T.C. Summary Opinion 2005-164
UNITED STATES TAX COURT
JOSEPH A. LOFTUS, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 2137-04S. Filed November 9, 2005.
Joseph A. Loftus, pro se.
Wanda M. Cohen, for respondent.
DEAN, Special Trial Judge: This case was heard pursuant to
the provisions of section 7463 of the Internal Revenue Code in
effect at the time the petition was filed. Unless otherwise
indicated, subsequent section references are to the Internal
Revenue Code of 1986, as amended. 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. Pursuant to sections 6320(c) and 6330(d),
petitioner seeks review of respondent’s filing of a notice of
Federal tax lien for his tax liabilities for 1996 and 1997.1 The
issue for decision is whether respondent abused his discretion by
filing the notice of Federal tax lien for petitioner’s 1996 and
1997 tax liabilities.
Background
The stipulated facts and the exhibits received into evidence
are incorporated herein by reference. At the time the petition
in this case was filed, petitioner resided in Houston, Texas.
The Underlying Liability
Petitioner received premature distributions from his IRA and
section 401 accounts in 1996 and 1997, respectively, rendering
himself liable for the 10-percent additional tax on early
distributions under section 72(t). Petitioner’s 1996 and 1997
Federal income tax returns, filed pursuant to extensions,
reported the distributions as income. Petitioner, however,
failed to pay the additional tax on early distributions due for
both years.
Respondent assessed the unpaid amounts and issued to
petitioner a notice and demand for payment.
1
Although respondent’s notice of determination also
references 2000, for which the notice of Federal tax lien
indicates a then-current liability of $43.03, the year was not
listed in the petition or addressed at trial.
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The Bankruptcy Proceeding
In February of 1998, petitioner filed a petition for relief
under chapter 7 of the United States Bankruptcy Code, 11 U.S.C.
sections 101-1330 (2000), and received a discharge of
dischargeable debts on June 9, 1998.
Respondent’s Insolvency Section prepared and filed with the
bankruptcy court an original and an amended proof of claim, as an
unsecured priority claimant, on behalf of the Internal Revenue
Service (IRS).
During the bankruptcy case, the chapter 7 trustee applied to
the court for authority to pay State sales taxes incurred by the
estate, postpetition, as administrative expenses. No party filed
an objection to the trustee’s application.2
The trustee filed a notice of final report, and a final
report before distribution on February 16, 2001, showing that
after payments for the secured claim and for administrative
expenses, there would be nothing remaining in the estate for
distribution for unsecured priority claims and general unsecured
claims. No objection to the final report before distributions
was filed by any party. Therefore, respondent did not receive
any distribution from the bankruptcy estate for the prepetition
unsecured priority claim.
2
As it was later determined that the estate had no
liability for State sales taxes, they were not included in the
trustee’s final report of distribution.
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The Section 6320/6330 Administrative Process
After respondent mailed him a Letter 3172, Notice of Federal
Tax Lien Filing and Your Right To a Hearing Under IRC 6320,
petitioner timely submitted a Form 12153, Request For a
Collection Due Process Hearing, referencing 1996 and 1997. In a
document attached to the Form 12153, petitioner stated that he
did not disagree with the asserted liability for the 10-percent
additional tax on early distributions. Petitioner strongly
objected, however, to what he perceived as the unjustified
failure of the IRS to file a motion to compel payment of its
claim before final distribution of the bankruptcy estate.
Petitioner asked that the IRS “completely abandon its claim”.
Petitioner received a telephonic hearing with the Office of
Appeals in Houston, Texas. The office issued a notice of
determination finding the filing of the notice of the Federal tax
lien to be an appropriate collection action.
After the petition was filed with the Court for review of
respondent’s determination, respondent obtained from the Court a
remand of the case for further consideration of the bankruptcy
issue. Petitioner, on remand, met face to face with an Appeals
conferee. The conferee issued a supplement to the original
notice of determination that again sustained as appropriate the
filing of the notice of Federal tax lien.
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Discussion
Procedure Under Sections 6320 and 6330
Section 6320 entitles a taxpayer to notice of his right to
request a hearing with the IRS Office of Appeals after a notice
of lien is filed by the Commissioner in furtherance of the
collection of unpaid Federal taxes. The taxpayer requesting the
hearing may raise any relevant issue with regard to the
Commissioner’s intended collection activities, including spousal
defenses, challenges to the appropriateness of the Commissioner’s
intended collection action, and alternative means of collection.
Secs. 6320(b) and (c); 6330(c); 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).
Where the validity of the tax liability is not properly part
of the appeal, the taxpayer may challenge the determination of
the Appeals officer for abuse of discretion. Sego v.
Commissioner, supra at 609-610; Goza v. Commissioner, supra at
181-182.
As the Court understands his argument, petitioner does not
challenge the existence or amount of the underlying tax
liability. The parties in fact so stipulate. For reasons to be
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explained, petitioner argues that the IRS should be limited to
collecting half of the amount of the liability for which the
notice of lien was filed for 1996 and 1997. In addition, he
objects to the failure to pay addition to tax and the interest
that accrued on the assessments after his bankruptcy action. The
Court will treat petitioner’s arguments as challenges to the
collection action.
Challenges to Collection Action
Questions about the appropriateness of the collection action
include whether it is proper for the Commissioner to proceed with
the collection action as determined in the notice of
determination, and whether the type and/or method of collection
chosen by the Commissioner is appropriate. See, e.g., Swanson v.
Commissioner, 121 T.C. 111, 119 (2003) (challenge to
appropriateness of collection reviewed for abuse of discretion).
In order for a taxpayer to prevail under the abuse of
discretion standard, it is not enough for the Court to conclude
that the Court would not have authorized collection; the Court
must conclude that, in authorizing collection, the Appeals
officer has exercised discretion arbitrarily, capriciously, or
without sound basis in fact. Estate of Jung v. Commissioner, 101
T.C. 412, 449 (1993); accord Mailman v. Commissioner, 91 T.C.
1079, 1084 (1988). It has been held that discretion can be
abused by neglecting a significant relevant factor, by giving
weight to an irrelevant factor, or by considering only the proper
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factors but nevertheless making a clear error in judging their
weight. Henry v. INS, 74 F.3d 1, 4 (1st Cir. 1996).
Petitioner’s arguments are based upon his perception of how
respondent’s Insolvency Section handled his tax liabilities in
the bankruptcy proceeding. Petitioner voiced several complaints
during his testimony, including the “indifference” to his plight
exhibited by respondent’s Insolvency Section.
The main bone of contention, however, is his belief that the
chapter 7 trustee would have paid 50 percent of petitioner’s
outstanding tax liabilities, the unsecured priority claim, if
only respondent had filed a motion to compel payment before the
final distribution. Petitioner testified that the trustee told
him that he would not oppose, and would in fact recommend, the
partial payment. Petitioner further testified that he relayed
the trustee’s “offer” to the Insolvency Section and was informed
that under their guidelines, motions to compel would not be filed
in cases involving less than $50,000 of tax liability.
Petitioner asserts that the failure of the Insolvency
Section to file a motion to compel was an abuse of discretion.
Neither the trustee in petitioner’s bankruptcy proceeding nor any
employee of the Insolvency Section was called as a witness in
this case.
Court Review of the Determination
The Court reviews the actions of the Appeals officer who
conducted the hearing and issued the notice of determination in
this case. Section 6330 does not contemplate that the Court
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directly review prior actions of IRS employees. See sec. 6330(c)
and (d) (“determination” is made by Appeals officer; court
reviews determination). The Court may indirectly review the
prior actions of IRS employees in that the determination by the
Appeals officer must take into consideration whether the
requirements of any applicable law or administrative procedure
have been met. Secs. 6320(c), 6330(c)(1).
Certain types of debt are nondischargeable under a chapter 7
bankruptcy proceeding. 11 U.S.C. sec. 523(a) (2000). Section
523(a)(1)(A) of the United States Bankruptcy Code automatically
excepted petitioner’s income tax liabilities from discharge
because they were a tax of the kind specified in 11 U.S.C.
section 507(a)(8).3 See Swanson v. Commissioner, supra at 128.
Petitioner understands and agrees with this legal principle.
Petitioner has stated that he also understands and agrees that
there was no legal or administrative requirement that respondent
file a motion to compel the chapter 7 trustee to pay a portion of
3
11 U.S.C. sec. 507(a)(8)(2000) provides in part:
(a) The following expenses and claims have priority in
the following order:
* * * * * * *
(8) Eighth, 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 --
(i) for a taxable year ending on or before the date of the
filing of the petition for which a return, if required, is
last due, including extensions, after three years before the
date of the filing of the petition * * *
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his tax liabilities from the bankruptcy estate. Even though
respondent was not required to file the motion to compel,
petitioner believes respondent’s Insolvency Section “should” have
exercised discretion to do so. Petitioner argues that by not
filing the motion, it enabled the trustee to request and receive
“the maximum amount of compensation allowed by law”. Petitioner
believes that the maximum is “not generally granted” and that the
“trustee compensation is not an administrative cost of the
estate.”
Administrative expenses include taxes incurred by the estate
(other than taxes listed in 11 U.S.C. section 507(a)(8)), such as
the postpetition State sales taxes in this case the proposed
payment of which petitioner believes respondent’s Insolvency
Section should have objected to. 11 U.S.C. sec. 503(b)(1)(B)
(2000). Also, petitioner’s belief concerning the classification
of the trustee’s compensation expense is incorrect.
Compensation and reimbursement of actual and necessary
expenses of the trustee are administrative expenses of the
bankruptcy estate. 11 U.S.C. secs. 503(c)(2), 330 (2000). The
determination of whether the amount of compensation requested is
reasonable requires consideration of a number of factors. 11
U.S.C. sec. 330(a)(3)(A). The fee requested by the trustee is
subject to reduction upon motion by the court itself, the United
States trustee, or “any party in interest.” 11 U.S.C. sec. 330.
Neither the bankruptcy court nor any party in interest moved to
reduce the trustee’s fee in petitioner’s bankruptcy proceeding.
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Petitioner’s belief that the maximum amount of trustee
compensation allowed by law is not generally granted is based
upon his reading of a report that he says listed the average fees
for all bankruptcies by size for the years 1994 through 2000.
The report was not introduced into evidence.
Petitioner, who was represented by counsel during the
bankruptcy proceeding, appears to be under the impression that
the IRS was also required to represent his best interests in the
bankruptcy proceeding. The failure of respondent vigorously to
do so was an “abuse of discretion”, according to petitioner,
requiring the withdrawal of the notice of lien and the reduction,
by half, of his tax liability, and the abatement of interest and
the additions to tax.
Without deciding the issue, the Court accepts as accurate
petitioner’s testimony that the Insolvency Section operates under
certain tolerance levels, governed by the amount of tax owed, in
requesting its lawyers to file motions to compel in bankruptcy
cases. Petitioner has failed however, to describe how that
policy relates to an abuse of discretion by the Appeals officer
in this case.
To reach the conclusion advocated by petitioner would
require the Court at the outset to find that the Appeals
officer’s determination that the requirements of applicable law
or administrative procedure had been met was an abuse of
discretion. Yet by petitioner’s own admission, and the Court’s
determination, there is no law or administrative procedure that
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requires the IRS to do what he says “should” have been done. The
mere failure to take discretionary action is the exercise of
discretion, not the abuse of discretion.
The Court finds that the Appeals officer did not neglect a
significant relevant factor, give weight to an irrelevant factor,
or consider only the proper factors but nevertheless make a clear
error in judging their weight. Respondent has not exercised
discretion arbitrarily, capriciously, or without sound basis in
fact.
Abatement of Interest and Additions to Tax
Interest
For tax years beginning before July 31, 1996, the
Commissioner may abate interest assessed on any deficiency or
payment of tax to the extent that any error or delay in payment
of the tax is attributable to erroneous or dilatory performance
of a ministerial act by an officer or employee of the
Commissioner and the taxpayer caused no significant aspect of the
delay. Sec. 6404(e)(1). A ministerial act is a procedural or
mechanical act that does not involve the exercise of judgment or
discretion by the Commissioner. Sec. 301.6404-2T(b)(1),
Temporary Proced. & Admin. Regs., 52 Fed. Reg. 30163 (Aug. 13,
1987).
The delay of which petitioner complains is respondent’s
focus “on actions of the trustee and the Federal Bankruptcy Court
as opposed to my contentions”. Insofar as the year 1996 is
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concerned, the Court finds the acts complained of to be other
than ministerial.
In 1996, Congress amended section 6404(e) to permit
abatement of interest that accrues as a result of an
“unreasonable” error or delay in performing a ministerial or
“managerial” act. Sec. 6404(e)(1)(A) and (B); Taxpayer Bill of
Rights 2 (TBOR 2), Pub. L. 104-168, sec. 301(a) (1996). The 1996
amendment applies to deficiencies or payments for tax years
beginning after July 30, 1996. TBOR 2 sec. 301(c). The
amendment applies to petitioner’s 1997 tax year.
A decision concerning the application of Federal or State
law is not a managerial act. Sec. 301.6404-2(b)(1), Proced. &
Admin. Regs. Petitioner has failed to show, with respect to
1997, that the acts complained of were unreasonable errors or
delays in performing a ministerial or managerial act.
Additions to Tax
The Court is not sure of the basis for petitioner’s
objection to the additions to tax for failure to pay timely under
section 6651(a)(2). The parties have stipulated that petitioner
does not object to the underlying tax liability. The assessed
tax liability includes any additions to tax. Sec. 6201(a); sec.
301.6201-1(a), Proced. & Admin. Regs.
Further, section 6330(c)(2)(B) provides that the taxpayer
may challenge the underlying tax liability at the Appeals Office
unless he received a statutory notice of deficiency for the
liability or otherwise had an opportunity to dispute the
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liability. Even if the Appeals Office considers a challenge to
the underlying tax liability where one of the two above
situations obtains, the Court may not review the determination on
the issue because it was not properly part of the hearing.
Sabath v. Commissioner, T.C. Memo. 2005-222; sec. 301.6330-
1(e)(3), Q&A-E11, Proced. & Admin. Regs.; see also Behling v.
Commissioner, 118 T.C. 572, 578-579 (2002).
The Court has held that when the IRS submits in a Federal
bankruptcy proceeding a proof of claim for unpaid taxes, the
taxpayer has an opportunity to dispute his tax liability within
the meaning of section 6330(c)(2)(B). See Kendricks v.
Commissioner, 124 T.C. 69, 77 (2005); Sabath v. Commissioner,
supra. Petitioner is therefore precluded from challenging his
liability for the additions to tax under section 6651(a)(2) in
this case.
In any event, petitioner, having admitted that the taxes
were not timely paid, testified that he chose to pay other
creditors instead of paying his tax liabilities. He provided no
documentary evidence on the issue, and his testimony fell short
of carrying his burden to show that there is reasonable cause for
his failure to pay timely. See Higbee v. Commissioner, 116 T.C.
438, 446 (2001); sec. 301.6651-1(c), Proced. & Admin. Regs.
Petitioner may also be asking for an abatement of the
addition to tax. Section 6404(f) allows for the abatement of an
addition to tax attributable to erroneous written advice by the
IRS. Petitioner has not argued or proved that he received any
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written advice on which he relied and to which he can attribute
his failure to pay timely his tax liabilities for 1996 and 1997.
Conclusion
The Court has considered all of petitioner’s contentions,
arguments, and requests, and to the extent they were not
discussed, the Court concludes that they are moot, irrelevant, or
without merit.
Reviewed and adopted as the report of the Small Tax Case
Division.
Decision will be entered
for respondent.