Gregory Drake v. Commissioner

125 T.C. No. 9

UNITED STATES TAX COURT

GREGORY DRAKE, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 20454-03L. Filed October 12, 2005.

Prior to a scheduled sec. 6330, I.R.C., hearing
with P, R’s settlement officer received a memorandum
from R’s insolvency unit advisor that questioned the
credibility and motives of P’s counsel in a prior court
proceeding. P was not provided an opportunity to
participate in the ex parte communication.

Held: The memorandum constitutes a prohibited ex
parte communication pursuant to Rev. Proc. 2000-43,
2000-2 C.B. 404, and therefore the instant case will be
remanded to R’s Appeals Office for a new hearing.

Timothy J. Burke, for petitioner.

Louise R. Forbes, for respondent.
 - 2 -

OPINION

WELLS, Judge: Respondent’s Appeals Office determined that a

proposed levy should be sustained against petitioner, who timely

filed a petition for review of the determination. We review the

determination for abuse of discretion. Unless otherwise

indicated, all section references are to the Internal Revenue

Code, as amended, and all Rule references are to the Tax Court

Rules of Practice and Procedure.

Background

Some of the facts have been stipulated and are so found.

The stipulation of facts and the accompanying exhibits are

incorporated herein by this reference.

Petitioner Gregory Drake and Barbara Drake are husband and

wife. At the time of the filing of the petition, petitioner

resided in South Yarmouth, Massachusetts.

As of August 19, 1997, respondent had filed Notices of

Federal Tax Lien against petitioner for income tax liabilities

for 1991, 1992, and 1995. On that date, Barbara Drake and

petitioner filed a joint bankruptcy petition under chapter 13 of

the Bankruptcy Code with the U.S. Bankruptcy Court for the

District of Massachusetts. In the bankruptcy proceedings,

Barbara Drake and petitioner received authority to sell three

properties which were subject to Federal tax liens. The

properties were sold free and clear of the tax liens, with a tax
 - 3 -

lien attaching to the sale proceeds.1 Subsequently, the

bankruptcy trustee filed a motion to dismiss the case for failure

to file a repayment plan,2 and Barbara Drake and petitioner filed

a Motion for Authority to Disburse Funds.3 The court granted the

motion to dismiss and issued an order mooting the Motion for

Authority to Disburse Funds. Upon the dismissal of the case on

June 30, 1999, the attorney representing Barbara Drake and

petitioner in the bankruptcy proceedings distributed to Barbara

Drake and petitioner sale proceeds in the amount of $151,139.74.4

Petitioner subsequently transferred, for no consideration, the

sale proceeds to his sons, Darren Drake and Gregory Drake, Jr.

On October 6, 1999, Notices of Federal Tax Lien were filed

against Barbara Drake and petitioner with respect to their 1994,

1995, and 1997 tax years.

On July 19, 2000, respondent mailed to Barbara Drake and

petitioner a Final Notice, Notice of Intent to Levy and Notice of

Your Right to a Hearing, with respect to their 1991, 1992, 1994,

1
The sale yielded proceeds of $161,250.65.
2
Pursuant to 11 U.S.C. sec. 1321 (2000), a debtor in a ch.
13 case must file a repayment plan. Pursuant to 11 U.S.C. sec.
1307, the bankruptcy court may dismiss a case for failure to file
a timely repayment plan.
3
The motion provided for sale proceeds to be distributed to
creditors, including respondent.
4
This amount represented the sale proceeds less legal fees
and expenses. We note that Barbara Drake and petitioner were
represented in the bankruptcy proceedings by Neal E. Satran, who
is not involved petitioner’s sec. 6330 proceedings.
 - 4 -

1995, and 1997 tax years. The notice asserted an unpaid tax of

$121,478.17 and penalties and interest of $88,607.27. Pursuant

to a power of attorney, Timothy J. Burke (Mr. Burke) submitted a

timely Form 12153, Request for a Collection Due Process Hearing,

on behalf of Barbara Drake and petitioner. Subsequently, on

behalf of Barbara Drake, Mr. Burke submitted a Form 8857, Request

for Innocent Spouse Relief, with respect to each of the years in

dispute.

Settlement Officer Eugene O’Shea was assigned to conduct the

requested section 6330 hearing, and he determined from Internal

Revenue Service records that petitioner had previously filed for

bankruptcy protection. On January 30, 2002, prior to the section

6330 hearing, Settlement Officer O’Shea conferred with Advisor

Sid Gordon of the Internal Revenue Service Insolvency Unit

regarding the bankruptcy case and requested related

documentation. On the same date, Advisor Gordon faxed to

Settlement Officer O’Shea a copy of Advisor Gordon’s prior

memorandum to respondent’s counsel Louise R. Forbes (Attorney

Forbes).5 In the memorandum, dated October 5, 1999, Advisor

Gordon stated that proceeds from the prior sale of the three

properties subject to Federal tax liens had been distributed to

Barbara Drake and petitioner, that the proceeds should have been

5
Louise R. Forbes, senior attorney in respondent’s Office of
Chief Counsel, represents respondent in the instant case.
 - 5 -

distributed to the creditors of Barbara Drake and petitioner, and

that Advisor Gordon believed that the attorney of Barbara Drake

and petitioner had “used the Court to bypass the Federal tax

Lien.” The memorandum further stated:

According to the settlement sheets the debtor
received $161,094.73 from the three sales. Although
the Bankruptcy Court approved the sales under 11 USC
363 the IRS received nothing. Attorney Satran had
knowledge of the Internal Revenue Service Federal Tax
Liens due to the considerable litigation involved in
this case. In fact Attorney Satran filed a motion with
the Court to disburse the funds including [sic] the IRS
liens. It is a mockery to the integrity [of the]
Bankruptcy Court if an Attorney can use it to defeat a
Federal Tax Lien allowing a Debtor to walk away with
the proceeds. The Bankruptcy Code was used because 11
USC 363 was authorized by the Court.

I informed Attorney Campobasso that Attorney
Satran had previously been suspended by the Bankruptcy
Court. Chief, US Bankruptcy Court Judge Carol J Keener
suspended attorney Satran from 01/30/1996 through
11/29/1996. The action of Attorney Satran in a Chapter
11 case [involving] Paula Wyner, Carlton House of
Brockton, Inc. was the cause of the suspension. I
think the Court should be informed of the conduct of
Attorney Satran in this case.

On January 30, 2002, Mr. Burke attended a meeting with

Settlement Officer O’Shea, who did not inform petitioner of his

communications with Advisor Gordon. Mr. Burke provided a copy of

Form 433-A, Collection Information Statement for Wage Earners and

Self-Employed Individuals, and Form 433-B, Collection Information

Statement for Businesses. A Form 656, Offer-in-Compromise, had

been completed but was not submitted to Settlement Officer O’Shea

for consideration. Petitioner concedes that the parties
 - 6 -

informally suspended consideration of any offer-in-compromise

pending a determination of Barbara Drake’s request for innocent

spouse relief, which would influence whether petitioner filed an

individual offer-in-compromise or a joint offer-in-compromise.

By letter dated February 5, 2002, respondent made a

preliminary determination denying Barbara Drake’s request for

innocent spouse relief, and she appealed the determination to

respondent’s Appeals Office. The Appeals Office assigned Appeals

Officer Jeffrey Kaplan to the case.

On September 4, 2002, petitioner submitted to respondent’s

Appeals Office an “amended” Form 656, Offer-in-Compromise,

offering to pay $5,500 in satisfaction of petitioner’s tax

liabilities for 1991, 1992, 1993, 1994, 1995, 1997, and 1999.6

In a letter to petitioner dated September 4, 2002, Settlement

Officer O’Shea acknowledged receiving the amended offer-in-

compromise but noted that consideration of the original offer-in-

compromise had been informally suspended by the parties pending

the determination of Barbara Drake’s request for innocent spouse

relief. Accordingly, Settlement Officer O’Shea informed Mr.

Burke that no original offer-in-compromise had been submitted for

consideration and returned the amended Form 656 to Mr. Burke.

Petitioner concedes that the reason for returning the Form 656

was to avoid any administrative confusion.

6
The tax years 1993 and 1999 were not within the scope of
the proposed levy nor part of the initial request for a sec. 6330
hearing.
 - 7 -

On January 17, 2003, the section 6330 matter was transferred

from Settlement Officer O’Shea to Appeals Officer Kaplan,7 who

subsequently advised Mr. Burke that no offer-in-compromise was

presently before the Appeals Office, as no original offer-in-

compromise had been submitted for consideration and the amended

offer-in-compromise had been returned to Mr. Burke. Appeals

Officer Kaplan informed Mr. Burke that any offer-in-compromise

should be larger than the $5,500 amount of the amended offer-in-

compromise submitted on September 4, 2002. Appeals Officer

Kaplan also noted that the former residence of Barbara Drake and

petitioner was now owned by their son and that the transfer

appeared questionable.

In a conversation on June 16, 2003, Mr. Burke informed

Appeals Officer Kaplan that Darren Drake, the son of Barbara

Drake and petitioner, had foreclosed upon and bought petitioner’s

house. Appeals Officer Kaplan requested documentation related to

the foreclosure and transfer.

In a letter dated July 2, 2003, Appeals Officer Kaplan

informed Mr. Burke that he would proceed with the section 6330

determination against Barbara Drake and petitioner. The letter

made the following request, reproduced verbatim, for the

production of documents:

7
As noted above, Appeals Officer Kaplan had been assigned to
Barbara Drake’s innocent spouse relief appeal.
 - 8 -

1. Documentation regarding what was done with the
funds received by the taxpayers from the sale of
property as part of their bankruptcy proceedings,
along with how much was actually received.

2. Documentation of the value of the property located
at 40 Keel Cape Drive, South Yarmouth, MA, prior
to the foreclosure.

3. Documentation of the foreclosure.

4. Documentation regarding the amount owed on the
mortgage by the taxpayers at the time of the
foreclosure.

5. Documentation regarding the entity that acquired
the mortgage from the prior mortgage holder prior
to the foreclosure.

6. Copies of the mortgage.

7. Documentation of the acquisition of the property
by Darren Drake.

8. An updated Collection Information Statement for
Mr. and Mrs. Drake.

9. Completed Offer-in-Compromise Questionnaire.

10. An updated Collection Information Statement for
their businesses.

Appeals Officer Kaplan informed Mr. Burke that he would make a

section 6330 determination based on information already within

his possession unless Mr. Burke submitted the requested documents

by July 30, 2003. In addition, Appeals Officer Kaplan informed

Mr. Burke that any offer-in-compromise should also be submitted.

In August of 2003, Mr. Burke provided respondent’s Appeals Office
 - 9 -

with numerous documents. However, Appeals Officer Kaplan

informed Mr. Burke that he had not received all of the requested

information.

On September 30, 2003, Barbara Drake filed a bankruptcy

petition under chapter 13 of the Bankruptcy Code with the U.S.

Bankruptcy Court for the District of Massachusetts. In October

of 2003, Mr. Burke advised Appeals Officer Kaplan that Barbara

Drake had filed a bankruptcy petition under chapter 13 of the

Bankruptcy Code, that the automatic stay of 11 U.S.C. sec. 362

applied to petitioner as well as Barbara Drake, and that 11

U.S.C. sec. 1301 precluded any collection action against either

Barbara Drake or petitioner. On October 27, 2003, Appeals

Officer Kaplan requested legal advice from Attorney Forbes

concerning the preclusion of any collection action against

petitioner. Attorney Forbes advised that 11 U.S.C. sec. 1301 did

not preclude the collection action against petitioner.8

8
11 U.S.C. sec. 1301(a) (2000) provides:

Sec. 1301 Stay of action against codebtor

(a) Except as provided in subsections (b) and (c)
of this section, after the order for relief under this
chapter, a creditor may not act, or commence or
continue any civil action, to collect all or any part
of a consumer debt of the debtor from any individual
that is liable on such debt with the debtor, or that
secured such debt, unless--

(1) such individual became liable on or secured
such debt in the ordinary course of such individual’s
business; or
(continued...)
 - 10 -

Consequently, on October 27, 2003, Appeals Officer Kaplan advised

Mr. Burke that the collection action could and would proceed

against petitioner. In addition, Appeals Officer Kaplan advised

Mr. Burke that information previously requested had not been

received by the Appeals Office and that the Appeals Office would

close the case and issue a determination based on information

already in its possession unless Mr. Burke submitted the

information immediately. Appeals Officer Kaplan did not receive

the requested information and closed the case file on October 29,

2003. Subsequently, respondent sent petitioner a notice of

determination (notice of determination), determining that all

statutory administrative and procedural requirements had been met

and that available information did not establish that an offer-

in-compromise was a viable collection alternative. On January

29, 2004, the Appeals Office issued to Barbara Drake a Final

Notice of Determination Concerning Your Request for Relief from

Joint and Several Liability under I.R.C. sec. 6015, denying the

requested relief. This Court dismissed Barbara Drake’s

8
(...continued)
(2) the case is closed, dismissed, or converted to
a case under chapter 7 or 11 of this title.

Respondent contends that tax debt is not considered consumer debt
for purposes of 11 U.S.C. sec. 1301(a). In re Stovall, 209
Bankr. 849 (Bankr. E.D. Va. 1997); In re Dye, 190 Bankr. 566
(Bankr. N.D. Ill. 1995). Consequently, respondent contends that
the stay of 11 U.S.C. sec. 1301(a) did not preclude the
collection action against petitioner. In the instant case,
petitioner does not dispute respondent’s contention that the stay
did not preclude collection against petitioner.
 - 11 -

subsequent petition for innocent spouse relief. See Drake v.

Commissioner, 123 T.C. 320 (2004). Petitioner timely petitioned

this Court for judicial review of the notice of determination.9

Discussion

Section 6330(a) provides that no levy may be made on any

property or right to property of a person unless the Secretary

first notifies the person in writing of the right to a hearing

before the IRS Office of Appeals (Appeals Office).10 Section

6330(c)(1) provides that the Appeals officer must verify at the

hearing that applicable laws and administrative procedures have

been followed.11 Sec. 6330(c)(1). At the hearing, the person

9
On Dec. 1, 2003, petitioner filed a timely Petition for
Levy Action Under Section 6330. Petitioner submitted an amended
petition on Jan. 18, 2005.
10
SEC. 6330 NOTICE AND OPPORTUNITY FOR HEARING BEFORE LEVY.

(a) Requirement of Notice Before Levy.--

(1) In general.--No levy may be made on any
property or right to property of any person unless the
Secretary has notified such person in writing of their
right to a hearing under this section before such levy
is made. * * *

* * * * * * *

(b) Right to Fair Hearing.--

(1) In general.--If the person requests a hearing
* * *, such hearing shall be held by the Internal
Revenue Service Office of Appeals.
11
Sec. 6330(c)(1) provides:

Requirement of investigation.--The appeals officer shall at
(continued...)
 - 12 -

may raise any relevant issue relating to the unpaid tax or the

proposed levy, including appropriate spousal defenses, challenges

to the appropriateness of collection actions, and collection

alternatives. Sec. 6330(c)(2)(A). The person may challenge the

existence or amount of the underlying tax liability, however,

only 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. Sec. 6330(c)(2)(B).12

In the instant case, petitioner does not contest the underlying

tax liability, and, consequently, we review the Appeals officer’s

determination for abuse of discretion. See Goza v. Commissioner,

114 T.C. 176, 181-182 (2000); Sego v. Commissioner, 114 T.C. 604,

610 (2000).

Petitioner contends, inter alia, that Settlement Officer

O’Shea and Appeals Officer Kaplan did not conduct the

administrative review in good faith, as evidenced by the ex

parte communication between Settlement Officer O’Shea and Advisor

11
(...continued)
the hearing obtain verification from the Secretary that the
requirements of any applicable law or administrative
procedure have been met.
12
Sec. 6330(c)(2)(B) provides:

(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.
 - 13 -

Gordon on January 30, 2002. As discussed above, on that date,

Advisor Gordon faxed to Settlement Officer O’Shea a copy of a

prior memorandum from Advisor Gordon to Attorney Forbes, dated

October 5, 1999, which discussed the distribution of proceeds

from the sale of petitioner’s three properties subject to Federal

tax liens upon dismissal of petitioner’s bankruptcy case.

Respondent contends that the ex parte communication between

Settlement Officer O’Shea and Advisor Gordon was inconsequential

because Settlement Officer O’Shea received no factual information

not already known to petitioner. Additionally, respondent

contends that petitioner was provided with the opportunity to

discuss the distribution of sale proceeds, as demonstrated by the

letter from Appeals Officer Kaplan to Mr. Burke dated July 2,

2003.

The Internal Revenue Service Restructuring and Reform Act of

1998, Pub. L. 105-206, sec. 1001(a), 112 Stat. 689, directed the

Commissioner of Internal Revenue to develop a plan to prohibit ex

parte communications between Appeals officers and other employees

of the Internal Revenue Service that appear to compromise the

independence of the Appeals officers:

The Commissioner of the Internal Revenue shall develop
and implement a plan to reorganize the Internal Revenue
Service. The plan shall * * * (4) ensure an
independent appeals function within the Internal
Revenue Service, including the prohibition in the plan
of ex parte communications between appeals officers and
other Internal Revenue Service employees to the extent
that such communications appear to compromise the
 - 14 -

independence of the appeals officers.

To fulfill that congressional mandate to ensure an

independent Appeals Office, respondent issued Rev. Proc. 2000-43,

2000-2 C.B. 404, which is effective for communications between

employees of the Appeals Office and other Internal Revenue

Service employees taking place after October 23, 2000. See

Harrell v. Commissioner, T.C. Memo. 2003-271. Rev. Proc. 2000-

43, sec. 3, Q&A-1, 2000-2 C.B. at 405, provides the following

general description of the prohibition on ex parte

communications:

For the purposes of this revenue procedure, ex parte
communications are communications that take place
between Appeals and another Service function without
the participation of the taxpayer or the taxpayer’s
representative (taxpayer/representative). While the
legislation refers to “appeals officers,” the overall
intent of the ex parte provision is to ensure the
independence of the entire Appeals organization. Ex
parte communications between any Appeals employee,
e.g., Appeals Officers, Appeals Team Case Leaders,
Appeals Tax Computation Specialists, and employees of
other Internal Revenue Service offices are prohibited
to the extent that such communications appear to
compromise the independence of Appeals.

Rev. Proc. 2000-43, 2000-2 C.B. 404, provides that an

Appeals officer may not engage in ex parte discussions of the

strengths and weaknesses of the issues of a case that would

appear to compromise the Appeals officer’s independence and must

give the taxpayer an opportunity to participate in any

discussions concerning matters that are not ministerial,

administrative, or procedural in nature. Rev. Proc. 2000-43,
 - 15 -

sec. 3, Q&A-6, 2000-2 C.B. at 406. The revenue procedure

specifically prohibits ex parte discussions of the “originating

function’s perception of the demeanor or credibility of the

taxpayer or the taxpayer’s representative” during the course of

the preliminary review of a newly assigned case.13 Rev. Proc.

2000-43, sec. 3, Q&A-5, 2000-2 C.B. at 405-406.

In the instant case, the memorandum faxed by Advisor Gordon

to Settlement Officer O’Shea on January 30, 2002, runs afoul of

Rev. Proc. 2000-43, sec. 3, Q&A-5, 2000-2 C.B. at 405-406. The

memorandum was not ministerial, administrative, or procedural in

nature. By questioning the credibility and motives of

petitioner’s counsel in the bankruptcy proceedings, the

memorandum may have had the effect of damaging petitioner’s

credibility in the administrative proceedings before Settlement

Officer O’Shea, who neither informed petitioner of the

communications with Advisor Gordon nor provided petitioner with

the opportunity to participate in the ex parte communication.

13
Rev. Proc. 2000-43, sec. 3, Q&A-5, 2000-2 C.B. 404, 405-
406, expressly applies to communications with the “originating
function”. The IRS Insolvency Unit does not appear to be an
originating function for purposes of the revenue procedure. See
Rev. Proc. 2000-43, sec. 3, Q&A-20, 2000-2 C.B. at 408. However,
Rev. Proc. 2000-43, sec. 3, Q&A-6, 2000-2 C.B. at 406, provides
that the ex parte communications prohibition also applies to
Appeals consideration of cases that originated in the Collection
function. Such cases that originate in the Collection function
include collection due process appeals. Id. Consequently, the
ex parte communications prohibition applies to the instant
collection due process appeal.
 - 16 -

Rev. Proc. 2000-43, Q&A-21, 2000-2 C.B. at 408, defines the

phrase “opportunity to participate” as follows:

It means that the taxpayer/representative will be given
a reasonable opportunity to attend a meeting or be a
participant in a conference call between Appeals and
the originating function when the strengths and
weaknesses of issues or positions in the taxpayer’s
case are discussed. The taxpayer/representative will
be notified of a scheduled meeting or conference call
and invited to participate. * * *

Because petitioner was not given an opportunity to participate in

a meeting or conference call with Advisor Gordon, we conclude

that petitioner did not have an opportunity to participate in the

ex parte communication for purposes of Rev. Proc. 2000-43, supra.

Based on the foregoing, we conclude that the communication

between Advisor Gordon and Settlement Officer O’Shea constituted

a prohibited ex parte communication that may have damaged

petitioner’s credibility before Settlement Officer O’Shea and

Appeals Officer Kaplan.14 Consequently, we hold that Appeals

Officer Kaplan abused his discretion and shall remand the instant

case to respondent’s Appeals Office for a new section 6330

hearing with an independent Appeals officer who has received no

communication relating to the credibility of petitioner or

14
The record reveals that the memorandum from Advisor Gordon
to Attorney Forbes became a part of respondent’s administrative
file and was ultimately reviewed by Appeals Officer Kaplan. The
record further reveals that Appeals Officer Kaplan did not
provide petitioner with a copy of the memorandum.
 - 17 -

petitioner’s representative.15

To reflect the foregoing,

An appropriate order will

be issued.

15
Petitioner also contends that the ex parte communication
between Appeals Officer Kaplan and Attorney Forbes on Oct. 27,
2003, demonstrates that Appeals Officer Kaplan did not conduct
the administrative review in good faith. In light of our holding
above, we need not decide whether the communication between
Appeals Officer Kaplan and Attorney Forbes constitutes a
prohibited ex parte communication for purposes of Rev. Proc.
2000-43, supra. We note, however, that Attorney Forbes was the
recipient of the original memorandum from Advisor Gordon which
questioned the credibility of petitioner’s counsel in the
bankruptcy proceeding.

In addition to petitioner’s contentions with respect to the
ex parte communications, petitioner contends that petitioner’s
Fifth Amendment right to due process was violated by the absence
of “recognizable” procedures to be followed in the sec. 6330
hearing; that petitioner did not receive a sec. 6330 hearing
before an impartial officer; that the proposed collection
alternative was “viable”; that Appeals Officer Kaplan’s request
that petitioner submit financial documentation without
investigating prior statements demonstrates his bias; and that
respondent did not balance the need for the efficient collection
of taxes with the legitimate concern that the collection be no
more intrusive than necessary. Because we remand the instant
case to respondent’s Appeals Office for a new hearing, we need
not consider the aforementioned contentions.