claims against J.R. Maze and Nicholasville Auto had already been dismissed with prejudice pursuant to an order entered on June 8, 2001. The record contains no information as to the terms of the dismissal.

Small Business/Self-Employed Interim Guidance for Calculation of Future Income in Offer in Compromise Cases, SBSE 05-0310-012, (Mar. 16, 2010)
2010ARD 052-5
Internal Revenue Service: Compromises: Future income
DEPARTMENT OF THE TREASURY INTERNAL REVENUE SERVICE Washington, DC 20224
March 10, 2010
SMALL BUSINESS / SELF-EMPLOYED DIVISION
SB/SE Control No: SBSE 05-0310-012
Expires: 3/10/2011
Impacted IRM 5.8.5
MEMORANDUM FOR DIRECTORS, COLLECTION AREA OPERATIONS DIRECTORS, CAMPUS COMPLIANCE OPERATIONS AND CHIEF, APPEALS
FROM: Frederick W. Schindler /s/ Frederick W. Schindler Director, Collection Policy
SUBJECT: Interim Guidance for Calculation of Future Income in Offer in Compromise Cases
The purpose of this memorandum is to provide revised guidance in the computation of the taxpayer's future income value during the evaluation of an offer in compromise.
Internal Revenue Manual (IRM) 5.8.5 defines future income as an estimate of the taxpayer's ability to pay based on an analysis of gross income, less necessary living expenses, for a specific number of months into the future. The number of months used depends on the payment terms of the offer. In general, a taxpayer's current income will be used in the analysis of future ability to pay.
Attached to this memorandum is a revision to sections of IRM 5.8.5, Financial Analysis which discuss the calculation of future income and the use of collateral agreements.
The revisions include specific examples of when the use of income averaging and/or a collateral agreement is appropriate.
These procedures are effective upon the date of issuance and should be applied to any offer currently under consideration. Additionally, these procedures may be applied to offers previously rejected which are currently in their appeal period or where the taxpayer has requested appeals consideration. These procedures will be incorporated into the next revision of IRM 5.8 Offers in Compromise.
If you have any questions, you may contact me, or a member of your staff may contact Thomas B. Moore, OIC Senior Program Analyst. Territory or Campus personnel should direct any questions, through their management staff, to the appropriate Area or Campus contact.
Attachment
cc: Commissioner, Small Business/Self-Employed Division
National Chief, Appeals
Chief Counsel
National Taxpayer Advocate
5.8.5.6 Future Income
(1) Future income is defined as an estimate of the taxpayer's ability to pay based on an analysis of gross income, less necessary living expenses, for a specific number of months into the future.
(2) As a general rule, the taxpayer's current income will be used in the analysis of future ability to pay. This includes situations where the taxpayer's income is recently reduced based on a change in occupation or employment status.
(3) Consideration should be given to the taxpayer's overall general situation including such facts as age, health, marital status, number and age of dependents, level of education or occupational training, and work experience.
(4) Situations that may warrant placing a different value on future income than current or past income indicates are discussed in the table below. Additionally, securing a future income collateral agreement based on the taxpayer's earnings potential may be appropriate and are discussed in more detail in IRM 5.8.5.19 and IRM 5.8.6, Collateral Agreements.

If… Then…

Income will increase or decrease or current necessary expenses will increase or decrease Adjust the amount or number of payments to what is expected during the appropriate number of months.

A taxpayer is temporarily or recently unemployed or underemployed Use the level of income expected if the taxpayer were fully employed and if the potential for employment is apparent. Each case should be judged on its own merit, including consideration of special circumstances or ETA issues.
Example: Unemployed - The taxpayer is a construction worker and between jobs. A review of the taxpayer's previous annual income and/or income averaging may be the appropriate method to determine taxpayer's income for calculation purposes.
Example: Underemployed - If a taxpayer is a teacher but recently moved and is currently at a lesser paying job until a teaching position becomes available, or has been hired and does not begin work until the school season begins, the taxpayer is considered to be currently underemployed. Use the anticipated income once the taxpayer is fully employed.

A taxpayer is unemployed and is not expected to return to their previous occupation or previous level of earnings Contact the taxpayer to discuss the expected future level of income. When considering future income, also allow anticipated increases in necessary living expenses and/or applicable taxes.
Each case should be judged on its own merit, including consideration of special circumstances or ETA issues.

A taxpayer is long-term unemployed Use of income averaging is not required; the taxpayer's current income may be used in the future income calculation.
Example: Taxpayer has been unemployed for over one year. There are currently no employment opportunities for the taxpayer and the household is living on one income. Use of the taxpayer's current income with a future income collateral agreement is appropriate.

A taxpayer is long-term underemployed Do not income average; use the taxpayer's current income.
Example: The taxpayer was previously employed in a manufacturing plant making $75,000 per year. There are currently no opportunities for the taxpayer to secure employment making the same rate of pay as their prior job. Their income is now $25,000 per year with no anticipated increase. Use the current income only.

A taxpayer has an irregular employment history or fluctuating income Average earnings over the three prior years. The use of a time period other than three years should be the exception and only when specific circumstances are present.
Example: The taxpayer is a stock broker whose income in 2007 was $150,000 and income in 2008 was $25,000. In this case, you should consider income averaging the prior three years or secure a future income collateral agreement if the offer is accepted.
Note: This practice does not apply to wage earners. Wage earners should be based on current income unless the taxpayer has unique circumstances.

A taxpayer is in poor health and their ability to continue working is questionable Reduce the number of payments to the appropriate number of months it is anticipated the taxpayer will continue working. Consider special circumstance situations when making any adjustments.
Example: Taxpayer has a serious health issue and it is anticipated they will be unable to work after six months. Use the taxpayer's current income for six months then reduce their income to the anticipated amount they will be receiving after they are unable to work.

A taxpayer is close to retirement and has indicated they will be retiring If the taxpayer can substantiate retirement is imminent, adjust the taxpayer's future earnings and expenses accordingly. If it cannot be substantiated, base the calculation on current earnings. At this point, it may be appropriate to discuss other options available to the taxpayer, for example an installment agreement.
Example: The taxpayer is 65 years of age and has indicated they will retire at the age of 66. They provide copies of documents that have been submitted to their employer discussing their retirement date. Use the taxpayer's current income until the taxpayer's anticipated retirement date, then adjust the taxpayer's income to reflect the amount expected in retirement.
Example: The taxpayer is 62 years of age, the taxpayer is in good health, and their income has remained stable for the past three years. The taxpayer states they would like to retire at age 65. Use the taxpayer's current income and if the RCP exceeds the offer amount, discuss the option of securing an installment agreement until the taxpayer actually retires, at which time an offer may be appropriate.

A taxpayer will file a petition for liquidating bankruptcy Consider reducing the value of future income. The total value of future income should not be reduced to an amount less than what could be paid toward non-dischargeable periods, or what would be recoverable through a bankruptcy proceeding. When considering a reduction in future income also consider the intangible value to the taxpayer of avoiding bankruptcy. Refer to IRM 5.8.10.2.

(5) Judgment should be used in determining the appropriate time to apply income averaging on a case by case basis. All circumstances of the taxpayer should be considered when determining the appropriate application of income averaging, including special circumstances and ETA considerations. Below are some examples of when income averaging may or may not be appropriate.
Example: Taxpayer's spouse has not worked for over two and one-half years and has no expectations of returning to work. Do not average income for the spouse's past employment.
Example: Taxpayer has been unemployed for over one year and provided proof that Social Security Disability is the sole source of income. Do not apply income averaging in this case but use current income to determine the taxpayer's future ability to pay.
Example: The taxpayer was incarcerated and unable to work for the past four years and provided proof that a relative is paying for all expenses, including child support payments. The taxpayer has no skills or promise of work in the near future but is planning on attending trade school to improve his chances of getting a job. Do not include income prior to the incarceration. In this case, since the taxpayer has no skills or promise of employment, their future income value may be determined to be zero. Consideration should be given whether it would be in the best interest of the government to accept the offer or reject the offer in favor of other case resolutions.
Example: The taxpayer recently began working after several months of unemployment. Use the most recent three months pay statements to determine future income. Since the taxpayer is a wage earner, the use of income averaging over the prior three years of income is not appropriate.
(6) In situations where the taxpayer's income does not appear to meet their stated living expenses the difference should not be included as additional income to the taxpayer, unless there are clear indications additional income not included on the collection information statement is being received and will continue to be received by the taxpayer. Discussion with the taxpayer/representative and a review of documents submitted by the taxpayer must take place to determine the appropriateness of including an additional amount in the calculation of future income. Verification of the source of unexplained bank deposits or statements from the source of gifts may be required to correctly determine the taxpayer's current income. Telephone contact is recommended to expedite case processing.
Example: The taxpayer has been receiving gifts from their parents to meet current living expenses for the past six months. The taxpayer has no guaranteed right to the funds in the future and the amount does not appear to be based on the transfer of assets to the parents. The gift amount should not be included as income.
Example: The taxpayer has been receiving an amount each month that only began recently, which they state is a gift from a friend. Further research has determined the taxpayer is in business with the friend and the amount is from their business. This amount should be included as income to the taxpayer. Additionally, consideration should be given to referring the taxpayer and the business income tax return to Examination.
Example: The taxpayer had gambling winnings over a period of time, but is not consistent. Do not include those winnings as additional income on the IET. This does not apply to professional gamblers.
Example: The collection information statement (CIS) submitted by the taxpayer included $ 3.000.00 of monthly income, which is verified by paystubs. The CIS submitted by the taxpayer includes $ 4,000.00 of expenses. An additional $ 1,000.00 should not be added to the taxpayer's income based solely on the fact it appears the taxpayer has been meeting the living expenses included on the CIS. Discussion with the taxpayer or representative is necessary to clarify the discrepancy prior to including the amount as additional income.
(7) Employees need to exercise good judgment when determining future income. The history must be clearly documented and support the known facts and circumstances of the case and include analysis of the supporting documents. Each case needs to be evaluated on its own particular set of facts and circumstances. The history must clearly explain the reasoning behind our actions.
Currently 5.8.5.6(7) Future Income Collateral Agreements
(1) In some instances, it may be difficult to calculate the taxpayer's anticipated income. While the use of income averaging is one method available and should be used when averaging the taxpayer's income provides a reasonable calculation of the taxpayer's future earnings potential, it may also be appropriate to use the taxpayer's current income and secure a future income collateral agreement. The use of a future income collateral agreement will protect the government's interest in any substantial increase in the taxpayer's earnings.
(2) A future income collateral agreement is most appropriate in situations where the taxpayer's future income is uncertain, but it is reasonably expected that the taxpayer will be receiving a substantial increase in income.
(3) A future income collateral agreement should not be used to accept an offer for a lesser amount than the calculated RCP. See IRM 5.8.6.3.1, Future Income, for instructions on completing collateral agreements.
Example: A taxpayer is currently in medical school; upon graduation income should increase dramatically. Consider securing a future income collateral agreement.
Example: A taxpayer recently secured a job as an attorney with a starting salary of $80,000 per year, with potential for significant increases in salary. Consider securing a future income collateral agreement.
Example: A taxpayer is a real estate agent who has had two years of high income and the current income is significantly diminished. Based on the current real estate market, it may be appropriate to use the taxpayer's current income and secure a future income collateral agreement in lieu of income averaging.
Example: A taxpayer's RCP is $12,000 but has offered $10,000 plus a future income collateral agreement. A future income collateral agreement is not appropriate in lieu of the taxpayer increasing their offer to the RCP amount. If the taxpayer is not willing to increase their offer to the RCP amount, the offer should be rejected.

The IRS and Treasury Department have provided revised guidance to Small Business/Self-Employed Division directors and the IRS Appeals chief on the computation of a taxpayer's future income value during the evaluation of an offer in compromise. The guidance revises sections of IRM 5.8.5, Financial Analysis, which discuss the calculation of future income and the use of collateral agreements. The revisions include specific examples of when the use of income averaging or a collateral agreement is appropriate.

The procedures apply to future offers and any offer currently under consideration. In addition, the procedures may be applied to offers previously rejected that are currently in their appeal period or where the taxpayer has requested appeals


IRS Small Business/Self-Employed Interim Guidance for Calculation of Future Income in Offer in Compromise Cases, SBSE 05-0310-012, (Mar. 16, 2010)
2010ARD 052-5
Internal Revenue Service: Compromises: Future income
DEPARTMENT OF THE TREASURY INTERNAL REVENUE SERVICE Washington, DC 20224
March 10, 2010
SMALL BUSINESS / SELF-EMPLOYED DIVISION
SB/SE Control No: SBSE 05-0310-012
Expires: 3/10/2011
Impacted IRM 5.8.5
MEMORANDUM FOR DIRECTORS, COLLECTION AREA OPERATIONS DIRECTORS, CAMPUS COMPLIANCE OPERATIONS AND CHIEF, APPEALS

FROM: Frederick W. Schindler /s/ Frederick W. Schindler Director, Collection Policy
SUBJECT: Interim Guidance for Calculation of Future Income in Offer in Compromise Cases

The purpose of this memorandum is to provide revised guidance in the computation of the taxpayer's future income value during the evaluation of an offer in compromise.
Internal Revenue Manual (IRM) 5.8.5 defines future income as an estimate of the taxpayer's ability to pay based on an analysis of gross income, less necessary living expenses, for a specific number of months into the future. The number of months used depends on the payment terms of the offer. In general, a taxpayer's current income will be used in the analysis of future ability to pay.
Attached to this memorandum is a revision to sections of IRM 5.8.5, Financial Analysis which discuss the calculation of future income and the use of collateral agreements.
The revisions include specific examples of when the use of income averaging and/or a collateral agreement is appropriate.
These procedures are effective upon the date of issuance and should be applied to any offer currently under consideration. Additionally, these procedures may be applied to offers previously rejected which are currently in their appeal period or where the taxpayer has requested appeals consideration. These procedures will be incorporated into the next revision of IRM 5.8 Offers in Compromise.
If you have any questions, you may contact me, or a member of your staff may contact Thomas B. Moore, OIC Senior Program Analyst. Territory or Campus personnel should direct any questions, through their management staff, to the appropriate Area or Campus contact.
Attachment
cc: Commissioner, Small Business/Self-Employed Division
National Chief, Appeals
Chief Counsel
National Taxpayer Advocate

5.8.5.6 Future Income

(1) Future income is defined as an estimate of the taxpayer's ability to pay based on an analysis of gross income, less necessary living expenses, for a specific number of months into the future.

(2) As a general rule, the taxpayer's current income will be used in the analysis of future ability to pay. This includes situations where the taxpayer's income is recently reduced based on a change in occupation or employment status.

(3) Consideration should be given to the taxpayer's overall general situation including such facts as age, health, marital status, number and age of dependents, level of education or occupational training, and work experience.

(4) Situations that may warrant placing a different value on future income than current or past income indicates are discussed in the table below. Additionally, securing a future income collateral agreement based on the taxpayer's earnings potential may be appropriate and are discussed in more detail in IRM 5.8.5.19 and IRM 5.8.6, Collateral Agreements.

If… Then…

Income will increase or decrease or current necessary expenses will increase or decrease Adjust the amount or number of payments to what is expected during the appropriate number of months.

A taxpayer is temporarily or recently unemployed or underemployed Use the level of income expected if the taxpayer were fully employed and if the potential for employment is apparent. Each case should be judged on its own merit, including consideration of special circumstances or ETA issues.

Example: Unemployed - The taxpayer is a construction worker and between jobs. A review of the taxpayer's previous annual income and/or income averaging may be the appropriate method to determine taxpayer's income for calculation purposes.

Example: Underemployed - If a taxpayer is a teacher but recently moved and is currently at a lesser paying job until a teaching position becomes available, or has been hired and does not begin work until the school season begins, the taxpayer is considered to be currently underemployed. Use the anticipated income once the taxpayer is fully employed.

A taxpayer is unemployed and is not expected to return to their previous occupation or previous level of earnings Contact the taxpayer to discuss the expected future level of income. When considering future income, also allow anticipated increases in necessary living expenses and/or applicable taxes.
Each case should be judged on its own merit, including consideration of special circumstances or ETA issues.

A taxpayer is long-term unemployed Use of income averaging is not required; the taxpayer's current income may be used in the future income calculation.
Example: Taxpayer has been unemployed for over one year. There are currently no employment opportunities for the taxpayer and the household is living on one income. Use of the taxpayer's current income with a future income collateral agreement is appropriate.

A taxpayer is long-term underemployed Do not income average; use the taxpayer's current income.
Example: The taxpayer was previously employed in a manufacturing plant making $75,000 per year. There are currently no opportunities for the taxpayer to secure employment making the same rate of pay as their prior job. Their income is now $25,000 per year with no anticipated increase. Use the current income only.

A taxpayer has an irregular employment history or fluctuating income Average earnings over the three prior years. The use of a time period other than three years should be the exception and only when specific circumstances are present.
Example: The taxpayer is a stock broker whose income in 2007 was $150,000 and income in 2008 was $25,000. In this case, you should consider income averaging the prior three years or secure a future income collateral agreement if the offer is accepted.
Note: This practice does not apply to wage earners. Wage earners should be based on current income unless the taxpayer has unique circumstances.

A taxpayer is in poor health and their ability to continue working is questionable Reduce the number of payments to the appropriate number of months it is anticipated the taxpayer will continue working. Consider special circumstance situations when making any adjustments.
Example: Taxpayer has a serious health issue and it is anticipated they will be unable to work after six months. Use the taxpayer's current income for six months then reduce their income to the anticipated amount they will be receiving after they are unable to work.

A taxpayer is close to retirement and has indicated they will be retiring If the taxpayer can substantiate retirement is imminent, adjust the taxpayer's future earnings and expenses accordingly. If it cannot be substantiated, base the calculation on current earnings. At this point, it may be appropriate to discuss other options available to the taxpayer, for example an installment agreement.
Example: The taxpayer is 65 years of age and has indicated they will retire at the age of 66. They provide copies of documents that have been submitted to their employer discussing their retirement date. Use the taxpayer's current income until the taxpayer's anticipated retirement date, then adjust the taxpayer's income to reflect the amount expected in retirement.
Example: The taxpayer is 62 years of age, the taxpayer is in good health, and their income has remained stable for the past three years. The taxpayer states they would like to retire at age 65. Use the taxpayer's current income and if the RCP exceeds the offer amount, discuss the option of securing an installment agreement until the taxpayer actually retires, at which time an offer may be appropriate.

A taxpayer will file a petition for liquidating bankruptcy Consider reducing the value of future income. The total value of future income should not be reduced to an amount less than what could be paid toward non-dischargeable periods, or what would be recoverable through a bankruptcy proceeding. When considering a reduction in future income also consider the intangible value to the taxpayer of avoiding bankruptcy. Refer to IRM 5.8.10.2.

(5) Judgment should be used in determining the appropriate time to apply income averaging on a case by case basis. All circumstances of the taxpayer should be considered when determining the appropriate application of income averaging, including special circumstances and ETA considerations. Below are some examples of when income averaging may or may not be appropriate.
Example: Taxpayer's spouse has not worked for over two and one-half years and has no expectations of returning to work. Do not average income for the spouse's past employment.
Example: Taxpayer has been unemployed for over one year and provided proof that Social Security Disability is the sole source of income. Do not apply income averaging in this case but use current income to determine the taxpayer's future ability to pay.
Example: The taxpayer was incarcerated and unable to work for the past four years and provided proof that a relative is paying for all expenses, including child support payments. The taxpayer has no skills or promise of work in the near future but is planning on attending trade school to improve his chances of getting a job. Do not include income prior to the incarceration. In this case, since the taxpayer has no skills or promise of employment, their future income value may be determined to be zero. Consideration should be given whether it would be in the best interest of the government to accept the offer or reject the offer in favor of other case resolutions.
Example: The taxpayer recently began working after several months of unemployment. Use the most recent three months pay statements to determine future income. Since the taxpayer is a wage earner, the use of income averaging over the prior three years of income is not appropriate.
(6) In situations where the taxpayer's income does not appear to meet their stated living expenses the difference should not be included as additional income to the taxpayer, unless there are clear indications additional income not included on the collection information statement is being received and will continue to be received by the taxpayer. Discussion with the taxpayer/representative and a review of documents submitted by the taxpayer must take place to determine the appropriateness of including an additional amount in the calculation of future income. Verification of the source of unexplained bank deposits or statements from the source of gifts may be required to correctly determine the taxpayer's current income. Telephone contact is recommended to expedite case processing.
Example: The taxpayer has been receiving gifts from their parents to meet current living expenses for the past six months. The taxpayer has no guaranteed right to the funds in the future and the amount does not appear to be based on the transfer of assets to the parents. The gift amount should not be included as income.
Example: The taxpayer has been receiving an amount each month that only began recently, which they state is a gift from a friend. Further research has determined the taxpayer is in business with the friend and the amount is from their business. This amount should be included as income to the taxpayer. Additionally, consideration should be given to referring the taxpayer and the business income tax return to Examination.
Example: The taxpayer had gambling winnings over a period of time, but is not consistent. Do not include those winnings as additional income on the IET. This does not apply to professional gamblers.
Example: The collection information statement (CIS) submitted by the taxpayer included $ 3.000.00 of monthly income, which is verified by paystubs. The CIS submitted by the taxpayer includes $ 4,000.00 of expenses. An additional $ 1,000.00 should not be added to the taxpayer's income based solely on the fact it appears the taxpayer has been meeting the living expenses included on the CIS. Discussion with the taxpayer or representative is necessary to clarify the discrepancy prior to including the amount as additional income.
(7) Employees need to exercise good judgment when determining future income. The history must be clearly documented and support the known facts and circumstances of the case and include analysis of the supporting documents. Each case needs to be evaluated on its own particular set of facts and circumstances. The history must clearly explain the reasoning behind our actions.
Currently 5.8.5.6(7) Future Income Collateral Agreements
(1) In some instances, it may be difficult to calculate the taxpayer's anticipated income. While the use of income averaging is one method available and should be used when averaging the taxpayer's income provides a reasonable calculation of the taxpayer's future earnings potential, it may also be appropriate to use the taxpayer's current income and secure a future income collateral agreement. The use of a future income collateral agreement will protect the government's interest in any substantial increase in the taxpayer's earnings.
(2) A future income collateral agreement is most appropriate in situations where the taxpayer's future income is uncertain, but it is reasonably expected that the taxpayer will be receiving a substantial increase in income.
(3) A future income collateral agreement should not be used to accept an offer for a lesser amount than the calculated RCP. See IRM 5.8.6.3.1, Future Income, for instructions on completing collateral agreements.
Example: A taxpayer is currently in medical school; upon graduation income should increase dramatically. Consider securing a future income collateral agreement.
Example: A taxpayer recently secured a job as an attorney with a starting salary of $80,000 per year, with potential for significant increases in salary. Consider securing a future income collateral agreement.
Example: A taxpayer is a real estate agent who has had two years of high income and the current income is significantly diminished. Based on the current real estate market, it may be appropriate to use the taxpayer's current income and secure a future income collateral agreement in lieu of income averaging.
Example: A taxpayer's RCP is $12,000 but has offered $10,000 plus a future income collateral agreement. A future income collateral agreement is not appropriate in lieu of the taxpayer increasing their offer to the RCP amount. If the taxpayer is not willing to increase their offer to the RCP amount, the offer should be rejected.

If the IRS takes the position that something is a sham trust, they cannot take an inconsistent position that it is not a sham trust.


BEMONT INVESTMENTS, LLC v. U.S., Cite as 105 AFTR 2d 2010-XXXX, 03/09/2010
________________________________________
BEMONT INVESTMENTS, LLC, by and through its Tax Matters Partner, et al., Plaintiffs, v. UNITED STATES OF AMERICA, Defendant.

Case Information:


Code Sec(s):
Court Name: IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF TEXAS SHERMAN DIVISION,
Docket No.: CASE NO. 4:07cv9 (consolidated with 4:07cv10),
Date Decided: 03/09/2010.
Disposition:
HEADNOTE
.
Reference(s):
OPINION

IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF TEXAS SHERMAN DIVISION,
MEMORANDUM OPINION AND ORDER REGARDING MOTION FOR PARTIAL SUMMARY JUDGMENT REGARDING INAPPLICABILITY OF VALUATION MISSTATEMENT PENALTY
Judge: DON D. BUSH UNITED STATES MAGISTRATE JUDGE

Before the Court is Plaintiffs' Motion for Partial Summary Judgment Regarding Inapplicability of Valuation Misstatement Penalty (Dkt. 137). The Court has considered the motion, as well as the response filed by the United States. The motion is GRANTED.

Plaintiffs, the partnerships herein, filed this suit contesting the determination by the Internal Revenue Service that the transactions which created partnership losses were sham transactions to create sham losses. The United States calls these tax shelters Son of Boss transactions.

The very narrow issue presented here is whether the United States can impose a penalty for valuation misstatements. The United States contends that the value of the currency swaps as reported results in a misstatement of over 8000%.
Section 6662 of the Internal Revenue Code allows an imposition of a penalty for underpayment of taxes when any one of the following factors is demonstrated: (1) negligence or disregard of rules or regulations; (2) any substantial understatement of income tax; (3) any substantial valuation misstatement under chapter 1; (4) any substantial overstatement of pension liabilities; or (5) any substantial estate or gift tax valuation understatement. 26 U.S.C. § 6662 (b)(1–5). Section 6662(h)(2) allows for a 40% penalty, if the substantial valuation misstatement is 400% or more. 26 U.S.C. § 6662(h)(2).

In October 2006, the I.R.S. sent both partnerships a Notice of Final Partnership Administrative Adjustment, or FPAA. Curiously, the notice states that, if the partnerships do nothing and do not enter into a binding settlement, they will be billed for any additional tax plus interest that they may owe under the FPAA. Nothing is said about penalties. However, the notice states that, if the partnerships accept the FPAA and sign the required form, then they are signing on for any additional penalties as determined by the I.R.S. This begs the question, why settle?

In the form 886-A, Explanation of Items, attached to the FPAA the I.R.S. notes a number of factors for its decision to disallow the transaction. First, the I.R.S. questions whether BPB Investments is a partnership as a matter of fact. Second, the I.R.S. states that the partnership was formed solely for the purposes of tax avoidance by artificially overstating basis in the partnership interests of its purported partners. Third, the transaction was noted by the I.R.S. as an economic sham with no business purpose. The I.R.S. makes the determination that the foreign currency swaps were acquired directly by the partners and not BPB Investments, LLC. The I.R.S. also concludes that the swap assumed by BM Investments, LLC is disregarded and any gains or losses on the swap is treated as having been realized by the partners. The I.R.S. then determines that the partners of BPB Investments are not to be treated as partners. It is also determined by the I.R.S. that obligations under the short positions transferred to BM Investments LLC are liabilities which reduce the purported partners' bases in BM Investments, LLC in the amount of $202,5000,000. The I.R.S. determines that there was no profit motive with this transaction and that any losses were not at risk. The I.R.S. also determines that none of the partners of BM Investments, LLC or PBP Investments, LLC established an adjusted basis in their respective interests in an amount greater than zero (0). The I.R.S. also determines that the sale, liquidation, or exchange of the above noted partnerships failed to establish a basis above zero for the partners' partnership interest.

Plaintiffs contend that, under well settled Fifth Circuit law, the I.R.S.'s determination that the transaction was a sham — and thus disallowed — forecloses assessment of the 40% penalty. The United States responds that current Fifth Circuit law either (1) does not apply to this transaction because the transaction is distinguishable or has been superseded by changes in the law and Treasury Regulations, or (2) precedent binding decisions were incorrectly decided. The United States points out that, when considering these type of tax shelters, most of the Circuits have upheld the 40% penalty provision. The United States concedes that the case law in the Ninth Circuit and Fifth Circuit reaches a contrary result.
Therefore, the task before the Court is relatively simple. If Fifth Circuit law operates in Plaintiffs' favor, there is little else to do than grant the motion. This Court is bound by precedent, not policy.
Plaintiffs contend that, under Todd v. Comm'r, 862 F.2d 540, 541–42 [63 AFTR 2d 89-523] (5th Cir. 1988), Heasley v. Comm'r, 902 F.2d 380, 382–83 [66 AFTR 2d 90-5068] (5th Cir. 1990), and their progeny, these penalties are not applicable if the I.R.S.'s disallowance of tax benefits is not “attributable to” a valuation misstatement. See Klamath Strategic Inv. Fund v. United States, 472 F. Supp.2d 885, 899–900 [99 AFTR 2d 2007-850] (E.D.Tex. 2007) aff'd in part, 568 F.3d at 553 (holding that a disallowance was not “attributable to” a valuation misstatement when the I.R.S. disallowed a transaction as lacking economic substance). In Todd, the Fifth Circuit held that, because deductions and credits were disallowed for a reason totally unrelated to any valuation overstatement, the resulting underpayment could not be “attributable to a valuation overstatement” and misstatement penalties should not apply.Todd, 862 F.2d at 542.

In Heasley, the Fifth Circuit determined:
Whenever the I.R.S. totally disallows a deduction or credit, the I.R.S. may not penalize the taxpayer for a valuation overstatement included in that deduction or credit. In such a case, the underpayment is not attributable to a valuation overstatement. Instead, it is attributable to claiming an improper deduction or credit.

Heasley, 902 F.2d at 383. The Fifth Circuit has reaffirmed the validity of the Todd/Heasley reasoning. See Weiner v. U.S., 389 F.3d 152, 160–62 [94 AFTR 2d 2004-6518] (5th Cir. 2004) (citing Todd/Heasley with approval); see also Southgate Master Fund, LLC ex rel. Montgomery Capital LLC v. United States, 651 F.Supp. 2d 596, 664 [104 AFTR 2d 2009-6053] (N.D. Tex. 2009) (noting that the Fifth Circuit reaffirmed the validity of Todd/Heasley in the 2004 opinion in Weiner).
Here, the Court must take into account the I.R.S.'s rationale for disallowing the transactions entered into by Plaintiffs. First and foremost, the transaction is not disallowed because of a substantial valuation misstatement. The I.R.S. determined that the transaction was created for no business purpose other than for tax avoidance. Accordingly, the I.R.S. disregards the partnerships and transactions in full. The I.R.S. goes on to hold that the transaction lacked economic substance and was an economic sham. All losses are not allowed. All increase in basis of assets are not allowed to eliminate gain, and increases to the adjusted basis of partnership interests are not allowed. In essence, the I.R.S. rips the whole transaction apart.
But, there is no finding in the explanation of benefits that the reason for doing so is because of a gross valuation misstatement. In fact, in its explanation of Accuracy - Related Penalties, the I.R.S. once again states that the tax shelter was created without substantial authority for the position taken and that there was no reasonable belief by the partners that the position taken was more likely than not the correct treatment of the shelter and related transactions.
The I.R.S. then “hedges its bet”, noting that, in addition, all underpayments of tax are due to, at a minimum, substantial understatements of income tax, gross valuation misstatement(s); or negligence or disregarded rules or regulations.
The United States argues that the earlier Fifth Circuit cases noted above dealt with shelters from the 1980s involving penalty provisions that are no longer in effect. However, the Fifth Circuit's decision in Weiner forecloses this argument. See Weiner, 389 F.3d at 161. Further, the United States's argument that Treas. Reg. Section 1.6662-5(g) mandates a finding that, when the basis is determined to be zero, the deemed valuation misstatement is considered to be a gross valuation statement is vain. As Plaintiffs point out, this section is only applicable when any portion of the underpaymentis attributable to a substantial valuation misstatement. See Treas. Reg., Section 1.6662-5(a).
Are Todd, Heasley and Weiner distinguishable? Although the degree of sophistication or motivation on the part of the taxpayers in the above cases might generate a more sympathetic treatment, the principle relied upon by Plaintiffs and cited above does not appear to hinge on the motives of the taxpayers, but rather how the United States treats the transaction. Therefore, although the United States invites this Court to ignore binding precedent, the Court will not and cannot do so. Any distinctions that might exist as to taxpayer motives, if such exist, are a matter of concern for the Fifth Circuit. Any attempt by the United States to establish a 40% penalty is foreclosed by its own actions in this case.
SO ORDERED.
SIGNED this 9th day of March, 2010.
DON D. BUSH
UNITED STATES MAGISTRATE JUDGE

Wilfulness” for trust fund penalty found both before and after actual knowledge of delinquency
Frohnaple v. U.S., (DC NC 3/8/2010) 105 AFTR 2d ¶ 2010-577
A district court's Magistrate Judge has concluded that the president of a failing company was liable for the trust fund penalty because he “wilfully” failed to pay over payroll taxes under Code Sec. 6672 , for periods both before and after he actually knew that payroll taxes hadn't been paid. His knowledge of the company's inability to meet its debts and cash flow problems, as well as red flags raised as to the integrity of financial information, imposed an affirmative duty on him to ensure that the payroll taxes were being paid.
Background. Where an employer fails to properly pay over its payroll taxes, IRS can seek to collect a penalty equal to 100% of the unpaid taxes from a “responsible person,” i.e., a person who: (1) is responsible for collecting, accounting for and paying over payroll taxes; and (2) willfully fails to perform this responsibility. ( Code Sec. 6672(a) )
In determining whether there is “willfulness” for purposes of Code Sec. 6672 liability, courts have focused on whether the taxpayer had knowledge of non-payment or reckless disregard of whether the payments were being made. Thus, IRS can show willfulness by showing either actual knowledge of non-payment or reckless disregard as to non-payment. Courts have held that although mere negligence isn't enough to establish reckless disregard, gross negligence is. (Thomsen v. U.S. (CA 1 1989), 64 AFTR 2d 89-5752 )
IRS assessed a Code Sec. 6672 penalty against Frohnaple for the tax periods ending June 30, 2000, Sept. 30, 2000, Dec. 31, 2000, Mar. 31, 2001, and June 30, 2001, in the amount of roughly $515,600.

Willfulness found. The Magistrate Judge initially concluded that Frohnaple acted willfully for four of the five quarters at issue—the portion of the last two quarters of 2000 and the first two quarters of 2001—when he was specifically made aware that the payroll taxes had not been paid. On learning of Boling Group's failure to remit payroll taxes, he had an absolute duty to use all corporate funds to pay the currently accruing tax liability, as well as the outstanding tax liability. However, Frohnaple did nothing to ensure that the taxes were paid and, instead, made payments to other creditors. From August 2000 through January 2001, Boling Group's bank deposits totaled more than $1.7 million, none of which was used to pay the payroll taxes. Instead it was used to pay other creditors, as well as employee salaries, including Frohnaple's own salary. Frohnaple's failure to ensure that the delinquent taxes were paid with these funds meets the willful standard of Code Sec. 6672 as a matter of law.
The Magistrate Judge concluded that Frohnaple's reliance on statements by Boling Group's Controller Phyllis Younts (who started in September 2000) that she was “dealing with” the payroll taxes, without doing anything more to investigate and ensure that they were being paid, was simply more than mere negligence. By the time Younts was hired Frohnaple already knew that Boling Group was delinquent in its payment of the taxes and that it was floundering financially. By December 2000, he had questioned Younts' reliability; and he could have examined Boling Group's books to confirm the payments. The Magistrate Judge found that after Frohnaple became aware that the payroll taxes had not been paid by Dizon, he had a duty to exercise greater oversight over the finance department to independently ensure that the payroll taxes were being paid, and his failure to do so during Younts' tenure with Boling Group amounted to careless disregard.
Further, the Magistrate Judge also concluded that for the time period before Frohnaple became aware that the payroll taxes weren't being paid, Frohnaple's failure to confirm whether Boling Group was current with its tax obligations and his failure to take remedial action amounted to reckless disregard for the purpose of finding willfulness. Even if he was never specifically told until August 2000 that Boling Group was delinquent in paying employment taxes, his knowledge of the company's inability to meet its debts and its severe cash flow constraints before August 2000, as well as the red flags that had already been raised about Dizon by the outside accountant as to the integrity of the financial information, gave rise to a duty to confirm that Boling Group was meeting its payroll tax obligations. Frohnaple knew that Boling Group had ongoing financial difficulties, and as a result, Frohnaple extended numerous personal loans to Boling Group for more than $200,000. At least once, Frohnaple personally loaned Boling Group money to meet payroll, and he also knew that the ability to pay suppliers to keep up with production was an ongoing problem.

BARRETT, JR. v. U.S., Cite as 105 AFTR 2d 2010-XXXX, 03/09/2010
________________________________________
CHARLES W. BARRETT, JR., Petitioner-Appellant, v. UNITED STATES OF AMERICA, Respondent-Appellee.
AFFIRMED.
________________________________________

§ 6672 Failure to collect and pay over tax, or attempt to evade or defeat tax.
________________________________________
(a) WG&L Treatises General rule.
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, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over. No penalty shall be imposed under section 6653 or part II of subchapter A of chapter 68 for any offense to which this section is applicable.
(b) Preliminary notice requirement.
(1) In general.
No penalty shall be imposed under subsection (a) unless the Secretary notifies the taxpayer in writing by mail to an address as determined under section 6212(b) or in person that the taxpayer shall be subject to an assessment of such penalty.
(2) Timing of notice.
The mailing of the notice described in paragraph (1) (or, in the case of such a notice delivered in person, such delivery) shall precede any notice and demand of any penalty under subsection (a) by at least 60 days.
(3) Statute of limitations.
If a notice described in paragraph (1) with respect to any penalty is mailed or delivered in person before the expiration of the period provided by section 6501 for the assessment of such penalty (determined without regard to this paragraph ), the period provided by such section for the assessment of such penalty shall not expire before the later of—
(A) the date 90 days after the date on which such notice was mailed or delivered in person, or
(B) if there is a timely protest of the proposed assessment, the date 30 days after the Secretary makes a final administrative determination with respect to such protest.
(4) Exception for jeopardy.
This subsection shall not apply if the Secretary finds that the collection of the penalty is in jeopardy.
(c) Extension of period of collection where bond is filed.
(1) In general.
If, within 30 days after the day on which notice and demand of any penalty under subsection (a) is made against any person, such person—
(A) pays an amount which is not less than the minimum amount required to commence a proceeding in court with respect to his liability for such penalty,
(B) files a claim for refund of the amount so paid, and
(C) furnishes a bond which meets the requirements of paragraph (3) ,

no levy or proceeding in court for the collection of the remainder of such penalty shall be made, begun, or prosecuted until a final resolution of a proceeding begun as provided in paragraph (2) . Notwithstanding the provisions of section 7421(a) , the beginning of such proceeding or levy during the time such prohibition is in force may be enjoined by a proceeding in the proper court. Nothing in this paragraph shall be construed to prohibit any counterclaim for the remainder of such penalty in a proceeding begun as provided in paragraph (2) .
(2) Suit must be brought to determine liability for penalty.
If, within 30 days after the day on which his claim for refund with respect to any penalty under subsection (a) is denied, the person described in paragraph (1) fails to begin a proceeding in the appropriate United States district court (or in the Court of Claims) for the determination of his liability for such penalty, paragraph (1) shall cease to apply with respect to such penalty, effective on the day following the close of the 30-day period referred to in this paragraph .
(3) Bond.
The bond referred to in paragraph (1) shall be in such form and with such sureties as the Secretary may by regulations prescribe and shall be in an amount equal to 11/2 times the amount of excess of the penalty assessed over the payment described in paragraph (1) .
(4) Suspension of running of period of limitations on collection.
The running of the period of limitations provided in section 6502 on the collection by levy or by a proceeding in court in respect of any penalty described in paragraph (1) shall be suspended for the period during which the Secretary is prohibited from collecting by levy or a proceeding in court.
(5) Jeopardy collection.
If the Secretary makes a finding that the collection of the penalty is in jeopardy, nothing in this subsection shall prevent the immediate collection of such penalty.
(d) Right of contribution where more than 1 person liable for penalty.
If more than 1 person is liable for the penalty under subsection (a) with respect to any tax, each person who paid such penalty shall be entitled to recover from other persons who are liable for such penalty an amount equal to the excess of the amount paid by such person over such person's proportionate share of the penalty. Any claim for such a recovery may be made only in a proceeding which is separate from, and is not joined or consolidated with—
(1) an action for collection of such penalty brought by the United States, or
(2) a proceeding in which the United States files a counterclaim or third-party complaint for the collection of such penalty.
(e) Exception for voluntary board members of tax-exempt organizations.
No penalty shall be imposed by subsection (a) on any unpaid, volunteer member of any board of trustees or directors of an organization exempt from tax under subtitle A if such member—
(1) is solely serving in an honorary capacity,
(2) does not participate in the day-to-day or financial operations of the organization, and
(3) does not have actual knowledge of the failure on which such penalty is imposed.

The preceding sentence shall not apply if it results in no person being liable for the penalty imposed by subsection (a) .

Offer in compromise - abuse of discretion issue

Gregg Bartl, et ux. v. Commissioner, TC Memo 2010-43 , Code Sec(s) 6320; 6330; 7122.
________________________________________
GREGG BARTL AND BETH FEINSTEIN-BARTL, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent .
Case Information:
Code Sec(s): 6320; 6330; 7122
Docket: Docket No. 22866-07L.
Date Issued: 03/4/2010
Judge: Opinion by LARO
Discussion
I. Overview Petitioners argue that Appeals was required to let them pay $50,000 to compromise their $83,755 in Federal income tax liability on the basis of (i) doubt as to collectibility; and (ii) effective tax administration. Our review is limited to those issues petitioners raised at the hearing. See Giamelli v. Commissioner, 129 T.C. 107, 114 (2007). At the hearing, petitioners raised only the appropriateness of their offers-in- compromise to be accepted. Accordingly, we limit our analysis to the propriety of Appeals' rejection of petitioners' $50,000 offer-in-compromise, the higher of their two offers.
II. Standard of Review Where, as here, petitioners' underlying tax liability is not at issue, we review the determination solely for abuse of discretion. See Sego v. Commissioner, 114 T.C. 604, 610 (2000). In deciding whether Appeals' rejection of an offer-in-compromise was an abuse of discretion, we decide whether the rejection was arbitrary, capricious, or without sound basis in fact or law. See Cox v. Commissioner, 126 T.C. 237, 255 (2006), revd. 514 F.3d 1119 [101 AFTR 2d 2008-685] (10th Cir. 2008); Murphy v. Commissioner, 125 T.C. 301, 308 (2005), affd. 469 F.3d 27 [98 AFTR 2d 2006-7853] (1st Cir. 2006); Woodral v. Commissioner, 112 T.C. 19, 23 (1999). We do not substitute our judgment for that of Appeals, and we do not prescribe the amount we believe would be an acceptable offer-in-compromise. See Murphy v. Commissioner, supra at 320; see also Fowler v. Commissioner, T.C. Memo. 2004-163 [TC Memo 2004-163].
III. Petitioners' Offers-in-Compromise
A. Overview
A taxpayer may offer to compromise a Federal tax liability. Sec. 7122; see also sec. 6330(c)(2)(A)(iii). The Commissioner has specified guidelines for determining when a taxpayer's offer- in-compromise should be accepted. See sec. 301.7122-1(b), Proced. & Admin Regs. These guidelines permit the Commissioner to accept an offer-in-compromise on the following grounds: “Doubt as to liability”, “Doubt as to collectibility”, and to “Promote effective tax administration”. Id. Petitioners argue that Appeals was required to accept the compromise of their tax liability on the latter two grounds.
B. Doubt as to Collectibility
1. Overview Petitioners argue that Appeals abused its discretion in failing to accept their $50,000 offer-in-compromise on the basis of doubt as to collectibility because their “limited assets do not enable them to pay their tax debt.” We disagree that Appeals abused its discretion.
2. No Abuse of Discretion in Rejecting Petitioners' Doubt as to Collectibility Claim The guidelines for evaluating offers-in-compromise on the basis of doubt as to collectibility are set forth in regulations under section 7122. See , sec. 301.7122-1(b)(2), (c)(2), Proced. & Admin. Regs.; see also IRM pt. 5.8.4.4 (Sept. 1, 2005). Under this guidance, the Commissioner may generally compromise a tax liability on the basis of doubt as to collectibility where the taxpayers' assets and income are less than the full liability. See sec. 301.7122-1(b)(2), Proced. & Admin. Regs. An offer-in- compromise based on doubt as to collectibility will be acceptable only if the offer reflects the taxpayer's reasonable collection potential (i.e., the amount less than the full liability that the Commissioner could collect through alternative remedies such as administrative and judicial proceedings). See Murphy v. Commissioner, supra at 309. A taxpayer's reasonable collection potential is determined, in part, using published guidelines that establish national and local allowances for necessary living expenses. Income and assets in excess of those needed for necessary living expenses are treated as available to satisfy Federal income tax liabilities. See IRM exhs. 5.15.1-3, 5.15.1- 8, 5.15.1-9 (Jan. 1, 2005).
Before the hearing, petitioners submitted Form 433-A on which they set forth their income, expenses, assets, and liabilities. Appeals reviewed petitioners' Form 433-A and adjusted petitioners' income, expenses, assets, and liabilities as prescribed by the IRM, determining that $308,285 could reasonably be collected from petitioners. On that basis, Appeals determined that petitioners possessed sufficient assets and income to satisfy in full the subject tax debts owed to the Government. Among the assets included by Appeals in its determination of petitioners' reasonable collection potential was the $92,000 in equity of petitioners' rental property. We find no reason to disturb Appeals' reliance on the rental property equity as an asset available to satisfy petitioners' outstanding tax liabilities. 8
3. No Abuse of Discretion in Respect of the Bank of America Home Equity Line or the Reich Mortgage Petitioners contend that Appeals failed to adjust their net realizable equity to include all encumbrances on the primary residence. We do not agree. Appeals noted in its report that even if petitioners' encumbrances were recognized, the net realizable equity ($183,800) less the encumbrances ($91,667) resulted in $92,133 in equity remaining to satisfy outstandingtax liabilities. 9 Appeals also considered whether the value of the rental property should be further reduced from its original $125,000 value to reflect (i) hurricane damage; and (ii) a generally depressed real estate market in South Florida. Appeals determined that no further adjustment was necessary because the rental property could be either sold or rented and the proceeds from either of those prospects would be sufficient to satisfy petitioners' outstanding tax liabilities.
4. Recalculation of Reasonable Collection Potential
Petitioners ask us to find that respondent should have adjusted their reasonable collection potential for the following items: (1) Bank of America home equity line; (2) Reich mortgage; (3) $3,226 owed to the State of New Jersey; and (4) $5,363 to satisfy Mr. Bartl's unpaid medical expenses. We note further that an additional amount for petitioners to satisfy the outstanding loan of $4,907 on the 2003 Chevrolet should have also been included in the calculation of petitioners' reasonable collection potential. Even if Appeals took into account each of the above-mentioned items, however, petitioners still have $197,198 with which to satisfy their tax liabilities, calculated as follows:
Amount
Net Realizable Equity Value of primary residence (discounted) $100,000 Value of rental property (discounted) 92,000 Value of vehicles (for sale) 480 Less Bank of America primary mortgage (9,604) 1 Less Reich mortgage (41,667) Less Bank of America home equity line (55,000) Total 86,209
Retired Debt Relief 47,445 Future Income Potential 77,040 Miscellaneous Liabilities State of New Jersey liabilities 3,226 Medical expenses 5,363 Balance on 2003 Chevrolet after sale 4,907 Total 13,496
Reasonable Collection Potential Net realizable equity 86,209 Retired debt relief 47,445 Future income potential 77,040 Less miscellaneous adjustments (13,496) Total 197,198 1 Although petitioners contend that respondent should have accounted for the Reich mortgage as $50,000, the mortgage deed only makes petitioners liable for $41,667. We decline to find that respondent should have accounted for any portion of the Reich mortgage in excess of the amount petitioners were personally liable. Accordingly, even if we treat as fact all of petitioners' assertions regarding the value of their assets and the accompanying encumbrances, petitioners will still realize $197,198 with which to satisfy their tax liabilities.
5. Summary of Doubt as to Collectibility Appeals' decision to reject petitioners' $50,000 offer-in- compromise was not arbitrary, capricious, or without a sound basis in fact or law, and it was not abusive or unfair to petitioners. The settlement officer's determination was based on a reasonable application of the guidelines which we decline to call into question. See Speltz v. Commissioner, 124 T.C. 165 (2005), affd. 454 F.3d 782 [98 AFTR 2d 2006-5364] (8th Cir. 2006); Sullivan v. Commissioner, T.C. Memo. 2009-4 [TC Memo 2009-4].
C. Effective Tax Administration
1. Overview The Commissioner may compromise a tax liability for promotion of effective tax administration where: (i) Collection in full, while achievable, would cause the taxpayer economic hardship; or (ii) compelling public policy or equity considerations provide a basis for compromising the liability. See Speltz v. Commissioner, supra at 172-173. Petitioners argue that their physical and psychological frailties coupled with an inability to maintain steady employment required Appeals to compromise their tax liability. We disagree.
2. Economic Hardship
Petitioners argue that Mr. Bartl's stroke and Ms. Feinstein- Bartl's tumors require that their $50,000 offer-in-compromise be accepted or else undue economic hardship will result. To this end, petitioners state that Appeals ignored their medical and psychological issues and that forcing the sale of their rental property would cause petitioners to be “homeless”, turning them into “public charges”. Section 301.6343-1(b)(4)(i), Proced. & Admin. Regs., states that economic hardship occurs when a taxpayer is “unable to pay his or her reasonable basic living expenses.” Section 301.7122-1(c)(3), Proced. & Admin. Regs., sets forth factors to consider in evaluating whether collection of a tax liability would cause economic hardship, as well as some illustrative examples. One example involves a taxpayer who provides fulltime care to a dependent child with a serious long-term illness. A second example involves a retired taxpayer who would lack adequate means to pay his basic living expenses were his only asset, a retirement account, to be liquidated. A third example involves a disabled taxpayer with a fixed income and a modest home specially equipped to accommodate his disability, who is unable to borrow against his home because of his disability. See sec. 301.7122-1(c)(3)(iii), Proced. & Admin. Regs. Petitioners' situation is not comparable to that of the taxpayers described in the regulations—they own two homes, four cars, and are easily meeting their basic living expenses. See Speltz v. Commissioner, 454 F.3d at 786. The record is clear that Appeals' settlement officer, in making his determination, took into account petitioners' claims of mental and employment difficulties. We find those claims to be speculative such that Appeals was not required to arbitrarily decrease petitioners' income potential to reflect them. See, e.g., Fargo v. Commissioner, 447 F.3d 706, 710 [97 AFTR 2d 2006-2381] (9th Cir. 2006), affg. T.C. Memo. 2004-13 [TC Memo 2004-13].
As to petitioners' claim that sustaining the lien action against them would turn them into public charges, we note that even after the payment of their tax liabilities, petitioners will have a surplus of approximately $113,443 ($197,198 - $83,755) with which to continue to develop their funds for retirement.
Appeals' analysis took into account, inter alia, petitioners' $83,755 uncontested liability and petitioners' net realizable equity in the rental property of $92,000, an amount that exceeds by a considerable margin petitioners' offer of $50,000. Appeals also examined articles published in South Florida newspapers in determining that Ms. Feinstein-Bartl continued to generate business income despite her contrary contentions. We do not consider Appeals to have abused its discretion by rejecting petitioners' claim that they will suffer economic hardship if required to pay more than their $50,000 offer.
3. Compelling Policy or Equity Considerations
Petitioners argue that their physical and mental illnesses entitle them to forgiveness of their tax liabilities as a matter of equity. However, petitioners present no convincing argument that requiring them to pay more than $50,000 would undermine public confidence that tax laws are being administered fairly. 10 To the contrary, if Appeals accepted petitioners' proposal that they pay less than all of their tax liabilities and of their reasonable collection potential under the facts of this case, then taxpayers in similar situations who lose a job or suffer health issues, but dutifully pay their taxes, might lose confidence in a system that excuses others when they fail to comply. See Sullivan v. Commissioner, supra.
IV. Conclusion Petitioners have not shown that Appeals' rejection of their $50,000 offer-in-compromise was arbitrary, capricious, or without sound basis in fact or law. Accordingly, we hold that Appeals' determination was not an abuse of discretion. In so holding, we express no opinion as to the amount of any compromise that petitioners could or should be required to pay, or that Appeals is required to accept. The only issue before us is whether Appeals abused its discretion in refusing to accept petitioners' specific offer-in-compromise of $50,000. See Speltz v. Commissioner, 124 T.C. at 179-180.
In reaching our decision, we have considered all arguments made, and to the extent that we have not specifically addressed them, we conclude that they are without merit. To reflect the foregoing,
Decision will be entered for respondent.
________________________________________
1
Unless otherwise indicated, section references are to the applicable version of the Internal Revenue Code. Some dollar amounts are rounded.
________________________________________
2
The extent of her medical expenses is not discernible from the record.
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3
The first offer initially asserted doubt as to liability as the reason for compromise. On June 26, 2006, respondent received petitioners' revised offer-in-compromise, which removed doubt as to liability as the reason for compromise and substituted doubt as to collectibility and effective tax administration. The original and revised offers were otherwise unchanged. We refer collectively to the first offer dated June 11, 2006, and the revised offer dated June 26, 2006, as the “first offer”.
________________________________________
4
Petitioners support the Reich mortgage with a mortgage deed dated Oct. 18, 2006, which was recorded with Broward County on Oct. 20, 2006. That mortgage calls for monthly payments of $277.78 and a maturity date of Oct. 18, 2021. The mortgage states that it does not bear interest, and the total payments equal $41,667 over the life of the mortgage, which is $8,333 less than the face amount of the mortgage. On Jan. 19, 2007, Ms. Reich drafted a letter to petitioners in which she threatened to foreclose on petitioners' primary residence in repayment of the mortgage. The record does not indicate whether any such foreclosure action was initiated.
________________________________________
5
The sum of individual expenses does not equal the total expenses because of rounding.
________________________________________
6
Mr. Bartl owed $5,970 in past-due medical expenses, but apparently $607 of that debt was forgiven.
________________________________________
7
Appeals apparently located at least seven articles published during January and

ADVANCE RELEASE Documents, R.P. Fairlamb, U.S. Tax Court, (Feb. 5, 2010)
Dec. 58,126(M)
Code Sec. 6330, Code Sec. 7122

Collection: Proposed levy: Offer in compromise (OIC): Doubt as to collectibility: Calculation of future income: Abuse of discretion


T.C. Memo. 2010-22

REMINGTON P. FAIRLAMB, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
UNITED STATES TAX COURT. Docket No. 19122-07L. Filed February 4, 2010.
Tony Mankus , for petitioner.

Derek W. Kaczmarek , for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION
THORNTON, Judge: Pursuant to section 6330(d) , petitioner seeks judicial review of respondent's determination to proceed with a proposed levy to collect petitioner's unpaid Federal income tax liabilities for 2002, 2003, and 2004. 1 The issue for decision is whether respondent abused his discretion in rejecting petitioner's proposed offer-in-compromise.

FINDINGS OF FACT
The parties have stipulated some facts, which we so find. When he petitioned the Court, petitioner resided in Illinois.

Petitioner, born in 1942, has worked for many years as an independent sales representative in the paint industry. In March 2005 he incorporated his business activities, forming Phoenix Sales & Service, L.L.C. (the LLC), in which he and his wife each owned a 50-percent interest.

Petitioner did not timely file Federal income tax returns for taxable years 1998 through 2004. After making substitutes for returns, on September 13, 2004, respondent assessed petitioner's income taxes for 1998 through 2001. On April 9, 2005, respondent sent petitioner notices of intent to levy with respect to his tax years 1998, 1999, 2000, and 2001. Insofar as the record shows, petitioner submitted no request for a collection due process hearing with respect to these notices.

On or about April 29, 2005, petitioner filed amended Federal income tax returns for the years 1998 through 2002 and original Federal income tax returns for 2003 and 2004. He did not pay the taxes reported on these returns. On October 6, 2005, respondent sent petitioner a Letter 1058, Final Notice—Notice of Intent to Levy and Notice of Your Right to a Hearing, with regard to petitioner's 2002, 2003, and 2004 income taxes, showing an unpaid balance of $108,486 for these years. 2 On October 14, 2005, petitioner submitted a timely Form 12153, Request for a Collection Due Process Hearing, on which he indicated that enforcement action would create a hardship on him and that he intended to submit an offer-in-compromise.

Petitioner's First Offer-in-Compromise
On December 29, 2005, respondent received from petitioner Form 656, Offer in Compromise (the first offer), offering to pay $150,000 to compromise his Federal income tax liabilities for taxable years 1998 through 2004, which exceeded $400,000. Petitioner proposed to pay $1,389 per month for 108 months. This offer indicated that it was based on doubt as to collectibility; i.e., petitioner represented that he had insufficient assets to pay the full amount of his tax liability. As required, petitioner submitted with the first offer Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, and Form 433-B, Collection Information Statement for Businesses, with respect to the LLC.

Respondent accepted petitioner's offer-in-compromise for processing. By letter dated April 25, 2006, however, respondent's offer-in-compromise specialist (the first OIC specialist) rejected the proposed terms of the first offer, determining that any acceptable offer should be at least $372,949, calculated as the sum of $18,755 of total net equity in assets and $354,194 of total future income.

By letter dated May 5, 2006, petitioner's counsel took exception to the determinations made by the first OIC specialist. Petitioner's counsel asserted, among other things, that petitioner was elderly and in poor health and planned to retire by age 70 if his health permitted him to work that long. Petitioner's counsel contended that petitioner's future income should be measured by reference to the 59 months that he said remained until petitioner reached age 70.

By letter dated May 11, 2006, the first OIC specialist agreed that petitioner's future income should be measured by the months remaining until he reached age 70 but asserted that the correct number of these remaining months was 69 rather than 59, as petitioner asserted. Using 69 months of future income, the first OIC specialist lowered the minimum acceptable offer to $149,286, an amount that was slightly less than petitioner's original $150,000 offer. In a phone call with the first OIC specialist, petitioner's counsel indicated that he agreed with most of the recalculations, except he contended that petitioner's future income should be calculated using 67 months instead of 69 months, because it would take about 2 months to have the offer accepted, and that this adjustment would reduce the offer by about $4,000.

Petitioner's Second Offer-in-Compromise
This position was memorialized in petitioner's amended offer-in-compromise (the second offer), which respondent received on May 22, 2006. Petitioner offered to pay $145,433 to compromise his Federal income tax liabilities for taxable years 1998 through 2004. He proposed to pay $16,332 within 30 days of the second offer's acceptance and $1,927 per month for the next 67 months, until he reached age 70. In a report dated May 24, 2006, the first OIC specialist recommended to her group manager that petitioner's second offer be accepted because it represented “the most that can be expected to be paid by this taxpayer” taking into account “Special circumstance[s] due to the taxpayers [sic] age and health”. 3

On June 22, 2006, a different offer-in-compromise specialist (the second OIC specialist) reviewed the second offer and determined that it should be rejected. By letter dated June 28, 2006, the second OIC specialist informed petitioner that, notwithstanding the contrary recommendation of the first OIC specialist, he would recommend that the second offer not be accepted because “it is not in the best interests of the government”. As grounds for this conclusion, the second OIC specialist asserted that petitioner had a long history of not filing and not paying income taxes and had formed the LLC in 2005 to reduce his self-employment taxes. The letter stated that petitioner should make any response within 2 days because the second OIC specialist would be retiring then. By letter dated August 21, 2006, respondent's territory manager formally notified petitioner that the second offer had been rejected because it was determined not to be in the Government's best interests.

In a letter dated September 13, 2006, petitioner's counsel disputed the rejection of the second offer and requested that the case be transferred to respondent's Appeals Office.

Petitioner's Third Offer-in-Compromise
Petitioner's case was assigned to a settlement officer in respondent's Appeals Office. After discussions with petitioner's counsel, the settlement officer indicated by letter dated May 14, 2007, that she had determined petitioner's reasonable collection potential to be $241,356. She indicated that she had calculated petitioner's future income assuming that he would work for 60 more months and retire at age 70. The letter stated that “there are still no guarantees of acceptance since we need the approval of my Territory Manager and Counsel approval.”

Petitioner accepted most of the settlement officer's calculations. On June 12, 2007, respondent received a second amended offer-in-compromise (the third offer) from petitioner that was based on doubt as to collectibility and that proposed to pay $241,356 to compromise his income tax liabilities for taxable years 1998 through 2004. He proposed to pay $4,023 within 30 days of the third offer's acceptance and $4,023 per month for the next 59 months.

The third time was not a charm. By letter dated June 20, 2007, the settlement officer informed petitioner that his third offer had not been approved. Citing provisions of the Internal Revenue Manual (IRM), the letter indicated that petitioner's reasonable collection potential had been recalculated to be $523,958, by projecting his future income over the 107 months asserted to remain in the collection period. The letter proposed that petitioner's liabilities could be resolved in one of two ways: (1) By a long-term deferred offer-in-compromise to pay $4,897 for 107 months; or (2) by a part-payment installment agreement, which would require petitioner to liquidate certain assets and to make monthly payments of $4,053, apparently for 167 months (the 107 months alleged to remain in the collection period plus 5 years), with the possibility that the monthly amount “could be adjusted to a lesser amount when you retire if your income is reduced.”

By letter dated July 2, 2007, petitioner's counsel disagreed with the settlement officer's application of the IRM provisions and requested that the settlement officer and her manager reconsider the third offer.

Notice of Determination
On August 6, 2007, respondent issued a Notice of Determination Concerning Collection Action(s) Under Section 6320 and/or 6330, with respect to petitioner's tax years 2002, 2003, and 2004, sustaining the proposed levies for those years (the notice). The notice states in part:

[T]he Appeals Team Manager confirmed that the offer could not be accepted because the offer was a deferred payment offer which is to be paid over the life of the collection statute. Your offer stipulated a payment term of 59 months (your remaining projected work life until retirement) rather than the 107 months remaining on the collection statute. Consequently, your offer is considered a deferred payment offer with special circumstances.

IRM 5.8.11.2(2) states taxpayers can have an offer accepted under Doubt as to Collectibility with special circumstances when their reasonable collection potential is less than their liability, but there are economic hardship factors that would justify accepting the offer for an amount less than the reasonable collection potential. Economic hardship is further defined in IRM 5.8.11.2.(2) as unable to pay reasonable basic living expenses. Since you are able to meet your basic living expenses, economic hardship does not apply to your situation. Therefore, your offer could not be accepted.

* * * * * * *

Offer Discussion and Analysis

Based on the financial data you provided, you are currently unable to pay the entire liability. Therefore an offer-in-compromise based on doubt as to collectibility would initially appear to be a more appropriate and less intrusive means of collection. However, your offer amount does not equal or exceed your Reasonable Collection Potential (RCP) of $523,988.00. Calculation of your RCP in the amount of $523,958.00 was based on Net Realizable Equity (NRE) in assets totaling $90,287.00 and Future Income Potential (FIP) of 433,671.00. For a long term deferred offer, future income is projected over the life of the collection statute.

OPINION
A. Collection Procedures
Section 6330 requires the Secretary to furnish a person notice and opportunity for a hearing before making a levy on the person's property. At the hearing, the person may raise any relevant issue relating to the unpaid tax or proposed levy, including spousal defenses, challenges to the appropriateness of the collection action, and offers of collection alternatives. The person may challenge the existence or amount of the underlying tax liability for any period only if the person did not receive a notice of deficiency or did not otherwise have an opportunity to dispute the liability. Sec. 6330(c)(2)(B) ; Sego v. Commissioner , 114 T.C. 604, 609 (2000). Once the Commissioner's Appeals Office issues a notice of determination, the person may seek judicial review in this Court. Sec. 6330(d)(1) .

Because petitioner has not challenged his underlying liability, our review is for abuse of discretion. Sego v. Commissioner , supra at 610. Under this standard of review, the question is whether respondent's rejection of petitioner's offers-in-compromise was arbitrary, capricious, or without sound basis in fact or law. See, e.g., Murphy v. Commissioner , 125 T.C. 301, 320 (2005), affd. 469 F.3d 27 (1st Cir. 2006). On brief the parties focus primarily on respondent's rejection of the third and final offer as the precipitating event for the notice. We shall do the same.

B. Offers-in-Compromise
Section 7122(a) authorizes the Secretary to compromise any civil or criminal case arising under the internal revenue laws. 4 The regulations set forth three grounds for compromising a liability: (1) Doubt as to liability; (2) doubt as to collectibility; and (3) promotion of effective tax administration. Sec. 301.7122-1(b) , Proced. & Admin. Regs. Petitioner based each of his three offers-in-compromise on doubt as to collectibility.

For purposes of evaluating an offer-in-compromise, doubt as to collectibility exists “where the taxpayer's assets and income are less than the full amount of the liability.” Sec. 301.7122-1(b)(2) , Proced. & Admin. Regs. An offer-in-compromise based on doubt as to collectibility “will be considered acceptable if it is unlikely that the tax can be collected in full and the offer reasonably reflects the amount the Service could collect through other means * * * This amount is the reasonable collection potential of a case.” Rev. Proc. 2003-71 , sec. 4.02(2) , 2003-2 C.B. 517, 517. In some cases, the Commissioner will accept an offer-in-compromise of less than the reasonable collection potential if there are “special circumstances.” Id.

The IRM describes procedures for analyzing a taxpayer's financial condition to determine reasonable collection potential. See IRM pt. 5.8.5 (Sept. 1, 2005). 5 The IRM defines reasonable collection potential as net equity plus future income. IRM pt. 5.8.11.2 (Sept. 1, 2005). “Future income” is defined as “an estimate of the taxpayers [sic] ability to pay based on an analysis of gross income, less necessary living expenses, for a specific number of months into the future.” IRM pt. 5.8.5.5(1). For a deferred payment offer, the general rule is that future income should be projected for “the number of months remaining on the statutory period for collection.” Id. The IRM also instructs the offer-in-compromise examiner to “Consider the taxpayers [sic] overall general situation including such facts as age, health, marital status, number and age of dependents, highest education or occupational training, and work experience.” IRM pt. 5.8.5.5(3). More specifically, the IRM states: “Some situations may warrant placing a different value on future income than current or past income indicates”. IRM pt. 5.8.5.5(5). By way of illustration, the IRM states that if “A taxpayer is elderly, in poor health, or both and the ability to continue working is questionable”, then the offer-in-compromise examiner should “Adjust the amount or number of payments to the expected earnings during the appropriate number of months. Consider special circumstance situations when making any adjustments”. Id.

The IRM also describes procedures for processing offers-in-compromise in the Commissioner's Appeals Office. See IRM pt. 8.23.3 (Oct. 16, 2007). It states: “IRM 5.8 is the primary authority for evaluating offers and should be followed when evaluating an appealed rejection. Appeals does not have the authority to disregard established guidance.” IRM pt. 8.23.3.3(1).

C. Analysis of Respondent's Determination
Respondent's settlement officer followed the just-cited IRM directives in initially recommending that petitioner's third offer be accepted. In determining petitioner's reasonable collection potential, she projected his future income for 60 months, which she noted was his “remaining working life until 70”. She noted in her case activity report:

Determination is made to recommend the offer for acceptance. Tp [taxpayer] owns no realty and only has minimal personal assets. His most important asset is his income as an independent paint sales manufacturing representative. This income is the source that will fund the offer of $241,356.00. Distraint action against this income could be a possibility but would not provide any more funds into the Treasury than is provided via monthly payments of $4,022.60 via the offer. Also continued levy could result in tp's dismissal. If the taxpayer maintains the offer, he will liquidate the back taxes and remain compliant with current taxes as well. Tp is now 65 years old. The older he becomes, the less likely the Service is to collect the liability or enforce collection.

Ultimately, the settlement officer was overruled by her superiors, and petitioner's third offer was rejected. The reasons articulated in the notice are somewhat cryptic. The notice cites IRM pt. 5.8.11.2(2) for the proposition that “[t]axpayers can have an offer accepted under Doubt as to Collectibility with special circumstances when their reasonable collection potential is less than their liability, but there are economic hardship factors that would justify accepting the offer for an amount less than the reasonable collection potential.” Applying this standard, the notice concludes that petitioner did not qualify for an offer-in-compromise based on doubt as to collectibility with special circumstances because “you are able to meet your basic living expenses”.

This rationale is deficient for at least two reasons. First, the notice misstates IRM pt. 5.8.11.2(2), which states that an offer-in-compromise based on doubt as to collectibility with special circumstances may be accepted where there are “economic hardship or public policy/equity factors that would justify accepting the offer”. (Emphasis added.) More fundamentally, according to the IRM an offer-in-compromise is to be evaluated as based on doubt as to collectibility with special circumstances (as opposed to plain-vanilla doubt as to collectibility) only if it is “for an amount less than the reasonable collection potential”. Id.

Petitioner's third offer was for the exact amount that the settlement officer had initially calculated to be his reasonable collection potential. Addressing this issue obliquely, the notice states (without citation of authority): “For a long term deferred offer, future income is projected over the life of the collection statute.” The notice fails to take into account, however, IRM pt. 5.8.5.5(5), which, as previously discussed, directs that in computing a taxpayer's future income, adjustments should be made for a taxpayer who is elderly or in poor health and whose ability to continue working is questionable. Following this directive, the settlement officer initially calculated petitioner's future income under the assumption that he would work until age 70. There is no indication in the record that any determination was ever made that petitioner would be able to work beyond age 70. Rather, the record strongly suggests that the determination in the notice was based on a misapplication of the IRM directives.

The Commissioner's internal procedures, as reflected in the IRM, do not have the force of law, and deviation from them does not necessarily render the Commissioner's action invalid. Vallone v. Commissioner , 88 T.C. 794, 807-808 (1987). Nevertheless, the determination in this case, which was based wholly on misapplication of internal procedures, cannot be said to have a sound basis in law or fact.

On brief respondent argues that the offer-in-compromise was properly rejected because of petitioner's alleged “long history of non-compliance and his affirmative tax avoidance actions”. 6 In making this argument, respondent cites section 301.7122-1(b)(3)(iii) , Proced. & Admin. Regs., which provides: “No compromise to promote effective tax administration may be entered into if compromise of the liability would undermine compliance by taxpayers with the tax laws.” (Emphasis added.) Because petitioner's various offers were all based on doubt as to collectibility rather than effective tax administration, this regulatory provision is not, by its terms, applicable. 7 In any event, we do not believe that respondent's ultimate determination, as explained in the notice, can fairly be construed as predicated on this rationale. In initially recommending petitioner's third offer, the settlement officer expressed no concern about this issue, and there is no indication in the record that this consideration played any role in the decision to overturn the settlement officer's initial recommendation.

In the light of the inadequacy of the reasons given in the notice for rejecting petitioner's third offer, which the settlement officer, with seemingly more soundly reasoned analysis, had initially recommended accepting, we are unable to conclude whether it was an abuse of discretion for respondent to determine to proceed with the proposed collection action for petitioner's 2002, 2003, and 2004 tax liabilities. We will remand the case to respondent's Appeals Office for further consideration and clarification and to allow petitioner, if he wishes, to propose a new collection alternative.

D. Evidentiary Issues
At trial the Court received into evidence a number of petitioner's exhibits over respondent's objection that they are outside the administrative record. On similar grounds respondent objected to petitioner's testimony and, in a motion in limine, to the testimony of petitioner's witness, a business associate. On brief respondent has renewed his objections.

Petitioner suggests that the disputed documents should be considered part of the administrative record because most of them are IRS documents and the others were sent to petitioner by the IRS. 8 Petitioner complains that respondent evinces a double standard in that, while insisting that judicial review should be limited to the administrative record, respondent seeks to raise in these proceedings for the first time issues and arguments that were never raised in the administrative hearings. 9 Petitioner states on brief: “The Petitioner cannot help but further wonder whether Respondent's strenuous efforts to limit the judicial review to the administrative file is not an effort to generally hamstring the tax courts and the taxpayers in order to avoid having its procedural missteps brought to light.”

The Tax Court does not follow the administrative record rule. See Robinette v. Commissioner , 123 T.C. 85 (2004), revd. 439 F.3d 455 (8th Cir. 2006). In any event, in reaching our decision we have not relied upon any of the disputed documents or their contents or any of the trial testimony. The portions of the record as to which respondent has raised no objection are sufficient to sustain our decision.

To reflect the foregoing,

An appropriate order will be issued .


Footnotes

1 Unless otherwise indicated, all section references are to the Internal Revenue Code, and all Rule references are to the Tax Court Rules of Practice and Procedure. All dollar amounts are rounded to the nearest dollar.

2 In addition to proposing the levy, on Oct. 24, 2005, respondent filed a notice of Federal tax lien with respect to petitioner's tax years 2002, 2003, and 2004. Petitioner did not file a Form 12153, Request for a Collection Due Process Hearing, in response to this notice of Federal tax lien, and it is not at issue in this proceeding.

3 The report indicates that petitioner had provided verification from two physicians regarding his health and states that petitioner “has coronary artery disease, hypertension, hyperlipidemia and problems with recurring sinusitis and pneumonia.”

4 Sec. 6331(k) generally prohibits the IRS from making a levy on a taxpayer's property while an offer-in-compromise is pending with the IRS. An offer-in-compromise becomes pending when it is accepted for processing. Rev. Proc. 2003-71 , sec. 5.01 , 2003-2 C.B. 517, 518.

5 The parties have stipulated the relevant provisions of the Internal Revenue Manual (IRM) referenced in this opinion.

6 Petitioner contests these assertions as unfounded in the record.

7 In Oman v. Commissioner , T.C. Memo. 2006-231, this Court found that IRS directives as contained in IRM pt. 5.8.7.6(5) (Nov. 15, 2004) and policy statement P-5-100 (Jan. 30, 1992) were inconsistent as to whether doubt as to future compliance is a sufficient reason to reject an offer-in compromise. The Court remanded for further consideration and clarification the Commissioner's determination rejecting on this ground the taxpayer's proposed offer-in-compromise based on doubt as to collectibility.

8 Evaluation of the parties' competing claims in this regard is complicated by the fact that respondent has not offered into evidence a certified copy of the entire administrative record. Although the parties have stipulated numerous documents that might properly appear in an administrative record, they have not filed with the Court the entire administrative record, stipulated as to its genuineness. Cf. Rule 217 (describing procedures for disposing of a declaratory judgment action on the administrative record). From the absence of certain documents cross-referenced in the stipulated exhibits, it is apparent that the entire administrative record is not in evidence.

9 For instance, on brief respondent disputes whether petitioner's health would necessitate his retirement by age 70. Insofar as the record shows, however, respondent's officers who examined petitioner's offers-in-compromise were satisfied with the documentary evidence petitioner submitted in this regard, and the notice of determination does not suggest that this issue played any role in the ultimate rejection of petitioner's offer-in-compromise.



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METADATA
title R.P. Fairlamb
search-title Case: ADVANCE RELEASE Documents, R.P. Fairlamb, U.S. Tax Court, (Feb. 5, 2010)
primary-class case-law/case
wk-da number WKUS_TAL_1432
CCH PubVol adc01
language http://psi.oasis-open.org/iso/639/#eng
region United States [http://wk-us.com/meta/regions/#US]
publisher http://wk-us.com/meta/publishers/#CCH
publishing-status new
publishing-dates available-date:
modified-date:
revised-date:
sort-date: 2010-02-05

key-phrase Collection
key-phrase Proposed levy
key-phrase Offer in compromise (OIC)
key-phrase Doubt as to collectibility
key-phrase Calculation of future income
key-phrase Abuse of discretion
document-transformation-history SOURCE-CRC: 931114030
G2I-VERSION: Group2Interchange-RELEASE-03-14-0012
G2I-TRANSFORMATION-DATE: 2010-02-26
I2A-VERSION: I2A-03-15-0006
I2A-TRANSFORMATION-DATE: 2010-02-26

wkcase-law:metadata parties in-re:R.P. Fairlamb

case-abbrev-name R.P. Fairlamb
court U.S. Tax Court [http://wk-us.com/meta/courts/#US-FJ-TAX]
document-date , precision: day
2010-02-05

BORITZ v. U.S., Cite as 105 AFTR 2d 2010-XXXX, 02/23/2010
________________________________________
PETER BORITZ, Plaintiff, v. UNITED STATES OF AMERICA and INTERNAL REVENUE SERVICE, Defendants.
Case Information:
Code Sec(s):
Court Name: UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA,
Docket No.: Civil Action No. 09-542 (CKK),
Date Decided: 02/23/2010.
Disposition:
HEADNOTE
.
Reference(s):
OPINION
UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA,
MEMORANDUM OPINION
Judge: COLLEEN KOLLAR-KOTELLY United States District Judge
Pro se Plaintiff Peter Boritz brings this action against the United States and the Internal Revenue Service (“IRS,” collectively with the United States, “Defendants”) 1 regarding allegedly unlawful tax collection and assessment activity. Plaintiff complains that Defendants have wrongfully held him liable for certain unpaid tax liabilities for tax years 1994 and 1995 and have issued a procedurally improper Notice of Federal Tax Lien and Notice of Levy on his property. He primarily seeks relief pursuant to the Taxpayer Bill of Rights, 26 U.S.C. §§ 7432 and 7433, which permit a taxpayer to bring a suit for damages against the United States for failure to release a lien and for certain unauthorized collection actions, respectively. In addition, Plaintiff asserts a claim for declaratory and injunctive relief pursuant to the Administrative Procedures Act, (“APA”), 5 U.S.C. § 706, and seeks to quiet title to the property that is the subject of the Notice of Federal Tax Lien and the Notice of Levy pursuant to 28 U.S.C. § 2410.
Currently pending before the Court is Defendants' [7] Motion to Dismiss or in the Alternative Motion for Summary Judgment. Defendants argue that the United States is the only proper defendant in this action and that Plaintiff's claims should be dismissed under Federal Rule of Civil Procedure 12(b)(1) and 12(b)(6) or alternatively that Defendants should be granted summary judgment pursuant to Federal Rule of Civil Procedure 56. Upon consideration of Defendants' motion and the parties' responsive briefings as well as attachments thereto, as may be appropriate, the relevant case law and statutory authority, and the record of this case as a whole, the Court GRANTS Defendants' [7] Motion to Dismiss or in the Alternative Motion for Summary Judgment, for the reasons set forth below.
Specifically, the Court holds as follows. First, Defendants' Motion to Dismiss Plaintiff's claims against the IRS is GRANTED as conceded. Second, Defendants' Motion to Dismiss Count I (quiet title action pursuant to 28 U.S.C. § 2410) and Count IX (APA) for lack of jurisdiction pursuant to Rule 12(b)(1) is GRANTED. Third, Defendants' Motion to Dismiss Count II (failure to issue notice of deficiency in violation of §§ 6212 and 6213), Count III (failure to make assessment in violation of § 6203), Count IV (failure to make assessment in violation of § 6303), Count V (failure to release lien in violation of § 7342), Count VII (unauthorized disclosure in violation of § 6103(b)(6)), and Count VIII (failure to issue certificate of release in violation of § 6325), for failure to state a claim pursuant to Rule 12(b)(6) is GRANTED. Fourth and finally, Defendants' Motion for Summary Judgment as to Count VI (failure to issue notice of levy in violation of § 6331(d)) is GRANTED.
I. BACKGROUND
Plaintiff filed his Complaint on March 19, 2009. Plaintiff's Complaint represents one of dozens of lawsuits brought in this jurisdiction by tax protestors — allegedly proceedingpro se — asserting a variety of forms of misconduct by the IRS. See Pollinger v. United States, 539 F. Supp. 2d 242, 245 [101 AFTR 2d 2008-1383] & n. 3 (D.D.C. 2008) (citing cases). Unlike the majority of the complaints in those other actions, however, Plaintiff's Complaint includes at least some particularized facts specifically pertaining to Plaintiff Peter Boritz. See generally Compl.
Although the allegations contained in Plaintiff's Complaint are somewhat nebulous in nature, Plaintiff appears to primarily complain about a Notice of Levy and a Notice of Federal Tax Lien issued by the IRS for the tax years 2004 and 2005. The former was issued on November 9, 2007, by the IRS against Plaintiff's bank account in the amount of $12,558.73 for tax years 1994 and 1995.Id. ¶ 8 & Ex. D (IRS Notice of Levy). The latter was filed shortly thereafter on November 13, 2007, with the County Auditor in King County, Washington in the amount of $21,485.89 for the tax years 1994 and 1995. Id. ¶ 9 & Ex. C (IRS Notice of Federal Tax Lien).
Plaintiff now seeks to challenge the validity of both the Notice of Levy and Notice of Federal Tax Lien. At heart, Plaintiff disputes the underlying tax assessment issued against him for tax years 1994 and 1995, alleging that he “is the sole owner of his physical and mental labor” and that he “does NOT owe the UNITED STATES, or any employees working on its behalf, the fruit of his labor property.” Id. ¶¶ 2, 6 (emphasis in original). Plaintiff further claims that he has “filed all returns required to be filed for tax years 1994 and 1995 and fully satisfied and paid allincome taxes Plaintiff was made liable for and required to pay regarding the years in dispute.”Id. ¶ 7 (emphasis in original).
Despite Plaintiff's unequivocal denial of any substantive liability for tax years 1994 and 1995 and his clear attack on the validity of the underlying tax assessments, Plaintiff has — in an apparent effort to avoid many of the same pitfalls that have befallen previous tax protester lawsuits — attempted to frame his lawsuit as asserting only procedural, rather than substantive, challenges to the Notice of Levy and Notice of Federal Tax Lien. Specifically, Plaintiff asserts the following nine causes of action in his Complaint:
• Count I: seeks to quiet title to the property that is the subject of the Notice of Levy and Notice of Federal Tax Lien pursuant to 28 U.S.C. § 2410;
• Count II: alleges a claim for monetary damages pursuant to 26 U.S.C. § 7433 based upon Defendants' alleged failure to send a notice of deficiency to Plaintiff's last known address prior to issuance of the Notice of Levy in violation of 26 U.S.C. §§ 6212(a) and 6213(a);
• Count III: alleges a claim for monetary damages pursuant to 26 U.S.C. § 7433 based upon Defendants' alleged failure to make a timely assessment in violation of 26 U.S.C. § 6203;
• Count IV: alleges a claim for monetary damages pursuant to 26 § U.S.C. § 7433 based upon Defendants' alleged failure to provide a timely notice of assessment in violation of 26 U.S.C. § 6303;
• Count V: alleges a claim for monetary damages pursuant to 26 U.S.C. § 7432 based upon Defendants' alleged failure to release the Notice of Federal Tax Lien in violation of 26 U.S.C. § 6325(a)(1);
• Count VI: alleges a claim for monetary damages pursuant to 26 U.S.C. § 7433 based upon Defendants' alleged failure to serve him with a notice of levy in violation of 26 U.S.C. § 6331(d)(2);
• Count VII: alleges a claim for monetary damages pursuant to 26 U.S.C. § 7433 based upon Defendants' allegedly unauthorized public disclosure of his social security number on the Notice of Federal Tax Lien in violation of 26 U.S.C. § 6103(b)(6);
• Count VIII: alleges a claim for monetary damages pursuant to 26 U.S.C. § 7433 based upon Defendants' alleged failure to issue a certificate of release with respect to the Notice of Federal Tax Lien in violation of 26 U.S.C. § 6325(a)(1); and
• Count IX: alleges that Defendants acted in excess of their statutory authority and seeks non-monetary declaratory and injunctive relief pursuant to the Administrative Procedures Act, 5 U.S.C. § 706(2).
See generally Compl.
As set forth in his Complaint, Plaintiff states that he previously submitted an administrative claim with the IRS and filed this lawsuit only after exhausting his administrative remedies. See id. ¶¶ 11–13 & Ex. A. Now before the Court is Defendants' Motion to Dismiss or in the Alternative Motion for Summary Judgment. See Defs.' Mot., Docket No. [7]. Plaintiff has filed his opposition to Defendants' Motion, see Pl.'s Opp'n, Docket No. [10], and Defendants have filed their reply,see Defs.' Reply, Docket No. [11]. Briefing on Defendants' Motion is therefore complete and the issues are ripe for the Court's resolution.
II. LEGAL STANDARDS
Defendants have moved for dismissal of Plaintiff's Complaint pursuant to Federal Rules of Civil Procedure 12(b)(1) and/or 12(b)(6) and have also moved in the alternative for summary judgment pursuant to Federal Rule of Civil Procedure 56. Insofar as Defendants have moved for dismissal of certain claims under Rule 12(b)(1), the Court may consider a complaint “supplemented by undisputed facts evidenced in the record or the complaint supplemented by undisputed facts plus the court's resolution of disputed facts.”” Coalition for Underground Expansion v. Mineta, 333 F.3d 193, 198 (D.C. Cir. 2003) (quoting Herbert v. Nat'l Acad. of Scis., 974 F.2d 192, 197 (D.C. Cir. 1992)). To the extent, however, that Defendants have moved to dismissed certain claims for failure to state a claim under Rule 12(b)(6), the Court is limited to considering the facts alleged in the complaint, any documents attached to or incorporated in the complaint, matters of which the court may take judicial notice, and matters of public record.See E.E.O.C. v. St. Francis Xavier Parochial Sch. , 117 F.3d 621, 624 (D.C. Cir. 1997).
In this case, Defendants have attached five exhibits to their motion — namely, the June 10, 1998 Order and Decision of the United States Tax Court in Boritz v. Commissioner of Internal Revenue and four Certificates of Official Record (Form 3430) relating to Plaintiff concerning tax years 1994 and 1995. See Defs.' Mot. at Exs. A–E. All of the attached exhibits may be appropriately considered by the Court for purposes of Defendants' Motion to Dismiss brought under Rule 12(b)(1). In addition, while the June 10, 1998 Order and Decision is a matter of public record and therefore may be considered by the Court in ruling on Defendants' Motion to Dismiss under Rule 12(b)(6), the Certificates of Official Record are not incorporated in or referenced by the Complaint and are therefore arguably outside the scope of the pleadings in this matter; as such, they may not be considered in evaluating Defendants' Motion to Dismiss brought under Rule 12(b)(6). Accordingly, to the extent the parties have relied upon those materials in moving for dismissal of Plaintiff's claims, the Court must construe Defendants' motion as a Motion for Summary Judgment pursuant to Rule 56. See Fed. R. Civ. P. 12(d) (“If, on a motion under Rule 12(b)(6) ..., matters outside the pleadings are presented to and not excluded by the court, the motion must be treated as one for summary judgment under Rule 56. All parties must be given a reasonable opportunity to present all the material that is pertinent to the motion.”). 2
Here, Defendants have moved to dismiss Plaintiff's claims against the IRS as well as Counts I (quiet title action pursuant to 28 U.S.C. § 2410) and IX (APA) of his Complaint for lack of jurisdiction under Rule 12(b)(1). As such, the Court may consider all attached exhibits in evaluating Defendants' Motion to Dismiss these claims pursuant to Rule 12(b)(1). With respect to the remaining claims, however, Defendants have moved to dismiss for failure to state a claim, or in the alternative, for summary judgment; accordingly, to the extent the parties rely upon and the Court does not exclude from consideration the Certificates of Official Record, the motion must be construed as a motion for summary judgment. In this case, the parties have relied upon and the Court does not exclude from consideration the Certificates in resolving Defendants' motion only with respect to Count VI (failure to issue notice of levy in violation of § 6331(d)). As such, the Court must construe Defendants' motion as to Count VI as a Motion for Summary Judgment pursuant to Rule 56. With respect to the remaining counts, however, the Court finds that the attached Certificates of Official Record are neither relied upon by the parties nor relevant to resolution of Defendants' motion. The Court therefore treats Defendants' motion on these counts — namely, Counts II (failure to issue notice of deficiency in violation of §§ 6212 and 6213), III (failure to make assessment in violation of § 6203), IV (failure to make assessment in violation of § 6303), V (failure to release lien in violation of § 7342), VII (unauthorized disclosure in violation of § 6103(b)(6)), and VIII (failure to issue certificate of release in violation of § 6325) — as a Motion to Dismiss for failure to state a claim pursuant to Rule 12(b)(6).
With this framework in place, the Court shall set forth the applicable legal standards relating to Defendants' Motion to Dismiss pursuant to Rule 12(b)(1) and Rule 12(b)(6), or in the alternative, Motion for Summary Judgment pursuant to Rule 56.
A. Motion to Dismiss Pursuant to Federal Rule of Civil Procedure 12(b)(1)
A court must dismiss a case when it lacks subject matter jurisdiction pursuant to Rule 12(b)(1). As indicated above, the Court may “consider the complaint supplemented by undisputed facts evidenced in the record, or the complaint supplemented by undisputed facts plus the court's resolution of disputed facts.” Coalition for Underground Expansion, 333 F.3d at 198 (citations omitted); see also Jerome Stevens Pharm., Inc. v. Food & Drug Admin., 402 F.3d 1249, 1253 (D.C. Cir. 2005) (“[T]he district court may consider materials outside the pleadings in deciding whether to grant a motion to dismiss for lack of jurisdiction.”);Vanover v. Hantman , 77 F. Supp. 2d 91, 98 (D.D.C. 1999), aff'd, 38 F. App'x 4 (D.C. Cir. 2002) (“[W]here a document is referred to in the complaint and is central to plaintiff's claim, such a document attached to the motion papers may be considered without converting the motion to one for summary judgment.”) (citing Greenberg v. The Life Ins. Co. of Va., 177 F.3d 507, 514 (6th Cir. 1999)). “At the motion to dismiss stage, counseled complaints, as well as pro se complaints, are to be construed with sufficient liberality to afford all possible inferences favorable to the pleader on allegations of fact.” Settles v. U.S. Parole Comm'n, 429 F.3d 1098, 1106 (D.C. Cir. 2005). In spite of the favorable inferences that a plaintiff receives on a motion to dismiss, it remains the plaintiff's burden to prove subject matter jurisdiction by a preponderance of the evidence.Am. Farm Bureau v. Envtl. Prot. Agency , 121 F. Supp. 2d 84, 90 (D.D.C. 2000).
B. Motion to Dismiss Pursuant to Federal Rule of Civil Procedure 12(b)(6)
The Federal Rules of Civil Procedure require that a complaint contain ““a short and plain statement of the claim showing that the pleader is entitled to relief,” in order to “give the defendant fair notice of what the ... claim is and the grounds upon which it rests.”” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007) (quoting Conley v. Gibson, 355 U.S. 41, 47 (1957)); accord Erickson v. Pardus, 551 U.S. 89, 93 (2007) (per curiam). Although “detailed factual allegations” are not necessary to withstand a Rule 12(b)(6) motion to dismiss, to provide the “grounds” of “entitle[ment] to relief,” a plaintiff must furnish “more than labels and conclusions” or “a formulaic recitation of the elements of a cause of action.” Id. at 1964–65; see also Papasan v. Allain, 478 U.S. 265, 286 (1986). Instead, a complaint must contain sufficient factual matter, accepted as true, to “state a claim to relief that is plausible on its face.” Twombly, 550 U.S. at 570. “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.”Ashcroft v. Iqbal , __ U.S. __, 129 S. Ct. 1937, 1949 (2009) (citing Twombly, 550 U.S. at 556).
In evaluating a Rule 12(b)(6) motion to dismiss for failure to state a claim, the court must construe the complaint in a light most favorable to the plaintiff and must accept as true all reasonable factual inferences drawn from well-pleaded factual allegations. In re United Mine Workers of Am. Employee Benefit Plans Litig., 854 F.Supp. 914, 915 (D.D.C. 1994);see also Schuler v. United States , 617 F.2d 605, 608 (D.C. Cir. 1979) (“The complaint must be “liberally construed in favor of the plaintiff,” who must be granted the benefit of all inferences that can be derived from the facts alleged.”). However, as the Supreme Court recently made clear, a plaintiff must provide more than just “a sheer possibility that a defendant has acted unlawfully.” Iqbal, 129 S.Ct. at 1950. Where the well-pleaded facts set forth in the complaint do not permit a court, drawing on its judicial experience and common sense, to infer more than the “mere possibility of misconduct,” the complaint has not shown that the pleader is entitled to relief. Id. at 1950.
C. Motion for Summary Judgment Pursuant to Federal Rule of Civil Procedure 56
Pursuant to Federal Rule of Civil Procedure 56, a party is entitled to summary judgment “if the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(c); see also Tao v. Freeh, 27 F.3d 635, 638 (D.C. Cir. 1994). Under the summary judgment standard, the moving party bears the “initial responsibility of informing the district court of the basis for [its] motion, and identifying those portions of the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits which [it] believe[s] demonstrate the absence of a genuine issue of material fact.”Celotex Corp. v. Catrett , 477 U.S. 317, 323 (1986). In response, the non-moving party must “go beyond the pleadings and by [its] own affidavits, or depositions, answers to interrogatories, and admissions on file, “designate” specific facts showing that there is a genuine issue for trial.” Id. at 324 (internal citations omitted).
Although a court should draw all inferences from the supporting records submitted by the nonmoving party, the mere existence of a factual dispute, by itself, is insufficient to bar summary judgment. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). To be material, the factual assertion must be capable of affecting the substantive outcome of the litigation; to be genuine, the issue must be supported by sufficient admissible evidence that a reasonable trier-of-fact could find for the nonmoving party. Laningham v. U.S. Navy, 813 F.2d 1236, 1242–43 (D.C. Cir. 1987);Liberty Lobby , 477 U.S. at 251 (the court must determine “whether the evidence presents a sufficient disagreement to require submission to a jury or whether it is so one-sided that one party must prevail as a matter of law”). “If the evidence is merely colorable, or is not sufficiently probative, summary judgment may be granted.” Liberty Lobby, 477 U.S. at 249–50 (internal citations omitted). “Mere allegations or denials in the adverse party's pleadings are insufficient to defeat an otherwise proper motion for summary judgment.” Williams v. Callaghan, 938 F. Supp. 46, 49 (D.D.C. 1996). The adverse party must do more than simply “show that there is some metaphysical doubt as to the material facts.” Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986). Instead, while the movant bears the initial responsibility of identifying those portions of the record that demonstrate the absence of a genuine issue of material fact, the burden shifts to the non-movant to “come forward with “specific facts showing that there is agenuine issue for trial .”” Id. at 587 (citing Fed. R. Civ. P. 56(e)) (emphasis in original).
III. LEGAL DISCUSSION

A. Defendants' Motion to Dismiss Pursuant to Rule 12(b)(1)
The Court turns first to consider Defendants' Motion to Dismiss pursuant to Federal Rule of Civil Procedure 12(b)(1), which is directed towards Plaintiff's claims against the IRS as well as Count I (quiet title action pursuant to 28 U.S.C. § 2410) and Count IX (APA) of Plaintiff's Complaint.

1. Plaintiff's Claims Against Defendant IRS

As indicated above, Plaintiff has named as Defendants in this action both the United States and the IRS. Defendants contend that the United States is the only proper defendant in this action and have therefore moved to dismiss Plaintiff's claims against the IRS for lack of jurisdiction. Although Plaintiff filed an opposition to Defendants' motion, he failed to address Defendants' specific argument that the IRS must be dismissed as a defendant in this case. See generally Pl.'s Opp'n. “It is well understood in this Circuit that when a plaintiff files an opposition to a dispositive motion and addresses only certain arguments raised by the defendant, a court may treat those arguments that the plaintiff failed to address as conceded.” Hopkins v. Women's Div., General Bd. of Global Ministries, 284 F. Supp. 2d 15, 25 (D.D.C. 2003),aff'd 98 Fed. Appx. 8 (D.C. Cir. 2004); see also Franklin v. Potter, 600 F. Supp. 2d 38, 60 (D.D.C. 2009) (treating defendant's argument in motion for summary judgment as conceded where plaintiff failed to address it in his response). The Court previously advised Plaintiff that his failure to respond to the Defendants' motion may result in the Court treating the motion as conceded. See 8/22/09 Order, Docket No. [8]. Accordingly, because Plaintiff had the opportunity to respond to the Defendants' argument but did not do so, the Court shall construe his failure as a concession with respect to Defendants' request to dismiss the IRS as a defendant in this action. See Hopkins, 284 F. Supp. 2d at 25. Defendants' Motion to Dismiss shall therefore be GRANTED as CONCEDED insofar as Defendants move to dismiss Plaintiff's claims against the IRS. 3

2. Count I of Plaintiff's Complaint

Count I of Plaintiff's Complaint purports to bring a quiet title action pursuant to 28 U.S.C. § 2410, which provides that the “United States may be named a party in any civil action or suit in any district court ... having jurisdiction of the subject matter ... to quiet title to ... real or personal property on which the United States has or claims a mortgage or other lien.” 28 U.S.C. § 2410(a)(1). Defendants argue that, although Plaintiff has attempted to frame his claim as challenging only the procedural deficiencies of the lien and levy at issue, it is apparent that Plaintiff is in fact attempting to use section 2410 as a means to challenge the validity of the underlying tax assessments and the Court therefore lacks jurisdiction to entertain his claim. Defs.' Mot. at 5; Defs.' Reply at 2–3. The Court agrees.

“It is elementary that the United States, as sovereign, is immune from suit save as it consents to be sued, and the terms of its consent to be sued in any court define that court's jurisdiction to entertain that suit.” United States v. Mitchell, 445 U.S. 535, 538 (1980) (citation omitted). Moreover, “a waiver of sovereign immunity “cannot be implied but must be unequivocally expressed.””Id. (citing United States v. King, 395 U.S. 1, 4 [23 AFTR 2d 69-1358] (1969)). Plaintiff argues that section 2410 acts as a waiver of sovereign immunity for his quiet title claim.See Pl.'s Opp'n at 5–8. 4 Plaintiff, however, is incorrect. Section 2410 “constitutes a waiver of sovereign immunity to a suit brought by a taxpayer against the United States which challenges the validity of a federal tax lien ... [but only] so long as the taxpayer refrains from contesting the merits of the underlying tax assessment itself.” Aqua Bar & Lounge v. U.S. Dep't of Treasury, 539 F.2d 935, 939–40 [38 AFTR 2d 76-5466] (3d Cir. 1976) (emphasis added); see also Pollinger, 539 F. Supp. 2d at 251. Indeed, “[t]he principle that a taxpayer cannot use section 2410(a) to challenge the extent of, or existence of, substantive tax liability is well-settled.” Robinson v. United States, 920 F.2d 1157, 1161 [67 AFTR 2d 91-393] (3d Cir. 1990). Despite Plaintiff's efforts to characterize his quiet title action as challenging only certain alleged procedural deficiencies, it is abundantly clear that his arguments regarding such alleged errors are premised upon his substantive challenge to the merits and validity of the tax assessment underlying the Notice of Federal Tax Lien and Notice of Levy issued. See Compl.¶ 7 (alleging that he “filed all returns required to be filed for tax years 1994 and 1995 and fully satisfied and paid all income taxes Plaintiff was made liable for and required to pay regarding the years in dispute”); see also id. ¶¶ 2–6. His principal concern is with the assessments — not with the actual tax liens. At heart, he alleges that the Notice of Federal Tax Lien and Notice of Levy are procedurally deficient only because he does not owe the claimed underlying taxes and/or no assessment ever took place, such that “Defendants have no estate, title, claim, lien, or superior claim in the Plaintiff's personal property or any portion thereof.” Id. ¶ 26. Accordingly, as Plaintiff has not “refrain[ed] from contesting the merits of the underlying tax assessment itself,” this Court lacks jurisdiction over his quiet title action. Defendants' Motion to Dismiss is therefore GRANTED insofar as Defendants seek dismissal of Count I of Plaintiff's Complaint for lack of jurisdiction pursuant to Rule 12(b)(1).

3. Count IX of Plaintiff's Complaint

In Count IX of the Complaint, Plaintiff alleges that Defendants acted in excess of their statutory authority and seeks non-monetary declaratory and injunctive relief pursuant to the section 706(2) of the APA. Compl. ¶¶ 58–64. As Defendants correctly point out, however, Plaintiff cannot pursue a claim for declaratory or injunctive relief under the APA based upon alleged wrongful tax assessment or collection actions. First, to the extent Plaintiff seeks injunctive relief, his claim is barred by the Anti-Injunction Act, 26 U.S.C. § 7421(a), which is part of the Tax Code and which “withdraw[s] jurisdiction from the state and federal courts to entertain suits seeking injunctions prohibiting the collection of federal taxes.” Enochs v. Williams Packing & Nav. Co., 370 U.S. 1, 5 [9 AFTR 2d 1594] (1962); see also Ross v. United States, 460 F. Supp. 2d 139, 149 [98 AFTR 2d 2006-7712] (D.D.C. 2006) (finding plaintiff's claim for injunctive relief under the APA barred by the Anti-Injunction Act where claim based on assessment or collection of taxes). Although the Supreme Court has recognized a limited exception to this rule, Plaintiff has not shown that the exception applies in this case. In Enochs, the Supreme Court held that the a suit for injunction may be maintained “[o]nly if it is [] apparent that, under the most liberal view of the law and the facts, the United States cannot establish its claim .... Otherwise, the District Court is without jurisdiction, and the complaint must be dismissed.” 370 U.S. at 7. As is selfevident from the Court's rulings herein granting Defendants' motion, it is clear that the limited exception recognized in Enochs is inapplicable to the case at hand.

Second, Plaintiff's claim for declaratory relief is barred by the Declaratory Judgment Act, 28 U.S.C. § 2201, which authorizes a court of the United States to “declare the rights and other legal relations of any interested party,” but expressly excludes cases “with respect to Federal taxes,” subject to one exception not applicable here. See Bob Jones Univ. v. Simon, 416 U.S. 725, 732–33 [33 AFTR 2d 74-1279] n. 7 (1974) (“The congressional antipathy for premature interference with the assessment or collection of any federal tax also extends to declaratory judgments.... [T]he federal tax exception to the Declaratory Judgment Act is at least as broad as the Anti-Injunction Act.”); see also McGuirl v. United States, 360 F. Supp. 2d 129, 132 [93 AFTR 2d 2004-1922] (D.D.C. 2004) (finding Plaintiff's claim under the APA for declaratory relief based upon the assessment or collection of taxes was barred by Declaratory Judgment Act), aff'd, 167 Fed. Appx. 808 (D.C. Cir. 2005). For these reasons, the D.C. Circuit has made clear that “Congress has preserved the immunity of the United States from declaratory and injunctive relief with respect to all tax controversies except those pertaining to the classification of organizations under § 501(c) of the IRC.” Murphy v. IRS , 493 F.3d 170, 174 [100 AFTR 2d 2007-5075] (D.C. Cir. 2007) (“Congress has preserved the immunity of the United States from declaratory and injunctive relief with respect to all tax controversies except those pertaining to the classification of organizations under § 501(c) of the [IRC].”). Accordingly, Defendants' Motion to Dismiss is GRANTED insofar as Defendants move to dismiss Count IX of Plaintiff's Complaint for lack of jurisdiction pursuant to Rule 12(b)(1).

B. Defendants' Motion to Dismiss Pursuant to Rule 12(b)(6)
The Court turns next to consider Defendants' Motion to Dismiss for failure to state a claim pursuant to Rule 12(b)(6), which as construed by the Court is directed towards Count II, which alleges a failure to issue a notice of deficiency; Counts III and IV, which allege a failure to assess taxes and provide assessment notices; Count V and VIII, which allege a failure to release a lien and to issue a certificate of release; and Count VII, which alleges unauthorized disclosure of Plaintiff's social security number.

1. Count II of Plaintiff's Complaint
Count II of Plaintiff's Complaint alleges that Defendants failed to send a notice of deficiency to Plaintiff's last known address before issuing the Notice of Levy thereby violating 26 U.S.C. §§ 6212(a) and 6213(a). Plaintiff seeks damages pursuant to section 7433 based upon this alleged violation. Compl. ¶¶ 28–31. Section 6212(a) “authorize[s]” the IRS, upon determining the existence of a tax deficiency, “to send notice of such deficiency to the taxpayer by certified mail or registered mail.” 26 U.S.C. § 6212(a). Such notice “shall be sufficient,” “if mailed to the taxpayer at his last known address ... even if such taxpayer is deceased or under a legal disability.” Id. § 6212(b). The taxpayer has 90 days after the notice is mailed in which to “file a petition with the Tax Court for a redetermination of the deficiency.” Id. § 6213(b). Pursuant to section 6213(a), the IRS is precluded from imposing any “assessment of a deficiency” or from making any “levy or proceeding in court for its collection” until the “notice [of deficiency] has been mailed to the taxpayer, []or until the expiration of [the] 90-day ... period, ... []or, if a petition has been filed with the Tax Court, until the decision of the Tax Court has become final.” Id.

“The purpose of a notice of deficiency is, first, to notify the taxpayer that a deficiency has been determined against him, and second, to afford him an opportunity to challenge the determination in tax court.” Kiley v. Kurtz, 533 F. Supp. 465, 467–68 [50 AFTR 2d 82-5501] (D. Colo. 1982) (citingBarnes v. Commissioner of Internal Revenue , 408 F.2d 65, 68 [23 AFTR 2d 69-895] (7th Cir. 1969)). As the Ninth Circuit has observed,

Reading the interrelated sections of the Code as an integrated whole, it is apparent that the legislative plan contemplates that actual notice of the deficiency should be given where such can reasonably be achieved and that the mailing authorized by § 6212(a) is a means to that end.

Clodfelter v. Commissioner of Internal Revenue, 527 F.2d 754, 756 [37 AFTR 2d 76-554] (9th Cir. 1975). The key, then, “is that the taxpayer have actual notice and not that he have it in any particular way.” Id. at 757; see also Borgman v. Commissioner of Internal Revenue, 888 F.2d 916, 917 [64 AFTR 2d 89-5795] (1st Cir. 1989) (“The purpose of section[] 6212(a) ... is to ensure that the taxpayer receives a timely actual notice so he can challenge the assessment within the 90-day period provided in section 6213.”). Accordingly, “[w]here the taxpayer receives actual notice of the contents of the deficiency notice, the purpose of the statute is satisfied.” Gibson v. United States, 761 F. Supp. 685, 690 [68 AFTR 2d 91-5102] (C.D. Cal 1991).

Plaintiff in this case alleges that he did not receive the required notice of deficiency prior to the issuance of the Notice of Levy and argues that Defendants are therefore in violation of sections 6212(a) and 6213(a). See Pl.'s Opp'n, Att. 1 (Affidavit of Peter Boritz) (hereinafter, “Boritz Aff.”), ¶ 7. Defendants respond that — even accepting Plaintiff's allegation as true — Plaintiff's claim must nonetheless be dismissed because public records demonstrate that he filed a timely petition with the Tax Court regarding the determination of tax deficiencies in the years at issue and therefore clearly received actual notice of the deficiencies.See Defs.' Mot. at 5–6 & Ex. A (Order and Decision dated June 10, 1998, in Boritz v. Commissioner of Internal Revenue, No. 17664-97) (hereinafter, “Tax Court Order”). 5 The Court agrees.

Plaintiff concedes that he filed a petition in Tax Court for tax years 1994 and 1995, but argues that he did so “without said notices, based on other letters and notices received from the IRS alleging the assessment of penalties.” Pl.'s Opp'n at 8. Even assuming, as Plaintiff apparently asserts, that none of the “letters and notices” he received from the IRS constituted the required notice of deficiency, this does not negate that Plaintiff had actual notice of the deficiencies and filed a timely petition in Tax Court for the tax years in question. As the IRS' mailings and notices “result[ed] in actual notice without prejudicial delay (as was clearly the case here),” the Court finds that the IRS has “[met] the conditions of § 6212(a).” Clodfelter, 527 F.2d at 757. Moreover, “[b]y timely invoking Tax Court jurisdiction, [Plaintiff] effectively waived any objection to the notice of deficiency.” Mulvania v. Commissioner of Internal Revenue, 769 F.2d 1376, 1380 [56 AFTR 2d 85-5744] (9th Cir. 1985);see also Roszkos v. Commissioner of Internal Revenue , 850 F.2d 514 [62 AFTR 2d 88-5084], (9th Cir. 1988) (where the “taxpayer acknowledges notice by timely petitioning the Tax Court for a redetermination of deficiency,” he “render[s] harmless the IRS' error”);cf. Kiley , 533 F. Supp at 468 (“In the present case, the plaintiff acknowledges that he actually received his notice of deficiency and he does not allege any detrimental delay. His challenge to the notice of deficiency is therefore without merit.”). Accordingly, Defendants' Motion to Dismiss is GRANTED insofar as Defendants assert that Count II of Plaintiff's Complaint should be dismissed for failure to state a claim pursuant to Rule 12(b)(6).

2. Count III and Count IV of Plaintiff's Complaint
Counts III and IV of Plaintiff's Complaint seek damages pursuant to 26 U.S.C. § 7433 for the IRS' alleged failure to assess taxes and provide assessment notices. Specifically, Plaintiff alleges in Count III of the Complaint that Defendants violated 26 U.S.C. § 6203 by issuing the Notice of Federal Tax Lien and the Notice of Levy without first making an assessment regarding Plaintiff's tax liabilities for years 1994 and 1995. Compl. ¶¶ 32–35. In Count IV of the Complaint, Plaintiff alleges that Defendants failed to give him notice within 60 days after any alleged assessment as is required by 26 U.S.C. § 6303(a). Id. ¶¶ 36–39.
Both claims therefore relate to the IRS' assessment of tax liability. As such, the claims are not actionable under section 7433 and must be dismissed for failure to state a claim. As noted above, Section 7433(a) authorizes taxpayers to bring actions for civil damages against the United States when any IRS officer or employee recklessly, intentionally, or negligently acts in disregard of the Code or its implementing regulations “in connection with any collection of Federal tax.” 26 U.S.C. § 7433(a) (emphasis added). As this Court has previously held, section 7433 is limited to alleged violations of law by the IRS in connection with tax collection and ““does not provide a cause of action for wrongful tax assessment or other actions that are not specifically related to the collection of income tax.”” Pollinger, 539 F. Supp. 2d 242 [101 AFTR 2d 2008-1383] at 255–56 (quoting Buaiz v. United States, 471 F. Supp. 2d 129, 135–36 [99 AFTR 2d 2007-699] (D.D.C. 2007));see also Jaeger v. United States , 524 F. Supp. 2d 60, 63–64 [100 AFTR 2d 2007-7117] (D.D.C. 2007) (holding that “ section 7433 does not provide a cause of action for wrongful tax assessment, the absence of a tax assessment, or other actions not related to collection of income tax”); Spahr v. United States, 501 F. Supp. 2d 92, 95 [100 AFTR 2d 2007-5601] (D.D.C. 2007) (same). 6 The Court's holding in Pollinger applies equally here and mandates the dismissal of Plaintiff's claims in Count III and Count IV arising from the IRS' alleged failure to make an assessment in compliance with 26 U.S.C. §§ 6203, 6303. While Defendants themselves have not specifically challenged the viability of Plaintiff's claims on this point, instead addressing the merits of Plaintiff's claims, it is well settled in this Circuit that “[c]omplaints may [] be dismissed,sua sponte if need be, under Rule 12(b)(6) whenever “the plaintiff cannot possibly win relief.””Best v. Kelly , 39 F.3d 328, 331 (D.C. Cir. 1994) (quoting Baker v. Director, United States Parole Comm'n, 916 F.2d 725, 726 (D.C. Cir. 1990) (per curiam)). Accordingly, because it is patently obvious that Plaintiff's claims relating to the alleged errors in the assessment of taxes “cannot possibly win relief,” the Court concludes that Count III and Count IV must be dismissed sua sponte for failure to state a claim under Rule 12(b)(6). Defendants' Motion to Dismiss is therefore GRANTED insofar as Defendants have moved to dismiss Counts III and IV, albeit on the alternative reasoning that Plaintiff has failed to state a claim under section 7433. 7
3. Count V and Count VIII of Plaintiff's Complaint
In Count V and Count VIII of the Complaint, Plaintiff alleges that Defendants have failed to release the Notice of Federal Tax Lien and issue a certificate of release as required by 26 U.S.C. § 6325(a)(1). Plaintiff seeks monetary damages for this failure under 26 U.S.C. §§ 7432 and 7433, respectively. Compl. ¶¶ 40–43, 53–57. Section 6325 provides that “the Secretary shall issue a certificate of release of any lien imposed with respect to any internal revenue tax not later than 30 days after the day on which ... [t]he Secretary finds that the liability for the amount assessed, together with all interest in respect thereof, has been fully satisfied or has become legally unenforceable.” 26 U.S.C. § 6325(a)(1).
In this case, the parties agree that the Notice of Federal Tax Lien is now unenforceable because the ten-year limitation periods for collection of the underlying tax assessment have expired.See Compl. ¶ 56; Defs.' Mot. at 9 (“the liens have not been refiled and are considered released”). This is confirmed by reference to the Notice of Federal Tax Lien, which is attached as an exhibit to Plaintiff's Complaint and which states as follows:
IMPORTANT RELEASE INFORMATION: For each assessment listed below, unless notice of the lien is refiled by the date given in column (e), this notice shall, on the day following such date, operate as a certificate of release as defined in IRC 6325(a).
Id., Ex. C. There is no allegation by Plaintiff that the liens have been refiled; indeed, Plaintiff alleges that the liens are now unenforceable (i.e., that no enforceable lien was refiled). See id. ¶¶ 54–56. Accordingly, the Notice of Federal Tax Lien itself operated as the certificate of release required under section 6325(a) and automatically released the tax liens at issue when no notice of lien was refiled by the dates listed in column (e).See Rotte v. United States , 615 F. Supp. 2d 1347, 1351 [103 AFTR 2d 2009-1734] (S.D. Fla. 2009) (finding that IRS “complied with section 7432 because the notice of federal tax lien was self-releasing);cf. Enax v. United States , Civ. Act. No. 06-14774, 2007 WL 708976 [99 AFTR 2d 2007-1356], 450 (11th Cir. Mar. 8, 2007) (observing that “[a]t the end of the limitations period, the liens self-release unless the IRS had revoked the self-release and re-filed the liens before the limitations period expired”);Eastman v. United States , Civ. Act. No. 06cv1069, 2008 WL 899252 [101 AFTR 2d 2008-1566], 2 (W.D. Ark. Mar. 31, 2008) (“[T]he 10 year collection statute of limitations on these assessments expired and the lien documents self released. The IRS did not refile its notice of lien ... [t]herefore, ... the Notice of Federal Tax Lien became the § 6325(a) certificate of release of these liens.”). As such, Plaintiff cannot succeed on his claims that Defendants violated section 6325 by failing to release the Notice of Federal Tax Lien and/or by failing to issue a certificate of release. Defendants' Motion to Dismiss is therefore GRANTED insofar as Defendants move to dismiss Counts V and VIII of Plaintiff's Complaint for failure to state a claim pursuant to Rule 12(b)(6).
4. Count VII of Plaintiff's Complaint
In Count VII of the Complaint, Plaintiff seeks damages under 26 U.S.C. § 7433 based upon Defendants' allegedly unauthorized public disclosure of his social security number on the Notice of Federal Tax Lien in violation of 26 U.S.C. § 6103(b)(6). Compl. ¶¶ 48–52. Section 6103 states the general rule that return information shall be kept confidential and, except as authorized, shall not be disclosed. 26 U.S.C. § 6103; Church of Scientology of Calif. v. IRS, 484 U.S. 9, 10–12 [60 AFTR 2d 87-5832] (1987). One of the exceptions to section 6103, however, permits disclosure of return information “in connection with ... collection activity ... to the extent that such disclosure is necessary in obtaining information ... with respect to the enforcement of any other provision of [the Code].” 26 U.S.C. § 6103(k)(6). The implementing regulations for section 6103 further provide that disclosure may be made in order “to locate assets in which the taxpayer has an interest ... or otherwise to apply the provisions of the Internal Revenue Code relating to establishment of liens against such assets, or levy, seizure, or sale on or of the assets to satisfy any such liability.” 26 C.F.R. § 301.6103(k)(6)-1(vi); see also Glass v. United States, 480 F. Supp. 2d 162, 165–66 [99 AFTR 2d 2007-1853] (D.D.C. 2007).
Based on section 6103(k)(6) and the related regulations, several courts, including the undersigned Judge, have concluded that a notice of lien does not give rise to an unauthorized disclosure action. See, e.g., Pollinger, 539 F. Supp. 2d at 253 (“Plaintiff cannot state an unauthorized disclosure claim based upon the various notices of liens and levies.”); see also Glass, 480 F. Supp. 2d at 165–66 (finding that “a notice of lien does not give rise to a cause of action”); Mann v. United States, 204 F.3d 1012, 1018 [85 AFTR 2d 2000-963] (10th Cir. 2000) (dismissing plaintiff's claim for unauthorized disclosure of social security number in notice of lien because “ § 6103(k)(6) and the relevant regulations do permit disclosure of tax return information when made in notices of lien and levy, to the extent necessary to collect on taxes assessed.”); McGraw v. United States, Civ. Act. No. 08-0092, 2008 WL 4000570 [102 AFTR 2d 2008-5875], 3 (W.D. Wash. Aug. 25, 2008) (dismissing plaintiff's claim that IRS violated section 6103(k) by disclosing plaintiff's social security number in the notices of federal tax liens and levies because disclosure was permitted under implementing regulations). Accordingly, the Court finds that Plaintiff cannot state an unauthorized disclosure claim based upon the Notice of Federal Tax Lien. Defendants' Motion to Dismiss is therefore GRANTED insofar as Defendants move to dismiss Count VII of Plaintiff's Complaint for failure to state a claim.
C. Defendants' Motion for Summary Judgment
The Court finally turns to consider Defendants' motion for summary judgment, which as construed by the Court is directed towards Plaintiff's final claim — Count VI, in which Plaintiff alleges that Defendants failed to serve him with a notice of levy, as required by 26 U.S.C. § 6331(d)(2). Plaintiff seeks civil damages for this alleged failure pursuant to 26 U.S.C. § 7433. Compl. ¶¶ 44–47. Given the somewhat obscure nature of Plaintiff's Complaint, it is not entirely clear whether he means to allege that Defendants violated section 6331(d)(2) by failing to serve him with an actual copy of the Notice of Levy issued against his bank account or rather by failing to serve him with a notice of its intent to issue the Notice of Levy before doing so. As Defendants correctly point out, section 6331(d) requires only that the IRS notify a taxpayer “in writing of his intention to make [the] levy” at least 30 days before the day of the levy. 26 U.S.C. § 6331(d)(1). It does not require that a copy of the Notice of Levy itself be provided to the taxpayer. See id. Accordingly, to the extent Plaintiff contends that the IRS violated section 6331(d) by failing to provide him with a copy of the actual Notice of Levy, such a claim cannot succeed.
Nonetheless, cognizant of Plaintiff's pro se status, the Court shall give Plaintiff the benefit of the doubt and instead construe Count VI as alleging that Defendants violated section 6331(d) by failing to provide a notice of intent to levy. Even construing Plaintiff's Complaint in his favor, however, it is clear that Plaintiff's claim is without merit. The undisputed facts on the present record demonstrate that the IRS issued the required notices of intent. Specifically, Defendants direct the Court to the Certificates of Official Record (Form 4340) regarding Plaintiff's tax liability in the tax years 1994 and 1995. Defs.' Mot. at 8 n. 2. These Certificates of Official Record, which are attached to Defendants' motion as Exhibits B, C, D and E, indicate that the required notices of intent to levy were provided to Plaintiff. See id., Ex. B, C, D, and E. As noted above, see supra n. 7, these Certificates of Official Record are “self-authenticating” and “provide a sufficient basis for summary judgment.”Buaiz , 521 F. Supp. 2d at 96; see also Hines v. United States, 658 F. Supp. 2d 139 [104 AFTR 2d 2009-6652] (D.D.C. 2009) (awarding presumption of regularity to IRS records demonstrating that notices of intent to levy were sent to plaintiff). Plaintiff has offered no facts or documentary evidence to refute the accuracy of the certified forms or to otherwise indicate that the notices of intent to levy were not provided. As such, he has failed to defeat the Defendants' motion for summary judgment. Accordingly, Defendants' Motion for Summary Judgment is GRANTED insofar as Defendants contend that there are no material disputes of fact and they are entitled to judgment as a matter of law with respect to Count VI of Plaintiff's Complaint.
IV. CONCLUSION
For the reasons set forth above, Defendants' [7] Motion to Dismiss or in the Alternative Motion for Summary Judgment is GRANTED. Specifically, the Court holds as follows. First, Defendants' Motion to Dismiss Plaintiff's claims against the IRS is GRANTED as conceded. Second, Defendants' Motion to Dismiss Count I (quiet title action pursuant to 28 U.S.C. § 2410) and Count IX (APA) for lack of jurisdiction pursuant to Rule 12(b)(1) is GRANTED. Third, Defendants' Motion to Dismiss Count II (failure to issue notice of deficiency in violation of §§ 6212 and 6213), Count III (failure to make assessment in violation of § 6203), Count IV (failure to make assessment in violation of § 6303), Count V (failure to release lien in violation of § 7342), Count VII (unauthorized disclosure in violation of § 6103(b)(6)), and Count VIII (failure to issue certificate of release in violation of § 6325), for failure to state a claim pursuant to Rule 12(b)(6) is GRANTED. Fourth and finally, Defendants' Motion for Summary Judgment as to Count VI (failure to issue notice of levy in violation of § 6331(d)) is GRANTED. An appropriate Order accompanies this Memorandum Opinion.
Date: February 23, 2010
COLLEEN KOLLAR-KOTELLY
United States District Judge
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1
As discussed below, the Court grants Defendants' motion to dismiss the IRS as a defendant in this action. The Court nevertheless refers to the United States and the IRS collectively as “Defendants” in this opinion, so as to be consistent with the parties' filings.
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2
The Court notes that Plaintiff was given notice that Defendants' motion may be treated as a motion for summary judgment under Rule 56 and that in opposing such a motion, he “may not rely merely on allegations or denials in its own pleading; rather, its response must—by affidavits or as otherwise provided in this rule—set out specific facts showing a genuine issue for trial. If the opposing party does not so respond, summary judgment should, if appropriate, be entered against that party.” See Aug. 22, 2009 Order, Docket No. [8].
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3
Alternatively, the Court notes that Plaintiff's claims for monetary damages under sections 7432(a) and 7433(a) against the IRS would nonetheless fail because suits for civil damages for wrongful tax collection activity and for failure to release a lien may be brought, if at all, against the “United States.” See 26 U.S.C. § 7432(a);id. § 7433(a). Similarly, Plaintiff's claims for declaratory and injunctive relief against the IRS would fail as “Congress has preserved the immunity of the United States from declaratory and injunctive relief with respect to all tax controversies except those pertaining to the classification of organizations under § 501(c) of the IRC. As an agency of the Government, of course, the IRS shares that immunity.”Murphy v. IRS , 493 F.3d 170, 174 [100 AFTR 2d 2007-5075] (D.C. Cir. 2007) (internal citations omitted).
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4
Although Plaintiff argues in his briefing that section 2410 acts as the relevant waiver of sovereign immunity in this case, Plaintiff's Complaint actually cites 28 U.S.C. § 1367 as jurisdictional grounds for his quiet title claim. See Compl. ¶ 16. Section 1367, however, does not save Plaintiff's claim. That section provides only that “in any civil action of which the district courts have original jurisdiction, the district courts shall have supplemental jurisdiction over all other claims that are so related to claims in the action within such original jurisdiction that they form part of the same case or controversy under Article III of the United States Constitution.” 28 U.S.C. § 1367(a). Section 1367 does not constitute a waiver of sovereign immunity by the United States. See 28 U.S.C. § 1367; see also San Juan Co., Utah v. United States, 503 F.3d 1163, 1181 (10th Cir. 2007) (“ Section 1367(a) is expressed in general terms, applying to all litigants. There is no mention of sovereign immunity or of the special status of the government as a litigant. Under settled law, ... this statute does not waive federal sovereign immunity.”); Dunn & Black v. United States, 492 F.3d 1084, 1088 [100 AFTR 2d 2007-5170] n. 3 (9th Cir. 2007) (same); United States v. Certain Land Situated in City of Detroit, 361 F.3d 305, 307 (6th Cir. 2004) (same).
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5
As shown by the Tax Court Order, Plaintiff was held to have outstanding tax deficiencies for the years in question. See Tax Court Order.
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6
While some courts have held that the limitations on the right of action under section 7433 are jurisdictional because they pertain to the scope of the United States' waiver of sovereign immunity, see, e.g., Buaiz, 471 F. Supp. 2d at 135–36; Spahr, 501 F. Supp. 2d at 96, this Court finds persuasive the reasoning set forth by Judge John D. Bates in Jaegar concluding that “the limitations on the right of action are nonjurisdictional because the language of section 7433 is not jurisdictional, and, furthermore, this Circuit treats the lack of a right of action as an issue of failure to state a claim upon which relief can be granted, id. 524 F. Supp. 2d at 64 n.1 (internal citations omitted). See also Pollinger, 539 F. Supp. 2d at 256 (dismissing claims relating to tax assessment under Rule 12(b)(6) for failure to state a claim).
________________________________________
7
Alternatively, the Court notes that Defendants would be entitled to summary judgment as the undisputed facts demonstrate that assessments were timely made and that notice was sent to Plaintiff as required. Defendants submit the Certificates of Official Record (Form 4340), regarding Plaintiff's tax liability in the tax years 1994 and 1995, which demonstrate that assessments were made, and that notice and demand in accordance with section 6303 was given, on November 16, 1998, December 18, 1998, and December 21, 1998, thus satisfying sections 6203 and 6303. See Defs.' Mot. at Exs. B, C, D, and E. While Plaintiff contends that the Certificates of Official Record are insufficient to support an award of summary judgment without providing the underlying supporting documentation, the case law makes clear that the certified Form 4340s “are self-authenticating and need no extrinsic evidentiary support as a predicate to admissibility.”Buaiz , 521 F. Supp. 2d at 96. As such, they are “presumptive proof of the taxpayer's liability” and “may provide a sufficient basis for summary judgment.”Id. Plaintiff has offered no facts or documentary evidence to refute the accuracy of the certified forms, and he has therefore failed to defeat the Defendants' motion for summary judgment.

CREEL SR. v. COMM., Cite as 96 AFTR 2d 2005-5487 (419 F.3d 1135), 08/02/2005 , Code Sec(s) 6330; 7122

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Billy S. CREEL, SR., PETITIONER-APPELLEE v. COMMISSIONER of Internal Revenue, RESPONDENT-APPELLANT.


Case Information:
Code Sec(s): 6330; 7122

Court Name: U.S. Court of Appeals, Eleventh Circuit,
Docket No.: No. 04-11817,
Date Decided: 08/02/2005.
Prior History: Tax Court affirmed.
Tax Year(s): Years 1987, 1988, 1989, 1990, 1991.
Disposition: Decision for Taxpayer.
Cites: 419 F.3d 1135, 2005-2 USTC P 50504.

HEADNOTE
1. Collection due process—review of administrative determination—satisfaction of liabilities—settlements—criminal restitution and civil tax liabilities. Tax Court properly determined that IRS erred in its administrative determination to collect taxpayer's liabilities for years subject of already-completed restitution order imposed in prior criminal tax case. Restitution order by its plain terms intertwined all taxpayer's criminal and civil tax liabilities for subject years, thus fully covering subject civil liabilities, including any applicable penalties and interest; so, those liabilities were completely extinguished and IRS had no right to pursue further collection once taxpayer completed his payments and U.S. Attorney issued lien release and satisfaction of judgment explicitly stating that obligations were fully paid or settled. Also, govt.'s attempt to circumvent such settlement on grounds U.S. Attorney lacked authority to enter same was meritless; and argument about missing witness inference was rejected.

Reference(s): ¶ 63,305.01(5) ; ¶ 71,225.01(15) ; ¶ 71,225.04(40) Code Sec. 6330 ; Code Sec. 7122

OPINION
IN THE UNITED STATES COURT OF APPEALS FOR THE ELEVENTH CIRCUIT,

Appeal from a Decision of the United States Tax Court

Before EDMONDSON, Chief Judge, and TJOFLAT and KRAVITCH, Circuit Judges.

Judge: KRAVITCH, Circuit Judge:

[PUBLISH]

Tax Court No. 3037-01L

Respondent-Appellant, the Commissioner of Internal Revenue (“the Commissioner”), appeals the Tax Court's decision denying a proposed levy to collect federal income taxes for the years 1987–1991 allegedly owed by Petitioner-Appellee, Billy Creel, Sr. (“Creel”). 1

I. Background
1. Prior Criminal Tax Case
Creel failed to file timely federal income tax returns for the years 1985–1991. The Internal Revenue Service (“IRS”) referred the matter to the Department of Justice [pg. 2005-5488] (“DOJ”) for prosecution, and the DOJ assigned the matter to the United States Attorney's Office for the Middle District of Alabama. On April 8, 1993, Creel pleaded guilty to both counts of a two-count criminal information charging him with willfully failing to file federal income tax returns for 1987 and 1988, in violation of 26 U.S.C. § 7203. As part of the plea agreement, Creel agreed to file returns for the years 1985–1991 and make full restitution of the amount of loss resulting from his failure to file returns for the years 1986–1991. 2

Creel's returns for the years 1986–1991 showed unpaid income taxes totaling $83,830. 3 The IRS assessed the taxes shown on the returns, plus interest. The IRS assessed penalties for failure to file timely returns for each year under 26 U.S.C. § 6651(a), and penalties for underpayment of estimated tax under 26 U.S.C. § 6654 for the years 1985–1989. 4

On June 14, 1993, the district court sentenced Creel in the criminal case and he was placed on probation for five years. As a condition of probation, Creel was ordered to make restitution to the IRS for the years 1986–1991 in the amount of “$83,830 plus any applicable penalties and interest.” 5 (emphasis added). The district court ordered the restitution pursuant to 18 U.S.C. § 3663(a)(3), which provides that a “court may...order restitution in any criminal case to the extent agreed to by the parties in a plea agreement.” To secure the restitution obligation, the U.S. Attorney recorded a judgment lien against Creel's property. [pg. 2005-5489]

Beginning in May 1994, and continuing through June 1998, Creel made monthly restitution payments totaling $83,830. On June 9, 1998, after Creel made his last monthly restitution payment, the USAO informed the district court that Creel's restitution obligation had been paid or was otherwise settled. The U.S. Attorney filed a Satisfaction of Judgment that stated: “The assessment, fine, and/or restitution imposed by the Court...having been paid or otherwise settled, the Clerk...is hereby authorized and empowered to satisfy the Judgment as to the monetary imposition only.” The U.S. Attorney also recorded a Cancellation and Release that stated that the previously-recorded judgment lien was “fully released, satisfied, discharged, and cancelled” because the debt was “paid in full.”

2. Administrative Proceeding
[1] The IRS applied the restitution payments totaling $83,830 to fully satisfy Creel's tax liability for 1986 and part of his tax liability for 1987. Claiming that Creel owed additional taxes, penalties, and interest for 1985 and 1987–1991, in June 1998, the IRS assigned the account to the Collection Division. The revenue officer and Creel's representative discussed whether Creel could enter into an offer in compromise or a deferred payment schedule. These discussions ended when the parties disagreed as to the amount Creel could afford to pay.

On February 2, 2000, the Commissioner sent Creel a notice of intent to levy showing unpaid amounts totaling $284,758.28 and a notice of a right to a collection-due-process (“CDP”) hearing with respect to these unpaid amounts 6 :

(For additional columns, see below.)

Assessed Late
Assessed Filing Penalties and
Unpaid Tax Statutory Interest
Year Per Return as of July 24, 2000
---- ---------- -------------------
1985 $18,772.16 $34,818.37
1987 $9, 514.96 $10,326.78
1988 $15,974.75 $16,720.50
1989 $15,148.34 $9,592.03
1990 $10,425.95 $4,834.60
1991 $9,479.16 $3,114.52

Total Unassessed Late
Assessed Payment Penalties
Amounts as of and Statutory Total
Year July 24, 2000 Interest Due
---- ------------- -------- ----
1985 $53,601.53 n7 $31,803.67 $85,405.20
1987 $18,063.01 n8 $19,189.06 $37,252.07
1988 $32,695.25 $28,729.02 $61,424.27
1989 $24,751.37 n9 $22,270.20 $47,021.57
1990 $15,271.55 n10 $14,026.54 $29,298.09
1991 $12,593.68 $11,763.40 $24,357.08
----------
Total $284,758.28

---------------------------------------------------------------------------
n7 Includes fees and collection costs totaling $11.
n8 Includes fees and collection costs totaling $11 and reflects
the application of a $1,500 payment and a $278.73 payment.
n9 Includes fee and collection costs totaling $11.
n10 Includes fee and collection costs totaling $11.
Creel requested a CDP hearing. Creel's counsel met with Judy Kelly, the Appeals Officer assigned to the case, to discuss the proposed levy. Creel's counsel argued that Creel's alleged civil tax liabilities for the years 1986–1991 had been satisfied by virtue of his payment of $83,830. Kelly disagreed, determining that the restitution order required that Creel pay “83,830 plus any applicable penalties and interest.” (emphasis added). Accordingly, Kelly sustained the Commissioner's proposal to collect the unpaid “applicable penalties and interest.”

3. Tax Court Proceeding
Creel petitioned the United States Tax Court under 26 U.S.C. § 6330(d) for review. At the trial, Creel testified that it was his understanding that his payment of $83,830 satisfied all of his tax liabilities for the subject years. Besides Creel, the only other witness to testify was Kelly. The Commissioner reserved in its trial memorandum the right to call as a witness [pg. 2005-5490] a representative of the DOJ and/or the USAO, but never did so.

Following the trial, the Tax Court entered an order, in which it did not sustain the proposed levy with respect to the 1987–1991 liabilities. 11 The Tax Court found that Creel's payment of $83,830 and the U.S. Attorney's issuance of a satisfaction of judgment and release of lien settled the alleged civil tax liabilities. The Tax Court found, inter alia, that Creel testified “credibly and without contradiction that he understood that his payment of the $83,830 would satisfy his civil tax obligation for $83,830 plus related penalties and interest.” The court also relied on the “missing witness inference,” inferring that the Commissioner's failure to call to the stand a representative of the U.S. Attorney's Office suggested that “any relevant testimony from such a witness would have been unfavorable” to the Commissioner. Finally, the Tax Court concluded that the U.S. Attorney had the authority to settle Creel's civil tax liabilities. The Commissioner now appeals the Tax Court's decision.

II. Discussion
1. Standard of Review
We review the Tax Court's factual findings for clear error and its legal conclusions de novo. Atlanta Athletic Club v. Commissioner, 980 F.2d 1409, 1411–12 [71 AFTR 2d 93-588] (11th Cir. 1993). “A finding of fact is clearly erroneous if the record lacks substantial evidence to support it, so that our review of the entire evidence leaves us with the definite and firm conviction that a mistake has been committed.” Atlanta Athletic Club, 980 F.2d at 1411–12 (citations and quotation marks omitted).

2. Analysis
The Commissioner concedes that Creel's criminal restitution obligation was satisfied, and thus, his criminal tax liabilities were discharged. The Commissioner contends, however, that the satisfaction of Creel's criminal restitution obligation has no bearing on the Commissioner's ability to pursue Creel for additional civil tax liabilities.

In the abstract, the Commissioner is correct. As a general rule, the government can recover criminal penalties from an individual in a criminal prosecution and can recover additional civil penalties in a civil proceeding. See generally United States v. Barnette, 10 F.3d 1553, 1558 (11th Cir. 1994); Hickman v. Commissioner of Internal Revenue, 183 F.3d 535, 537–38 [84 AFTR 2d 99-5346] (6th Cir. 1999). Moreover, an order to pay restitution under 18 U.S.C. § 3663 is a criminal penalty rather than a civil penalty. United States v. Johnson, 983 F.2d 216, 220 (11th Cir. 1993). Indeed, the restitution statute used in the instant case expressly contemplates that a civil claim may be brought subsequent to a criminal conviction by providing for an offset for the amount of restitution paid in the criminal case against any damages recovered in the civil proceeding. 18 U.S.C. § 3663(e)(2).

The key problem with the Commissioner's position is that it fails to take into account the unique facts and the nuances of the instant case, most notably the language of the restitution judgment and the actions of the U.S. Attorney.

As a condition of probation, the district court ordered Creel to pay restitution to the IRS. As stated in the PSI, the plea agreement mandated: “[a]s a condition of probation, the Court shall impose a condition requiring restitution in the amount of $83,830 to the Internal Revenue Service, in addition to any interest and penalties which may be imposed by the Internal Revenue Service.” (emphasis added). In turn, the judgment in the criminal case set the amount of restitution at “$83,830 plus any applicable penalties and interest.” (emphasis added). Thus, as the Tax Court found, the restitution amount specifically included the civil [pg. 2005-5491] penalties that the Commissioner now seeks to recover. 12

Creel made his monthly restitution payments totaling $83,830. As a condition of probation, Creel still owed the “applicable penalties and interest.” Rather than pursue these additional civil penalties, the U.S. Attorney undertook two key actions. First, the U.S. Attorney issued a satisfaction of judgment which stated that “[t]he assessment, fine, and/or restitution imposed by the Court in the above styled case having been paid or otherwise settled...” (emphasis added). Second, the U.S. Attorney signed a cancellation and release of lien which stated that “[t]he debt secured...having been paid in full, said lien is hereby fully released, satisfied, discharged, and cancelled.” (emphasis added).

Creel argues that because the government elected to include his civil tax liabilities as part of the restitution order, when the U.S. Attorney discharged the restitution obligation, Creel's civil tax liabilities were also extinguished. We agree. Creel testified in the Tax Court proceeding that he understood his payment of $83,830 constituted a full payment of his tax liabilities. He also testified to the effect that he understood the release issued by the U.S. Attorney discharged all that he owed. The Commissioner did not refute Creel's testimony or show that the release of lien and satisfaction of judgment should be viewed as anything other than a release of all liabilities contained in the restitution order. As the Tax Court noted:

Although the record does not establish why the USAO treated the restitution order satisfied for the lesser amount, the record does establish that the sentencing court considered petitioner to be a man of limited wealth. A reasonable inference is that the USAO believed that the receipt of petitioner's civil taxes (exclusive of penalties and interest) in the amount of $83,830 was the most that it could recover from petitioner and agreed with him following his sentencing that his timely payment of that amount would serve to settle his civil tax liability of $83,830 plus related penalties and interest.
Upon review of the record, we conclude that the Tax Court did not err in finding that Creel's civil tax liabilities were settled by virtue of the $83,830 payment and the actions of the U.S. Attorney. Thus, although not compelled to do so, the government discharged Creel's civil tax liabilities as part of the criminal case.

The Commissioner also argues that the Tax Court erred in applying certain legal principles. The Commissioner first contends that the Tax Court erred in concluding that the U.S. Attorney had the authority to compromise Creel's civil tax liabilities. Without such authority, the U.S. Attorney's actions would not bind the government, even if he intended to compromise Creel's civil tax liabilities. United States v. Beebe, 180 U.S. 343, 351 (1901); Klein v. Commissioner, 899 F.2d 1149, 1152 [65 AFTR 2d 90-1039] (11th Cir. 1990). “It is well settled that persons dealing with a governmental agent must take notice of the agent's authority and that any unauthorized acts taken by the agent do not bind the government. United States v. Killough, 848 F.2d 1523, 1526 (11th Cir. 1988).

Under 26 U.S.C. § 7122(a), “the Attorney General or his delegate may compromise” any “civil or criminal case arising under the internal revenue laws” after “reference to the Department of Justice for prosecution or defense.” In turn, the Attorney General's authority to compromise any “civil or criminal case arising under the internal revenue laws” has been delegated to the Assistant Attorney General, Tax Division. 28 C.F.R. §§ .70, 0.160. Moreover, some civil claim settlement authority has been re-delegated to U.S. Attorneys. Tax Div. Directive No. 105, § 7, 60 Fed. Reg. 31244 (1995), 28 C.F.R., Appendix to [pg. 2005-5492] Subpart Y of Part O. 13 Although the Commissioner acknowledges that some civil settlement authority has been re-delegated to U.S. Attorneys, he argues that Creel fails to show that the formal requirements of a re-delegation were satisfied.

Under the unique facts of this case, we are not persuaded by the Commissioner's position. Importantly, the Commissioner concedes that the U.S. Attorney had authority to settle Creel's criminal restitution obligation. And here the restitution obligation was drafted such that Creel's civil tax liabilities were inextricably intertwined with his criminal tax liabilities, which together formed a condition of his probation. Because the U.S. Attorney had the authority to settle the criminal side of the case, and the civil penalties were consolidated within the criminal case, the U.S. Attorney acted within the scope of his authority. Cf. In re Knopf v. United States, 190 B.R. 647, 651–52 (Bankr. D. Mont. 1995) (noting that “it does not bode well for an IRS attorney to...challenge the authority of the Assistant U.S. Attorney to settle a tax prosecution case by a court accepted Plea Agreement.”).

Finally, the Commissioner argues that the Tax Court erred in applying the missing witness inference. The Tax Court inferred from the Commissioner's failure to present a witness from the DOJ or U.S. Attorney's Office that any relevant testimony from such a witness would have been unfavorable to the Commissioner. The Tax Court noted that the failure to call such a witness was peculiar given that the Commissioner listed a representative from the U.S. Attorney's Office or DOJ on its pre-trial witness list.

“It is well settled that the production of weak evidence when strong is available can lead only to the conclusion that the strong would have been adverse.” Raley, Inc. v. Kleppe, 867 F.2d 1326, 1329 (11th Cir. 1989); see also Mammoth Oil Co. v. U.S., 275 U.S. 13, 52 (1927). The Commissioner argues that the use of the inference was improper because Creel had the burden to show that his civil tax liabilities were compromised, and the Commissioner's failure to call a witness cannot by itself satisfy Creel's burden. 14 That argument assumes that the Tax Court relied solely on the missing witness inference. A review of the record reveals that such an assumption is incorrect. The Tax Court simply relied on the missing witness inference along with the other evidence presented in the case. See Steiner v. Commissioner, 350 F.2d 217, 223 [16 AFTR 2d 5174] (7th Cir. 1965). Creel proffered other evidence to support the existence of a compromise: (1) Creel's uncontradicted testimony that he believed his payment of $83,830 fully satisfied all of the amounts he owed to the government; and (2) evidence showing that the U.S. Attorney issued a release of lien and satisfaction of judgment. Under these circumstances, we hold that there was nothing improper about the use of the missing witness inference.

For the foregoing reasons, we AFFIRM.

AFFIRMED.


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1

The Tax Court sustained the Commissioner's proposed collection with respect to Creel's tax liabilities for 1985. Thus, the 1985 tax liabilities are not at issue in this appeal.
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2

The plea agreement itself is not in the record. The Presentence Investigation Report (PSI) issued by the U.S. Probation Office states the terms of the plea agreement.
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3

The tax returns showed the following unpaid taxes:

Year Tax Unpaid
---- ----------
1986 $23,287.00
1987 $9,514.96
1988 $15,974.75
1989 $15,148.34
1990 $10,425.95
1991 $9,479.16


Creel also filed a return for 1985 showing unpaid taxes of $18,772.16.
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4

The assessed penalties and interest were as follows:
Year Sec. 6651(a) Sec. 6654 Interest Total
---- ------------ --------- -------- -----
1985 $4,223.74 $1,396.73 $29,197.90 $34,818.37
1986 $5,239.65 $1,267.57 $23,477.31 $29,984.53
1987 $2,140.87 $578.13 $7,607.78 $10,326.78
1988 $3,594.32 $3,594.31 $9,531.87 $16,720.50
1989 $3,408.37 ----- $6,183.66 $9,592.03
1990 $2,345.83 ----- $2,488.77 $4,834.60
1991 $2,132.81 ----- $981.71 $3,114.52

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5

The amount of restitution was computed as follows:

Year Tax Amount
---- ----------
1986 $23,287
1987 $9,514.96
1988 $15,974.75
1989 $15,148.34
1990 $10,425.95
1991 $9,479.16

Total $83,830.00


The judgment stated that the restitution should be paid to the DOJ in monthly installments according to a schedule determined by the U.S. Probation Office.
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6

Prior to a levy, the IRS must give the taxpayer notice of an opportunity for a CDP hearing before the IRS Appeals Office. 26 U.S.C. § 6330(a).
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7

Includes fees and collection costs totaling $11.
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8

Includes fees and collection costs totaling $11 and reflects the application of a $1,500 payment and a $278.73 payment.
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9

Includes fee and collection costs totaling $11.
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10

Includes fee and collection costs totaling $11.
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11

The Tax Court sustained the proposed levy for the 1985 tax year because that year was not included in the restitution order. Thus, as noted earlier, the 1985 tax liabilities are not at issue in this appeal. The court also held that the Appeals Office did not abuse its discretion in rejecting Creel's proposal to make minimal monthly payments of $250.
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12

The Commissioner also argues that the “any applicable penalties and interest” portion of the restitution judgment was too vague to be legally enforceable. The fact that penalties and interest might be undetermined at sentencing does not make them legally ineffective, so long as the amount is eventually agreed upon by the parties or adjudicated. See United States v. Stoehr, 196 F.2d 276, 284 [41 AFTR 1190] (2d Cir. 1952). Here, there was no such need for agreement or adjudication because the penalties and interest were waived.
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13

The full text of the regulation states:
Section 7. Subject to the conditions and limitations set forth in Section 8 hereof, United States Attorneys are authorized to:
((A)) Reject offers in compromise of judgments in favor of the United States, regardless of amount;
((B)) Accept offers in compromise of judgments in favor of the United States where the amount of the judgment does not exceed $300,000; and
((C)) Terminate collection activity by his or her office as to judgments in favor of the United States which do not exceed $300,000 if the United States Attorney concludes that the judgment is uncollectible:
provided that such action has the concurrence in writing of the agency or agencies involved, and provided further that this authorization extends only to judgments which have been formally referred to the United States Attorney for collection.


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14

The Commissioner also argues that a witness was not called because he did not have adequate notice prior to the trial of Creel's theory of the case. Creel's pre-trial memorandum, however, specifically stated the relevant issue as whether “[he had] paid his tax liability in full” and argued that he paid as restitution the total amount of taxes owed in the amount of $83,830 and had received a satisfaction of judgment. Thus, there is no merit to this argument.