T.C. Memo. 2004-65
UNITED STATES TAX COURT
PHILLIP AND GLADIES AARON, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 9879-01L. Filed March 12, 2004.
Phillip and Gladies Aaron, pro sese.
Catherine L. Campbell, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
VASQUEZ, Judge: This case was commenced in response to a
Notice of Determination Concerning Collection Action(s) Under
Sections 63201 and 6330. The issue is whether respondent may
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code, and all Rule references are to the Tax
Court Rules of Practice and Procedure. All amounts are rounded
to the nearest dollar.
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proceed with collection of petitioners’ 1997 and 1998 income tax
liabilities.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
The stipulation of facts, stipulation of settled issues, and
attached exhibits are incorporated herein by this reference. At
the time they filed the petition, petitioners resided in
Bellevue, Washington.
At the time of trial, Phillip Aaron (petitioner) and Gladies
Aaron had been married for 35 years. Mrs. Aaron works for the
State of Washington as a social worker. Petitioner is an
attorney in private practice and also owns interests in various
closely held corporations.
In the latter part of 1996, petitioner’s health declined. In
the beginning of 1997, petitioner was diagnosed with colon cancer
and underwent surgery immediately. After the surgery, petitioner
underwent chemotherapy treatment until approximately December
1997.
On April 30, 1998, petitioner returned to the practice of
law part time.
BP Concessions, Inc.
Petitioner and Bernie Foster formed BP Concessions, Inc. (BP
Concessions), to sell goods and duty-free items at the Portland,
Oregon, airport. Mr. Foster and petitioner each held 50 percent
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of the shares of BP Concessions. On or about October 1, 1988, BP
Concessions elected to become an S corporation pursuant to
section 1362(a).
In December 1996, petitioner and Mr. Foster agreed in a
board meeting to terminate BP Concessions’ S corporation status
by revoking the S corporation election. They decided to revoke
the S corporation election on account of an anticipated and
substantial distributive share of income based on “a lowering of
the cost of goods which was going to result in an increase from
prior years” to the shareholders.
Petitioner was responsible for revoking the election. For
the revocation to be effective for 1997, petitioner had to revoke
the S corporation election by March 17, 1997. Petitioner failed
to revoke the S corporation election by March 17, 1997, because
he was ill with cancer. Indeed, the parties stipulated that BP
Concessions was an S corporation during the years 1997 and 1998.
As of March 13, 2003, the date of the trial in this case,
petitioner had not properly revoked the S corporation election
for BP Concessions.
Keith Meyers, the accountant who prepared BP Concessions’
tax return for 1997, was unaware of the shareholders’ desire to
terminate the S corporation election. On October 20, 1998,
petitioner signed the Form 1120S, U.S. Income Tax Return for an S
Corporation, for 1997. The Schedule K-1, Shareholder’s Share of
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Income, Credits, Deductions, etc., reported $447,653 as
petitioner’s share of the income from BP Concessions for 1997.
Petitioners’ Tax Returns
On their Form 1040, U.S. Individual Income Tax Return, for
1997, petitioners reported a Schedule K-1 distributive share of
$447,653 of nonpassive income from BP Concessions and a total tax
of $103,708.2 On their Form 1040 for 1998, petitioners reported
a distributive share of $21,336 of nonpassive income from
Schedule K-1 from BP Concessions and a total tax of $35,909.
They sought a refund of $5,825. On March 29, 2000, petitioners
signed both returns.
Petitioner decided to report the distributive share of
income from BP Concessions on his Form 1040 for 1997 so that he
would not be viewed as underreporting his income. Petitioner
intended to amend his return and “correct the situation at a
2
On their 1997 return, petitioners reported that they had
overpaid their taxes by $217,952 and sought a refund of $192,952
and application of $25,000 to their 1998 estimated taxes. This
alleged overpayment was based on petitioners’ belief that the
Internal Revenue Service (IRS) owed them a refund of $300,000
plus interest. The alleged refund arises from a prior dispute
with the IRS concerning petitioner’s personal liability on unpaid
employment taxes for his corporation, National Waste Co., Inc.
Petitioners claimed a refund on their 1997 return of $300,000
plus interest on the basis of their allegation that the IRS sold
their personal residence at below market value when it foreclosed
on their house to collect the unpaid employment taxes.
Petitioners never filed a claim for refund with a U.S. District
Court.
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later date”. Petitioner did not believe that this course of
action would result in any problems.
The Internal Revenue Service (IRS) did not issue petitioners
a statutory notice of deficiency for 1997 or 1998.
IRS Collection Efforts
The IRS concluded that petitioners’ individual tax return
for 1997 contained multiple mathematical errors. On June 10,
2000, after correcting the mathematical errors, the IRS assessed
a tax liability of $111,636.
The IRS concluded that petitioners’ individual tax return
for 1998 contained multiple mathematical errors. On July 17,
2000, after correcting the mathematical errors, the IRS assessed
a tax liability of $34,890.
Before collection proceedings, petitioner and Revenue
Officer Steve Lerner corresponded regarding petitioners’ unpaid
taxes and refund claims for 1997 and 1998.
On November 16, 2000, Revenue Officer Lerner issued a Final
Notice--Notice of Intent to Levy and Notice of Your Right to a
Hearing. On December 6, 2000, Revenue Officer Lerner advised
petitioners that he would delay filing the notice of Federal tax
lien until December 28, 2000, so that petitioners could file
amended income tax returns for 1997 and 1998. On December 27,
2000, Revenue Officer Lerner issued a Notice of Federal Tax Lien
Filing and Your Right to a Hearing Under IRC 6320.
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On January 29, 2001, petitioners, through their attorney
Deborah Jaffe,3 filed a Form 12153, Request for a Collection Due
Process Hearing. In their “Statement in Support of Form 12153”
petitioners identified three issues to be discussed at the
hearing. First, petitioners disputed the amount of the tax
liability set forth in the notice of Federal tax lien. The
statement in support of Form 12153 stated:
The taxpayers are in the process of determining the
correct amount of their income tax liabilities for
these years, and they anticipate that their actual
liability will be substantially less than as set forth
in the notice of Federal tax lien. While the taxpayers
acknowledge that the liability set forth in the notice
was assessed based on a 1997 return filed by the
taxpayers, that return as filed was incorrect, and the
taxpayers had so advised the Internal Revenue Service
prior to the filing of the notice of Federal tax lien.
Second, petitioners claimed that the “notice of Federal tax lien
was filed despite the taxpayers’ cooperation with the IRS”.
Third, petitioners claimed that the filing of the notice of
Federal tax lien would hinder the ability of the IRS to collect
the tax liabilities because potential investors would not invest
in BP Concessions if a Federal tax lien was filed.
On March 20, 2001, Appeals Settlement Officer J.A. Vander
Linden wrote to Ms. Jaffe regarding the Appeals process. On May
14, 2001, Ms. Jaffe proposed a settlement to Appeals Settlement
Officer Vander Linden. The settlement proposed filing of
3
On Sept. 18, 2002, the Court granted Ms. Jaffe’s motion
to withdraw as counsel of record.
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individual and corporate amended returns for 1997 and 1998 and
filing of an appropriate revocation of BP Concessions’ S
corporation election in exchange for withdrawal of the notice of
Federal tax lien. In May 2001, petitioner gave Ms. Jaffe amended
individual income tax returns but stated they were never filed.
On May 22, 2001, petitioner and Mr. Foster executed an “Agreement
to Change BP Concessions to a C Corporation”. The agreement
stated:
The undersigned hereby agree that at the year-end
meeting in December of 1996, Phillip Aaron was charged
by the Corporation with converting BP CONCESSIONS, INC.
from a Sub-Chapter S Corporation to a C Corporation for
the specific purpose, and in anticipation of, BP
CONCESSIONS, INC., receiving income and loaning part of
that income to Bernie Foster and Phillip Aaron during
the year of 1997. Phillip Aaron was responsible for
changing the Corporation from a Sub-Chapter S to a C
Corporation. Phillip Aaron developed cancer and
underwent chemotherapy during 1997 and, as a result,
the C Corporation election was not made. It is still
the desire of BP CONCESSIONS, INC., Phillip Aaron, and
Bernie Foster that BP CONCESSIONS, INC., be changed
from a Sub-Chapter S Corporation to a C Corporation and
that the disbursement of proceeds for 1997 be
classified as a loan as they were intended to be at the
time of disbursement.
Appeals Settlement Officer Vander Linden prepared a detailed
Appeals case memo evaluating petitioners’ appeal and recommending
that it be denied. On July 6, 2001, the IRS issued a Notice of
Determination Concerning Collection Action(s) Under Sections 6320
and 6330.
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Litigation
On August 8, 2001, petitioners timely filed a petition with
the Court.
On the morning of the trial in this case, petitioners mailed
to the IRS Ogden Service Center Forms 1040X, Amended U.S.
Individual Income Tax Return, for 1997 and 1998. The amended
returns eliminated the $447,653 distributive share of income from
BP Concessions for 1997 and indicated that the amount of tax owed
for each year was zero. At trial, petitioners presented no
evidence regarding any spousal defenses, any challenges to the
appropriateness of the collection actions, or any offers of
collection alternatives.
On September 22, 2003, the parties filed a stipulation of
settled issues. This stipulation stated:
1. In their petition, petitioners requested that
the Court determine, inter alia, that the amounts of
the assessments for petitioners’ 1997 and 1998 income
taxes are incorrect and are overstated because the
petitioners were entitled to revoke the subchapter S
election for BP Concessions, Inc. for years 1997 and
1998.
2. Petitioners concede that there is no
reasonable cause exception for their failure to timely
revoke the subchapter S status of BP Concessions, Inc.
for years 1997 and 1998.
OPINION
1. Applicable Law
Section 6321 provides that, if any person liable to pay any
tax neglects or refuses to do so after demand, the amount shall
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be a lien in favor of the United States upon all property and
rights to property, whether real or personal, belonging to such
person. Pursuant to section 6323, the Commissioner generally is
required to file a notice of Federal tax lien with the
appropriate State office for the lien to be valid against certain
third parties.
After the Commissioner files a notice of lien, section
6320(a)(1) requires the Commissioner to provide notice to the
taxpayer of such filing. Additionally, under section
6320(a)(3)(B) and (b), the Commissioner must provide the taxpayer
with notice of and an opportunity for an administrative review of
the lien filing; i.e., a hearing. Section 6320(b)(1) requires
that the Appeals Office conduct the hearing. Section 6320(c)
incorporates section 6330(c) and certain parts of section
6330(d), which describe the procedural rules that apply to the
hearing and the judicial review thereof.
At the hearing, the taxpayer may raise certain matters set
forth in section 6330(c)(2), which provides, in pertinent part:
SEC. 6330(c). Matters Considered at Hearing.--In
the case of any hearing conducted under this section--
* * * * * * *
(2) Issues at hearing.--
(A) In general.--The person may raise at the
hearing any relevant issue relating to the unpaid
tax or proposed levy, including--
(i) appropriate spousal defenses;
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(ii) challenges to the
appropriateness of collection actions;
and
(iii) offers of collection
alternatives, which may include the
posting of a bond, the substitution of
other assets, an installment agreement,
or an offer-in-compromise.
(B) Underlying liability.--The person may
also raise at the hearing challenges to the
existence or amount of the underlying tax
liability for any tax period if the person did not
receive any statutory notice of deficiency for
such tax liability or did not otherwise have an
opportunity to dispute such tax liability.
Pursuant to section 6330(d)(1), within 30 days of the
issuance of the notice of determination, the taxpayer may appeal
that determination to this Court if we have jurisdiction over the
underlying tax liability. Van Es v. Commissioner, 115 T.C. 324,
328 (2000).
Although section 6330 does not prescribe the standard of
review that the Court is to apply in reviewing the Commissioner’s
administrative determinations, we have stated that, where the
validity of the underlying tax liability is properly at issue,
the Court will review the matter de novo. Where the validity of
the underlying tax liability is not properly at issue, however,
the Court will review the Commissioner’s administrative
determination for abuse of discretion. Sego v. Commissioner, 114
T.C. 604, 610 (2000); Goza v. Commissioner, 114 T.C. 176, 181
(2000).
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In Montgomery v. Commissioner, 122 T.C. __, __ (2004) (slip
op. at 2), we recently held that section 6330(c)(2)(B) permits a
taxpayer to challenge the existence or amount of the tax
liability reported on an original tax return when the taxpayer
has not received a notice of deficiency and has not otherwise had
an opportunity to dispute the tax liability in question.
Pursuant to section 6330(c)(2)(A), a taxpayer may raise at the
section 6330 hearing any relevant issue with regard to the
Commissioner’s collection activities, including spousal defenses,
challenges to the appropriateness of the Commissioner’s intended
collection action, and alternative means of collection. Sego v.
Commissioner, supra at 609; Goza v. Commissioner, supra at 180.
2. Stipulation of Settled Issues
After trial but before the submission of petitioner’s
posttrial brief, the parties filed a stipulation of settled
issues that stated: “there is no reasonable cause exception for
* * * [petitioners’] failure to timely revoke the subchapter S
status of BP Concessions, Inc. for years 1997 and 1998”. On
brief, petitioner argues that his illness was a reasonable cause
exception for failing to timely terminate BP Concessions’ S
corporation election.
A settlement stipulation is usually a compromise. “A
settlement stipulation is in all essential characteristics a
mutual contract by which each party grants to the other a
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concession of some rights as a consideration for those secured
and the settlement stipulation is entitled to all of the sanctity
of any other contract.” Saigh v. Commissioner, 26 T.C. 171, 177
(1956). Absent wrongful misleading conduct or mutual mistake, we
will enforce a stipulation of settled issues in accordance with
our interpretation of its written terms. See Stamm Intl. Corp.
v. Commissioner, 90 T.C. 315, 322 (1988); Korangy v.
Commissioner, T.C. Memo. 1989-2, affd. 893 F.2d 69 (4th Cir.
1990).
The stipulation was entered into fairly and freely by both
parties. The stipulation of settled issues was filed after
petitioner wrote a letter to the Clerk of the Court conceding
respondent’s position that there is no reasonable cause exception
for failing to revoke BP Concessions’ S corporation election. In
that letter, petitioner stated that he wished to discontinue the
case. The stipulation of settled issues was also filed after the
Court held a telephone conference with the parties discussing
this issue. Petitioner has not shown mutual mistake or
misleading conduct or that he was unaware of the consequences of
the stipulation.
In the petition and at trial, petitioners’ only challenge to
the underlying tax liability was that they were entitled to a
reasonable cause exception on account of petitioner’s illness.
On the basis of the stipulation of settled issues, we find that
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petitioner has conceded his challenge to the underlying tax
liability. Accordingly, we sustain respondent’s determination.
3. Additional Points Raised by Petitioner
Nevertheless, for the sake of completeness, we shall address
additional points raised by petitioner.
A. Termination of BP Concessions’ S Corporation Election
Petitioner argues that “Although there is no reasonable
cause exception that directly excuses the petitioners’ failure to
timely revoke the Subchapter S Election of BP Concessions, there
is no specific provision that directly indicates that a
reasonable cause exception does not apply.” An election to be an
S corporation continues until terminated. Mourad v.
Commissioner, 121 T.C. 1, 4 (2003). An S corporation election
may be terminated: (1) By revocation of the election to be
treated as an S corporation; (2) by the corporation’s ceasing to
be a small business corporation; or (3) where passive investment
income exceeds 25 percent of gross receipts and the corporation
has subchapter C earnings and profits. See sec. 1362(d); Mourad
v. Commissioner, supra. The Code provides no other manner in
which to terminate an S corporation election. Mourad v.
Commissioner, supra.
While section 1362(b)(5) authorizes the Secretary to treat
late S corporation elections as timely if the Secretary
determines that there was “reasonable cause for the failure to
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timely make such election”, this section applies only to the
election to become an S corporation. See sec. 1362(a) and
(b)(5)(A). Congress provided no reasonable cause exception for
termination of an S corporation election by revocation. See sec.
1362(d)(1). The regulations provide no reasonable cause
exception for termination of an S corporation election by
revocation.
Petitioner failed to revoke BP Concessions’ S corporation
election by March 17, 1997. See secs. 1362(d)(1)(C)(i), 7503.
Indeed, as of the date of trial, petitioner conceded that he
still had not revoked BP Concessions’ S corporation election.
While we are sympathetic to petitioner’s medical condition during
1997 and 1998, there is no provision under section 1362(d) for a
reasonable cause exception for revocation of the S corporation
election. We must apply the law as written; it is up to Congress
to address questions of fairness and to make improvements to the
law. Metzger Trust v. Commissioner, 76 T.C. 42, 59-60 (1981),
affd. 693 F.2d 459 (5th Cir. 1982).
Furthermore, the May 22, 2001, agreement between petitioner
and Mr. Foster is insufficient to revoke the S corporation
election for 1997 or 1998. There is no indication that the
agreement was filed with the proper IRS service center. It does
not include the number of shares of stock issued and outstanding.
See sec. 1.1362-6(a)(3), Income Tax Regs. Additionally, it does
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not comply with the requirements for obtaining shareholders’
consents. See sec. 1.1362-6(b), Income Tax Regs.
Because the S corporation election was in effect for 1997
and 1998, petitioners were required to report their distributive
share of income from BP Concessions. Petitioners reported this
distributive share of income. The IRS assessment was proper.
B. Allegations of Loan to Petitioner From BP Concessions
At trial, petitioner testified that even if the S
corporation election remained in effect, the distribution of
$447,653 from BP Concessions was actually a loan to him from the
corporation. Generally, proceeds of a loan do not constitute
income to a borrower because the benefit is offset by an
obligation to repay. United States v. Rochelle, 384 F.2d 748,
751 (5th Cir. 1967); Arlen v. Commissioner, 48 T.C. 640, 648
(1967). Whether a particular transaction actually constitutes a
loan, however, is to be determined upon consideration of all the
facts. Fisher v. Commissioner, 54 T.C. 905, 909 (1970).
For a payment to constitute a loan, at the time the payments
are received the recipient must intend to repay the amounts and
the transferor must intend to enforce payment. Haag v.
Commissioner, 88 T.C. 604, 615 (1987), affd. without published
opinion 855 F.2d 855 (8th Cir. 1988); Beaver v. Commissioner, 55
T.C. 85, 91 (1970). Further, the obligation to repay must be
unconditional and not contingent on a future event. United
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States v. Henderson, 375 F.2d 36, 39 (5th Cir. 1967); Bouchard v.
Commissioner, 229 F.2d 703 (7th Cir. 1956), affg. T.C. Memo.
1954-243; Haag v. Commissioner, supra at 615.
Petitioner offered no convincing proof that the funds were
actually lent to him. The “Agreement to Change BP Concessions to
a C Corporation” signed by petitioner and Mr. Foster mentions the
shareholders’ intentions to treat the distribution as a loan.
However, this document was prepared more than 4-1/2 years after
the board meeting occurred and was drafted in support of an
attempt to settle the issues of this case. No other documents
were submitted regarding the alleged loan. The Court is not
required to, and in this case we do not, accept petitioner’s
unsubstantiated testimony regarding this issue. See Wood v.
Commissioner, 338 F.2d 602, 605 (9th Cir. 1965), affg. 41 T.C.
593 (1964).
C. Issues Raised Initially in Petitioners’
Posttrial Briefs
In their posttrial briefs, petitioners raised for the first
time the issues of abatement of interest and penalties, an
entitlement to spousal defenses, a request for an installment
agreement, and a request for other reasonable alternatives to
collection. These issues were not raised in the petition to the
Court or at trial. Nor were they raised at the collection due
process hearing. Generally, in a section 6330 proceeding the
Court is not obligated to consider requests for abatement of
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penalties or proposals of collection alternatives if they were
not raised by the taxpayer at the section 6330 hearing or
otherwise brought to the attention of the Appeals Office. Magana
v. Commissioner, 118 T.C. 488, 493 (2002); Miller v.
Commissioner, 115 T.C. 582, 589 n.2 (2000); Sego v. Commissioner,
114 T.C. at 612. Generally, we do not consider issues that are
raised for the first time at trial or on brief, and we decline to
do so in this case. Foil v. Commissioner, 92 T.C. 376, 418
(1989), affd. 920 F.2d 1196 (5th Cir. 1990); Markwardt v.
Commissioner, 64 T.C. 989, 997 (1975). Petitioner has failed to
raise a spousal defense, make a valid challenge to the
appropriateness of respondent’s intended collection action, or
offer alternative means of collection. These issues are now
deemed conceded. See Rule 331(b)(4).
In reaching all of our holdings herein, we have considered
all arguments made by the parties, and to the extent not
mentioned above, we find them to be irrelevant or without merit.
To reflect the foregoing,
Decision will be entered
for respondent.