T.C. Summary Opinion 2005-59
UNITED STATES TAX COURT
DAVID E. AND SUSANA V. JUDD, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 873-04S. Filed May 18, 2005.
Paul C. Allred, for petitioners.
Marty J. Dama, for respondent.
DEAN, Special Trial Judge: This case was heard pursuant to
the provisions of sections 6330(d) and 7463 of the Internal
Revenue Code in effect at the time that the petition was filed.
Unless otherwise indicated, all section references are to the
Internal Revenue Code in effect for the year in issue. The
decision to be entered is not reviewable by any other court, and
this opinion should not be cited as authority.
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The petition in this case was filed in response to a Notice
of Determination Concerning Collection Action(s) Under Section
6320 and/or 6330 (notice of determination). Pursuant to section
6330(d), petitioners seek review of respondent’s determination to
proceed with collection of their tax liability for 1996.
After a concession,1 the issues for decision are: (1)
Whether respondent impermissibly applied petitioners’ overpayment
for 1995 against their unpaid tax liability for 1985 rather than
for 1996; and (2) whether the Appeals officer abused her
discretion in sustaining a proposed levy to collect petitioners’
unpaid 1996 tax liability.
Background
The stipulation of facts and the exhibits received into
evidence are incorporated herein by reference. Petitioners
resided in Dallas, Texas, at the time the petition was filed.
During 1995, petitioner David E. Judd was an attorney, and
petitioner Susana V. Judd did not work outside the home.
Petitioners timely filed Form 4868, Application for
Automatic Extension of Time to File U.S. Individual Income Tax
Return, for 1985. They then filed Form 2688, Application for
Additional Extension of Time To File U.S. Individual Income Tax
Return. On October 22, 1986, petitioners jointly filed with the
1
Respondent concedes that petitioners’ estimated tax
payments for 1995 totaled $29,000.
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Internal Revenue Service (IRS) a Form 1040, U.S. Individual
Income Tax Return, for tax year 1985, showing a tax liability of
$12,428.61. No payment was remitted with the return.
During 1995 and in January 1996, petitioners made estimated
tax payments for tax year 1995 totaling $29,000. Petitioners did
not timely file a Form 1040 for 1995. On January 15, 1996,
respondent applied $7,879.24 from petitioners’ 1995 and January
1996 estimated tax payments to petitioners’ outstanding tax
liability for 1985.
On October 15, 1996, petitioners filed a chapter 13
bankruptcy petition in the U.S. Bankruptcy Court for the Eastern
District of Texas (bankruptcy court). Respondent filed proofs of
claim which included petitioners’ 1985 income tax liability as a
general unsecured claim.
During the pendancy of their chapter 13 bankruptcy,
petitioners timely filed a joint Form 1040 for 1996, showing a
tax liability of $10,506. A payment of $2,802 was remitted with
the return.
On July 23, 1997, the bankruptcy court issued an Agreed
Order Allowing Claim of Internal Revenue Service, which allowed
respondent a general unsecured nonpriority claim of $148,734.40,
and a secured claim of $17,247 against petitioners. On October
21, 1997, the bankruptcy court confirmed petitioners’ chapter 13
plan.
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On April 15, 1998, petitioners filed their joint Form 1040
for 1995 showing a total tax of $21,295.90 and an overpayment of
$7,704.10. On the Form 1040, petitioners indicated that they
wanted the overpayment to be applied to their 1996 estimated
taxes. On August 31, 1998, respondent assessed tax of $21,120.76
on petitioners’ 1995 return.
Petitioners’ chapter 13 bankruptcy case was completed on
March 6, 2001, and a Notice of Plan Completion was filed on July
11, 2001. On August 13, 2001, the bankruptcy court entered its
Order Discharging Debtor After Completion of Chapter 13 Plan.
On October 27, 2002, respondent issued to petitioners a
Final Notice of Intent to Levy and Notice of Your Right to a
Hearing regarding collection of petitioners’ 1996 income tax
liability. Petitioners timely filed a Form 12153, Request for a
Collection Due Process Hearing (hearing).
During the hearing, petitioners asserted that their tax
liability for 1996 was paid in full through the application of
the overpayment from their 1995 return in addition to the payment
submitted with the 1996 return. Appeals Officer Deborah Glover
(Ms. Glover) informed petitioners that the 1995 overpayment had
been applied to their 1985 tax liability. Petitioners asserted
that since they had undergone a bankruptcy, they should not owe
anything.
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Ms. Glover attempted to discuss collection alternatives with
petitioners, but they declined to provide any financial
information. She informed petitioners that they were not
eligible for an installment agreement because they were not
current in their estimated tax payments or their filing
obligations. Petitioners had not filed a tax return since 2002.
On December 17, 2003, respondent sent petitioners a notice of
determination sustaining the proposed levy to collect their 1996
income tax liability.
Petitioners timely filed a petition in this Court in which
they alleged that “the Internal Revenue Service violated an order
of the U.S. Bankruptcy Court, Eastern District of Texas in the
manner and time of its allocation of funds in its possession for
payment to tax years covered in the bankruptcy. In the
alternative, the Internal Revenue Service violated the intent of
the bankruptcy court’s orders.”
Discussion
1. IRS’s Application of Petitioners’ 1995 Funds Against
Petitioners’ 1985 Tax Liability
a. Did the IRS Violate a Bankruptcy Order by Applying
Petitioners’ 1995 Overpayment to Their 1985 Tax Liability?
Petitioners allege that the IRS violated an order of the
bankruptcy court in the manner and time of its allocation of
funds in its possession for payment to tax years covered in the
bankruptcy. The Certificates of Official Record for petitioners’
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1995 and 1985 tax years reflect that the application of the funds
from petitioners’ 1995 account to their outstanding 1985 tax
liability occurred on January 15, 1996. Petitioners did not file
their bankruptcy petition until October 15, 1996. Therefore, the
Court concludes that there could not have been a violation of any
bankruptcy order prior to the filing of a bankruptcy petition.
In any event, if the IRS has violated an order of the
bankruptcy court, it has not been definitively established that
the authority of this Court extends to such questions and, if so,
the appropriate remedy for such violation.2 Even if we had the
authority, this Court might still defer to the bankruptcy court
based on comity and judicial efficiency, as well as our
recognition that this Court does not deal with bankruptcy matters
and does not have the expertise that the bankruptcy court would.
Meadows v. Commissioner, 95 AFTR 2d 2005-1785, 2005-1 USTC par.
50274 (11th Cir. 2005) (citing Washington v. Commissioner, 120
T.C. 114, 125 (2003) (Wells, J., concurring)).
2
We note that actions against creditors for violations of
automatic stays are to be brought in the bankruptcy court. See
11 U.S.C. sec. 362(h) (2000); see also Meadows v. Commissioner,
95 AFTR 2d 2005-1785, 2005-1 USTC par. 50274 (11th Cir. 2005)
(citing Langlois v. United States, 155 Bankr. 818 (N.D.N.Y.
1993)) (sitting in bankruptcy jurisdiction and holding that the
IRS’s application of a collected amount to penalties that were to
be discharged in bankruptcy was a violation of the automatic
stay). Thus, it is clear that the bankruptcy court is more
knowledgeable than the Tax Court about the scope and effect of
the automatic stay and about appropriate remedies.
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b. The Right of Setoff Under Section 6402(a)
The IRS’s right to set off derives from section 6402(a),
which permits the IRS to set off any existing tax deficiencies
against any tax refunds due the taxpayer. Section 6402(a)
provides:
In the case of any overpayment, the Secretary, within the
applicable period of limitations, may credit the amount of
such overpayment, including any interest allowed thereon,
against any liability in respect of an internal revenue tax
on the part of the person who made the overpayment and
shall, subject to subsections (c) and (d), refund any
balance to such person.[3]
Effectively, section 6402(a) provides that a party is
entitled to a tax refund only of the amount which exceeds any
outstanding tax liabilities. In re Davis, 889 F.2d 658, 661 (5th
Cir. 1989); Kabbaby v. Richardson, 520 F.2d 334 (5th Cir. 1975);
United States v. Rochelle, 363 F.2d 225, 232-233 (5th Cir. 1966).
Petitioners contend that respondent could not apply the
overpayment of their voluntary 1995 estimated taxes to their
outstanding 1985 tax liability because on their 1995 return
petitioners directed that the overpayment should be applied to
their 1996 estimated taxes.
When a taxpayer makes voluntary payments to the IRS, he or
she has a right to direct the application of those payments to
3
Sec. 6402(a) was amended by the Internal Revenue Service
Restructuring and Reform Act of 1998, Pub. L. 105-206, sec.
3711(a), 112 Stat. 779, to include a reference to subsec. (e).
That amendment applies to refunds payable after Dec. 31, 1999,
and is not applicable to this case.
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whatever type of liability he chooses. Wood v. United States,
808 F.2d 411, 416 (5th Cir. 1987); Muntwyler v. United States,
703 F.2d 1030, 1032 (7th Cir. 1983); O’Dell v. United States, 326
F.2d 451, 456 (10th Cir. 1964). Under the voluntary payment
rule, when a taxpayer who has outstanding tax liabilities
voluntarily makes a payment, the IRS usually will honor a
taxpayer’s request as to how to apply that payment. In re Ryan,
64 F.3d 1516, 1522 (11th Cir. 1995). However, the Treasury
regulations promulgated under section 6402(a) demonstrate that
the IRS does not apply the voluntary payment rule to
overpayments.
The regulations do provide that a taxpayer can instruct the
IRS to credit his overpayment against the estimated tax for the
taxable year immediately succeeding the overpayment. Sec.
301.6402-3(a)(5), Proced. & Admin. Regs. However, the
regulations mirror the statute and authorize the IRS to override
that election and apply the overpayment against “any outstanding
liability for any tax”. Sec. 301.6402-3(a)(6)(i), Proced. &
Admin. Regs.; see N. States Power Co. v. United States, 73 F.3d
764, 767 (8th Cir. 1996) (citing In re Ryan, supra at 1523
(“[Section 6402], plainly gives the IRS the discretion to apply
overpayments to any tax liability”)); Pettibone Corp. v. United
States, 34 F.3d 536, 538 (7th Cir. 1994) (section 6402(a) “leaves
to the Commissioner’s discretion whether to apply overpayments to
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delinquencies or to refund them to the taxpayer”); Kalb v. United
States, 505 F.2d 506, 509 (2d Cir. 1974) (rejecting the argument
that because tax overpayment was voluntary, IRS was bound to
comply with the taxpayer’s direction about how to apply that
payment; section 6402(a) “clearly gives the IRS discretion to
apply a refund to ‘any liability’ of the taxpayer”).
Clearly, petitioners’ right to designate payments does not
extend to overpayments. Respondent’s application of petitioners’
1995 overpayment to their 1985 liability falls within his
authority to credit overpayments to any liability for any tax
year and was, therefore, proper.
2. Whether the Appeals Officer Abused Her Discretion in
Sustaining the Proposed Levy
Section 6330(c) prescribes the matters that a person may
raise at an Appeals Office hearing. Section 6330(c)(2)(A)
provides that a person may raise collection issues such as
spousal defenses, the appropriateness of the Commissioner’s
intended collection action, and possible alternative means of
collection. See Sego v. Commissioner, 114 T.C. 604, 609 (2000);
Goza v. Commissioner, 114 T.C. 176, 180 (2000).
The taxpayer may raise challenges “to the existence or
amount of the underlying tax liability”, however, only if he “did
not receive any statutory notice of deficiency for such tax
liability or did not otherwise have an opportunity to dispute
such tax liability.” Sec. 6330(c)(2)(B). Pursuant to section
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6330(c)(2)(B), petitioners were entitled to challenge the
existence or amount of the underlying tax liabilities for 1996 at
their Appeals Office hearing. If the validity of those
underlying tax liabilities is properly at issue, the Court
reviews the matter de novo. Poindexter v. Commissioner, 122 T.C.
280, 284 (2004); Sego v. Commissioner, supra at 610.
Petitioners did not address their 1996 tax liability in the
hearing or at trial and have failed to aver or prove facts
sufficient to show error in the assessments. Where, as is the
case here, the validity of the underlying tax liability is not
properly placed at issue, the Court will review the
administrative determination of the Appeals Office for abuse of
discretion. Sego v. Commissioner, supra at 610; Goza v.
Commissioner, supra at 181-183. The Court reviews only whether
the Appeals officer’s decision to sustain the proposed levy was
arbitrary, capricious, or without sound basis in fact or law.
See Woodral v. Commissioner, 112 T.C. 19, 23 (1999).
During the hearing, petitioners did not challenge the amount
of their underlying 1996 tax liability. They were ineligible for
an installment agreement because they were not current in their
tax obligations and estimated tax payments. Petitioners declined
to give Ms. Glover any financial information with which she could
determine the appropriateness of any other collection
alternatives.
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Petitioners have failed to present grounds on which this
Court could find that the Appeals officer abused her discretion
in sustaining the proposed levy. Accordingly, collection by levy
of petitioners’ unpaid 1996 tax liability reflected in the notice
of determination may proceed.
Reviewed and adopted as the report of the Small Tax Case
Division.
Decision will be
entered for respondent.