T.C. Memo. 2014-209
UNITED STATES TAX COURT
DOUGLAS W. LUNDY AND RENITTA H. LUNDY, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 29616-13L. Filed October 8, 2014.
Ps filed a return for 2011, included in income P-H’s wages and
P-W’s net profit from self-employment, and reported both regular
income tax and self-employment tax. Ps did not pay any part of the
tax either before, with, or after the filing of the return. R now
proposes to collect by levy Ps’ outstanding liability.
Ps challenge the existence of the underlying liability on the
ground that P-H’s disability retirement income, which R conceded in
a prior redetermination action for 2005 was excludable from income,
served to capitalize P-W’s proprietorship, thereby rendering P-W’s
net profit nontaxable.
Held: No part of P-W’s net profit from self-employment is
excludable from Ps’ income, nor is any part of P-H’s wages.
Held, further, R may proceed with the proposed collection
action.
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[*2] Douglas W. Lundy and Renitta H. Lundy, pro sese.
Laura A. Price, for respondent.
MEMORANDUM OPINION
ARMEN, Special Trial Judge: Petitioners commenced this case for judicial
review of a Notice Of Determination Concerning Collection Action(s) Under
Section 6320 and/or 6330 (notice of determination).1 See sec. 6330(d)(1). In the
notice of determination, respondent’s Appeals Office sustained a proposed levy to
collect petitioners’ outstanding income tax liability for 2011. Pending now before
the Court is respondent’s motion for summary judgment, filed pursuant to Rule
121. Petitioners oppose the granting of respondent’s motion.
Background
The following is a summary of relevant facts that are not in dispute. These
facts are stated solely for the purpose of deciding the pending motion for summary
judgment and are not findings of fact for this case. See Estate of Roski v.
Commissioner, 128 T.C. 113, 115 (2007); see also Estate of Kahn v.
1
Unless otherwise indicated, all section references are to the Internal
Revenue Code, as amended and in effect at all relevant times. All Rule references
are to the Tax Court Rules of Practice and Procedure.
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[*3] Commissioner, 125 T.C. 227, 228 (2005) (citing Fed. R. Civ. P. 52(a) and
Lakewood Assocs. v. Commissioner, T.C. Memo. 1995-552).
Petitioners resided in the State of Florida at the time that the petition was
filed with the Court.
As previously stated, the instant case was commenced by petitioners
challenging a proposed levy to collect their outstanding liability for 2011.
However, to understand petitioners’ position, we must begin with their prior case
in this Court.
Petitioners’ Case at Docket No. 27549-07S for 2005
In November 2007 petitioners commenced an action for redetermination at
docket No. 27549-07S challenging a notice of deficiency for 2005. See sec.
6213(a). In that notice respondent determined a deficiency in petitioners’ income
tax and an accuracy-related penalty for 2005. Respondent’s deficiency
determination was based solely on $42,181 of retirement income that had been
reported by a third-party payor on a Form 1099-R, Distributions From Pensions,
Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance, Contracts, etc., for
2005, but had been excluded from gross income by petitioners on their 2005
return. Petitioners alleged in their petition that the amount received, which
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[*4] apparently represented disability retirement benefits received by petitioner
Douglas W. Lundy, was “fully exempted [sic] from taxes”.
The case at docket No. 27549-07S was resolved pursuant to agreement of
the parties, and a stipulated decision was entered by the Court (per Chief Judge
John O. Colvin) on April 4, 2008. The stipulated decision was typically terse,
reciting only that “pursuant to agreement of the parties” there was no deficiency in
income tax due from, nor overpayment due to, petitioners for 2005, nor was any
penalty due from them for that year. The stipulation page of the stipulated
decision, which the parties signed, was likewise terse, stating in its entirety (using
standard and customary language for this type of case) only the following: “It is
hereby stipulated that the Court may enter the foregoing decision in this case.”
Neither party filed any post decision motion, see Rule 162, and the
stipulated decision became final in due course, see sec. 7481(b).
Origin of Petitioners’ Tax Liability for 2011
Petitioners timely filed a joint Federal income tax return for 2011. On it,
Mr. Lundy listed his occupation as “bus driver” and petitioner Renitta H. Lundy
listed her occupation as “general contractor”. On their return petitioners reported
total income of $31,309, consisting of (1) wages of $11,983 received by Mr.
Lundy from the Leon County School Board in Tallahassee, Florida, and
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[*5] (2) business income of $19,326 received by Mrs. Lundy. Regarding the
latter, petitioners attached to their return a Schedule C, Profit or Loss From
Business (Sole Proprietorship), identifying Mrs. Lundy as the proprietor and
reporting net profit of $19,326, which amount represented the difference between
gross income of $146,067 and total expenses of $126,741. Finally, as relevant,
petitioners reported on their return total tax of $3,467, consisting of “regular”
income tax of $1,093 and self-employment tax of $2,374, plus an estimated tax
penalty of $69, for a total reported liability of $3,536 for 2011. See secs. 1(a)(1),
1401(a) and (b), 6654(a).
Petitioners paid no estimated tax for 2011, nor was any income tax withheld
from Mr. Lundy’s wages for that year. Further, petitioners did not enclose any
remittance with their 2011 return, nor did they pay any part of their reported
liability after filing their return.
Respondent assessed the tax and the estimated tax penalty as reported by
petitioners on their 2011 return, together with an addition to tax for failure to
timely pay and statutory interest, see secs. 6651(a)(2), 6601(a), and sent
petitioners a notice and demand for payment (“statutory notice of balance due”),
see sec. 6303(a). As previously stated, petitioners did not pay any part of the
amount due.
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[*6] Final Notice of Intent To Levy
On April 27, 2013, respondent sent petitioners a Final Notice Of Intent To
Levy And Notice Of Your Right To A Hearing, see sec. 6330(a), in respect of their
outstanding liability for 2011. Petitioners responded by filing a Form 12153,
Request For A Collection Due Process Or Equivalent Hearing (CDP hearing). In
it, petitioners did not propose any collection alternative, nor did either of them
seek so-called innocent spouse relief; rather, petitioners challenged their
underlying liability. In that regard, petitioners attached to Form 12153 a letter
dated May 17, 2013, which stated in part as follows:
The funds that you are attempting to collect from are indeed part of
my total and permanently [sic] disability benefits which were subject
of the UNITED STATES TAX COURT CASE # 27549-07S * * *.
We filed a timely appeal to the U.S. TAX COURT and laid out all of
our affirmative defenses to the Commissioner of the Internal Revenue
Service claims at that time. The most important claim that we made
at that time is that whatever we funded, financed, and paid for with
my total and permanently [sic] disability funds which were
determined by this order to be non-reportable, tax free, and tax
exempt from the clutches of the IRS was also off limits from the IRS.
***
* * * The IRS COMMISSIONER gave up any rights to any amount of
taxes, which are directly or indirectly due from my tax free, tax
exempt benefits.
So in closing, if your agency illegally violates Judge John O. Colvin’s
Order that your IRS COMMISSIONER FREELY and
VOLUNTARILY ENTERED into and attempt [sic] to seize any of
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[*7] our protected property and monies, than we will see your agency
back in TAX COURT IN FRONT OF CHIEF JUDGE JOHN O.
COLVIN to explain your actions. [Reproduced literally.]
In addition to this letter, petitioners also attached to Form 12153 a letter that
had been sent to respondent by Mr. Lundy on October 20, 2012. This second
letter states in part as follows:
ANY PROPOSED SEIZURE OF WAGES AND PROPERTY
WOULD BE IN VIOLATION OF THE COURT ORDER SIGNED
BY JUDGE JOHN O. COLVIN ON APRIL 4, 2008.
FROM ALL OF THE RELEVANT INFORMATION THAT WAS
RECEIVED BY THE U.S. TAX COURT WHEN WE FILED OUR
APPEAL ABOUT THE PROPOSED CHANGES TO OUR 2005
TAX RETURN BY YOUR ORGANIZATION WHICH WAS GIVEN
TO YOUR ORGANIZATION BY THE TAX COURT, THE
ATTORNEY’S FOR YOUR ORGANIZATION OPTED NOT TO
COME TO TALLAHASSEE, FLORIDA TO FEDERAL COURT TO
LITIGATE THEIR STANCE ABOUT OUR TAXABLE STATUS.
WHAT THIS ORDER DOES IS MAKE EVERYTHING THAT WE
SPEND AND FUND WITH MY TOTAL AND PERMANENTLY
[sic] DISABILITY FUNDS, FREE FROM ALL TAXATION,
ATTACHMENTS, AND FREE FROM ALL LEGAL PROCESSES.
* * * * * * *
ALL OF OUR WORLDLY POSSESSIONS AND ANY FUNDS
THAT WE AMASS COMES STRICTLY FROM TAX EXEMPT,
NON-REPORTABLE FUNDS WHICH YOUR ORGANIZATION
AGREED TO. [Reproduced literally.]
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[*8] Administrative Developments
During the administrative stage of this case petitioners continued to
challenge the existence of their underlying liability. Petitioners did not request a
collection alternative such as an installment payment agreement or an offer-in-
compromise, nor did they furnish the requisite financial information that might
support a collection alternative. In addition, neither petitioner raised a spousal
defense.
Commencement of Judicial Action
On November 18, 2013, respondent’s Appeals Office sent petitioners a
notice of determination sustaining the proposed levy in respect of petitioners’
outstanding income tax liability for 2011. See sec. 6330(b) and (c). In response
petitioners timely filed a petition with this Court. See sec. 6330(d)(1); Rules 330-
334. In it, they state that Mr. Lundy “retired as a Fire Captain under total and
permanent disability under Florida law”, and they explain their disagreement with
respondent’s collection determination as follows:
(1) Because of the Tax Order 27549-07S.
(2) The Above order was about Total & Permanently Disability
monies that is not income to be reported to IRS. These funds are
completely free from taxes and attachment/Garnishment.
(3) When The above case was filed, we stated at that time that any
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[*9] thing we funded with those funds were completely tax free also.
The IRS did not raise any issues with that statement. [Reproduced
literally.]
Motion for Summary Judgment
After the case was at issue, respondent filed his motion for summary
judgment. See Rules 38, 121(a). In his motion respondent contends that the
Appeals settlement officer who conducted the administrative hearing properly
sustained the proposed collection action. Respondent also contends that the
settlement officer did not abuse her discretion in not considering a collection
alternative because petitioners neither requested one nor furnished the requisite
financial documentation.
Petitioners oppose the granting of respondent’s motion. They argue that the
stipulated decision entered at docket No. 27549-07S on April 4, 2008, served to
exempt from tax any income earned through the use or investment of Mr. Lundy’s
disability retirement payments.
In rebuttal to petitioners’ objection, respondent points out that he is not
seeking to tax any disability income that Mr. Lundy may have received in 2011;
rather, he only seeks the liability that petitioners themselves reported on their 2011
return in respect of Mr. Lundy’s wages and Mrs. Lundy’s net profit from self-
employment. Insofar as the proposed levy is concerned, respondent acknowledges
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[*10] that section 6334 exempts from levy various types and amounts of property,
and he asserts that “[r]espondent has not even identified any property that * * *
[he] might levy in order to satisfy petitioners’ outstanding 2011 income tax
liability.”
In reply to respondent’s rebuttal, petitioners contend that section 6334 “does
not come into play” because of the aforementioned stipulated decision.
Discussion
I. Summary Judgment
Summary judgment is intended to expedite litigation and avoid unnecessary
and expensive trials. Fla. Peach Corp. v. Commissioner, 90 T.C. 678, 681 (1988).
Summary judgment may be granted with respect to all or any part of the legal
issues in controversy “if the pleadings, answers to interrogatories, depositions,
admissions, and any other acceptable materials, together with the affidavits or
declarations, if any, show that there is no genuine dispute as to any material fact
and that a decision may be rendered as a matter of law.” Rule 121(a) and (b);
Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), aff’d, 17 F.3d 965
(7th Cir. 1994). The moving party bears the burden of proving that there is no
genuine dispute of material fact, and factual inferences will be read in a manner
most favorable to the party opposing summary judgment. Dahlstrom v.
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[*11] Commissioner, 85 T.C. 812, 821 (1985); Barker v. Commissioner, T.C.
Memo. 2002-13.
After carefully reviewing the record, the Court is satisfied that there is no
genuine dispute as to any material fact and that a decision may be rendered as a
matter of law. Accordingly, respondent’s motion for summary judgment shall be
granted.
II. Administrative Hearings Under Section 6330 and Judicial Review
Section 6331(a) authorizes the Commissioner to levy on property and rights
to property of a taxpayer who is liable for taxes and who fails to pay those taxes
within 10 days after notice and demand for payment is made. Section 6331(d)
provides that the levy authorized in section 6331(a) may be made only if the
Commissioner has given notice to the taxpayer no less than 30 days before the day
of the levy.
Section 6330(a) reiterates the requirement of notice before levy and confers
on the taxpayer the right to request a prelevy administrative hearing. Sec.
6330(a)(3)(B), (b); see Davis v. Commissioner, 115 T.C. 35, 37 (2000); Goza v.
Commissioner, 114 T.C. 176, 179 (2000). If such a hearing is requested, the
hearing is to be conducted by the IRS Office of Appeals. Sec. 6330(b)(1).
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[*12] At an administrative hearing the taxpayer may raise any relevant issue,
including offers of collection alternatives such as an installment agreement or an
offer-in-compromise. Sec. 6330(c)(2)(A)(iii). A taxpayer may also challenge the
existence or amount of the underlying tax liability but only if the taxpayer did not
receive a statutory notice of deficiency with respect to the underlying tax liability
or did not otherwise have an opportunity to dispute that liability. Sec.
6330(c)(2)(B); see Montgomery v. Commissioner, 122 T.C. 1 (2004).
A determination made by the IRS Office of Appeals under section 6330 to
sustain a proposed levy may be reviewed by this Court. Sec. 6330(d)(1); see
Rules 330-334. Where the underlying tax liability is properly at issue, the Court
reviews the determination de novo. Goza v. Commissioner, 114 T.C. at 181-182.
Where the underlying tax liability is not at issue, the determination is reviewed for
abuse of discretion. Id. at 182; see also Sego v. Commissioner, 114 T.C. 604, 610
(2000). Because petitioners did not have the opportunity to dispute the liability
previously, the Court reviews their underlying liability de novo. See sec.
6330(c)(2)(B); Montgomery v. Commissioner, 122 T.C. 1.
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[*13] III. Petitioners’ Underlying Tax Liability
A. Gross Income
Generally, section 61(a) provides that gross income means all income from
whatever source derived. This includes compensation for services, see sec.
61(a)(1), and income derived from business, see sec. 61(a)(2). Exclusions from
income are construed narrowly, and taxpayers must bring themselves within the
clear scope of the exclusion. Commissioner v. Schleier, 515 U.S. 323, 328 (1995).
Without an applicable exclusion, Mr. Lundy’s wage income is included in gross
income pursuant to section 61(a)(1). See United States v. Connor, 898 F.2d 942,
943-944 (3d Cir. 1990); Connor v. Commissioner, 770 F.2d 17, 20 (2d Cir. 1985);
United States v. Romero, 640 F.2d 1014, 1016 (9th Cir. 1981). Similarly, without
an applicable exclusion, Mrs. Lundy’s net business income is included in gross
income pursuant to section 61(a)(2). See Hastings v. Commissioner, T.C. Memo.
2002-310; Cohen v. Commissioner, T.C. Memo. 2001-249.
B. Petitioners’ Contentions
Petitioners do not deny having received either the wages or the business
income that they reported on their 2011 tax return and that gave rise to the tax
liability that respondent seeks to collect. Rather, petitioners contend that they
invested Mr. Lundy’s disability retirement income (which respondent does not
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[*14] challenge as nontaxable) in Mrs. Lundy’s sole proprietorship and that, as a
consequence, income generated by that proprietorship is nontaxable.2 Or, in
petitioners’ words: “[A]ny thing we funded with those funds were completely tax
free also.”
In arguing as they do, petitioners fail to distinguish between an item that is
excludable from income and the income that such an item may produce once it is
invested. Many items are statutorily excluded from gross income. For example,
gross income does not include the value of property acquired by gift or
inheritance. Sec. 102(a). In contrast, income generated from property acquired by
gift or inheritance does not come within such statutory exclusion. Sec. 102(b)(1).
However, if property acquired by gift or inheritance were invested in a tax-
advantaged medium, such as State or local municipal bonds, then the income from
such investment might be excludable from gross income under a specific statutory
provision. See sec. 103(a) and (b).
Similarly, although Mr. Lundy’s continuing disability retirement income
may be statutorily excludable from gross income (as respondent appears to
concede), the investment of the disability retirement income in some enterprise
2
Notably, petitioners make no effort to explain how Mr. Lundy’s wages are
related to his disability retirement income or why such wages might be nontaxable.
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[*15] does not itself serve to exclude from taxation the income generated by that
enterprise through its own activities. Rather, any such exclusion would
necessitate a specific statutory provision. And in the case of Mrs. Lundy, a U.S.
person operating a business in the State of Florida, there is no statutory provision
that serves to exempt from gross income the net profit from her proprietorship; to
the contrary, her net profit is includible in gross income pursuant to section
61(a)(2).3
Petitioners’ reliance on the stipulated decision entered in docket No. 27549-
07S on April 4, 2008, is misplaced. That decision did nothing other than
memorialize respondent’s concession that $42,181 of disability retirement income
received by Mr. Lundy in 2005 was excludable from petitioners’ gross income for
that year.4 Indeed, the only adjustment to income giving rise to the deficiency
determined by respondent for 2005 was the omission of that retirement income
from petitioners’ 2005 return. Necessarily, therefore, the decision could not have
spoken--and most assuredly did not speak--to the excludability vel non of business
3
Lest there be any doubt, in the case of Mr. Lundy, a U.S. person
performing personal services in the State of Florida, there is no statutory provision
that serves to exempt his wages from gross income, which are includible in gross
income pursuant to sec. 61(a)(1).
4
It bears repeating that the excludability of Mr. Lundy’s disability
retirement income has never been an issue in the instant case.
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[*16] income that may have been generated by Mrs. Lundy’s proprietorship in
2005 or in any other year.
Further, the Court rejects petitioners’ suggestion that the introductory
phrase of the aforementioned stipulated decision--“pursuant to the agreement of
the parties”--evidences some side agreement of the parties or, more nefariously,
some agreement between respondent’s counsel and the Court, of which there is
none. Rather, the Court ascribes no meaning to such phrase other than that for
2005 respondent agreed to concede the determined deficiency and penalty and
petitioners agreed to concede any claim of an overpayment, i.e., that the parties
agreed to conclude the litigation without trial or further proceedings. In short,
there is nothing to suggest that respondent conceded, or intended to concede,
anything other than the deficiency and penalty as determined in the notice of
deficiency for 2005. After all, nothing else was justiciable in docket No. 27549-
07S. In sum, petitioners’ challenge to the existence or amount of their underlying
liability for 2011, i.e., the liability that they themselves reported on their own
return,5 is without merit.
5
Petitioners never mounted any challenge to either the addition to tax for
failure to timely pay, see sec. 6651(a)(2), or statutory interest, see sec. 6601(a),
independent of their challenge to the underlying tax itself.
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[*17] IV. Remaining Matters
Petitioners have not at any time raised spousal defenses. See secs. 6015,
6330(c)(2)(A)(i). Thus, any such defense need not be considered. See Giamelli v.
Commissioner, 129 T.C. 107, 114-115 (2007); Magana v. Commissioner, 118 T.C.
488, 493 (2002).
Similarly, petitioners have not sought a collection alternative, such as an
installment agreement or an offer-in-compromise. See sec. 6330(c)(2)(A)(iii). It
is not an abuse of discretion for the IRS Appeals Office to decline to consider a
collection alternative when no specific proposal is ever presented to the settlement
officer. E.g., Kindred v. Commissioner, 454 F.3d 688, 696 (7th Cir. 2006);
Kendricks v. Commissioner, 124 T.C. 69, 79 (2005). In any event, it is generally
incumbent on the taxpayer to provide requisite financial information to support a
collection alternative so that the settlement officer may evaluate the taxpayer’s
ability to pay. E.g., Kindred v. Commissioner, 454 F.3d at 697; Olsen v. United
States, 414 F.3d 144, 151 (1st Cir. 2005); Murphy v. Commissioner, 125 T.C. 301,
315 (2005), aff’d, 469 F.3d 27 (1st Cir. 2006); Wright v. Commissioner, T.C.
Memo. 2012-24. This petitioners did not do.
Arguably, petitioners may indirectly seek to challenge the appropriateness
of the proposed collection action, see sec. 6330(c)(2)(A)(ii), by arguing that
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[*18] respondent may not “come and seize Mr. Lundy’s State Protected Disability
Funds to collect back taxes which those Funds have been off the table from the
IRS since the year 2000 and to this present time.” However, respondent has not
sought to levy on those funds, and the Court need not (and does not) decide in the
instant case whether those funds may be exempt from levy under section 6334 or
under any other applicable provision of law.6 Rather, what the Court does decide
is that respondent’s Appeals Office did not abuse its discretion in sustaining the
proposed collection action given petitioners’ outstanding liability and their neglect
or refusal to pay or otherwise address that liability other than to challenge its
existence. Cf. sec. 6321.
Finally, insofar as verification of procedures is concerned, see sec.
6330(c)(1), it is well settled that no particular form of verification is required; that
no particular document need be provided to the taxpayer at a hearing conducted
under section 6330; and that Forms 4340, Certificate of Assessments, Payments,
and Other Specified Matters, and transcripts of account may be used to satisfy the
requirements of section 6330(c)(1). See Roberts v. Commissioner, 118 T.C. 365,
6
As respondent points out, if the Commissioner should erroneously levy on
exempt property, the law provides a variety of administrative and judicial
remedies. E.g., secs. 6343(b), 7433; secs. 301.6343-2, 301.7433-1, Proced. &
Admin. Regs.
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[*19] 371 n.10 (2002), aff’d, 329 F.3d 1224 (11th Cir. 2003); Nestor v.
Commissioner, 118 T.C. 162, 166 (2002); Lunsford v. Commissioner, 117 T.C.
183 (2001). The transcripts and materials that are attached as exhibits to
respondent’s motion for summary judgment and the accompanying declaration,
together with the statements of the Appeals settlement officer in such declaration
as well as in the attachment to the notice of determination, demonstrate that
required assessment and collection procedures were followed.
V. Conclusion
Drawing all factual inferences against respondent, the Court concludes that
there are no genuine disputes of material fact and that respondent is entitled to
judgment as a matter of law. Accordingly,
An appropriate order granting
respondent’s motion and decision for
respondent will be entered.