ORDER DENYING PLAINTIFFS' APPLICATION FOR DISMISSAL OF INSTANT ACTION IN THE INTEREST OF JUSTICE AND DUE PROCESS OF LAW

COYLE, District Judge:

On October 20, 1997, the court heard plaintiffs' Application for Dismissal of Instant Action in the Interest of Justice and Due Process of Law.

Upon due consideration of the written and oral arguments of the parties and the record herein, the court denies plaintiffs' application. Plaintiffs' application is without merit. The law is clear that the regulations and procedures for closing agreements under 26 U.S.C. §7121 and for compromises under 26 U.S.C. §7122 are the exclusive method of settling claims with the I.R.S. Botany Worsted Mills v. United States [1 USTC ¶348], 278 U.S. 282, 288-289 (1929); Luarins v. Commissioner [89-2 USTC ¶9636], 889 F.2d 910, 912 (9th Cir. 1989), Shumaker v. C.I.R. [81-2 USTC ¶9508], 648 F.2d 1198, 1999-1200 (9th Cir. 1981). As explained in Laurins,

First, an offer of compromise must be submitted on special forms prescribed by the Secretary, and an offer will not be considered to have been accepted until and unless the taxpayer is notified in writing of the acceptance. . . .

Here, the Packs have not complied with the regulations and procedures governing Sections 7121 or 7122.

Furthermore, the Packs are not seeking to enforce an agreement to compromise their tax liabilities. Rather, they are seeking to extinguish the tax liabilities found by this court when it granted summary judgment for the United States concerning the Packs' income tax liabilities involved in this action. In this regard, the Fifth Circuit in Overseas Inns S.A., P.A. v. United States, rejected an argument that the acceptance by the IRS of a plan of reorganization by which it was to receive 23.49% of any taxes due from the bankrupt corporation precluded the IRS from bringing a suit in the district court to collect the balance of the taxes due:

. . . Overseas bases error on the argument that the acceptance was 'an acquiescence in a judgment, not a 'compromise,' and that therefore, section 7122 does not control. It contends that the IRS acquiesced by failing to challenge the plan and by accepting payments which the IRS knew were made pursuant to the plan; that when one accepts the benefits of a judgment, one also accepts its burdens.

This argument is without merit. Overseas owed a fixed amount to the IRS and attempted to satisfy that amount by paying only 23.49% of it. This, therefore, is an attempted compromise, seeking to reduce the amount of the taxes owed. Accordingly, the exclusive statutory provisions would apply.

Id.

Furthermore, the Packs' Offer does not extinguish or in any way reduce the amount of the Packs' federal tax liabilities as adjudicated by this court under California law. Because the Packs' Offer is invalid under either federal or state law, it is not necessary for the court to determine whether the relevant provisions of the California Civil Code have been preempted by federal law with respect to contracts involving the federal government.

ACCORDINGLY, IT IS ORDERED that plaintiffs' Application for Dismissal of Instant Action in the Interest of Justice and Due Process of Law is denied.

 

 

 

 

[97-1 USTC ¶50,404] Nathan Segel and Esme Segel, Plaintiffs v. United States of America , Defendant

U.S. District Court, So. Dist. Fla. , 95-0522- CIV -MARCUS, 3/6/97

[Code Secs. 7121 and 7122 ]

Closing agreements: Compromises: Authority to enter: Proof.--The IRS could assess additional income tax and interest because it had not entered into a settlement agreement with a married couple for the years in question. Code Secs. 7121 and 7122 exclusively govern the settlement of disputed tax liabilities, and no agreement was entered into under those provisions. Letters from the IRS purported to be a settlement offer applied to a different tax year and were not signed by an official authorized to enter into settlement agreements. Further, the taxpayers' filing of amended returns for the disputed years containing changes based on the alleged settlement terms was not evidence of a settlement agreement; the taxpayer cited no authority for such a rule and the use of amended returns as a means of settlement would be contrary to the explicit settlement procedures set out in Code Secs. 7121 and 7122.

[Code Secs. 7121 and 7122 ]

Closing agreements: Compromises: Equitable estoppel: Evidence.--The IRS was not equitably estopped from assessing additional taxes and interest after a married couple paid taxes with amended returns. The taxpayers failed to prove the existence of a settlement agreement between them and the IRS as to the years at issue. Payment of taxes did not constitute the type of detrimental reliance necessary to invoke estoppel, and there was no representation by an authorized official of an intent to settle. BACK REFERENCES: ¶41,890.26 and 41,930.0254

[Code Sec. 6224 ]

Administrative proceedings: Settlement agreements: Authority to bind IRS .--Code Sec. 6224 provided no authority for settling tax disputes arising under the Tax Equity and Fiscal Responsibility Act of 1982 (P.L. 97-248). The settlement of disputed tax liabilities is governed exclusively by Code Secs. 7121 and 7122 . Code Sec. 6224 merely details the binding effect a settlement agreement that was otherwise properly concluded would have on the parties to the agreement. BACK REFERENCES: ¶38,669.35

Richard A. Josepher, Gutter & Josepher, P.A., 1 E. Broward Blvd., Fort Lauderdale, Fla. 33301, for plaintiffs. Robert Joseph Higgins, Robert L. Walsh, Department of Justice, Washington , D.C. 20530 , for defendant.

ORDER GRANTING DEFENDANT'S MOTION FOR SUMMARY JUDGMENT AND DENYING PLAINTIFFS' CROSS-MOTION FOR SUMMARY JUDGMENT.

MARCUS, District Judge:

THIS CAUSE comes before the Court upon the Defendant's Motion for Summary Judgment, filed March 6, 1996 [D.E. 10], and the Plaintiffs' Cross-Motion for Summary Judgment, filed March 26, 1996 [D.E. 12]. Responsive pleadings were filed by the parties, and thereafter, the Court took oral argument on July 18, 1996 . Having reviewed the pleadings, the arguments, and the file, and being otherwise fully advised in the premises, the Defendant's Motion for Summary Judgment must be and is GRANTED, and the Plaintiffs' Cross-Motion for Summary Judgment must be and is DENIED.

I.

A.

Plaintiffs Nathan Segel and Esme Segel filed this action against Defendant United States of America for a refund of federal income taxes. Plaintiffs allege that between 1986 and 1987 they reached a cash out-of-pocket settlement with the Internal Revenue Service for the tax years 1981 through 1984 with regard to a limited partnership they had used as a tax shelter. The Plaintiffs further allege that on February 7, 1994 , the Defendant assessed against them additional federal income taxes and interest for tax years 1983 and 1984. According to the Plaintiffs, they paid the assessments and then sought refunds of their payments, contending that the additional assessments were erroneous and illegal in light of the settlement reached in respect to those tax years. The Defendant disallowed in full the Plaintiffs' request for a refund. Plaintiffs then instituted this action, claiming their entitlement to a refund in the amount of $15,983.00 plus interest for the Plaintiffs' taxable years 1983 and 1984.

B.

The Plaintiffs and the Defendant now seek summary judgment, and the relevant facts do not appear to be in dispute. Plaintiff Nathan Segel was an investor/partner in the tax shelter partnership known as Peat Oil and Gas Associates (the "Partnership"). For the taxable years 1981, 1982, 1983, and 1984, the Plaintiffs claimed losses related to the Partnership. In a letter dated November 1, 1985 , the IRS forwarded to the Plaintiffs an audit examination report for taxable year 1981, proposing an increased assessment of income tax and an overvaluation penalty as a result of a disallowance of losses claimed for that year in connection with the Partnership. Pl. Cross-Motion, Exh. A. On December 27, 1985 , the Plaintiffs' attorney mailed a letter to the IRS indicating that they wished to settle their case regarding the taxable years 1981 through 1984. Id. , Exh. F. Counsel's letter stated in pertinent part:

. . . Based upon the fact that similar cases . . . have been settled by allowing taxpayers in those cases a deduction to the extent of their cash invested, the above taxpayers have recomputed their tax liabilities on the assumption that all deductions in excess of the amount of the cash actually invested in the subject partnership will be disallowed.

Although it is my understanding that your settlement position with respect to Peat Oil & Gas Associates, Limited has not been finalized, there is no doubt that taxpayers will be disallowed all deductions in excess of their cash investment. On this basis, the taxpayers are filing amended returns for the years 1981 through 1984 and have mailed a waiver of restrictions on assessment with the District Director in Florida . . . .

Id. Enclosed with the letter were two checks executed on December 26, 1985 , one for a tax payment in the amount of $125,351.00 for the years 1981 through 1984, and the other for interest in the amount of $45,634.00 for those same years. Id. , Exhs. F & G.

In a notice dated December 1, 1986 , the IRS stated in pertinent part:

. . . The settlement policy for the tax shelter investments involved in this case have been developed, permitting us to resolve this case in the following manner:

. . .

Allowing a deduction for the amount of your cash investment in the year of payment unless allowed previously in any other taxable year. Having reviewed the case file, I do not find any canceled checks to substantiate the cash investment. Therefore, please forward copies for our files, and we will then prepare computations and the appropriate agreement forms for closing the case.

. . .

Id. , Exh. M. The notice clearly indicated that it only related to the tax year ending December 31, 1981 . Id. In response Plaintiffs' counsel sent a letter to the IRS on December 5, 1986 , stating in pertinent part:

The taxpayers accept your offer to settle their case based on an allowance of a deduction for the amount of their cash investment. The taxpayers have filed Form 1040X [amended return] for the years 1981 through 1984 in anticipation of the cash settlement proposal. Copies of those Amended Tax Returns are enclosed for your records.

Pursuant to your request in your December 1 letter, I am enclosing copies of canceled check [sic] reflecting principal and interest payments . . .

Id. , Exh. N. In a notice dated February 19, 1987 , the IRS stated that it had closed the case on the basis agreed upon for the tax year ended December 31, 1981 . Id. , Exh. O. In another notice, dated April 27, 1987 , the IRS indicated that it would resolve the 1982 taxable year by

[a]llowing a deduction for the amount of your cash investment in the year of payment unless allowed previously in any other taxable year. Enclosed herewith is a computation reflecting the above proposed settlement and the appropriate agreement forms. Please execute the agreement forms and return them to me in the envelope provided.

Id. , Exh. R. Under a cover letter dated May 11, 1987 , the Plaintiffs returned the executed agreement form for taxable year 1982. Id. , Exh. S.

At issue in the parties' summary judgment motions are the Plaintiffs' taxable years 1983 and 1984, the first two years for which the IRS conducted an audit of the Partnership pursuant to the Tax Equity and Fiscal Responsibility Act of 1982 ("TEFRA"). The Act dictated that audit adjustments of the partnership's return would be passed through to the individual partners/investors. For the years 1983 and 1984, the audit results were contested at the partnership level under the TEFRA provisions, and as a result of the Tax Court's decision regarding the dispute, the IRS assessed additional tax and interest against the Plaintiffs on February 7, 1994 , for those years. Def. Mot., Exh. 1. Indicated on the assessment reports were credits to the 1983 and 1984 tax years for the Plaintiffs' payment on December 27, 1985 . Compare id. with Pl. Cross-Motion, Exh. F. Plaintiffs paid the new tax assessment and then protested it, arguing that the tax years 1984 and 1985 had already been settled and the tax paid.

At the core of the Plaintiffs' Complaint is the contention that they had already reached a settlement with the IRS regarding the Partnership losses for the 1983 and 1984 tax years. The Defendant, in turn, argues that it is entitled to summary judgment because the Plaintiffs have failed to come forward with any evidence that a settlement had been reached with the IRS regarding Plaintiffs' 1983 and 1984 tax years.

II.

A.

The standard to be applied when reviewing a motion for summary judgment is stated unambiguously in Rule 56(c) of the Federal Rules of Civil Procedure:

The judgment sought shall be rendered forthwith if the pleadings, depositions, answers to interrogatories and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.

It may be entered only where there is no genuine issue of material fact. Moreover, the moving party has the burden of meeting this exacting standard. Adickes v. S.H. Kress & Co., 398 U.S. 144, 157 (1970).

In applying this standard, the Eleventh Circuit has explained:

In assessing whether the movant has met this burden, the courts should view the evidence and all factual inferences therefrom in the light most favorable to the party opposing the motion. Adickes, 398 U.S. at 157, 90 S.Ct. at 1608; Marsh, 651 F.2d at 991. All reasonable doubts about the facts should be resolved in favor of the non-movant. Casey Enterprises v. Am. Hardware Mutual Ins. Co., 655 F.2d 598, 602 (5th Cir. 1981). If the record presents factual issues, the court must not decide them; it must deny the motion and proceed to trial. Marsh, 651 F.2d at 991; Lighting Fixture & Elec. Supply Co. v. Continental Ins. Co., 420 F.2d 1211, 1213 (5th Cir. 1969). Summary judgment may be inappropriate even where the parties agree on the basic facts, but disagree about the inferences that should be drawn from these facts. Lighting Fixture & Elec. Supply Co., 420 F.2d at 1213. If reasonable minds might differ on the inferences arising from undisputed facts, then the court should deny summary judgment. Impossible Electronics, 669 F.2d at 1031; Croley v. Matson Navigation Co., 434 F.2d 73, 75 (5th Cir. 1970).

Moreover, the party opposing a motion for summary judgment need not respond to it with any affidavits or other evidence unless and until the movant has properly supported the motion with sufficient evidence. Adickes v. S.H. Kress & Co., 398 U.S. at 160, 90 S.Ct. at 1609-10; Marsh, 651 F.2d at 991. The moving party must demonstrate that the facts underlying all the relevant legal questions raised by the pleadings or otherwise are not in dispute, or else summary judgment will be denied notwithstanding that the non-moving party has introduced no evidence whatsoever. Brunswick Corp. v. Vineberg, 370 F.2d 605, 611-12 (5th Cir. 1967). See Dalke v. Upjohn Co., 555 F.2d 245, 248-49 (9th Cir. 1977).

Clemons v. Dougherty County, 684 F.2d 1365, 1368-69 (11th Cir. 1982); see also Amey, Inc. v. Gulf Abstract & Title, Inc., 758 F.2d 1486, 1502 (11th Cir. 1985), cert. denied, 475 U.S. 1107 (1986).

The United States Supreme Court has provided significant additional guidance as to the evidentiary standard that trial courts should apply in ruling on a motion for summary judgment:

[The summary judgment] standard mirrors the standard for a directed verdict under Federal Rule of Civil Procedure 50(a), which is that the trial judge must direct a verdict if, under the governing law, there can be but one reasonable conclusion as to the verdict. Brady v. Southern R. Co., 320 U.S. 476, 479-80, 64 S.Ct. 232, 234, 88 L.Ed. 239 (1943).

Anderson v. Liberty Lobby Inc., 477 U.S. 242, 250 (1986). The Court in Anderson further stated that "[t]he mere existence of a scintilla of evidence in support of the position will be insufficient; there must be evidence on which the jury could reasonably find for the [nonmovant]." Id. at 252. In determining whether this evidentiary threshold has been met, the trial court "must view the evidence presented through the prism of the substantive evidentiary burden" applicable to the particular cause of action before it. Id. at 254. If the nonmovant in a summary judgment action fails to adduce evidence that would be sufficient to support a jury finding for the nonmovant when viewed in a light most favorable to the nonmovant, summary judgment may be granted. Id. at 254-55.

In another case, the Supreme Court has declared that a nonmoving party's failure to prove an essential element of a claim renders all factual disputes as to that claim immaterial and requires the granting of summary judgment:

In our view, the plain language of Rule 56(c) mandates the entry of summary judgment. . . . against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial. In such a situation, there can be "no genuine issue as to any material fact," since a complete failure of proof concerning an essential element of the nonmoving party's case necessarily renders all other facts immaterial. The moving party is "entitled to judgment as a matter of law" because the nonmoving party has failed to make a sufficient showing on an essential element of her case with respect to which she has the burden of proof.

Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986). It is against these standards that we measure the parties' motions for summary judgment.

B.

Again, at the core of all four counts of the Plaintiffs' Complaint is the alleged existence of a settlement agreement for the 1983 and 1984 tax years. According to the Defendant, the settlement of tax liability disputes are governed exclusively by 26 U.S.C. §§7121 and 7122 and their accompanying regulations. Those provisions state in pertinent part:

§7121. Closing agreements

(a) Authorization.--The Secretary is authorized to enter into an agreement in writing with any person relating to the liability of such person . . . in respect of any internal revenue tax for any taxable period.

(b) Finality.--If such agreement is approved by the Secretary (within such time as may be stated in such agreement, or later agreed to) such agreement shall be final and conclusive, and, except upon a showing of fraud or malfeasance, or misrepresentation of a material fact--

(1) the case shall not be reopened as to the matters agreed upon or the agreement modified by any officer, employee, or agent of the United States , and

(2) in any suit, action, or proceeding, such agreement, or any determination, assessment, collection, payment, abatement, refund, or credit made in accordance therewith, shall not be annulled, modified, set aside, or disregarded.

§7122. Compromises

(a) Authorization.--The Secretary may compromise any civil or criminal case arising under the internal revenue laws prior to reference to the Department of Justice for prosecution or defense.

26 U.S.C. §§7121, 7122(a). The Defendant argues that the requirements contained in these provisions are exclusive and strictly construed and therefore permit only specifically authorized IRS officers to bind the Government to such compromises. Further, the Defendant contends that the Plaintiffs cannot produce any document pertaining to their taxable years 1983 and 1984 where an authorized IRS employee accepted an offer to settle their tax liabilities for those years. In the absence of evidence suggesting a settlement for those years, Defendant argues, the Plaintiffs' Complaint must be rejected, and the Defendant is entitled to summary judgment.

Plaintiffs argue, however, that there is ample evidence demonstrating the existence of a settlement for 1983 and 1984. First, they point to the IRS 's December 1, 1986 letter to them, Pl. Cross-Motion, Exh. M, supra, which they contend was an offer for a cash out-of-pocket settlement that "unambiguously applied to 1981-1984, all of the years in which Plaintiffs' [sic] made out-of-pocket cash investments in the Partnership." Id. at 10. The Plaintiffs then note that their counsel timely responded to this offer in the December 5, 1986 letter, id., Exh. N, supra, and that they submitted, along with the letter, the requested canceled checks evidencing their cash investment. Id. at 10. According to the Plaintiffs, they fully complied with the terms of the IRS 's settlement offer by submitting the acceptance letter, the canceled checks, and their amended tax returns. Id. at 11. Plaintiffs also argue that when the IRS confirmed the amount of the cash investments reflected on their amended returns, the Plaintiffs' cases for 1981, 1982, 1983, and 1984 were closed. Id. Plaintiffs assert that the absence of a "closing agreement" does not preclude the existence of the settlement agreement. Id. Finally, Plaintiffs contend that the Defendant has relied on the wrong provisions and that 26 U.S.C. §6224 is the governing section with regard to these facts. Id. at 8. That provision states in pertinent part:

§6224. Participation in administrative proceedings; waivers; agreements

. . .

(c) Settlement agreement.--In the absence of a showing of fraud, malfeasance, or misrepresentation of fact--

(1) Binds all parties.--A settlement agreement between the Secretary and 1 or more partners in a partnership with respect to the determination of partnership items for any partnership taxable year shall (except as otherwise provided in such agreement) be binding on all parties to such agreement with respect to the determination of partnership items for such partnership taxable year. . . .

26 U.S.C. §6224(c)(1).

C.

The Defendant is plainly correct that the settlement of disputed tax liabilities is governed exclusively by sections 7121 and 7122 of the Internal Revenue Code. The Eleventh Circuit has explained:

The settlement of disputed tax liabilities is governed by 26 U.S.C. §§7121 and 7122; these sections authorize the Secretary of the Treasury or an authorized delegate to settle any tax disputes and compromise any civil or criminal case arising under the internal revenue laws. The requirements set forth in these statutes and the accompanying regulations are exclusive and strictly construed.

Klein v. Comm'r [90-1 USTC ¶50,251 ], 899 F.2d 1149, 1152 (11th Cir. 1990) (emphasis added) (internal citations omitted). Cf. Botany Worsted Mills v. United States [1 USTC ¶348 ], 278 U.S. 282, 288-89 (1929) (holding that precursor to current sections 7121 and 7122 prescribed exclusive method by which to compromise tax cases, explaining that "[w]hen a statute limits a thing to be done in a particular mode, it includes the negative of any other mode."). The highlighted language in the Klein holding disposes of Plaintiffs' assertion that section 6224 is an independent source of authority for settling TEFRA cases. Rather, section 6224 details the binding effect a settlement agreement that was otherwise properly concluded would have on the parties to that agreement. The IRS may only enter into that agreement pursuant to the terms of sections 7121 and 7122, and the regulations promulgated thereunder, which authorize the Secretary or his designee to settle any tax dispute arising under any of the tax provisions, including the TEFRA provisions.

The settlement of tax disputes is governed by general principles of contract law, and settlement offers made and accepted by letters can be enforced as binding agreements. Haiduk v. Comm'r [ CCH Dec. 46,888(M)], 60 T.C.M. ( CCH ) 864, 865-66 (1990). Accord Treaty Pines Inv. Partnership v. Comm'r [92-2 USTC ¶50,418], 967 F.2d 206, 211 (5th Cir. 1992). Settlements, however, that are entered upon by officials without authority to do so under sections 7121 and 7122 will not bind the United States . Klein [90-1 USTC ¶50,251], 899 F.2d at 1153.

The Plaintiffs have failed to present any evidence that supports their contention that a valid settlement in respect to the 1983 and 1984 tax years was consummated. The December 1, 1986 , letter from the IRS , Pl. Cross-Motion, Exh. M, unambiguously applied only to the tax year 1981. At the top of the letter, it stated that it regarded "Tax Year(s) Ending: 12-31-81 , Peat Oil & Gas." Id. We can find no basis for concluding that this purported offer to settle applied to any of the Plaintiffs' taxable years other than 1981. Moreover, the notice only stated that-upon the Plaintiffs' forwarding copies of the canceled checks to the IRS , the IRS would "then prepare computations and the appropriate agreement forms for closing the case." Id. The Plaintiffs' argument that this provision established a condition precedent for forming a binding contract is unpersuasive; this provision was merely a request for additional documentation. In fact, the February 19, 1987 letter from the IRS , Id. , Exh. O, was the "appropriate agreement form" referenced in the December 1, 1986 , letter, and it was sent upon the Plaintiffs' submission of the canceled checks. We hasten to note again, however, that the February 19th letter only applied to the tax year ending December 31, 1981 . A Form 872-T, which terminated the case, was apparently attached to that letter, and it too indicated that the "Tax Period(s) Covered by this Notice" was December 31, 1981 . Id. On this record, there is no basis upon which to conclude that the IRS offered to settle any tax year other than 1981 through these two letters. We are equally unpersuaded by the Plaintiffs' contention that the filing of returns for 1983 and 1984, containing changes based on the alleged settlement terms, is evidence that a settlement agreement existed. The Plaintiffs cite to no legal authority for this contention, and the use of amended returns as a means of settlement would be contrary to the explicit settlement procedures set out in sections 7121 and 7122 and their accompanying regulations.

Finally, the Plaintiffs have failed to come forward with any evidence that the December 1, 1986 letter sent to the Plaintiffs--which they contend was in fact an offer to settle--was signed by an official authorized to settle tax liabilities. The regulation accompanying section 7121 states in pertinent part:

The Commissioner may enter into a written agreement with any person relating to the liability of such person [] in respect of any internal revenue tax for any taxable period ending prior or subsequent to the date of such agreement.

26 C.F.R. §301.7121-1(a). This authority in turn has been delegated to "Regional Commissioners; Regional Counsel; Regional Directors of Appeals; Assistant Regional Commissioners (Examination); District Directors; Chiefs and Associate Chiefs of Appeals Offices; and Appeals Team Chiefs with respect to his/her team cases." Delegation Order No. 97 (Rev. 21), 47 F.R. 46,613 (1982). The December 1st letter was signed by an S. Chavez of the Miami Appeals Support Unit, and the Plaintiffs do not even suggest that Chavez held one of the positions listed in the Delegation Order. Likewise, the Plaintiffs have not come forward with any evidence to rebut the Defendant's contention that the letter was not signed by an authorized official. Accordingly, we are constrained to conclude that the Plaintiffs have not established that the December 1, 1986 , letter was an authorized offer to settle the Plaintiffs' taxable years 1983 and 1984. Further, the Plaintiffs have not come forward with any evidence to rebut what the February 19, 1987 letter indicates on its face, which is that the IRS settled and terminated the case only with regard to the 1981 tax year. In short, the Plaintiffs have failed to produce any evidence raising a genuine issue of material fact in respect to whether a settlement agreement was consummated for the 1983 and 1984 tax years.

The Plaintiffs have also failed to establish that they are entitled to the application of the doctrine of equitable estoppel. Under controlling law, for estoppel to lie against the Defendant, three conditions must be met: "(1) the traditional private law elements of estoppel must have been present; (2) the Government must have been acting in its private or proprietary capacity as opposed to its public or sovereign capacity; and (3) the Government's agent must have been acting within the scope of his or her authority." United States v. Vonderau, 837 F.2d 1540, 1541 (11th Cir. 1988). In the first place, the Plaintiffs have not satisfied any of the three traditional elements required by estoppel, which are "(1) words, acts, conduct, or acquiescence causing another to believe in the existence of a certain state of things, (2) willfulness or negligence with regard to the acts, conduct, or acquiescence, and (3) detrimental reliance by the other party upon the state of things so indicated." Dade County v. Rohr Indus., Inc., 826 F.2d 983, 989 (11th Cir. 1987). As has already been discussed, supra, the Plaintiffs have not produced any evidence that the IRS ever represented its intent to settle the 1983 and 1984 tax years along with tax years 1981 and 1982. To the contrary, the two documents upon which the Plaintiffs rely plainly apply only to the tax year ended 1981. At all events, however, the payment of taxes does not constitute the type of detrimental reliance necessary to invoke estoppel. Bunce v. United States [93-2 USTC ¶60,142], 28 Fed. Cl. 500, 506 (1993), aff'd, 26 F.3d 138 (Fed. Cir.), cert. denied, 115 S. Ct. 635 (1994). Rather, in the tax area, detrimental reliance usually refers to false information that caused the claimant to lose a legal right. Id. The Plaintiffs have not presented any evidence showing detrimental reliance other than having paid their taxes for the 1983 and 1984 tax years. Moreover, the Defendant, through the IRS , was clearly acting in its public capacity with respect to the assessment of federal tax liabilities, and not in a private or proprietary capacity. Cf. Gibson v. Resolution Trust Corp., 750 F. Supp. 1565, 1573 (S.D. Fla. 1990) ("Proprietary governmental functions include essentially commercial transactions involving the purchase or sale of goods and services and other activities for the commercial benefit of a particular government agency . . . Conversely, in its sovereign role, the government carries out unique governmental functions for the benefit of the whole public."), aff'd, 51 F.3d 1016 (11th Cir. 1995). Finally, as we have also already discussed, supra, the Plaintiffs have failed to present any evidence of a representation by an authorized official of an intent to settle the 1983 and 1984 tax years. In sum, the Plaintiffs have not created a genuine issue of material fact as to whether principles of equitable estoppel should apply here.

Because the Plaintiffs have failed to establish the existence of a settlement agreement in respect to the 1983 and 1984 tax years, and there being no basis for equitable estoppel to lie against the Defendant in this case, we must find that the Defendant's Motion for Summary Judgment should be granted as to all four counts of the Complaint. Accordingly, it is hereby

ORDERED AND ADJUDGED that the Defendant's Motion for Summary Judgment is GRANTED, and the Plaintiffs' Cross-Motion for Summary Judgment is DENIED. The Defendant is directed to submit a proposed Order of Final Summary Judgment to the Court within ten (10) days of this Order. It is further

ORDERED AND ADJUDGED that all other pending motions are DENIED as moot. The Clerk of the Court is directed to close the case.

 

 

 

[97-1 USTC ¶50,127] In re Charles L. Hobbs, Debtor. Charles L. Hobbs, Plaintiff v. United States of America (Internal Revenue Service), Defendant

U.S. Bankruptcy Court, No. Dist. Iowa , West. Div., 95-51466XS, 6/5/96

[Code Secs. 6871 and 7122 ]

Bankruptcy: Prepetition tax liability: Collection: 240-day period: Tolling: Offer in compromise: Termination of.--

A debtor's tax liabilities were dischargeable in bankruptcy because 240 days had passed between the date of the IRS assessment of the liabilities and the date of the debtor's bankruptcy petition. Although the debtor made an offer in compromise that tolled the 240-day period, an IRS letter to the debtor constituted a formal rejection, which terminated the pendency of the offer, thus allowing in excess of 240 days to pass between the assessment date and the petition date. The letter stated that the debtor's appeal of the initial rejection of his offer was terminated and that the debtor would have to submit a new offer. Finally, an earlier letter sent by the debtor's representative did not terminate the offer because it indicated that the debtor wanted the offer to be accepted.

Wilford L. Forker, 232 Davidson Bldg., Sioux City , Iowa 51101 , for plaintiff. Joan Ulmer, United States Attorney, Sioux City , Iowa 51102 , for defendant.

ORDER RE: MOTIONS FOR SUMMARY JUDGMENT

EDMONDS , Chief Bankruptcy Judge:

On August 14, 1995, Plaintiff Charles Hobbs filed a complaint to determine the dischargeability of his federal income tax liability for tax years 1986 and 1987. On March 15, 1996, Hobbs filed a motion for summary judgment. On March 28, 1996, Defendant Internal Revenue Service filed a resistance to Plaintiff's motion and a cross motion for summary judgment. Hearing on the motions was held April 23, 1996. Attorney Wil Forker appeared for Hobbs . Assistant United States Attorney Joan Stentiford Ulmer appeared on behalf of the Internal Revenue Service. The court now issues its ruling on the motions. This is a core proceeding pursuant to 28 U.S.C. §157(b)(2)(I).

Summary judgment is governed by Fed.R.Civ.P. 56, made applicable in bankruptcy adversary proceedings by Fed.R.Bankr.P. 7056. A party may move with or without supporting affidavits for a summary judgment in the party's favor. Fed.R.Civ.P. 56(a). A party is entitled to summary judgment if:

the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.

Fed.R.Civ.P. 56(c). The parties agree that the material facts are not in dispute and that the determinative issue is a matter of law. The court bases its decision on the following uncontested facts:

Charles Hobbs filed a Chapter 7 bankruptcy petition August 7, 1995.

Hobbs incurred federal income tax liability for tax years 1986 and 1987 as a result of corporate transactions. The tax liabilities for 1986 and 1987 were assessed on July 13, 1992. (Answer, ¶4.) Neither party has stated an amount believed owing for the 1986 tax year. Government's Exhibit D, attached to Document 15, appears to show there is none. ¹ The parties agree that as of the date Hobbs filed his bankruptcy petition, his tax liability for the 1987 tax year was $334,515.63. (Doc. 12, Affidavit of Charles L. Hobbs.)

On November 19, 1992, Hobbs made an offer to compromise his tax liability for $38,000 (Doc. 15, Exhibit A), and submitted that amount with the offer. Hobbs submitted the offer in compromise on IRS Form 656 as required by Treasury Regulations. 26 C.F.R. §§301.7122-1(d)(1), 601.203(b). The form contains the following language at paragraph eight:

The taxpayer-proponents agree to the waiver and suspension of any statutory periods of limitations for assessment and collection of the tax liability described in paragraph (1) while the offer is pending, during the time any amount offered remains unpaid and for one (1) year after the satisfaction of the terms of the offer. The offer shall be deemed pending from the date an authorized official of the Internal Revenue Service accepts taxpayer-proponents' waiver of the statutory periods of limitation and shall remain pending until an authorized official of the Internal Revenue Service formally, in writing, accepts, rejects or withdraws the offer. If there is an appeal with respect to this offer, the offer shall be deemed pending until the date the Appeals office formally accepts or rejects this offer in writing. If within thirty (30) days of being notified of a right to protest a determination with regard to this offer, no protest is filed, the taxpayer-proponents agree to waive the right to a hearing before the Appeals office for this offer in compromise.

The offer was signed on December 12, 1992 by Revenue Officer Gordon Zens, accepting the waiver of the statutory period of limitations. Federal tax liability may be compromised only upon grounds of doubt as to liability or doubt as to collectibility. 26 C.F.R. §§301.7122-1(a), 601.203(a)(2). Hobbs based his offer on doubtful collectibility of the tax claim.

On February 25, 1994, the IRS rejected the offer in compromise and advised Hobbs of his right to appeal the decision. (Doc. 15, Exhibit C.) By letter April 8, 1994, Adam Chavis, Hobbs ' representative, appealed the rejection of the offer. (Doc. 12, Exhibit B.) The IRS treated the appeal as timely. The case was referred to Robert Amick in the Omaha Appeals Office. Amick requested information from Chavis and others about Hobbs ' financial condition, including an explanation of the circumstances of the sale of a promissory note prior to making the offer in compromise. (Doc. 15, Decl. of Robert Amick, Exhibits G, H, I.)

On September 19, 1994, Adam Chavis wrote to Amick regarding Hobbs ' offer in compromise. The letter stated in part:

At this time Mr. Hobbs is also requesting that the $38,000.00 deposit which he made to the Internal Revenue Service on November 2, 1992 be returned to him. Once the Offer in Compromise is accepted by the Internal Revenue Service the $38,000.00 offer amount will be remitted in full. Please return the deposit to P.O. Box 1 , Whiting , Iowa 51063 .

(Doc. 15, Exhibit P.)

On February 13, 1995, Amick again wrote to Chavis about the offer in compromise. Following is the body of the letter in its entirety:

I apologize for the delay in responding since our last discussions. I have been waiting for additional information from Collection in Aberdeen , South Dakota .

During my wait, I have discussed the case with our District Counsel attorneys, who originally rejected the offer. They indicated that three things need to occur before the offer could be accepted. They indicated the facts presented by you and the government would reject the offer, as they had previously.

* The offer form needs to be resubmitted on the 1993 revision form.

* The offer must be amended to change the terms from $38,000 paid with the offer to $38,000 will be paid within "X" number of days from the date of the acceptance of the offer.

* You must submit evidence substantiating the fair market value and arms length transaction regarding the sale of corporation notes to the taxpayer's relative.

Do not send this information to me. I am in the process of returing [sic] the case to the Collection Division for further investigation. They will contact you.

Your cooperation has been appreciated.

(Doc. 15, Exhibit N, emphasis in original.) Hobbs did not submit anything in response to the February 13 letter.

The Internal Revenue Manual describes procedures for handling an offer in compromise. The manual states that a Form 1271 should be completed for all offer in compromise cases which are being rejected or withdrawn. (Doc. 15, Exhibit K, §8(13)62.2.) An example of Form 1271 was submitted as Government's Exhibit L. (Doc. 15.) The IRS file containing all documents relating to the offer in compromise submitted by Hobbs does not contain a Form 1271. (Doc. 15, Decl. of Joan S. Ulmer.) Pattern rejection letters referred to in the Internal Revenue Manual state that "your offer is rejected" and demand payment of the taxpayer's account in full. (Doc. 15, Exhibit M.)

DISCUSSION

The taxing authority bears the burden of proof by a preponderance of the evidence that taxes are nondischargeable, even if the complaint to determine dischargeability is brought by the debtor. Langlois v. United States , 155 B.R. 818, 820 (N.D.N.Y. 1993); Aberl v. United States (In re Aberl), 159 B.R. 792, 795 (Bankr. N.D. Ohio 1993), aff'd, 175 B.R. 915 (N.D. Ohio 1994), aff'd [96-1 USTC ¶50,151], 78 F.3d 241 (6th Cir. 1996). The exceptions to a Chapter 7 discharge are to be construed narrowly in favor of the debtor. Caspers v. Van Horne (Matter of Van Horne), 823 F.2d 1285, 1287 (8th Cir. 1987).

Dischargeability of tax liability is governed by 11 U.S.C. §523(a)(1) which provides that a Chapter 7 discharge does not discharge any debt:

for a tax or a customs duty--

(A) of the kind and for the periods specified in section 507(a)(2) or 507(a)(8) of this title, whether or not a claim for such tax was filed or allowed;

(B) with respect to which a return, if required--

(i) was not filed; or

(ii) was filed after the date on which such return was last due, under applicable law or under any extension, and after two years before the date of the filing of the petition; or

(C) with respect to which the debtor made a fraudulent return or willfully attempted in any manner to evade or defeat such tax.

11 U.S.C. §523(a)(1). Hobbs claims that he has met all the timing requirements of §523(a)(1)(A), incorporating §507(a)(8), and §523(a)(1)(B). The IRS contends that Hobbs ' tax liability is a nondischargeable priority claim under 11 U.S.C. §507(a)(8)(A)(ii). That section provides eighth priority for:

allowed unsecured claims of governmental units, only to the extent that such claims are for--

(A) a tax on or measured by income or gross receipts--

...

(ii) assessed within 240 days, plus any time plus 30 days during which an offer in compromise with respect to such tax that was made within 240 days after such assessment was pending, before the date of the filing of the petition....

11 U.S.C. §507(a)(8)(A)(ii). Collection activities are not necessarily stayed while an offer in compromise is pending. 26 C.F.R. §301.7122-1(d)(2). If the IRS chooses to defer collection during the pendency of an offer, however, §507(a)(8)(A)(ii) assures the IRS 240 days prepetition in which to collect assessed taxes. Aberl, 159 B.R. at 798.

The IRS assessed Hobbs ' tax liability on July 13, 1992. He filed his bankruptcy petition on August 7, 1995. The tax liability is not a priority tax claim, and is thus dischargeable, if 240 days passed between assessment and filing. The 240-day period is tolled during the time the offer in compromise was pending plus 30 days. The offer was deemed pending as of December 10, 1992, the date IRS Officer Zens accepted the waiver of the statutory periods of limitation for assessment and collection. (Doc. 15, Exhibit A.) An offer remains pending after appeal of a rejection "until the date the Appeals office formally accepts or rejects [the] offer in writing." ( Id. ) A taxpayer may withdraw an offer at any time prior to its acceptance. 26 C.F.R. §301.7122-1(d)(4). The issue is whether the conduct of either party had the legal effect of terminating the offer in compromise.

Hobbs argues that either of two events terminated the offer. First he says that after he requested the IRS to return the $38,000 submitted with the offer, he considered the offer withdrawn. (Doc. 12, Affidavit of Hobbs .) This claim is contradicted by the language of the letter requesting return of the money. On September 19, 1994, Adam Chavis wrote, "Once the Offer in Compromise is accepted by the Internal Revenue Service the $38,000.00 offer amount will be remitted in full." (Doc. 15, Exhibit P.) Hobbs still desired that the offer would be accepted. The IRS apparently will consider an offer without the offer amount on deposit. The Treasury Regulations prescribe that an offer in compromise "should generally be accompanied by a remittance representing the amount of the compromise offer or a deposit if the offer provides for future installment payments." 26 C.F.R. §301.7122-1(d)(1). The court concludes that the offer was pending after September 19, 1994.

The second event that Hobbs argues terminated the offer was the IRS letter of February 13, 1995. (Doc. 15, Exhibit N.) If Hobbs is correct that his offer was no longer pending after February 13, 1995, the tax liability would be dischargeable. Between the July 13, 1992 assessment date and December 10, 1992, when IRS Officer Zens signed the offer, 149 days passed. The thirtieth day after February 13, 1995 was March 15. From March 16, 1995 through August 6, 1995, the day before Hobbs filed his Chapter 7 petition, 144 days passed, for a total of 293 days. Because this number exceeds 240, Hobbs ' tax liability would not be a priority claim under 11 U.S.C. §507(a)(8)(A)(ii).

The IRS contends that the February 13, 1995 letter was not a rejection but an explanation of the need for additional information, and that the offer is still pending. The IRS emphasizes that the letter did not contain specific language found in pattern rejection letters used by the IRS and that the IRS did not prepare a Form 1271, memorandum of withdrawal or rejection, for Hobbs ' file. Hobbs claims that his offer was no longer pending after February 13, 1995. He argues that the letter made it clear that the IRS would no longer consider acceptance of his offer and requested him to propose a new offer. The court agrees with Hobbs .

The Offer in Compromise submitted by Hobbs provides that after appeal, the offer is pending until the "Appeals office formally accepts or rejects this offer in writing." Formal acceptance or rejection may refer to acceptance or rejection meeting the requirements of 26 U.S.C. §7122 and the accompanying regulations promulgated by the Secretary of the Treasury. See Aberl v. United States (In re Aberl), 159 B.R. 792, 800-01 (Bankr. N.D. Ohio 1993), aff'd, 175 B.R. 915 (N.D. Ohio 1994), aff'd [96-1 USTC ¶50,151], 78 F.3d 241 (6th Cir. 1996) (discussing cases in which "informal agreements" were not binding because they were not in compliance with applicable statutes and regulations). In Aberl, the court held that a letter asking the IRS to reconsider a pre-assessment offer was not an "offer in compromise" because it did not comply with 26 C.F.R. §301.7122-1(d)(1). Id. , 159 B.R. at 800. Courts have held that the terms of Treasury Regulation §301.7122-1(d) are mandatory and have the force of law. Boulez v. Commissioner [87-1 USTC ¶9177], 810 F.2d 209, 215 & n. 50 (D.C. Cir. 1987), cert. denied, 108 S.Ct. 229 (1987); Aberl, 159 B.R. at 799. Rules contained in the Internal Revenue Manual, in contrast, have been held to govern the internal administration of the IRS ; they do not have the binding force and effect of law. United States v. Horne [83-2 USTC ¶9548], 714 F.2d 206, 207 (1st Cir. 1983); Continental Illinois Corp. v. United States, 727 F.Supp. 425, 429 (N.D. Ill. 1989); see also Boulez [87-1 USTC ¶9177], 810 F.2d at 215 & n. 48 (procedural rules, like provisions of the Internal Revenue Manual, are directory and not mandatory). The Treasury Regulations prescribe no particular formality for rejection of an offer in compromise other than notice in writing. 26 C.F.R. §301.7122-1(d)(4) (the taxpayer "shall be promptly notified in writing"). A letter from the IRS taking a position legally inconsistent with the notion of a pending offer should be construed as terminating the pendency of the offer, notwithstanding the IRS 's failure to use specific words prescribed in the Internal Revenue Manual.

There was little evidence presented about the IRS appeal process. The letters written between Amick and others show that the appeal process includes gathering information to decide if grounds for compromise exist. (Doc. 15, Exhibits G, H, I, J.) The substance of the February 13, 1995 letter is that the appeal was terminated and that the offer of November 1992 would no longer be considered. After discussion of Hobbs ' offer with District Counsel attorneys, Amick concluded that the offer was unacceptable. The letter set three conditions Hobbs would have to meet before the IRS would consider an offer in compromise of his tax liability. Hobbs would have to submit a new offer and "change the terms" of payment. This requirement is not sufficient in itself to find the offer rejected; it was made necessary by the return of the deposit. However, the letter as a whole should be construed as a rejection of the offer. Hobbs was to submit a new offer on a different form, including changed terms and new evidence. Finally, Amick told Hobbs not to send any information to him. The appeal was concluded. If Hobbs wanted the IRS to consider an offer in compromise, he would have to begin the process again by submitting a new offer. Hobbs was not required to submit a new offer, and he did not do so.

The IRS controlled the language of the letter. It could have stated that it considered the offer pending. Or it could have stated that if a new offer were not submitted in a specified period of time, the pending offer would be rejected by the appeals office (a notice of proposed rejection). Hobbs would then be on notice that he would have to withdraw the offer to terminate it sooner.

The court concludes that the letter of February 13, 1995 was a formal rejection sufficient to terminate the pendency of Hobbs ' offer. Rejection of the offer as of that date allowed in excess of 240 days to pass between the date of assessment of the tax liability and the date of Hobbs' Chapter 7 petition for purposes of 11 U.S.C. §507(a)(8)(A)(ii). The tax liability is not a priority tax claim and should be held dischargeable.

ORDER

IT IS ORDERED that the motion for summary judgment filed by Charles L. Hobbs is granted.

IT IS FURTHER ORDERED that the cross motion for summary judgment filed by the United States of America , Internal Revenue Service, is denied.

IT IS FURTHER ORDERED that Hobbs ' income tax liability to the IRS for tax years 1986 and 1987 is discharged. Judgment shall enter accordingly.

SO ORDERED.

JUDGMENT

This proceeding having come on for hearing before the court, the Honorable William L. Edmonds, United States Bankruptcy Judge, presiding, and the issues having been duly heard and a decision having been rendered,

IT IS ORDERED AND ADJUDGED that the motion for summary judgment filed by Charles L. Hobbs is granted.

IT IS FURTHER ORDERED AND ADJUDGED that the cross motion for summary judgment filed by the United States of America , Internal Revenue Service, is denied.

IT IS FURTHER ORDERED AND ADJUDGED that Hobbs ' income tax liability to the IRS for tax years 1986 and 1987 is discharged.

¹ Document 15 consists of the Declaration of Joan S. Ulmer, Declaration of Gordon Zens, Declaration of Larry Paschke, Declaration of Robert Amick and Exhibits A-P.

 

 

 

 

96-2 USTC ¶50,686] International Paper Company and Consolidated Subsidiaries, Plaintiffs v. The United States , Defendant

U.S. Court of Federal Claims, 90-119T, 8/14/96, 36 FedCl 313

36 FedCl 313.

[Code Secs. 165 , 7402 and 7422 ]

Casualty loss: Hurricane damage: Timber: Discovery proceedings: Admissions: Single identifiable property: Fair market value: Burden of proof: Reasonable.-- IRS admissions given in response to a corporate taxpayer's request did not constitute judicial admissions of the volumes and fair market values (FMVs) of the taxpayer's timber that suffered hurricane damage. The requested admissions related only to what evolved at the administrative level, before the IRS , and not to the underlying accuracy of the volumes and FMVs. The single, identifiable property had not been determined at the time the IRS gave its admissions. Therefore, the FMV could not be determined. The taxpayer bore the burden of proving the amount of the casualty loss at trial. Further, the government's request for discovery was not unreasonable or unduly burdensome. The only prejudice alleged by the taxpayer was the expense and time of litigation.

[Code Sec. 7422 ]

Refund actions: Refund claim: Adequacy: Procedure and practice: Evidence: IRS findings of fact.--Factual findings by the IRS following an audit of a corporate taxpayer that suffered timber losses from hurricane damage did not create a presumption of correctness as to the taxpayer's volumes and fair market values of damaged timber. By litigating the claim, the taxpayer placed at issue any factual findings made by the IRS underlying the determination of the tax liability. BACK REFERENCES: 96 FED ¶42,288.19

[Code Sec. 6402 ]

Claim for refund: Form 870-AD: Further factual determination.--The execution of a Form 870-AD, Offer of Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and of Acceptance of Overassessment, did not preclude the IRS from disputing the volumes and fair market values of a timber damaged by a hurricane. Therefore, further factual development of the amount of the alleged casualty loss by the IRS was appropriate. BACK REFERENCES: 96 FED ¶39,469.523

[Code Sec. 7122 ]

Compromises: Authority to bind: Reference to Justice Department.-- IRS admissions, given in response to a corporate taxpayer's request, did not unilaterally settle factual issues in a case after administrative proceedings were completed and the case was referred to the Department of Justice. Therefore, counsel for the government could take a position contrary to that of the IRS concerning volumes and fair market values (FMVs) of the taxpayer's timber that suffered hurricane damage. BACK REFERENCES: 96 FED ¶41,930.0455

Dennis P. Bedell, Miller & Chevalier, 655 15th St. , Washington , D.C. 20005-5701 , for plaintiffs. Loretta C. Argrett, Assistant Attorney General, William C. Rapp, Department of Justice, Washington, D.C. 20530, for defendant.

ORDER

I. INTRODUCTION

GIBSON, Senior Judge:

This discovery dispute raises the following related issues--(i) whether or not plaintiff should be required to provide discovery (in the form of responses to defendant's requests for admission and through the production of documents) concerning the amount of the casualty loss sustained by plaintiff-taxpayer to its timber resources as a consequence of a 1979 hurricane; and (ii) whether or not defendant should be precluded from raising a factual dispute relative to said casualty loss amount. These issues are presented to the court by twin motions, now before the court. First, the court has before it plaintiff's motion for a protective order, filed June 3, 1996 , in which plaintiff seeks an order protecting it from the disputed discovery and prohibiting defendant from raising any factual dispute concerning the amount of its casualty loss (i.e., the volumes and fair market values of the timber damaged or destroyed by the hurricane). Second, the court also has before it defendant's motion to compel the contested discovery, filed July 11, 1996 , wherein defendant requests an order compelling plaintiff to answer its requests for admission and to produce the documents requested in its fourth set of requests for production of documents.

Clearly, these two motions simply represent obverse sides of the same fundamental question--is defendant entitled to the requested discovery? Resolution of this question and its related sub-issues will resolve both motions. As detailed below, we find that defendant is entitled to pursue discovery relative to the amount of the casualty loss sustained by plaintiff in 1979. Accordingly, the court denies plaintiff's motion for a protective order and grants defendant's motion to compel discovery.

II. BACKGROUND

International Paper Company is a New York corporation and the common parent of an affiliated group of corporations (collectively "IP" or "plaintiff") engaged in two primary businesses: (i) growing and managing timber; and (ii) manufacturing paper and other wood products. On February 6, 1990, IP filed a complaint in this court, seeking a refund of federal income taxes, premised on nine substantive grounds or "issues." This discovery dispute relates to one such issue, identified by the parties as "the Hurricane Frederic Casualty Loss Issue."

In September 1979, Hurricane Frederic struck the Gulf Coast , allegedly damaging or destroying certain interests in timber owned by plaintiff in Alabama and Mississippi . As a result thereof, IP claimed a casualty loss deduction for the tax year 1978, in accordance with Rev. Rul. 79-426 , 1979-2 Cum. Bul. 85 (allowing a casualty loss deduction to be taken in the year preceding the casualty event for losses caused by, inter alia, Hurricane Frederic). According to the complaint, plaintiff allegedly subdivided its timber interests into depletion blocks for federal income tax purposes. IP avers that it sustained approximately $26 million in property damage to its timber, in the alleged affected depletion blocks, from the hurricane. IP further alleges that it erroneously claimed a deduction of roughly $4.5 million; and that the correct deductible amount should have been roughly $24.5 million, i.e., its adjusted basis in the affected depletion blocks. See I.R.C. §165 ; Tres. Reg. §1.165-7(b)(1) (limiting taxpayers casualty loss deduction to the adjusted basis in the affected property).

In 1988, after an Internal Revenue Service ( IRS ) audit and administrative appeal, IP and the IRS jointly executed a Form 870-AD, ¹ settling plaintiff's tax liabilities for 1972 through 1979 and reflecting an overassessment of $582,200 for 1978. However, the Form 870-AD expressly reserved IP's right to file refund claims with respect to nine issues, including the Hurricane Frederic Casualty Loss Issue. On June 21, 1989, IP filed eight administrative refund claims (one for each of the years 1972-1979) based on the aforementioned nine issues. These claims were subsequently denied in full by the Commissioner on January 10, 1990. Shortly thereafter, as previously noted, IP filed its complaint in this court on February 6, 1990.

Discovery in this case was closed on March 1, 1992, by order of the court, dated December 20, 1991. However, in light of this court's decision in Weyerhaeuser Co. v. United States [94-2 USTC ¶50,471 ], 32 Fed. Cl. 80 (1994) (holding that the single, identifiable property for casualty loss purposes was dependent on the facts and circumstances of any given case), aff'd in part, rev'd in part and remanded [96-2 USTC ¶50,420 ], 92 F.3d 1148 (Fed. Cir. August 2, 1996) (reversing the lower court's determination of the SIP), the parties agreed to seek to reopen discovery on the Hurricane Frederic Casualty Loss Issue. On September 11, 1995, this court ordered that "[t]he parties may engage in voluntary discovery regarding the Hurricane Casualty Loss Issue ... to the extent that both parties agree that the factual inquiry is reasonable and not unduly burdensome."

On or about May 24, 1996, the government tendered to plaintiff defendant's fourth set of document requests and first set of requests for admission, seeking the damage assessment plan, tally sheets, and timber salvage records used by IP in quantifying its casualty loss or, at least, an admission by IP that such documents are irretrievably lost. Thereafter, on June 3, 1996, plaintiff filed the instant motion for a protective order. The government then filed its motion to determine the sufficiency of plaintiff's objections to defendant's requests for admission and to compel discovery on July 11, 1996. These twin motions have been fully briefed, and oral argument was heard thereon on July 22, 1996. Accordingly, we now turn to address the subject motions.

III . CONTENTIONS OF THE PARTIES

A. Plaintiff

IP contends that defendant's requested discovery is unreasonable and unduly burdensome for three reasons. First, plaintiff asserts that defendant has previously judicially admitted the volumes and fair market values of its damaged and destroyed timber. This assertion is premised on plaintiff's interpretation of certain of the government's admissions obtained in response to plaintiff's requests for admission. As such, IP maintains that the quantum of its casualty loss is conclusively established and that, accordingly, further factual development of this issue is irrelevant and impermissible.

Second, IP alleges that the volumes and fair market values of the damaged and destroyed timber were established and agreed upon at the administrative level, before the IRS . After an extensive audit, the IRS accepted the amount of the casualty loss, avers plaintiff. Moreover, plaintiff notes, the IRS and IP jointly executed a Form 870-AD, wherein, contends plaintiff, the IRS allowed it a casualty loss deduction premised on the established volumes and fair market values. Thus, IP asserts that the acceptance by the IRS of the volumes and fair market values constitutes a determination by the Commissioner that is entitled to a presumption of correctness, as a matter of law. Moreover, plaintiff charges that the IRS continued to agree with plaintiff's figures and that defense counsel may not take a position contrary to his client.

Finally, plaintiff avers that it has never agreed to provide the disputed discovery and that discovery has been closed in this case for some time. Furthermore, contends plaintiff, discovery was only reopened on a limited, voluntary basis. If the government is allowed to pursue this discovery and to dispute the amount of the casualty loss, IP represents that it will be seriously prejudiced by the time and expense necessary to prepare and present evidence on a factual issue that it regards as settled. In IP's view, the sole issue for trial is--what is the single, identifiable property for purpose of determining the casualty loss and the adjusted basis limitation? Thus, IP prays for a protective order precluding the government from raising other issues at trial.

B. Defendant

In response, the government counters that it has not judicially admitted the substantive correctness of the volumes and fair market values in question, but only that certain verifiable events occurred at the administrative level. Moreover, observes defendant, at least one of the admissions relates to a method of calculating casualty losses, used prior to the Court of Claims' decision in Westvaco Corp. v. United States, 639 F.2d 700 (Ct. Cl. 1980), that is no longer valid. Defendant concludes on this point by arguing that, to the extent that plaintiff's requests for admission are ambiguous, they must be construed against the drafter, IP.

Next, the government contends that any reliance on any so-called agreement at the administrative level is unreasonable. A tax refund suit in this court is a de novo proceeding in which plaintiff bears the burden of proof as to all of the elements of its claim, maintains defendant. Accordingly, the government asserts that plaintiff is required to prove the amount of its casualty loss and that defendant is entitled to discover any information in the possession of IP on this issue.

Lastly, defendant argues that IP has agreed to the discovery sought by the government both in a status report and at a status conference. The government vigorously contends that it needs the information it has sought through discovery in order to evaluate the damage assessment methodology used by IP in quantifying its casualty loss. Accordingly, defendant asks that the court order plaintiff to provide the requested discovery.

IV. DISCUSSION

In considering the motions now before the court, and the positions of the parties, we are mindful of the fact that a party moving for a protective order (at bar, plaintiff) bears the burden of showing "good cause" in support of such motion "to protect a party or person from ... undue burden or expense." RCFC 26(c). Moreover, we are similarly mindful of the generally broad scope of discovery in this court, within which the "[p]arties may obtain discovery regarding any matter, not privileged, which is relevant to the subject matter involved in the pending action...." RCFC 26(b). However, the court will not allow discovery that is "unduly burdensome or expensive, taking into account the needs of the case, the amount in controversy, the limitations on the parties' resources, and the importance of the issues at stake in the litigation." RCFC 26(b)(iii). In addition, discovery will be limited where "the party seeking discovery has had ample opportunity by discovery in the action to obtain the information sought...." RCFC 26(b)(ii). With these principles firmly in mind, we now proceed to examine the competing contentions of the parties.

A. Defendant's Responses to Plaintiff's Requests for Admission

We begin by considering defendant's admissions, secured in response to plaintiff's requests for admission, which plaintiff contends constitute judicial admissions on the part of the government of the volumes and fair market values (FMVs) of the damaged timber. Specifically, IP points to defendant's admission of the following statements:

285. The Internal Revenue Service audited and accepted both the estimates of timber damaged by Hurricane Frederic and the fair market values detailed in Exhibit 23-W[, listing volumes of damaged timber, fair market values per unit, and fair market values for different types of timber in each of IP's depletion blocks].

286. Both the Internal Revenue Service and International agree that the per unit fair market value of timber damaged or destroyed by Hurricane Frederic was in excess of its appropriate depletion rate.

287. Both the Internal Revenue Service and International agree that taking into account the IRS audit adjustments, International realized the following damage from Hurricane Frederic: [list of dollar values for each depletion block omitted.]

Because we disagree with plaintiff's strained interpretation of these admissions, we hold that they do not foreclose further factual development respecting the amount of the casualty loss suffered by IP, even though they may be judicial admissions.

A judicial admission is a "formal act, done in the course of judicial proceedings, which waives or dispenses with the production of evidence, by conceding for purposes of litigation that the proposition of fact alleged by the opponent is true." Weyerhaeuser [94-2 USTC ¶50,471 ], 32 Fed. Cl. at 118 (quoting Hofer v. Bituminous Casualty Corp., 148 N.W.2d 485, 486 ( Iowa 1967)). Furthermore, a judicial admission is "conclusively binding" and is, therefore, beyond the power of evidence to controvert. Id. Clearly, the government's admissions made in response to a discovery request are formal acts, done in the course of judicial proceedings, conceding the truth of the propositions laid out above. However, the parties disagree over the content of the propositions. Plaintiff attempts to give these requests for admission a construction broader than their plain and unambiguous terms will admit, contending that they conclusively establish the truth of the volumes and FMVs of damaged timber set forth therein.

Each of the three statements admitted by the government to be true speaks of the IRS and not "defendant," the "government," or "the United States ." None of the statements purports to affirm the truth or accuracy of the underlying volumes or fair market values. Rather, all that defendant has facially admitted is that the IRS "audited and accepted" and "agrees" with the figures detailed in the requests for admission. While this fact may or may not be significant, it is not the same thing as an admission that IP's volumes and FMVs are in fact correct. Quite simply, the admitted propositions do not say what IP contends that they say.

Request for admission 285, which states that the IRS "audited and accepted" IP's figures, obviously relates to what occurred at the audit level before the IRS . And, requests 286 and 287 again relate to a verifiable occurrence at the administrative level, i.e., before the IRS . The fact that these latter two statements are worded in the present tense cannot change the fact that the expressly address the administrative level through the use of the term "Internal Revenue Service." Moreover, plaintiff drafted two proposed stipulations of fact, never assented to by the government, which unequivocally stated that "the parties agree" with the estimates of timber damage put forth by IP. This shows that plaintiff knew full well how to unambiguously elicit an admission of the substantive correctness of the volumes and fair market values of damaged timber. That IP chose not to do so in its requests for admission weighs conspicuously against plaintiff's asserted interpretation of said requests.

Furthermore, even if the court were less than certain as to the proper interpretation of these requests for admission, we would be required to construe any ambiguity therein against IP, the drafter of these requests, under the well-established principle of contra proferentum. ² Assuming, arguendo, that plaintiff's requests for admission are unclear on whether they relate solely to the administrative level or whether they establish the substantive correctness of the volumes and FMVs of damaged timber, the requests should be construed against the drafter. See Talley v. United States , 990 F.2d 695, 699 (1st Cir. 1993); Otho Diagnostic Sys. Inc. v. Miles Inc., 865 F. Supp. 1073, 1079 (S.D.N.Y. 1994). In this light, the court would interpret the admitted propositions as narrowly addressing what transpired at the administrative level, before the IRS .

Finally, we observe that plaintiff's proposed construction of the admitted statements is in tension with established precedent. First, as explained in Weyerhaeuser, identification of the single, identifiable property (SIP) is the first step in determining the amount of a casualty loss. [94-2 USTC ¶50,471 ], 32 Fed. Cl. at 109. Only after the SIP has been identified can the fair market value of the SIP be determined, both immediately before and after the casualty event. IP's attempt to conclusively establish the amount of its loss prior to ascertaining the SIP, which plaintiff concedes is an open issue, is thus somewhat backwards. Apparently, plaintiff seeks to extrapolate from per unit FMVs, multiplying that figure by the number of units determined to have been lost in each SIP, once identified. However, the Court of Claims, in Westvaco Corp. v. United States, 639 F.2d 700 (Ct. Cl. 1980), counselled against such an approach.

In Westvaco, the court held that, because of its holding that the SIP was the depletion block, "an aggregation of the value of destroyed units of merchantable timber, together with the value of partial losses resulting from nonfatal injuries to merchantable trees, does not necessarily measure the reduction in fair market value of the property." Id. at 707. This was due to the fact that other intangible factors might possibly affect the FMV of the SIP, without affecting the per unit FMV of timber, "e.g., changes in access to and changes in density, changes in supply and demand, and possible offsetting benefits such as pine release." ³ Id. For this reason, the court remanded the case to the trial judge to determine "the difference in fair market value of each of the various affected management districts immediately before and immediately after the respective casualties," id. at 721, even though, in that case, "[t]he parties [had] agree[d] on the volume of timber destroyed, and on the fair market value of the merchantable units represented by the destroyed timber," id. at 703, just as IP contends has been done in this case.

Not only does the foregoing analysis persuade the court that it is highly unlikely that the parties intended the requested admissions to bear the meaning that plaintiff would ascribe to them, even if the admissions related to the substantive correctness of the volumes and FMVs, said admissions would not necessarily correspond to the amount of the casualty loss sustained by IP. Accordingly, even if plaintiff was correct concerning the interpretation of the requested admissions, the amount of the casualty loss (i.e., the reduction in FMV) would not be conclusively established.

For all of the foregoing reasons, then, the court holds that the requested admissions relate exclusively and only to what evolved at the administrative level, before the IRS , and not to the underlying accuracy of the volumes and FMVs delineated therein. Therefore, we turn next to examine the significance of the events that occurred before the IRS .

B. Actions of the IRS Re: the Volumes and FMVs of IP's Damaged and Destroyed Timber

1. Audit & Determination of the Commissioner

Plaintiff avers that the IRS accepted IP's volumes and FMVs of damaged timber after an extensive audit. As such, contends plaintiff, the Commissioner's determination on this factual issue is entitled to a presumption of correctness. The court cannot agree with plaintiff's argument. While it is certainly true that the determination of the Commissioner is entitled to a presumption of correctness, that presumption attaches only to the determination of the tax liability (i.e., the assessment), giving rise to the taxpayer's burden of proving (i.e., producing evidence sufficient to show) that it is entitled to a refund of taxes paid.

Moreover, while "[t]his presumption may appear to give evidential weight to the Service's action, ... this is not the case." IRS Practice and Procedure ¶1.05[2][c]. "No weight is given to findings of fact that the IRS may have made in its administrative processing of the case." Id. As stated by the U.S. District Court for the District of Delaware in Pierson v. United States [77-1 USTC ¶9245 ], 428 F. Supp. 384, 390 (D. Del. 1977), "[t]he reasons for the Commissioner's determination are not relevant for the Court does not review those reasons." This precept was later echoed by the district court for the Eastern District of Michigan, in Garity v. United States, 81-2 U.S. Tax Cas. ( CCH ) ¶9599, at 88,005-006 (E.D. Mich. 1980), cited in Estate of Akin v. United States [94-1 USTC ¶50,200 ], 31 Fed. Cl. 89, 97 (1994), wherein the court explained that the "conclusions and reasoning of IRS agents are irrelevant to the validity of the assessment...." We concur in the view that the factual findings, if any, underlying the Commissioner's determination of tax liability are irrelevant and entitled to no evidentiary weight. This position is, of course, fully consistent with the de novo nature of tax refund proceedings in the Court of Federal Claims (as well as in the district courts), in which the taxpayer bears the full burden of proof (i.e., both the burden of production and of persuasion). See Part IV.C, infra.

In an analogous case, Sara Lee Corp. v. United States [93-2 USTC ¶50,560 ], 29 Fed. Cl. 330 (1993), the taxpayer argued that a revenue agent's report embodied an agreement by the IRS that certain favorable adjustments were not at issue. The court held as follows:

Plaintiff completely ignores the fact that by initiating this lawsuit it placed "at issue" all of the 170 favorable adjustments underlying its refund claim ... Thus, contrary to plaintiff's belief, defendant is not required to provide evidence that the agreed adjustments are "in issue."

Id. at 337 (citations omitted). Just as a plaintiff, by litigating his claim, places at issue all favorable adjustments underlying his refund claim, so too does he place at issue any factual determination made by the IRS underlying the determination of his tax liability. Therefore, by bringing this action, IP has placed the amount of its casualty loss (i.e., the volumes and FMVs of timber damaged or destroyed) at issue.

Finally, we note that, even if the factual determinations of the IRS were entitled to a presumption of correctness, such a presumption would surely be rebuttable. Thus, defendant would be entitled to adduce evidence to rebut said presumption. It is precisely this type of evidence that the government is seeking, through discovery, in the case at bar. Accordingly, because the factual findings of the IRS carry no weight in this court, we hold that the IRS 's audit and alleged acceptance of IP's volumes and FMVs of damaged timber did not and could not conclusively settled that factual issue in this tax refund action. However, under certain circumstances, the IRS can conclusively settle issues with taxpayers at the administrative level. One potential means of doing so is the execution of a Form 870-AD.

2. Form 870-AD

IP maintains that the execution of a Form 870-AD by the government precludes defendant from disputing the volumes and FMVs of damaged timber that plaintiff asserts were agreed to. According to plaintiff, the overassessment reflected for the 1978 tax year on the Form 870-AD was derived using the volumes and FMVs that it claims may not now be disputed. On its face, however, the Form 870-AD says nothing about timber volumes or FMVs. Rather, it merely states that IP is entitled to a specific dollar amount ($582,200) for the 1978 tax year. Moreover, IP's right to file a refund claim for the Hurricane Frederic Casualty Loss Issue is expressly reserved by the terms of the agreement. Lastly, there is no evidence in the record (as opposed to counsel's unsupported assertion) to support the averment that the specific dollar amount corresponding to the overassessment for 1978 was arrived at using the figures advanced by plaintiff.

Furthermore, even assuming that said overassessment was in fact premised on IP's figures, the Form 870-AD does not preclude further factual development on the amount of plaintiff's casualty loss. Indeed, as noted above, this issue is expressly left open by the agreement, and, in any event, the parties to a settlement agreement "are bound to the terms agreed upon and not to the premises underlying their agreement." Pack v. United States , 992 F.2d 955, 959-60 (9th Cir. 1993) (citing Zaentz v. Commissioner [CCH Dec. 44,714 ], 90 T.C. 753, 761 (1988), and discussing a closing agreement between a taxpayer and the IRS). In other words, "general contract law principles govern tax case settlements," Treaty Pines Invs. Partnership v. Commissioner [92-2 USTC ¶50,418 ], 967 F.2d 206, 211 (5th Cir. 1992), and nothing in the language of the Form 870-AD prohibits defendant from contesting (or dispenses with plaintiff's burden of proof respecting) the amount of IP's casualty loss, now that IP has chosen to bring this tax refund action. Therefore, we hold that the Form 870-AD executed by the parties does not conclusively establish the volumes and FMVs of timber damaged by Hurricane Frederic. Thus, further factual development of the amount of the alleged casualty loss by defendant is appropriate. ⁴

3. Current "Agreement" by the IRS with IP's Volumes and FMVs of Damaged Timber

Relying on the admission by defendant that the IRS "agree[s]" that IP realized certain damage from Hurricane Frederic, plaintiff argues that defense counsel may not now take a position contrary to that of his client, the IRS . Evidently, plaintiff construes the use of the present tense to refer to an agreement by the IRS concurrent with this litigation before the court and after the completion of all administrative proceedings before the IRS . To the extent that plaintiff's interpretation is correct, however, we must reject this line of argument.

First of all, the IRS is not the defendant in this tax refund case; the United States is. Moreover, after a case leaves the administrative level and a tax refund case is filed in the Court of Federal Claims, the IRS no longer has primary responsibility over that case. Rather, the Department of Justice bears the responsibility for speaking on behalf of the government and conducting the proceedings in this court. See United States Department of Justice v. Tax Analysts [89-1 USTC ¶9386 ], 492 U.S. 136, 138 (1989). Put another way, it is beyond the scope of the IRS 's authority to settle unilaterally a factual issue in a case pending in this court, after administrative proceedings are complete and the case has been referred to the Department of Justice. 26 U.S.C. §7122(a) (1994). ⁵ See also United States v. Forma [92-1 USTC ¶50,156 ], 784 F.Supp 1132, 1139 (S.D.N.Y. 1992) ("Once a tax matter is referred to the Department of Justice, only the Attorney General or a person to whom authority has been delegated may settle the matter."). Cf. Sanders v. Commissioner [55-2 USTC ¶9636 ], 225 F.2d 629, 633 (10th Cir. 1955) (holding that only Treasury officials could compromise a tax case prior to a reference of the matter to the Department of Justice).

Thus, we regard a post-administrative "agreement" by the IRS with IP's volumes and FMVs the same way we would an identical "agreement" by the Department of Veteran's Affairs, for example. Accordingly, any current agreement or agreement in 1992, when plaintiff's requests for admission were admitted by defendant, is nonbinding at a minimum and possibly wholly irrelevant. Moreover, the admitted statement is noticably silent on several points: who at the IRS "agree[d]"; on what grounds, if any, was that person authorized to do so; and was the agreement memorialized in writing, or was it merely, an informal, oral agreement? All this, of course, supports the view that the requests for admission refer to the events at the administrative level, which we have already determined do not conclusively bind defendant.

C. Tax Refund Litigation in the Court of Federal Claims

It is well-settled that a tax refund suit in the Court of Federal Claims "is a de novo proceeding, in which the plaintiff bears the burden of proof" with respect to each and every element of its claim. Sara Lee [93-2 USTC ¶50,560 ], 29 Fed. Cl. at 334. See also Helvering v. Taylor [35-1 USTC ¶9044 ], 293 U.S. 507, 514 (1935) (burden of proof); Welch v. Helvering [3 USTC ¶1164 ], 290 U.S. 111, 115 (1933) (burden of proof); Young & Rubicam, Inc. v. United States [69-1 USTC ¶9404 ], 410 F.2d 1233, 1238 (Ct. Cl. 1969) (burden of proof); George E. Warren Corp. v. United States [56-2 USTC ¶9641 ], 141 F. Supp. 935, 940 (Ct. Cl. 1956) ("The tax laws contemplate a trial de novo"); L.W. Hardy Co. v. United States [82-2 USTC ¶9648 ], 1 Cl. Ct. 465, 470 (1982) ("taxpayer has the burden of proof"). Plaintiff's burden is that of production as well as persuasion. Sara Lee [93-2 USTC ¶50,560 ], 29 Fed. Cl. at 334. "This means that the taxpayer must come forward with enough evidence to support a finding contrary to the Commissioner's determination ... Even after satisfying this burden, the taxpayer must still carry the ultimate burden of proof." Danville Plywood Corp. v. United States [90-1 USTC ¶50,161 ], 899 F.2d 2, 7-8 (Fed. Cir. 1990) (citations omitted). In other words, plaintiff must prove not only that the Commissioner's determination was erroneous but also the precise dollar amount of the refund to which it is entitled. United States v. Janis [76-2 USTC ¶16,229 ], 428 U.S. 433, 440 (1976); Eli Lilly & Co. v. United States [67-1 USTC ¶9248 ], 372 F.2d 990, 997 (Ct. Cl. 1967); Missouri Pac. R.R. v. United States [64-2 USTC ¶9839 ], 338 F.2d 668, 671 (Ct. Cl. 1964).

Given the foregoing, it is uncontrovertible that plaintiff must adduce sufficient evidence at trial to carry its burden of proving the amount of its casualty loss (as well as the resultant deduction). This means that IP must prove the diminution in the FMV of its damaged timber property occasioned by Hurricane Frederic in 1979, as well as its adjusted basis in the damaged property. Moreover, as explained above, plaintiff may rely neither on administrative findings nor on defendant's admissions to conclusively establish the quantum of its casualty loss. This is a trial de novo, in which plaintiff is expected to produce evidence supporting a refund, "not a quasi appellate review of an administrative determination." Hearst Corp. v. United States [93-1 USTC ¶50,303 ], 28 Fed. Cl. 202, 230 (1993) (emphasis added). "When a suit is brought for the recovery of taxes, the taxpayer must affirmatively show that he has overpaid his taxes since 'an overpayment must appear before refund is authorized.' " Missouri Pac. [64-2 USTC ¶9839 ], 338 F.2d at 671 (quoting Lewis v. Reynolds [3 USTC ¶856 ], 284 U.S. 281, 283 (1932).

D. Reasonableness of Defendant's Discovery Requests

As noted previously, discovery in this case had been closed until the court ordered, on September 11, 1995 , that "[t]he parties may engage in voluntary discovery regarding the Hurricane Casualty Loss Issue ... to the extent that both parties agree that the factual inquiry is reasonable and not unduly burdensome." At bar, IP alleges that the factual inquiry defendant seeks to pursue through discovery is unreasonable and unduly burdensome. However, the only prejudice that plaintiff alleges it will suffer if the government is permitted to obtain the contested discovery is the expense and time of litigation associated with proving every element of its tax refund claim. Unfortunately, it is a simple fact of life that litigation can be expensive and time-consuming, especially when attempting to prove a claim of substantial dollar value in a de novo proceeding. Since this is precisely what it should have been prepared to do all along, the "prejudice" to plaintiff does not amount to an undue burden, especially "taking into account the needs of the case, the amount in controversy, the limitations on the parties' resources, and the importance of the issues at stake in the litigation." RCFC 26(b)(ii).

Conversely, we find on this record that defendant's requested discovery is not unreasonable, given the issues at bar. Counsel for IP has indicated that it intends to prove the amount of its casualty loss using a casualty loss damage report (supplemented by testimony) prepared by IP using a random sample methodology. The government asserts that it needs the requested discovery so that it may test the accuracy and validity of the methodology used by IP to determine its casualty loss and, if necessary, rebut plaintiff's report and witnesses. Such a request is not unreasonable given that plaintiff bears the burden of proving the quantum of its casualty loss, for which it seeks a tax deduction.

Moreover, it appears that the government's latest discovery requests were generated as a result of depositions taken of certain IP employees (e.g., deposition of Arthur Verdel, May 2, 1996 ). In addition, defendant requires the documents sought through discovery in order to gain a complete understanding of the damage report already provided voluntarily by IP to the government. Finally, both parties agreed that this court's September 1, 1994 decision in Weyerhaeuser, supra, merited a reopening of discovery. The only dispute now is the extent of that reopening. Plaintiff concedes that identification of the SIP is an appropriate area for discovery. Given that the identification of the SIP is the analytical first step in determining the quantum of a casualty loss, see Weyerhaeuser [94-2 USTC ¶50,471 ], 32 Fed. Cl. at 109, the ultimate issue of quantifying the diminution in FMV of each SIP is necessarily open if the SIP is in contention.

Furthermore, on August 2, 1996 , the Federal Circuit decided the appeal in Weyerhaeuser, wherein the court framed the issue as the "determination of what measure of Weyerhaeuser's property is the appropriate single identifiable property." Weyerhaeuser [96-2 USTC ¶50,420 ], (emphasis added). In this connection the Federal Circuit, in Weyerhaeuser, held that "[t]he determination of the single identifiable property as set forth in Westvaco controls this case." Id. at 7 (emphasis added). In reaching this conclusion, the Federal Circuit embraced the following holding in Westvaco:

We hold that the single, identifiable property damaged or destroyed in the case of this plaintiff was all of the standing timber in the area of the individual district [i.e., depletion block] directly affected by each casualty.

Westvaco, 639 F.2d at 720 (emphasis added), quoted in Weyerhaeuser [96-2 USTC ¶50,420 ]. Thus, the court of appeals found that the operative facts established Weyerhaeuser's SIP, like Westvaco's, as the depletion block. That decision obviously sheds new light on the issues in the instant case. Therefore, we do not regard defendant's requested discovery as untimely.

V. CONCLUSION

Plaintiff bears the burden of showing "good cause" in support of the entry of a protective order. RCFC 26(c). For all of the foregoing reasons, the court finds that IP has failed to establish good cause in support of its motion. Thus, plaintiff's motion for a protective order is hereby DENIED. Accordingly, and for the reasons set forth above, defendant's motion to compel discovery is GRANTED. Plaintiff shall respond to (i.e., admit or deny) defendant's requests for admission and shall produce the documents identified in defendant's fourth request for the production of documents forthwith.

IT IS SO ORDERED.

¹ " IRS Form 870-AD (appellate division), entitled 'Offer of Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and of Overassessment,' is the general purpose form which the IRS uses to register and memorialize settlement negotiations." Kretchmar v. United States [85-2 USTC ¶9826 ], 9 Cl. Ct. 191, 192 n.2 (1985).

² "[A]n ambiguous provision is construed most strongly against the person who selected the language." Black's Law Dictionary 296 (5th Ed. 1979) (citing United States v. Seckinger, 397 U.S. 203, 216 (1970)).

³ The Court of Claims defined "pine release" as "the elimination or reduction of vegetative material, usually woody plants and trees, that interfere with the growth of pine trees being managed." Westvaco, 639 F.2d at 703 n.5.

⁴ In Kretchmar v. United States [85-2 USTC ¶9826 ], 9 Cl. Ct. 191, 198 (1985), this court held that a Form 870-AD could equitably estop a taxpayer from litigating a tax refund claim, provided that three conditions were met: "(1) the execution of the Form 870-AD was the result of mutual concession or compromise; (2) there was a meeting of the minds that the claims be extinguished; and (3) that to allow [one party] to reopen the case would be prejudicial given the [other party's] reliance on the extinguishment thereof." At bar, plaintiff has not shown any meeting of the minds that the volumes and FMVs of IP's damaged timber would be settled as a result of the execution of the Form 870-AD, and no such meeting of the minds is disclosed on the face of the document. Accordingly, the principle of equitable estoppel is inapplicable on these facts.

⁵ Section 7122(a) provides:

The Secretary [of the Treasury] may compromise any civil or criminal case arising under the internal revenue laws prior to reference to the Department of Justice for prosecution or defense; and the Attorney General or his delegate may compromise any such case after reference to the Department of Justice for prosecution or defense.

26 U.S.C. §7122(a) (emphasis added).

 

 

 

95-1 USTC ¶50,089] Barmat, Inc. v. United States of America and Internal Revenue Service

U.S. District Court, No. Dist. Ga., Atlanta Div., Civ. 1:94-cv-360-ODE, 10/17/94

[Code Sec. 7122 ]

Offers in compromise: Compromise process: Rejection of offer: Consent orders.--Cross motions regarding the validity of a consent order concerning the release of property wrongfully seized by the IRS from a nominee agent in satisfaction of a bankrupt corporation's tax liability were resolved by the court. The nominee agent's motion for a declaratory judgment abating all employment tax penalties referred to in the consent order and stating that the IRS had no interest in its assets was denied because the consent order did not rise to the level of an enforceable judgment, the procedural posture of the case did not warrant declaratory relief and the motion sought adjudication of a nonparty's rights. The IRS 's contention that the Assistant United States Attorney lacked authority to settle the case was also without merit because the IRS representative had notice of, and participated in, the settlement. Further, the jurisdictional claim of improper service was held to have been waived because the government failed to raise the issue in a preanswer motion, voluntarily appeared and filed responsive pleadings. Portions of the consent order regarding the government's promise to abate employment tax penalties were binding. However, portions of the consent order relating to the individual tax liabilities of the bankrupt corporation's owner were unenforceable because the parties only agreed that the owner would pay an amount in consideration of his offer-in-compromise, not that the government would be bound by the offer.

Leon Pomerance, Garland, Samuel & Loeb, 3151 Maple Dr., N.E., Atlanta, Ga. 30305, for plaintiff (Barmat Inc.). Leon Pomerance, Garland, Samuel & Loeb, 3151 Maple Dr., N.E., Atlanta, Ga. 30305, for plaintiff (Matthews, B.A.). Patricia Rebecca Stout, 75 Spring St., N.W., Atlanta, Ga. 30335, Michael N. Wilcove, Department of Justice, Washington, D.C. 20530, defendant (U.S.). Patricia Rebecca Stout, 75 Spring St., S.W., Atlanta, Ga. 30335, Michael N. Wilcove, Department of Justice, Washington, D.C. 20530, for defendant (I.R.S.).

Order

EVANS, United States District Judge:

This civil action is before the court on Plaintiff's motions for judgment for specific acts and declaratory judgment and for contempt and protection under Rule 70 and Defendants' motion to vacate agreed order. A hearing on Plaintiffs' Rule 70 motion was held on September 20, 1994. The court makes the following findings:

This action initially arose as a suit for wrongful levy under 26 U.S.C. §7426 . Plaintiffs, Barmat, Inc. ("Barmat") and Barbara Matthews, ¹ individually, claim that agents of the Internal Revenue Service (" IRS ") wrongfully seized their restaurant property, which was located at Papa Piroziki's Ltd., an Atlanta area restaurant in bankruptcy. The complaint states that Barbara Matthews had previously purchased Papa Piroziki's, Ltd.'s assets. The IRS agents acted pursuant to an order which authorized the seizure of property of Barmat "as nominee agent" of Papa Piroziki's Ltd. and did not mention Barbara Matthews. (Complaint, exh. B). Apparently, Barbara Matthews owns Barmat and Lee Matthews, her ex-husband, owns Papa Piroziki's, Ltd. (Consent order at 2-3).

Plaintiffs moved for a temporary restraining order (" TRO ") and/or preliminary injunction to halt the seizure. After a hearing in which the government was represented by an Assistant U.S. Attorney and an IRS agent, the motion for TRO was denied. By consent, the motion for preliminary injunction was referred to a magistrate judge.

The parties then entered into two consent orders. In the first, the parties essentially agreed that Papa Piroziki's Ltd. would continue to operate until disposition of the motion for preliminary injunction. Counsel for both parties and the undersigned executed this document. The present relevance of this agreement is questionable because some time in the spring of 1994 an electrical fire completely destroyed Papa Piroziki's. Ltd.

The validity of the second consent order is at issue in this case. It is, at best, an inartfully worded document, drafted by counsel for both parties and several IRS representatives. It provides, in pertinent part, the following:

To release the seizure on Barmat, Inc., doing business as Papa Piroziki's, and to satisfy the tax liability of Papa Piroziki's, Ltd., Lee Matthews would:

1. Pay a sum of $20,000, in cash, no later than February 22, 1994, at the offices of defendant IRS ;

2. Pay an additional $10,000, in cash, no later than thirty (30) days from the date of execution of this consent order. This combined $30,000 represents--the value of the assets of Papa Piroziki's, Ltd.;

3. Payment of all outstanding 941 employee taxes of Barmat, Inc., which were due and owing for tax periods ending December 31, 1992 , June 30, 1993 , September 30, 1993 , and December 31, 1993 , no later than March 18, 1994 . The parties agree that the amount owed was approximately $15,000, receipt of which the IRS acknowledges. The IRS shall provide an exact accounting to Barmat, Inc., of any outstanding balance within one week of the execution of this agreement and Barmat, Inc. agrees to pay any remaining outstanding amount within two weeks of receipt of the accounting. Any penalties associated with the outstanding 941 taxes which are the subject of this agreement shall be abated . . .

5. Once the tax liability of Papa Piroziki's, Ltd. has been satisfied, the 100% penalty assessed against Lee Matthews, individually, totalling $34,306.66, plus additions, incurred a [sic] as a responsible person for Papa Piroziki's, Ltd., will be abated.

6. Simultaneously with the execution and filing of this consent order, plaintiff will voluntarily dismiss with prejudice the instant wrongful levy action against the defendant.

To resolve the instant action as well as all collateral tax liabilities of Mr. Matthews, the parties further agreed Mr. Matthews would:

7. File an offer-in-compromise on Lee Matthews' individual tax liability, for consideration in the amount of $105,000. This liability includes the 100% penalty assessment incurred as a responsible person for Papa Piroziki's, Ltd., which will be abated upon satisfaction of Papa Piroziki's payment per paragraph 5, Alex Lee Group, unassessed penalty for Lee Cuisine, assessed and unassessed income tax, and any other tax that has been proposed to be assessed. Mr. Matthews must comply with all filing and payment requirements. The offer-in-compromise is to be filed no later than February 25, 1994. It is the parties' understanding that the offer-in-compromise will take approximately six months to process, and agree that in order to afford Lee Matthews sufficient time to obtain the $105,000, his offer-in-compromise shall not be formally accepted for six months from the date it was submitted. The offer amount is to be paid within the statutory period of thirty (30) days of acceptance by the IRS . . . .

(9) That Lee Matthews will cooperate with the IRS by completing an offer-in-compromise for his individual tax liability, providing the IRS with all necessary documents and records to support said offer-in-compromise, and responding to all IRS inquiries concerning the offer-in-compromise. Mr. Matthews understands that the IRS intends to place nominee liens against certain real property which he transferred to Barbara Alexander Matthews, and in which the IRS contends he still has an ownership interest. The IRS agrees not to take any further collection action against Lee Matthews, individually, during the period of time that his offer-of-compromise is under consideration, provided that Mr. Matthews takes no action to place his assets beyond the reach of the IRS , or to otherwise attempt to frustrate the IRS efforts to collect this debt.

Counsel for both parties and the undersigned executed this document, which was entered into the record on April 15, 1994.

As noted, Barbara Matthews filed an unopposed motion for voluntary dismissal with prejudice pursuant to the consent order. Barmat moved for judgment for specific acts and for declaratory judgment which is presently before the court. In it, Barmat claims that although Lee Matthews paid, on its behalf, the amounts due under the consent order, the government provided an inadequate accounting, refuses to refund the portions of the payments that included penalties, and wrongfully levied against $158,999 in insurance proceeds from the fire. ² Barmat also states it was informed that the IRS would probably reject Lee Matthwes' offer-in-compromise. Barmat seeks a declaratory judgment applying principals of collateral estoppel or res judicata. Specifically, it requests an order requiring the government to abate all penalties associated with Barmat's employment taxes referred to in the consent order and stating that the IRS has no interest in Barmat's assets

to the extent of a determination being made as to all employment and individual tax liabilities referred to in its Consent Order, specifically the taxes referred to in the Offer-in-Compromise for Lee Matthews' individual tax liability for $105,000 subject to the credit of $34,306.66 which is to be abated upon Papa Piroziki's tax liability pursuant to paragraphs numbered 7 and 5 for the Consent Order issue by this Court.

Barmat also seeks an order pursuant to Fed.R.Civ.P. 70 compelling the IRS to abate the penalties referred to in the consent order.

After twice seeking extensions of time to respond, the government simultaneously filed its response and a motion to vacate the consent order. In it, the government argues that (1) the court lacks jurisdiction because Plaintiff improperly served the summons on the U.S Attorney (who failed to transfer the case to the tax division), rather than the Attorney General; and (2) the consent agreement is void and must be set aside because the Assistant U.S. Attorney ("AUSA") who sought the entry of the consent order lacked the authority to settle the case. The government contends that only certain delegated individuals may compromise tax cases.

The government's response to Barmat's motion also states that, except for retaining the cash seized from Papa Piroziki's cash register, it has released all the property seized and the levies against the insurance proceeds in Lee and Barbara Matthews' names (although not those issued in the names of Barmat or Papa Piroziki's Ltd). In addition, it argues that estoppel may not be invoked against the United States when its agents act without authority, and the court may not determine the preclusive effect of its own order. It further states that nothing in the consent order required it to accept Lee Matthews' offer-in-compromise, and Barmat Inc.'s employment tax liabilities are satisfied, including the $5,000 in penalties it has not refunded.

Barmat responds that IRS representatives knew of the consent order because its counsel contacted IRS District Counsel Dean Morley about it and sent copies of a letter memorializing the settlement agreement to Eric Jorgensen, IRS District Counsel; Joan Cardoza, IRS Chief Field Branch Division; and Rhonda Pierce, Field Supervisor, IRS Collection Division. It also argues that Fed.R.Civ.P. 11 was violated when the AUSA represented that she had authority to settle by submitting the consent order to the court.

After receiving the government's motion, Barmat filed a motion for contempt and protection under Fed.R.Civ.P. 70, seeking to prevent the IRS from further collection activity against Lee Matthews, individually. Alternatively, it requests that the government be held in contempt for violating the consent order. It claims that by filing the motion to vacate, the government has shown it intends to breach those portions of the consent order setting Papa Piroziki's liability at $30,000 and permitting Lee Matthews a $34,306 credit against his individual tax liability. As relief, it seeks an order restraining the IRS from further collection activity against Lee Matthews or, alternatively, holding the IRS in contempt, and attorney fees.

In response, the government reiterates that nothing in the consent order requires it to accept Lee Matthews' offer-in-compromise and it has, in fact, rejected the offer. It argues that, because Lee Matthews is not a party to this action, Barmat lacks standing to litigate Lee Matthews' tax liabilities, and the Anti-Injunction Act deprives the court of jurisdiction to enjoin the collection of taxes.

The parties verbalized most of the foregoing arguments during the previously-mentioned hearing on Plaintiff's motion for contempt and protection under Rule 70. At the hearing, Plaintiff argued that the government sought to void the consent order only after the restaurant burned down. The government acknowledged that Barmat had satisfied its tax liability, but its penalties have not been abated. The government admitted that Papa Piroziki's tax liability has been satisfied and it had intended and agreed to abate the 100% penalty assessed against Lee Matthews, individually, totalling $34,306.66, upon the satisfaction of the liability. However, it argued that it is not bound by the promise to abate the penalty because the AUSA who joined in the consent order lacked proper authority to settle the case. The government also reported that it has rejected Lee Matthews' offer-in-compromise and has determined that he owed substantially more than the amount the offer contemplates.

As a preliminary matter, the court will address the argument that it lacks personal jurisdiction over the government because Plaintiff failed to properly serve the United States . The defenses of insufficiency of process or insufficiency of service are waived by failing to assert them in a preanswer motion or the first responsive pleading, or by making a voluntary general appearance. Fed.R.Civ.P. 12(h)(1); see Trustees of Cent. Laborers' Welfare Fund v. Lowery, 924 F.2d 731, 732 (7th Cir. 1991). Because the government voluntarily appeared, never raised the issue in a preanswer motion, and filed responsive pleadings, its jurisdictional argument is waived.

As to Plaintiff's motion for judgment for specific acts and declaratory judgment, Fed.R.Civ.P. 70 states in pertinent part "[i]f a judgment directs a party to . . . perform any . . . specific act and the party fails to comply within the time specified, the court may direct the act to be done. . . ." This rule is operative only after entry of judgment. See DeBeers Consol. Mines v. United States , 325 U.S. 212 (1945). Thus, insofar as Plaintiff seeks relief under Rule 70, its motion is denied.

At its most basic, Plaintiff's motion for declaratory judgment seeks enforcement of its interpretation of certain portions of the Consent Order, a request that directly conflicts with the government's positions in its motion to vacate. Although the wording of the consent order is inartful, it is clear the parties agreed that by paying $30,000, and approximately $15,000 in outstanding 941 employee taxes by a date certain, Lee Matthews would satisfy Barmat's tax liabilities. In return, the government agreed to abate any penalties against Barmat associated with the 941 taxes and to abate the 100% penalty assessed against Lee Matthews individually, totalling $34,306.66, plus additions. The court finds, with respect to these provisions of the consent order, that insofar as Lee Matthews has fulfilled his end of the bargain (and the court has been informed that he has), the government is bound by its promise to abate the penalties.

However, that portion of the consent order relating to Lee Matthews' individual tax liability is unenforceable. In the consent order, Lee Matthews submitted an "offer-in-compromise . . . for consideration in the amount of $105,000." By its plain language, Lee Matthews agreed to pay that amount in return for filing an offer to settle his individual tax liabilities. Under the terms of the consent order, the government never promised to accept this offer, only to consider it. This is reflected in that part of the consent order which limits the IRS 's collection activities "during the period of time that his [Lee Matthews'] offer-in-compromise is under consideration." Although the consent order contemplates a six months processing period prior to formal acceptance, its language, as a whole, does not manifest a clear intent to be bound to the "offer-in-compromise."

The court rejects the government's argument that it is not bound to the consent order because the AUSA lacked authority to settle the case. First, none of the authorities on which the government relies for the proposition that it is not bound to its contract speak to the present situation, where the parties sought the court's involvement in their settlement through a consent order. Second, the record shows that IRS representatives had notice of and actually participated in the settlement. Third, an argument seeking to renege under these circumstances, where, inter alia, the AUSA and the IRS 's representatives implicitly represented that they had authority to settle the case and Barmat substantially performed and relied on the agreement, offends public policy.

The procedural posture of this case does not clearly lend itself to declaratory relief. See 28 U.S.C. §2201 . Generally, declaratory judgments are sought by petition or complaint, rather than by motion, by parties to a controversy. See, e.g. Mission Insurance Co. v. Puritan Fashions, Corp., 706 F.2d 599, 602 (11th Cir. 1983). The motion before the court seeks an adjudication of Lee Matthews' rights and his status as a "party" remains questionable.

Accordingly, Plaintiff's motions for judgment for specific acts and declaratory judgment [#6] and for contempt and protection under Rule 70 [#26] are DENIED. Defendants' motion to vacate [#16] is GRANTED in part insofar as it relates to paragraphs 7 through 9 of the consent order and DENIED in part insofar as it relates to paragraphs 1 through 6 of the consent order.

SO ORDERED.

¹ Barbara Matthews subsequently filed an unopposed motion for voluntary dismissal which was granted.

² The other actions they claim breached the consent agreement occurred prior to its execution.

 

 

 

 

[94-2 USTC ¶50,555] In re Robert Turner Optical, Inc., Debtor. Max C. Pope, as Trustee for Robert Turner Optical, Inc., Plaintiff. New City Communications of Alabama, Inc.; et al., Defendants

U.S. Bankruptcy Court, No. Dist. Ala. , So. Div., 93-01004, 9/8/94

[Code Secs. 6325 and 7122 ]

Tax liens: Release of lien: Offers in compromise: Form: Authority: Bankruptcy and receivership.--

A federal tax lien filed against a bankrupt debtor with respect to which the debtor made a partial payment was not released because: (1) the lien did not become unenforceable, (2) the debt was not paid in full, and (3) no offer in compromise was accepted by the IRS . There was no evidence that an offer in compromise was submitted or that an agreement between the debtor and the IRS to accept a lesser amount was reached. A request for release of the lien that was sent with the partial payment did not establish that an offer in compromise was submitted and accepted by the IRS . Thus, the bankruptcy estate, to the extent it had funds, was liable for the unsatisfied amount.

MEMORANDUM OPINION AND ORDER

MITCHELL, Bankruptcy Judge:

This proceeding is before the Court for trial on the Plaintiff's Complaint to Determine the Validity, Priority or Extent of Lien. Appearing at the August 9, 1994 hearing on this matter were Harry P. Long, Attorney, counsel for the Trustee and Plaintiff; Richard E. O'Neal, Assistant United States Attorney, counsel for the Internal Revenue Service (hereafter referred to as " IRS "); William B. Hairston, Jr., counsel for David Shelby (hereafter referred to as "Shelby"); and Edward J. Ashton, counsel for AmSouth Bank, N.A. (hereafter referred to as "AmSouth"). No other counsel for the remaining named Defendants or none of the other named defendants appeared at the hearing. This Court has jurisdiction of this proceeding pursuant to 29 U.S.C. §157(b)(2)(K). After considering the documentary evidence and the oral evidence presented at the hearing and the applicable law, the Court concludes that the IRS has a valid lien that is superior to the liens of all the other named Defendants. The amount of said lien as of the petition date was $187,067.34 and to the extent that the debt is fully secured by assets of the estate, the IRS is entitled to accrued interest on its secured claim amount.

FINDINGS OF FACT

On November 15, 1993 , Max C. Pope, Trustee (hereafter referred to as "Trustee") for the estate of Robert Turner Optical, Inc. filed a Complaint to Determine the Validity, Priority and Extent of Lien and the complaint was amended on March 15, 1994 to add additional Defendants. An answer to the complaint or the amended complaint was filed by LSB, Properties; David Shelby; Southern Optical; Internal Revenue Service; AmSouth Bank N.A.; O.Z. Hall, as Tax Collector for Jefferson County ; New City Communications of Alabama, Inc.; Wesley-Jesson Corporation; and Datronic Equipment Income Fund XVIL.P. of Delaware .

At the hearing held on August 9, 1994 , it was stipulated by the Trustee, IRS , Shelby and AmSouth that the tax lien which was recorded by the IRS on November 11, 1989 in the Office of the Judge of Probate for Jefferson County, Alabama was a valid and perfected tax lien against Robert Turner Optical, Inc. (hereafter referred to as "Debtor") and that as between the parties appearing at the hearing and as far as the recordation dates of the documents perfecting the liens, the IRS was in a first lien position, Shelby was in a second lien position and AmSouth was in a third lien position. See Plaintiff's Exhibit Nos. 1. and 2.

Having established the recorded lien priority, the Court then had to resolve three issues and these were as follows:

1. What was the amount of debt that was owed by the Debtor to the IRS for the tax periods which were listed on the tax lien filed by the IRS ?

2. Did the Debtor have an agreement with the IRS which provided that the IRS would satisfy the liability for the tax periods stated on the tax lien filed by the IRS upon the receipt of the October 19, 1990 payment of $178,067.05?

3. Did the Debtor have an agreement with the IRS which provided that upon the receipt of the October 19, 1990 payment of $178,067.05 by the IRS , the IRS would release the tax lien filed by the IRS even though said sum was not sufficient to pay in full the amount owed for the tax periods stated on the tax lien?

DETERMINATION OF THE AMOUNT OWED TO THE IRS

The first witness to testify in behalf of the IRS was Ms. Jackie Brock Washington . Ms. Washington is employed by the IRS and works as an advisor in the Special Procedures Function of the IRS . She is responsible for supervising the preparation of and the filing of claims by the IRS in bankruptcy proceedings. She stated that when the IRS receives a notice that either a business entity or an individual has filed bankruptcy, the IRS researches the debtor's account for any evidence of liability. If it is determined that a liability does exist, a proof of claim is filed with the court which would include the tax, interest and penalty amount as of the petition date. This claim would also state the type of tax, the tax period, whether a tax lien had been filed and whether the amount for a specific tax period was classified as secured, unsecured priority or general unsecured.

Ms. Washington stated that in this case, when the IRS received the notice that the Debtor had filed bankruptcy, the IRS researched the Debtor's accounts, determined that the Debtor did in fact owe the IRS and based on that determination the IRS filed a proof of claim in this case. See Government's Exhibit No: 1. The IRS determined that as of the petition date of February 9, 1993, the Debtor was indebted to the IRS in the sum of $817,189.58. According to the claim, the sum of $187,067.34 was secured by a tax lien which was filed on November 22, 1989. This secured claim amount was for the Form 941 tax type and for the tax periods ended March 31, 1987 through September 30, 1988. These were the same tax periods that were listed on Plaintiff's Exhibit No: 1. The claim showed that no tax was due for these tax periods but that penalty was due in the sum of $88,337.94 and interest was due in the sum of $98,729.40.

Ms. Washington stated that in the event that the Debtor in this case desired to know the amount needed to pay off any period on the tax lien, the debtor could obtain from the IRS a document entitled Certificate of Payments and Assessments (hereafter referred to as "CPAS"). She further stated that she obtained the CPAS for the tax periods which were listed on the IRS tax lien and the secured portion of the IRS claim. As of August 8, 1994, the tax, interest and penalty amount due for these tax periods as of was $203,261.14. See Government's Exhibit 3. The calculations that were contained in the CPAS for the tax lien periods were based on the tax returns that were filed by the debtor and included all payments made by the debtor from the due date of the respective returns to August 8, 1994.

Dr. John Katapodis verified that the payments that were listed as credits on the CPAS for the tax lien periods reflected all the payments that were made by the debtor towards the liability stated on the CPAS. He stated that the debtor did make a payment to the IRS on October 19, 1990 in the total sum of $178,067.05. He stated that this payment amount was reflected on the CPAS for the secured or tax lien periods and that the application of the payments directly to the tax due was a correct application of the payments. He further stated that since October 19, 1990, the debtor had not remitted any further payments to the IRS to be applied to the interest and penalty amounts for the tax periods on the tax lien. No other evidence was offered by any other party at the hearing to show that any other payments were remitted to the IRS for application to the tax periods listed on the IRS tax lien.

AGREEMENT BETWEEN THE DEBTOR AND THE IRS TO SATISFY THE TAX LIABILITY OR RELEASE THE TAX LIEN

Mr. David Shelby testified that the debtor was indebted to him in the approximate sum of $70,000.00 as a result of a loan that he made to the debtor in the months of February 1992 and April 1992. Mr. Shelby filed a UCC-1 with the Office of the Secretary of State of Alabama on April 20, 1992. As to the AmSouth, the parties at the hearing agreed that the debtor was indebted to said entity in the approximate sum of $408,000.00. AmSouth's UCC-1 was filed with the Office of the Secretary of State of Alabama on July 6, 1992. Based on the recording dates of the liens of the IRS , Shelby and the Bank, the IRS is in first position, Shelby in second position and the Bank in third position. Based on the lien search that was offered into evidence by the counsel for the Trustee and received by this Court, the Court determines that the liens of the IRS , Shelby and the AmSouth are superior to the liens of any of the parties listed on Plaintiff's Exhibit No: 2.

Having determined the priority of liens among the parties before the Court based on the recording dates of the respective liens, the Court must determine if at or subsequent to the time the debtor remitted the October 19, 1990 payment to the IRS , the debtor had an agreement with the IRS which provided that the IRS was to satisfy the liability for the tax periods stated on the tax lien thereby causing the lien to be released by operation of law or which provided that the IRS was to release the tax lien for less than full payment.

The first witness to testify regarding this alleged agreement was Dr. Katapodis. He was the person in charge of the operations of the debtor from the year 1989 until the filing of the present petition. He stated that he was contacted by Mr. Doug Dugger, who was a revenue officer with the IRS , regarding the unpaid tax liabilities of the debtor. On several occasions, he and Mr. Dugger met to discuss the payment of the debtor's tax liability. Mr. Dugger made him fully aware that the tax liability for the periods that were on the tax lien had balances well in excess of the amount of the October 19, 1990 payment. Dr. Katapodis stated that at the time he remitted the aforementioned payment to the IRS through Mr. Dugger, he sent a letter with the payment and in the letter requested that the interest and penalty amounts for the tax years on the tax lien be reduced and the lien released. It should be noted that Dr. Katapodis did not produce a copy of the letter at the hearing.

Dr. Katapodis stated that subsequent to the time that the letter was sent to the IRS , he continued to discuss with Mr. Dugger his plans to sell the debtor's business and the payment of the remaining tax liability. After sending the letter to the IRS , Dr. Katapodis did not take any affirmative action to follow up on his request that the interest and penalty amounts for the tax lien periods be satisfied and the tax lien released. He did not file an Offer in Compromise (hereafter referred to as "OIC") with the IRS . He and [sic] never received any further correspondence with either Mr. Dugger or the IRS which indicated that the IRS agreed to his proposal by agreeing to satisfy the tax liability for the periods for which the payment was to be applied or release the tax lien based on the receipt of the October 19, 1990 payment.

At the same time that Mr. Dugger was attempting to collect the tax liability from the debtor, Dr. Katapodis was made aware by Mr. Dugger that the IRS was proposing to assess the "trust fund" portion of the employment tax liability of the debtor against him personally. Mr. Doug Dugger of the IRS testified that the "trust fund" portion of the debtor's tax liability for the tax lien periods in the sum of $116,961.55 was assessed against Dr. Katapodis on August 20, 1990. After the October 19, 1990 payment was received by the IRS , the IRS abated the "trust fund" liability that had been assessed against Dr. Katapodis individually and since that date, Dr.Katapodis has not received any notice from the IRS informing him that he owes any of the "trust fund" tax which related to the tax lien periods.

Mr. Dugger testified that he has been a revenue officer with the IRS for the past 20 years. His duties include the obtaining delinquent tax returns and collecting delinquent tax debts of both businesses and individuals. Mr. Dugger stated that there are three ways in which an IRS tax lien can be released and those are (1) the tax lien becomes unenforceable by operation of time, (2) the debt which is the basis of the lien is paid in full or (3) an OIC is accepted by the IRS and the debt is settled, considered paid in full and any tax lien associated with the debt would be no longer enforceable and be released.

In his capacity as a revenue officer, he does not have the authority to make any agreement with a taxpayer in which the IRS would accept payment in less than the full amount of the debt and satisfy the tax liability for any tax period. He stated that in situations where such a request was made by the taxpayer, the request would have to be in the form of an OIC. The OIC will usually contain an offer from the taxpayer which provides that the taxpayer will pay an amount less than the total debt amount in full satisfaction of the total debt for the stated periods in the OIC. Upon the receipt of the OIC, the revenue officer transmits the request to the Special Procedures Function, OIC Coordinator and awaits a decision on the OIC. The revenue officer does not have the authority to approve or disapprove the OIC. In this case, neither Mr. Dugger or the IRS ever received an OIC wherein the debtor offered to remit the sum of $178,067.05 in full satisfaction of the tax debt for the periods on the IRS tax lien. He also stated that he did not have an agreement with the debtor or any representative of the debtor which provided that as to the tax periods listed on the tax lien, the IRS would satisfy the liability or release the tax lien for the for less than full payment of the amount due.

CONCLUSIONS OF LAW

There are three ways in which an IRS tax lien can be released and those are (1) the tax lien becomes unenforceable by operation of time, (2) the debt which is the basis of the lien is paid in full or (3) an OIC is accepted by the IRS which would settle the debt and any tax lien associated with the debt would be no longer enforceable and have to be released. See 26 U.S.C. §6325(a)(1) . In this case, the parties have stipulated to the validity of the IRS lien and it is enforceable against the debtor and the assets of the debtor. The amount of debt for the tax periods listed on the IRS tax lien have not been paid in full by the debtor as is evidenced by Government Exhibit's No: 1 and 2. The debt for the tax lien periods was $187,067.43 as of the petition date and $203,261.14 as of August 8, 1994. There is no evidence which would substantiate that the debtor filed an OIC with the IRS and even if the alleged letter which accompanied the October 19, 1990 payment could be construed as an OIC, there is no evidence that the IRA ever accepted the terms of the offer in the letter. None of the parties at the hearing or any other named Defendant produced any evidence that would support their argument that the IRS agreed to release its lien in accordance with the statute cited herein.

Based on the foregoing, it is

ORDERED, ADJUDGED, DECREED and DETERMINED that the Notice of Federal Tax Lien filed by the IRS against the Debtor on November 22, 1989 with the Office of the Judge of Probate of Jefferson County, Alabama is a valid lien, perfected lien and enforceable lien against the assets of the Debtor and this estate;

ORDERED, ADJUDGED, DECREED and DETERMINED that as to the funds of this estate the Notice of Federal Tax Lien filed by the IRS against the Debtor on November 22, 1989 with the Office of the Judge of Probate of Jefferson County, Alabama is a secured claim and lien which is paramount to the secured claims, liens or interests of the other named Defendants in this case;

ORDERED, ADJUDGED, DECREED and DETERMINED that the amount of the secured claim of the IRS as of the petition date was $187,067.34 and to the extent that the estate has funds in excess of the stated amount, the IRS is entitled to any applicable accrued interest according to law.

DONE and ORDERED

 

 

 

 

[92-2 USTC ¶50,413] Gerald H. and Carole J. Keating, Plaintiffs v. United States of America , Defendant

U.S. District Court, Dist. Neb. , CV. 90-0-484, 5/15/92, 794 FSupp 888

[Code Sec. 7122 ]

Offers in compromise: Oral agreements: Tax refunds--Oral agreements to amend an offer in compromise did not alter the IRS 's ability to withhold a taxpayer's refund to offset an outstanding tax liability. Following a request by the IRS for a collateral agreement concerning future income, the taxpayer increased the offer amount contained in Form 656. The taxpayer claimed that the IRS was bound by oral agreements involving the amended amount, but, the agreements only called for changing the amount of the offer and not the conditions of the compromise. Accordingly, the IRS was allowed to withhold the refund. .

MEMORANDUM OPINION

STROM, Chief Judge:

This matter is before the Court on the plaintiffs' objections (Filing No. 18) to the findings and recommendations of the magistrate judge (Filing No. 17), wherein it was recommended that plaintiffs' motion for summary judgment (Filing No. 10) be denied and that defendant's motion for summary judgment (Filing No. 8) be granted. Pursuant to 28 U.S.C. §636(b) , the Court has conducted a de novo review of those portions of the magistrate judge's findings and recommendations to which objections have been made.

Summary judgment is proper if there is no genuine issue of material fact, and the moving party should prevail as a matter of law. Fed. R. Civ. P. 56(c). Upon review of a motion for summary judgment, this Court must give the party opposing the motion the benefit of all favorable factual inferences. Holloway v. Lockhart, 813 F.2d 874, 878 (8th Cir. 1987). The parties agree there are no material facts in dispute.

The plaintiffs, Gerald H. and Carol J. Keating, brought this action seeking to recover $6,989.24, plus interest, which the Keatings claimed the Internal Revenue Service ( IRS ) wrongfully withheld from the Keatings' 1987 tax refund and which was applied to the Keatings' 1986 tax liability. The IRS withheld the monies pursuant to ¶3(b) of a Form 656 Offer in Compromise, which read as follows:

In making this offer, and as part of the consideration, it is agreed (a) that the United States shall keep all payments and other credits made to the accounts for the periods covered by this offer, and (b) that the United States shall keep any and all amounts to which the taxpayer-proponents may be entitled under internal revenue laws, due through overpayments of any tax or other liability, including interest and penalties, for periods ending before or within or as of the end of calendar year in which this offer is accepted. (And which are not in excess of the difference between the liability sought to be compromised and the amount offered). Any such refund received after this offer is filed will be returned immediately.

(Emphasis added). According to the Keatings, the government's actions violated a February, 1988, Thirty Thousand Dollar ($30,000) offer in compromise which the parties negotiated in full satisfaction for all of the Keatings' tax liabilities for 1986 and other prior taxable years. The Keatings argue that their agreement, including an oral agreement, effectively superseded the inconsistent language contained in ¶3(b) of Form 656.

The United States contends that the $30,000 Offer in Compromise did not supersede ¶3(b), which authorizes the IRS to retain the Keatings' 1987 tax refund. The magistrate judge agreed with the government that ¶3(b) remained part of the parties' final agreement.

The settlement offer, which the parties negotiated over the course of seven months, effectively began with the September 9, 1987, Form 656 Offer in Compromise, in the amount of $21,000. In January, 1988, the IRS demanded a collateral agreement on future income, in addition to the $21,000 settlement offer. After subsequent negotiations, the parties orally agreed to a $30,000 cash offer in lieu of the Keatings having to contend with monthly payments, quarterly payments, future income collateral agreements, or any other form of future liability (Fritz Deposition 49:10-50:23; Exhibit Nos. 21, 22). The IRS requested that the Keatings submit a letter agreeing to the amended amount (Exhibit No. 21). In February, 1988, the Keatings amended the settlement amount, increasing it from $21,000 to $30,000, in exchange for the IRS dropping its demand for a collateral agreement on future income (Exhibit No. 22). The Keatings' attorney, Matthew Fritz, testified that he and the Keatings considered this letter to be an acceptance of the offer to settle for $30,000 and, despite the language referencing the Offer in Compromise, they believed that it effectively revoked all other provisions of the Form 656 then on file (Fritz Deposition 52:3-53:10; 82:1-17; 86:9-87:3; 106:9-109:5).

These amendments and other terms of the offer were memorialized in various letters between the parties subsequent to the submission of the original Form 656. At no time did the IRS demand, nor did the Keatings submit, another Form 656 containing these amendments. However, the correspondence often referred back to the pending Offer in Compromise (Exhibit Nos. 12, 14, 19, 21, 22, 23, 25, 26, 27, 28, 29, and 32).

After reviewing the evidence submitted in support of, and in opposition to, the parties' respective motions for summary judgment, the magistrate judge concluded that the provisions of Form 656 were binding upon the plaintiffs and recommended that the government's motion for summary judgment be granted. The Keatings object to what they perceive as the apparent failure of the magistrate judge to consider the deposition of Matthew Fritz in its entirety. The only testimony in the record is that of Fritz, which both parties submitted in support of their respective motions for summary judgment. The Keatings assert that Fritz' deposition read in its entirety, makes it logically impossible to conclude that ¶3(b) of the Offer in Compromise was not superseded by subsequent oral and written agreements.

According to the Keatings, in a contract dispute over the construction of the offer in compromise, the Court must endeavor to apply the true intention of the parties. The Keatings argue that Fritz' deposition is dispositive regarding this intention. The Keatings state that the magistrate judge failed to consider the circumstances surrounding the $30,000 oral cash agreement, namely that the Keatings would not be required to make any additional future monetary outlays. The Keatings posit that this is what the parties intended and that this intention was embodied in an oral agreement between Messrs. Fritz and Robert Wilson, the IRS Special Procedures Function Adviser. According to the Keatings, the magistrate judge misconstrued the term "offer in compromise" as referring exclusively to Form 656. They suggest that the term, as used by the parties, refers not only to Form 656, but also to the entire series of oral and written agreement composing the compromise process.

The Keatings specifically object to the following findings of the magistrate judge:

(1) that the IRS consistently required that a Form 656, unaltered by any deletions, be the basis of the plaintiff's Offer in Compromise (Magistrate's report, at 12);

(2) that the parties agree that all the terms of their agreement were expressed in writing (Magistrate's report, at 11); and

(3) that the evidence, and particularly the plaintiffs' own correspondence, fails to support the Keatings' contention that Form 656 and ¶3(b) were superseded by subsequent oral and written agreements (Magistrate's report, at 12).

Finally, the Keatings object to the magistrate judge's finding that Robbins Tire & Rubber Co. v. United States [72-2 USTC ¶9477 ], 462 F.2d 684 (5th Cir. 1972), cert. denied, 410 U.S. 913 (1973), is persuasive authority. In Robbins Tire, the taxpayer contended that ¶3(b) of Form 656 was ambiguous, and he sought to introduce parol evidence of prior agreements under the ambiguity exception to the parol evidence rule. The Keatings argue that the parol evidence rule is not applicable to this action because the agreements at issue postdate the execution of the Form 656. As such, the Keatings claim that Robbins Tire has no bearing on the resolution of the issues before the Court.

The government contends that the Keatings' agreement with the IRS was completely integrated and wholly unambiguous and that the writings themselves were the only competent evidence of the agreement. Therefore, the government argues, parol evidence cannot be considered by the Court for the purposes of varying or contradicting ¶3(b) of the Offer in Compromise Form 656.

The writings, taken as a whole, reasonably appear to be a complete agreement. The oral agreement at issue apparently occurred between January 14, 1988 , when the IRS notified Fritz that the collateral agreement on future income would be required, and February 10, 1988 , when the IRS notified Fritz that the IRS would accept the $30,000 from the Keatings. Wilson 's February 10, 1988 , letter to Fritz concludes: "If an amended offer of $30,000 cash upon notice of acceptance can be arranged, please have your clients address a letter to this office amending the amount of the offer." (Exhibit No. 21). Subsequently, the Keatings submitted a letter to Mr. Wilson dated February 24, 1988 , which read:

As a follow-up to your letter dated February 10, 1988 , to our legal counsel, we are forwarding this correspondence which is intended to amend the offer in compromise which we submitted to your office on or about September 9, 1987 . The purpose of this amendment is to increase the amount of our cash offer from $21,000 to $30,000, which shall be due and payable upon receipt of notice from your office that the amended offer is acceptable to the IRS . In consideration for increasing the amount of the cash offer it is our understanding that no collateral agreement for future income will be required.

(Exhibit No. 22) (emphasis supplied). This letter clearly refers back to the Form 656 offer in compromise and speaks only of amending the amount of the offer rather than changing any of its conditions. Mr. Fritz' deposition also reveals that at no time in these negotiations was the elimination of ¶3(b) specifically discussed (100:19-101:1). The Court agrees with the magistrate judge that the evidence does not support the Keatings' contention that ¶3(b) was superseded by subsequent oral or written agreements.

Even assuming that an oral agreement existed between the parties that attempted to supersede Form 656, an oral agreement with the Internal Revenue Service with respect to federal income tax liability cannot bind the government. Boulez v. Commissioner [87-1 USTC ¶9177 ], 810 F.2d 209, 213-16 (D.C. Cir.), cert. denied, 484 U.S. 896 (1987). The Internal Revenue Code and the Treasury regulations specifically require a written offer and acceptance of an offer in compromise. Id. at 213. The parties negotiated the offer in compromise subject to the terms of these regulations. Furthermore, these treasury regulations support the magistrate judge's reliance on Robbins Tire, in which the Fifth Circuit held that parol evidence was inadmissible to vary or contradict the provisions of an unambiguous offer in compromise. Robbins Tire [72-2 USTC ¶9477 ], 462 F.2d at 687-88. The magistrate judge properly looked to Robbins Tire and correctly found that the Keatings had presented no competent evidence of an amendment to the offer in compromise.

As the evidence supports the magistrate judge's finding that Form 656 is binding on the plaintiff, the Court will adopt the magistrate judge's report and recommendation and will grant defendant's motion for summary judgment and deny plaintiff's motion for summary judgment. An order in conformity with this memorandum opinion will issue this date.

 

 

 

 

[92-1 USTC ¶50,178] Gerald H. and Carole J. Keating, Plaintiffs v. The United States of America , Defendant

U.S. District Court, Dist. Neb. , CV 90-0-484, 3/9/92

[Code Sec. 7122 ]

Offer in compromise: Refund suit: Fact finding.--Since an offer in compromise was valid and binding, the taxpayers could not escape its conclusive bar to their refund suit. The original offer, which was made on Form 656, was later revised and then amended by letter. The amended letter constituted a collateral agreement, which simply offered additional consideration for the acceptance of the offer in compromise. The validity of the offer in compromise on two documents was recognized by both parties and had to be recognized by the court under principles of contract law. Thus, summary judgment was granted in favor of the government.

Robert J. Murray, Kennedy, Holland Law Firm, 10306 Regency Parkway Dr., Omaha , Neb. 68114 , for plaintiff. Daniel A. Morris, United States Attorney, Omaha, Neb. 68101, Robert D. Metcalfe, Department of Justice, Washington, D.C. 20530, for defendant.

REPORT AND RECOMMENDATION

JAUDZEMIS, Magistrate Judge:

This matter is before the court pursuant to 28 U.S.C. §636 on the parties' cross motions for summary judgment (filings nos. 8 and 10). The plaintiffs, Gerald H. and Carole J. Keating, filed this action on July 17, 1990 , seeking the return of $6,989.24, plus interest, representing the amount retained by the Internal Revenue Service ( IRS ) from the Keatings' 1987 income tax refund and credited to the Keatings' unpaid income tax liability for 1986.

In its answer, the United States affirmatively alleged that plaintiffs' recovery was barred (1) by a prior accord and satisfaction and/or settlement reached by the parties concerning the plaintiffs' federal income tax liabilities for taxable years ending December 31, 1979 , through December 31, 1986 , as expressed in an Offer in Compromise between the parties which was accepted on behalf of the United States on or about April 7, 1988 ; and (2) by the setoff of plaintiffs' overpayment of 1986 income taxes against the plaintiffs' unpaid 1987 income tax liabilities.

UNDISPUTED FACTS

Plaintiffs and defendant agree that there are no material facts in dispute. The plaintiff has submitted a Statement of Material Facts Not in Dispute, which filing has not been objected to by the defendant. Both plaintiffs and defendant have submitted, in support of their respective motions for summary judgment, the deposition of Matthew Fritz, the attorney who represented the plaintiffs in their original dispute with the IRS .

The record shows that the plaintiffs consulted Matthew J. Fritz, a licensed attorney, regarding federal income tax deficiencies accrued over several years. Fritz acted as the plaintiffs' attorney in fact at all times relevant to this action.

Revenue Officer Sharon Barber was assigned to collect the back taxes from plaintiffs. On August 31, 1987 , Fritz submitted duplicate originals of an IRS Form 656, Offer in Compromise, to the IRS on behalf of the plaintiffs, offering to compromise federal tax deficiencies for tax years 1979, 1980, 1983, 1985, and 1986. The amount of the offer was $21,000 to be paid in full upon acceptance of the offer. Fritz obliterated certain boilerplate language on the form pertaining to deferred payments. (14:1-15:20; 19:5-25; E5) ¹ Fritz's forwarding letter also stated that the Form 656 did not completely embody the terms of the offer:

I also want you to be aware by way of this letter of additional conditions on the Offer, which do not appear in the Form 656. It should be understood that the amount of money to be borrowed by Mr. and Mrs. Keating in connection with this offer is $30,000.00. The additional $9,000.00 would be applied to bring current their estimated tax liability for the year 1987. In addition, the taxpayers would continue to make the $900.00 monthly payments, which were begun last month, toward their 1987 estimated liability.

(14:10-12; E4)

Sometime between August 31 and September 9, 1987 , Barber informed Fritz that the omission of the deferred payment language on the August 31, 1987 Form 656 was unacceptable. She requested that a revised Form 656 be submitted providing for payment of the $21,000 settlement amount not later than 10 days after taxpayer receipt of acceptance. (19:5-25)

On September 9, 1987 , Fritz submitted duplicate originals of a revised Form 656 containing the terms directed by Barber. (18:2-11;E7) The paragraph in Form 656, Offer in Compromise, which is at the heart of the current controversy between the plaintiffs and defendant, is as follows:

3. In making this offer, and as a part of the consideration, it is agreed (a) that the United States shall keep all payments and other credits made to the accounts for the periods covered by this offer, and (b) that the United States shall keep any and all amounts to which the taxpayer-proponents may be entitled under internal revenue laws, due through overpayments of any tax or other liability, including interest and penalties, for periods ending before or within or as of the end of the calendar year in which this offer is accepted (and which are not in excess of the difference between the liability sought to be compromised and the amount offered). Any such refund received after this offer is filed will be returned immediately.

(Emphasis added).

Fritz's forwarding letter again stated that the revised Form 656 did not completely embody the terms of the settlement offer:

By way of this letter, I want to confirm the additional conditions of this Offer which do not appear in the Form 656. In connection with this Offer, Mr. and Mrs. Keating will borrow $30,000.00. $9,000.00 of the loan will be made on or before September 30, 1987, at which time that $9,000.00 will be forwarded to you for application toward Mr. and Mrs. Keating's estimated income tax liability for the year 1987. ² In addition, the taxpayers will continue to make the $900.00 monthly payments, which were begun last month, toward their 1987 estimated liability. ³ The remaining $21,000.00 of the Offer will also be borrowed and forwarded to you not later than ten (10) days after receipt by the taxpayers or this firm of notice that the Offer has been accepted. It is further understood that during the time in which the Service is considering the Offer, the Service will take no enforced collection activity with regard to the liabilities for the years 1979 through 1986, and that the taxpayers are not required to make any additional payments for those years during that time period. These final two understandings are conditional upon the taxpayers' lender, Robin Rasmussen obtaining a Letter of Credit which is acceptable to the Service and which will "guaranty" that the $21,000.00 will be available if and when the Offer is accepted.

(20:1-24:19; E6) (Emphasis added.) The Keatings and Rasmussen purchased a letter of credit dated October 7, 1987 , from American National Bank.

On or about January 14, 1988 , Fritz received notice that the IRS would require a collateral agreement on future income in conjunction with plaintiffs' Offer in Compromise, and in addition to the $21,000 settlement offer. (42:13-43:11; 46:5-16; E19) Between January 14 and February 10, 1988 , Fritz contacted Robert Wilson, the offer in compromise specialist employed by the IRS Special Procedures Function in Omaha , concerning the IRS ' request for a collateral agreement on plaintiffs' future income. Fritz told Wilson that the plaintiffs had obligations to creditors who would be financing the offer in compromise, so any agreement which provided for a monetary obligation beyond the settlement amount was unacceptable. As a result, the parties agreed to a higher cash offer ($30,000) in lieu of plaintiffs having to contend with monthly payments, quarterly payments, future income collateral agreements, or any other form of future liability. (49:10-50:23; E21; E22)

In confirmation of the parties' oral agreement to raise the cash offer in lieu of future monetary obligations, Fritz received a written request from Wilson for the plaintiffs to submit a written offer of $30,000 cash. (E21) Wilson 's letter concluded: "If an amended offer of $30,000.00 cash upon notice of acceptance can be arranged, please have your clients address a letter to this office amending the amount of their offer." (E21) Wilson 's letter did not request a revised Form 656 or a formal amendment referencing the Form 656 then on file.

On or about February 24, 1988 , the plaintiffs submitted a written offer (E22) of $30,000 cash:

As a follow-up to your letter . . . we are forwarding this correspondence which is intended to amend the Offer in Compromise which we submitted to your office on or about September 9, 1987 . The purpose of this amendment is to increase the amount of our cash offer from $21,000 to $30,000, which shall be due and payable upon receipt of notice from your office that the amended offer is acceptable to the IRS . In consideration for increasing the amount of the cash offer, it is our understanding that no collateral agreement for future income will be required.

(Emphasis added).

Fritz testified at his deposition that he and the plaintiffs considered this letter to be an acceptance of the IRS 's offer to settle for $30,000 cash and, despite the language referencing an amendment to the Offer in Compromise, believed that it effectively revoked all other provisions of the Form 656 then on file. (52:3-53:10; 82:1-17; 86:9-87:3; 106:9-109:5)

On April 1, 1988 , Fritz received notice that consideration of the plaintiffs' offer was on hold because the Examination Division had opened an audit of the 1986 tax year. The plaintiffs' irrevocable letter of credit was due to expire on April 7, 1988 . (60:2-61:9; 58:4-18; E26) Fritz arranged to expedite the audit examination by meeting with the auditor, Mary Sullivan, and conceding several proposed adjustments which the plaintiffs otherwise would have challenged. (61:10-62:33; 65:3-66:10) The record shows that the audit resulted in a deficiency or additional assessment of $4,084.40. (E27 p.2) Fritz testified that the plaintiffs conceded that amount because of Wilson 's agreement that it would be treated as subject to the Offer in Compromise. (64:8-66: 10)

On April 6, 1988 , Fritz, on behalf of the plaintiffs, executed a consent to collection and assessment regarding the $4,084.40 deficiency for 1986. Fritz's forwarding letter (E27) stated:

This consent to assessment and collection is submitted to you with the understanding that the additional liabilities reflected in this report are to be treated as part of the 1986 liabilities which are the subject of the Offer in Compromise which is about to be approved by the District Director.

(Emphasis added).

On April 7, 1988 , the plaintiffs were sent formal notice from the District Director that their $30,000 cash offer had been accepted. The notice (E28) stated:

Your deferred payment offer of $30,000.00 on Form 656, Offer in Compromise, submitted to compromise Federal income tax including statutory additions for the years ending December 31, 1979 ; December 31, 1980 ; December 31, 1983 ; December 31, 1984 ; December 31, 1985 and December 31, 1986 , has been accepted.

(Emphasis added).

The letter further provided that "[t]he total sum of $30,000 [must] be paid within ten days of notice of acceptance." The plaintiffs made the $30,000 cash payment within 10 days of receipt of the notice of acceptance (Answer ¶11) and received certificates of release of federal tax lien dated April 7, 1988 , for taxable years 1979, 1980, 1983, and 1984. (E28 Attachments)

In his April 8, 1988 , letter to the plaintiffs, Fritz informed Mr. Keating that

[a]s you know, the Compromise also involved the years 1985 and 1986. I have questioned Bob Wilson of the IRS regarding the lack of releases for those years. He informs me that no Notice of Federal Tax Lien was ever filed for those years, and thus, there is no need for a Certificate of Release.

On August 8, 1988 , the plaintiffs timely filed a Form 1040, U.S. Individual Income Tax Return, for the 1987 tax year. The return showed a tax overpayment owing to the plaintiffs in the amount of $5,189.21; however, the tax return preparer made a $900 calculation error with respect to the plaintiffs' 1987 estimated tax payments and the return should have reflected an overpayment of $6,089.21. (Answer ¶6) The plaintiffs directed that their 1987 overpayment be applied to their 1988 estimated tax. Instead, relying upon the language of Form 656, Offer in Compromise, infra at p. 3, the IRS applied the plaintiffs' 1987 tax overpayment to tax year 1986, a year covered by the parties' agreement. (E30, entry of 8-10-88 )

On or about April 9, 1990 , the plaintiffs filed a Form 1040X, Amended U.S. Individual Income Tax Return, for the 1987 tax year. The amended return showed an overpayment of $6,089.24, which the plaintiffs claimed as a refund. The plaintiffs also claimed an erroneous application of the overpayment to tax year 1986. On or about June 18, 1990 , the plaintiffs received notice that their claim for refund had been rejected. (Answer ¶¶6 and 8)

STANDARD OF REVIEW

Summary judgment is proper if there is no genuine issue of material fact, and the moving party should prevail as a matter of law. Fed. R. Civ. P. 56(c). "Regardless of whether the question is one of law or fact, when considering a motion for summary judgment the determination to be made is whether any material facts are disputed, and if none are disputed summary judgment is appropriate." Hyman Freightways v. Carolina Freight Carriers Corp., 942 F.2d 500, 502 (8th Cir. 1991). Upon review of a motion for summary judgment, the district court must give the party opposing the motion the benefit of all favorable factual inferences. Holloway v. Lockhart, 813 F.2d 874, 878 (8th Cir. 1987).

The parties herein agree that there are no material facts in dispute. This court finds that no material facts are in dispute and that summary judgment is appropriate on the legal issues presented.

ANALYSIS

The sole issue is whether the final agreement between the plaintiffs and the IRS contemplated the application of plaintiffs' 1987 tax overpayments to 1986, a year covered by the agreement.

In order to resolve the issue, it is necessary to determine whether the following language included in the revised IRS Form 656, Offer in Compromise, submitted by the plaintiffs on September 9, 1987 , remained part of the parties' final agreement:

3. In making this offer, and as a part of the consideration, it is agreed (a) that the United States shall keep all payments and other credits made to the accounts for the periods covered by this offer, and (b) that the United States shall keep any and all amounts to which the taxpayer-proponents may be entitled under the Internal Revenue laws, due through overpayments of any tax or other liability, including interest and penalties, for periods ending before or within or as of the end of the calendar year in which this offer is accepted (and which are not in excess of the difference between the liability sought to be compromised and the amount offered). Any such refund received after this offer is filed will be returned immediately.

(Emphasis added.)

Plaintiffs contend that the IRS 's request for a written offer of $30,000 cash and the plaintiffs' submission of that offer, made over 5 months after the revised Form 656 was filed, effectively modified and superseded the Form 656 and the provisions contained at paragraph 3(b). The plaintiffs argue that as a matter of law, no single writing constitutes the final and complete expression of the parties' agreement and that parol evidence is admissible to aid in the construction of the material terms of the agreement. The plaintiffs also argue that the government is estopped to deny plaintiffs' interpretation of the contract because of plaintiffs' reasonable detrimental reliance upon defendant's representations.

The government contends that the plaintiffs' letters of September 14, 1987 (adding taxable year 1984 to the offer in compromise), February 24, 1988 (increasing the cash offer from $21,000 to $30,000), and April 7, 1988 (consenting to the assessment of additional tax liabilities for 1986) served only to amend the revised Form 656 submitted by the plaintiffs on September 9, 1987 , and that the plaintiffs ultimately agreed to be bound by the language in Form 656 paragraph 3(b). Accordingly, the IRS did not breach the parties' agreement by applying plaintiffs' 1987 federal income tax overpayment ($6,089.21) to the unpaid balance of plaintiffs' 1986 tax liabilities.

An agreement between taxpayers and the government compromising unpaid taxes is a contract which is governed by the rules applicable to contracts generally. Big Diamond Mills Co. v. United States [2 USTC ¶791 ], 51 F.2d 721 (8th Cir. 1931). The legal effect and interpretation of a contract are governed by the law of the state in which the contract was entered into and performed--in this case, Nebraska . Bernard v. Metcalfe Const. Co., 64 F.Supp. 953 (D. Neb. 1946); Tobin Quarries v. Central Neb. Public Power & Irr. Dist., 64 F.Supp. 200 (D. Neb. 1946), aff'd, 157 F.2d 482 (8th Cir. 1946).

The parties agree that all the terms of their agreement are expressed in writing, but disagree as to which particular writings constitute the agreement. ⁴ In Nebraska , the construction of a written contract is a question of law to be determined by the court. Leo A. Daly Co. v. Omaha-Douglas Public Bldg. Comm., 212 Neb. 533, 324 N.W.2d 252 (1982). See also Albee v. Maverick Media, Inc., 239 Neb. 60, 71, 474 N.W.2d 238, 245 (1991) (" 'Whether a document is ambiguous is a question of law initially determined by a trial court.' ")

The precise paragraph and language at issue in this dispute was the subject of the decision of the 5th Circuit in Robbins Tire and Rubber Co. v. United States [72-2 USTC ¶9477 ], 462 F.2d 684 (5th Cir. 1972) cert. den., 410 U.S. 913 (1973). The District Court held that the language of paragraph 3(b) of Form 656, Offer in Compromise, was ambiguous and permitted the taxpayer to introduce parol evidence of its intentions at the time of making the offer. The appellate court found that, as a matter of law, no ambiguity existed in the form and it was error to have received testimony as to the intention of one of the parties. Therefore, the court held that the United States was entitled to retain the plaintiff's refund for the year in which the settlement was entered. While not controlling in this circuit, that opinion is very persuasive, particularly in light of the facts presented herein.

The assertion of the plaintiffs that Form 656, Offer in Compromise, had no force and effect because of later amendments is not borne out by the evidence, and most particularly not supported by plaintiffs' own correspondence. In February of 1988 when the plaintiffs submitted in writing the offer to pay $30,000 instead of $21,000, the plaintiffs specifically reference the earlier Offer in Compromise and refer to the change in the dollar amount of their offer as an amendment to the September 1987 Offer in Compromise. Similarly, in April of 1988 the plaintiffs again reference the Offer in Compromise and express their understanding that the Offer in Compromise "is about to be approved by the District Director." (E27) That understanding was confirmed by the IRS in its response to plaintiffs' offer. In informing the plaintiffs that their $30,000 cash offer had been accepted, the District Director wrote: "Your deferred payment offer of $30,000 on Form 656, Offer in Compromise. . . . has been accepted." (E28)

The IRS consistently required that Form 656 unaltered by any deletions be the basis of the plaintiffs' Offer in Compromise and plaintiffs complied with that requirement. The application of the 1987 tax year overpayment to tax year 1986 was contemplated by the express terms of the Offer in Compromise submitted by the plaintiffs.

For that reason, I conclude that summary judgment in favor of the defendant is appropriate.

IT IS THEREFORE RECOMMENDED that plaintiffs' motion for summary judgment (filing no. 10) be denied and that defendant's motion for summary judgment (filing no. 8) be granted.

DATED this 9th day of March, 1992.

¹ Citations in the body of this report refer to the deposition of Matthew Fritz taken April 12, 1991, and the exhibits thereto.

² The $9,000 was forwarded to the IRS on October 8, 1987. (E14)

³ The plaintiffs made all of the $900 monthly payments required by the agreement.

⁴ In Leo A. Daly Co. v. Omaha-Douglas Public Bldg. Comm., 212 Neb. 533, 541, 324 N.W.2d 252, 256 (1982), the Nebraska Supreme Court adopted the Restatement definition of "integrated agreement": "(1) An integrated agreement is a writing or writings constituting a final expression of one or more terms of an agreement. "(2) Whether there is an integrated agreement is to be determined by the court as a question preliminary to determination of a question of interpretation or to application of the parol evidence rule. "(3) Where the parties reduce an agreement to a writing which, in view of its completeness and specificity reasonably appears to be a complete agreement, it is taken to be an integrated agreement unless it is established by other evidence that the writing did not constitute a final expression." (Quoting the Restatement (Second) of Contracts §209 at 115 (1981).)

 

 

 

 

[91-1 USTC ¶50,288] Terrence Waller and Leota Waller, Plaintiffs v. United States of America , Defendant

U.S. District Court, Eastern District of California, S-90-0693-WBS/GGH, 5/6/91

[Code Sec. 7122 ]

Compromises: Fact-finding.--Since an offer in compromise was valid and binding, the taxpayers could not escape its conclusive bar to their refund suit. The original offer, which was made on Form 656, was later amended by letter. The amendment letter constituted a collateral agreement, which simply offered additional consideration for the acceptance of the offer in compromise. The validity of the offer in compromise on two documents was recognized by both parties and had to be recognized by the court. Furthermore, the taxpayers knew of the possibility that the assessment was illegal and yet, in signing the Form 656, they waived any right to later bring a refund suit. In addition, they submitted no evidence of fraud or mutual mistake in entering the compromise agreement, and it appeared that they would have no grounds to make such an allegation. .

Richard H. Jenkins, United States Attorney, Sacramento, Calif. 95814, John P. Pirkle, Department of Justice, Washington, D.C. 20530, for defendant.

ORDER

SHUBB, District Judge:

This tax refund suit is before the Court on cross-motions for summary judgment under Fed. R. Civ. P. 56.

On May 14, 1979 , the IRS discovered an error in plaintiffs' timely-filed tax return for the 1978 tax year. The IRS adjusted plaintiffs' tax owing (line 35 of the return) from $4,388.00 to $11,500.32 and erroneously allowed plaintiffs credits of $11,614.00, refunding to plaintiffs $113.68. On April 19, 1982 , the IRS reversed the erroneous credit of $5,807.00 allowed in 1979, charged plaintiffs interest of $1,920.37, and assessed plaintiffs a late penalty of $1,016.22.

Plaintiffs informed the IRS that the late penalty was illegal because plaintiffs received no prior notification, and the entire assessment was illegal because it was made more than three years after the filing of the return. 26 U.S.C. §6501(a) . On February 22, 1984 , plaintiffs submitted to the IRS an offer in compromise of $0 on Form 656. At that time, plaintiffs were represented by counsel. On April 5, 1984 , plaintiffs amended their offer in compromise to $500. On July 21, 1987 , plaintiffs signed a letter devised by the IRS which began, "In regards to the Offer in Compromise for 1978 originally submitted on 2-22-84 , we hereby amend such offer to reflect the following terms: . . . ." On September 25, 1987 , the IRS accepted this offer in compromise. Plaintiffs, prior to bringing this suit, made payments in the sum of $7,471 in full satisfaction of the agreement.

Plaintiffs allege they are entitled to summary judgment because the IRS ' assessment was clearly made beyond the statute of limitations. Plaintiffs further claim that there was no valid offer in compromise. Defendant asserts that a valid offer in compromise bars plaintiffs' suit.

The "purpose of summary judgment is to 'pierce the pleadings and to assess the proof in order to see whether there is a genuine need for trial.' " Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986) (quoting Fed. R. Civ. P. 56(e) advisory committee's note on 1963 amendments). Summary judgment is appropriate when there exists no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(c); see also Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250 (1986).

This court finds the existence of a valid and binding offer in compromise. Plaintiffs argue that an offer in compromise is not valid unless made on Form 656. Treas. Reg. §§301.7122-1(d) , 601.203 . In this case, the original offer was made on Form 656, and was later amended by letter. In Timms v. United States [82-2 USTC ¶9426 ], 678 F.2d 831 (9th Cir. 1982), the taxpayers made a compromise offer pursuant to 26 U.S.C. §7122 , and then amended it several times. The taxpayers then submitted, by letter, a proposed settlement, drafting the basic language of the agreement. The government, by letter, made minor revisions in the taxpayer's proposal and accepted the settlement. While the opinion does not explicitly state that the original offer in compromise was submitted on Form 656, it does state that the "taxpayers made a compromise offer pursuant to IRC §7122 ," implying that the offer was proper in form. Id. at 832. The opinion later mentions that the content of the offer was changed by letter. Thus, it is fairly clear from the opinion that the revisions to the offer were made through letters alone. Id. at 834 n.3.

Other cases have recognized an amendment by letter to Form 656, terming it a "collateral agreement". Treasury Regulation §301.7122-1(d)(3) states, "As a condition to accepting an offer in compromise, the taxpayer may be required to enter into any collateral agreement . . . ." The Regulations set no standard as to the form these collateral agreements must take. In Finen v. Commissioner of Internal Revenue [CCH Dec. 26,616 ], 41 T.C. 557 (1964), the taxpayers made an offer in compromise on two documents: Form 656, and a so-called collateral agreement, which offered additional consideration for the acceptance of the offer in compromise. The two documents were submitted separately, almost two months apart. The collateral agreement in Finen was remarkably similar to the Wallers' letter amending their offer in compromise. In Finen, the two documents were treated as a valid offer in compromise. Similarly, in United States v. Lane [62-1 USTC ¶9467 ], 303 F.2d 1 (5th Cir. 1962), the taxpayer submitted a series of offers in compromise. Part of the offer was submitted on Form 656, and a second document, termed a "collateral income agreement," was also submitted. The collateral agreement simply offered additional consideration for acceptance of the offer in compromise, id. at 2, which seems to have been the sole function of the amended offers in compromise in the case at bar. Finally, in the case at bar, both plaintiffs' and defendant's independent use of letters to amend Form 656 suggests that such a method of amendment is recognized.

The validity of the offer in compromise was recognized by both parties, and must be recognized by this court. Plaintiffs claim, inter alia, that there was no valid offer in compromise because, in signing the agreement, they did not intend to waive their rights to later bring a refund action. The face of the agreement signed by plaintiffs stated plainly and unambiguously that the agreement was an amendment to the February 22, 1984 offer in compromise, and paragraph 5 of Form 656, signed by plaintiffs, states, "It is further agreed that upon notice to the taxpayers of the acceptance of this offer, the taxpayers shall have no right to contest in court or otherwise the amount of the liability sought to be compromised." Plaintiffs' alleged intent not to waive such a right is irrelevant in light of the clear and unambiguous character of the agreement dated July 21, 1987 and Form 656, incorporated by it. See Kelly v. Commissioner of Internal Revenue [CCH Dec. 46,538(M) ], T.C. Memo 1990-202, 1990 WL 45664 (1990) (taxpayer's intent in signing Form 872-A to extend statute of limitations period as to business portion of return but not as to entire return deemed irrelevant in light of clear and unambiguous terms of the Form).

Plaintiffs also argue that the offer in compromise was not valid because the IRS made no compromises. While plaintiffs cite no authority for this proposition, it also appears that the IRS did compromise the $1,016.22 late penalty as well as 20% of the tax assessment and interest. Plaintiffs also argue that, since the tax was illegally assessed, plaintiffs had no liability to compromise. Again, plaintiffs cite no authority for such a proposition. In Sprowles v. United States [89-2 USTC ¶9467 ], 63 A.F.T.R.2d 89-1423, 1989 WL 85652 (W.D.Ky 1989), the taxpayer contested an assessment on the grounds that it was barred by the statute of limitations, but he nevertheless submitted an offer in compromise, which was eventually accepted by the IRS . The court ruled that the taxpayer not only waived the right to contest legally assessed taxes, but also those illegally assessed, and it found the valid and binding offer in compromise conclusively established the taxpayer's liability. Here, plaintiffs knew of the possibility that the assessment was illegal and yet, in signing the Form 656, they waived any right to later bring a refund suit.

Since the offer in compromise is valid and binding, plaintiffs cannot escape its conclusive bar to their refund suit. A valid offer in compromise conclusively establishes liability and may only be set aside on the grounds of fraud or mutual mistake of fact. Treas. Reg. §301.7122-1(c) ; see also Timms v. United States [82-2 USTC ¶9426 ], 678 F.2d at 833. Plaintiffs have submitted no evidence of fraud or mutual mistake in entering the compromise agreement, and it appears that they would have no grounds to make such an allegation. Plaintiffs' action for refund is therefore barred. See Timms v. United States [82-2 USTC ¶9426 ], 678 F.2d at 834 (disallowing taxpayer's claim for refund following a compromise settlement, and stating, "[A]n agreement is an agreement and the taxpayer is bound by its terms . . . ."). Because plaintiffs' suit is foreclosed by the offer in compromise and Treasury Regulation §301.7122-1(c) , summary judgment must be granted in favor of defendant pursuant to Fed. R. Civ. P. 56.

IT IS THEREFORE ORDERED, plaintiffs' motion for summary judgment be, and the same hereby is, denied, and defendant's motion for summary judgment be, and the same hereby is, granted.

 

[82-2 USTC ¶9692]Ira A. Edens, Plaintiff v. United States of America , Defendant

U. S. District Court, Dist. S. C., Columbia Div., Civil Action No. 79-509-15, 10/22/82

[Code Sec. 7122]

Compromises: Fact finding: Complete settlement.--A settlement report signed by the taxpayer and a representative of the IRS was found to contain provisions settling all issues between the parties and, at the time the report was signed, complete settlement was the clear understanding of the parties. Taxpayer could not later contend that a refund and credits were still due from the IRS . .

Ira A. Edens, P. O. Box 412, Columbia, S. C. 29202, pro se. Arthur T. Cole, P. O. Box 2311, Columbia, S. C. 29202, for plaintiff. Lincoln C. Jenkins, Assistant United States Attorney, Columbia, S. C. 29202, Mark Muedeking, Department of Justice, Washington, D. C. 20530, for defendant.

Order of Dismissal

HAMILTON, District Judge:

Following extensive negotiations between the parties, a "Settlement" was entered into in the form of a letter-agreement dated January 28, 1982 , a copy of which is attached as a part of this Order of Dismissal. Pursuant to subparagraph (1) of the "Settlement," the Internal Revenue Service (" IRS ") caused to be prepared its "concluding 'Settlement' report" (Form 4549 consisting of 5 pages) for the tax years in dispute in this matter, which "concluding 'Settlement' report" was approved by the parties on March 10, 1982 , a copy of which is also attached as a part of this Order of Dismissal. ¹ As the final (narrative) part of the March 10, 1982, report, it is provided in part:

In further consideration of Form 4549, Income Tax Examination Changes Revised Report dated 3-8-82, Ira A. Edens agrees to submit a motion to dismiss Civil Action No. 79-509, in the United States District Court, District of South Carolina, Columbia Division, in the case of Ira A. Edens, Plaintiff v. United States of America , Defendant.

. . .

This Agreement of Jan. 28, 1982 is further supplemented by Form 4549, Revised Income Tax Examination Changes dated 3-8-82.

s/ Henry J. Chardos,

Columbia District 3/10/82 I. R. A.

s/ Ira A. Edens 3/10/82

s/ Velta Jane Edens 3/10/82

Witness: s/ Arthur T. Cole

Attorney at Law

With the acceptance on March 10, 1982 , of the computations and results as contained within the "concluding 'Settlement' report" (Form 4549, March 8, 1982 ), Mr. Edens remitted to the IRS the $426.50 in taxes and interest reflected as due and payable by the taxpayers.

The matter then came on before the court sua sponte for a hearing on September 30, 1982, to determine why this action should now be dismissed. At this hearing, Mr. Edens appeared pro se with his wife. During a brief recess, the court called Mr. Arthur T. Cole, an attorney friend of Mr. Edens who had some knowledge about this matter, having advised Mr. Edens previously, and he was kind enough to come down to the hearing. Also present were Mr. Henry J. Chardos of the IRS and Assistant U. S. Attorney Lincoln C. Jenkins, III , appearing on behalf of IRS .

Succinctly stated, Mr. Edens contends IRS has not complied with terms of the letter-agreement of January 28, 1982 , in particular the provisions of subparagraphs (5) calling for a refund of $5,300 and (6) stipulating that Mr. Edens is to be given Social Security (FICA) credits for the tax years 1976, 1977 and 1978. On the other hand, IRS contends that these, and all other relevant matters for the tax years in question, were included in the data and computations of the "concluding 'Settlement' report" (Form 4549, March 8, 1982 ). Stated differently, it is the position of IRS , and the Court so finds, that the report of March 8, 1982, settled all remaining issues between the parties and that this was the clear understanding of all parties. At the hearing on September 30, 1982 , Mr. Chardos reviewed the computations contained in the March 8, 1982 , report and detailed how these computations included the matters stipulated in subparagraphs (5) and (6) of the letter-agreement of January 28, 1982 . It was his testimony that these computations, as including and fulfilling the stipulations of subparagraphs (5) and (6) of the January 28, 1982 , letter-agreement, were fully explained and understood by Mr. Edens at the time he accepted these computations on March 10, 1982 , and remitted the $426.50 to IRS . The testimony of Mr. Cole and Mrs. Edens confirms Mr. Chardos' version of the acceptance by Mr. Edens of this report.

Mr. Edens now contends that he did not understand the March 8, 1982 , report (Form 4549) in this manner and he asserts that IRS has yet to comply with the stipulations of subparagraphs (5) and (6) of the January 28, 1982 , letter-agreement. The record does not support Mr. Edens' contentions in these regards.

Upon reviewing this entire matter and after a full explanation of the positions of Mr. Edens and IRS , Mr. Arthur Cole, an attorney friend of Mr. Edens who had advised him on certain matters from time to time, including at least some aspects of this matter, candidly and very frankly advised the Court that it was his understanding at the signing of the "concluding 'Settlement' report" on March 10, 1982 , to which he was a witness, that all issues in dispute in this matter had been completely and finally settled with the payment by Mr. Edens of the additional $426.50, and that there remained nothing further to be done on the part of either party. Concisely stated, the settlements between the parties had been consummated. The Court agrees and so finds. Mr. Cole recalled advising Mr. Edens that it was in his best interest to so settle this dispute of some duration with IRS by accepting the "concluding 'Settlement' report" (Form 4549) of March 8, 1982 .

When questioned in these same regards, Mrs. Edens, in direct contrast with her husband's position and understanding, advised the Court that she also understood the 'concluding 'Settlement' report" (Form 4549 of March 8, 1982 , to be a final consummation of the settlement between these taxpayers and Internal Revenue Service. Mrs. Edens stated that she did not accept or execute this report on March 10, 1982, with any understanding or expectation that anything further was required of IRS or taxpayers to conclude the settlement.

At the conclusion of this rather lengthy hearing, Mr. Cole, in the capacity as counsel for Mr. Edens, and without any objection on the part of Mr. Edens, moved the Court to dismiss this action with prejudice. Based on the foregoing findings of fact by this Court, the Court concludes that the agreed settlement by and between the parties has in fact been fully consummated and concluded in accordance with its terms, and that, accordingly, this action should be dismissed pursuant to the stipulation of the parties quoted herein from the report (narrative) consented to by the parties on March 10, 1982 .

It is therefore, ORDERED, AUJUDGED AND DECREED that this action be, and the same hereby is, dismissed with prejudice and forever ended.

IT IT SO ORDERED at Columbia , South Carolina , this 22nd day of October, 1982.

¹ An earlier Income Tax Examination Changes (Form 4549) consisting of 5 pages and dated March 4, 1982 , was revised by the final conclusions contained in the Form 4549 as approved by the parties under date of March 10, 1982 .

 

 

[75-2 USTC ¶9709]United States of America v. Harold T. Teti, Individually and as Administrator of the Estate of Emma M. Teti, Deceased, et al.

U. S. District Court, Dist. Conn. , Civil No. B-340, 8/5/75

[Code Sec. 7122]

Compromises: Authority to accept: Informal agreement.--The taxpayer was found liable for the amount of taxes determined in a conference between him and an IRS officer. The taxpayer's contention, that there was an agreement reached in that conference which reduced the amount owed, was rejected by the court. There was insufficient evidence to find that an agreement had been reached. Further, the IRS officer was not authorized to accept such an agreement.

[Code Sec. 6402]

Credits and refunds: Reversal of credit: Commissioner's discretion.--The government was not required to reverse a credit for overpayment of income taxes and apply the amount to later assessed deficiencies. The government had credited the taxpayer's claimed overpayment for the years 1967-1969 to the taxpayer's withholding tax liabilities. Subsequently, income tax liabilities were assessed for the 1967-1969 period. The taxpayer claimed that the government should have recredited the amount of overpayment to his income tax liabilities. The court concluded that such reversal was not required but merely permitted. The withheld sums which made up the overpayment were properly treated as an overpayment when they were credited to the withholding liabilities and the government was not obligated to take the taxpayer's preferences into account when making its decision. BACK REFERENCES: 75 FED ¶5406.098.

[Code Sec. 7121]

Closing agreements: Requirements: Representation of taxpayer.--The taxpayer's claim, that she was not bound by the closing agreement since she was not represented at the meeting, was rejected. The court concluded that the agreement reached at the conference did bind the taxpayer because her husband had actual authority to act as her agent. The taxpayer understood the purpose of the conference was to resolve outstanding tax liabilities, knew that her own tax liabilities would be the subject of the conference and knew that she would have no separate representative but took no steps to object or secure such representation. BACK REFERENCES: 75 FED ¶5693.279.

[Code Sec. 6213]

Assessment of tax: Waiver: Premature assessment.--Assessments made a month after a conference between the taxpayers and the IRS , while originally premature, became valid and enforceable after the expiration of the statutory 90-day period. The taxpayers contended that the government made the assessments during the 90-day period and that they, thus, were void. However, they conceded that the husband had executed a waiver of the notice and time restriction. The wife failed to testify that she had not executed a waiver and, given the presumptive correctness of the assessments, her claim failed. The court also noted that the conference provided adequate notice of the liabilities. Further, the 90-day period was to allow the taxpayers to petition the Tax Court but the taxpayers never sought relief there. BACK REFERENCES: 75 FED ¶5322.85.

[Code Sec. 6672]

Penalties, civil: Failure to collect and pay over tax: Responsible person: Willful--The taxpayer was found to be a responsible The taxpayer was found to be responsible person who willfully failed to collect and pay over withholding taxes. The taxpayer was the president and sole shareholder of a company. The taxpayer contended that officials of the bank to which the company was factoring accounts receivables were making all of the company's financial decisions. However, the court concluded that the taxpayer was a responsible person on the basis that the agreement between the bank and the company was informal and that the taxpayer voluntarily participated in the payment arrangement. Further, the taxpayer continued to sign checks at all times involved. Finally, the taxpayer's failure was willful in that by negotiating and participating in the payment arrangement he made a deliberate chocie in establishing the arrangement to pay other creditors and avoid paying the government. BACK REFERENCES: 75 FED ¶5569.013.

[Code Secs. 6204 and 6861]

Assessment of tax: Validity: Prior jeopardy assessment.--An assessment made on October 28, 1966 was found to be a proper jeopardy assessment which was abated so that a second assessment of taxes for 1965 and 1966 was valid. The court found that the first assessment had been made in the belief that the collection of tax from the taxpayer would be jeopardized by delay. Thus, there was no defect in the assessment of taxes and penalties against the taxpayer. BACK REFERENCES: 75 FED ¶5308.05 and 75 FED ¶5620.03.

[Code Sec. 6502]

Collection of tax: Assessment preceding: Assessment date.--Regardless of which assessment date was used, either the date of the jeopardy assessment made on October 28, 1966 or the date of the second assessment made on April 14, 1967, the suit for collection of tax, filed on August 13, 1971, was not barred by the six-year limitation period. BACK REFERENCES: 75 FED ¶5453.04.

[Code Sec. 7403]

Lien for taxes: Foreclosures: Conveyance by guardian.--The taxpayer was found to have a two-thirds interest in real property to which tax liens had attached. The taxpayer contended that he had transferred all interest in the property when he gave his wife a quitclaim deed. The court found that the taxpayer had only transferred his original one-third interest but was unable to transfer the two-thirds interest because at the time of the transfer the taxpayer was the legal guardian of his son, to whom the two-thirds interest belonged, and the taxpayer had not complied with local probate law to effect a transfer of the son's interest. BACK REFERENCES: 75 FED ¶5772.37.

Peter C. Dorsey, U. S. Attorney, Kenneth R. Davis, Ass't U. S. Attorney, Bridgeport , Conn. , for plaintiff. William J. Egan, Wiggin & Dana, New Haven, Conn., for New Haven Savings Bk., Thomas P. Hackett, John W. Hogan, Jr., DiSesa & Evans, New Haven, Conn., for H. T. Teti, Nicholas Triffin, DiSesa & Evans, New Haven, Conn., for A. B. Teti, for defendants.