T.C. Summary Opinion 2006-42
UNITED STATES TAX COURT
JAMES CURTIS BARRETT, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 7444-04S. Filed March 22, 2006.
James Curtis Barrett, pro se.
Catherine G. Chang, for respondent.
PANUTHOS, Chief Special Trial Judge: This case was heard
pursuant to the provisions of sections 6330(d) and 7463 of the
Internal Revenue Code in effect when the petition was filed. The
decision to be entered is not reviewable by any other court, and
this opinion should not be cited as authority. Unless otherwise
indicated, all subsequent section references are to the Internal
Revenue Code in effect at relevant times. All Rule references
are to the Tax Court Rules of Practice and Procedure.
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This proceeding arises from a petition for judicial review
filed in response to a Notice of Determination Concerning
Collection Action(s) Under Section 6320 and/or 6330 (notice of
determination) sent to petitioner on April 8, 2004. Pursuant to
sections 6320(c) and 6330(d), petitioner seeks review of
respondent’s determination sustaining the filing of a notice of
Federal tax lien against petitioner. The issue for decision is
whether petitioner may dispute the underlying tax liability for
any of the years in issue and, if so, whether any adjustment is
appropriate.
Background
Some of the facts have been stipulated, and they are so
found, except as described below. The record consists of the
stipulation of facts with attached exhibits, additional exhibits
admitted during trial, and the testimony of petitioner and Alyce
Wong, who is benefits supervisor for the San Francisco City and
County Employees Retirement System. At the time of filing the
petition, petitioner resided in San Francisco, California.
Respondent made assessments against petitioner for income
taxes and related penalties and interest for the taxable years
1994, 1995, 1996, 1997, and 1998. Respondent also assessed for
collection costs for the taxable year 1994.
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1994 and 1995
Petitioner worked for the City and County of San Francisco
(the city and county) for more than 30 years. During the taxable
years 1994 and 1995, petitioner was an operator of light rail
vehicles. Although petitioner earned wage income during both
years, he failed to file his 1994 and 1995 Federal income tax
returns.1
On December 11, 1997, respondent issued a notice of
deficiency to petitioner for the taxable year 1995. Petitioner
received the notice of deficiency but did not file a petition
with the Court. A notice of deficiency for the taxable year 1994
was not made part of the record.
1996, 1997, and 1998
Petitioner was a member of a pension plan administered by
the city and county (the plan). Before retiring, petitioner made
after-tax contributions to the plan totaling $71,244.41. The
city and county also contributed to the plan on petitioner’s
behalf.
Petitioner retired from the city and county in December 1995
at the age of 56. He began receiving distributions from the plan
on February 1, 1996. Petitioner received gross distributions of
$31,996.57, $34,714.88, and $35,756.37 for the taxable years
1
Respondent asserts he prepared a substitute for return
for petitioner for each taxable year, see sec. 6020(b), but
neither substitute for return was made part of the record.
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1996, 1997, and 1998, respectively. Forms 1099-R, Distributions
From Pensions, Annuities, Retirement or Profit-Sharing, IRAs,
Insurance Contracts, etc., issued to petitioner reflect the
taxable portions of those gross distributions as $28,893.99,
$31,426.69, and $32,468.25, respectively.
On or about June 15, 1999, petitioner filed his Federal
income tax returns for the taxable years 1996, 1997, and 1998.2
There is no indication that petitioner received an extension to
file for any of those years. Petitioner reported the
distributions he received from the plan and the resulting tax
liability on his tax returns, but made no tax payments.
Respondent sent petitioner a letter titled “Proposed
Individual Income Tax Assessment” on September 15, 1998. This
letter states that petitioner failed to file a return for the
taxable year 1996 and includes respondent’s calculation of his
income tax liability. Respondent also claims he issued a notice
of deficiency to petitioner for the taxable year 1996 on May 13,
1999.3 Petitioner denies receiving any such notice.
2
Petitioner initially failed to sign all three tax returns
but later ratified them by means of a declaration signed on July
22, 1999.
3
The Sept. 15, 1998, letter and the notice of deficiency
appear to contradict other documents in the record. For example,
respondent assessed $2,299 for the taxable year 1996; however,
the Sept. 15, 1998, letter and the notice of deficiency each
shows a tax liability of $6,654, excluding additions to tax.
Furthermore, while the Sept. 15, 1998, letter shows prepayment
(continued...)
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On October 6, 2003, respondent sent petitioner a Notice of
Federal Tax Lien Filing and Your Right to a Hearing Under IRC
6320 (the notice of lien) for the taxable years 1994, 1995, 1996,
1997, and 1998. Petitioner timely submitted to respondent a Form
12153, Request for a Collection Due Process Hearing. Petitioner
stated in this request that he did not owe the amounts listed in
the notice of lien. He did not raise a spousal defense or offer
collection alternatives.
Respondent’s Appeals officer and petitioner had a face-to-
face hearing on March 8, 2004, and also exchanged subsequent
correspondence. A narrative of what took place at the
administrative hearing was not made part of the record. On April
8, 2004, respondent issued to petitioner a notice of
determination, which stated that the Appeals Office had
determined that the notice of lien filing was appropriate. On
May 3, 2004, petitioner filed with the Court a petition for lien
or levy action seeking review of respondent’s notice of
determination.
3
(...continued)
credits totaling $1,860, that amount is not reflected on
petitioner’s tax return, the Form 1099-R, Distributions From
Pensions, Annuities, Retirement or Profit-Sharing, IRAs,
Insurance Contracts, etc., or respondent’s Form 4340, Certificate
of Assessments, Payments, and Other Specified Matters. These
discrepancies have not been explained. However, the notice of
lien reflects the lower amount and appears consistent with the
Form 4340. Accordingly, we do not need to consider this matter
any further.
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Discussion
Section 6321 imposes a lien in favor of the United States on
all property and rights to property of a person when a demand for
the payment of the person’s liability for taxes has been made and
the person fails to pay those taxes. Such a lien arises when an
assessment is made. Sec. 6322. Section 6323(a) requires the
Secretary to file notice of Federal tax lien if such lien is to
be valid against any purchaser, holder of a security interest,
mechanic’s lienor, or judgment lien creditor. Lindsay v.
Commissioner, T.C. Memo. 2001-285, affd. 56 Fed. Appx. 800 (9th
Cir. 2003).
Section 6320 provides that a taxpayer shall be notified in
writing by the Secretary of the filing of a Federal tax lien and
provided with an opportunity for an administrative hearing. Sec.
6320(b). An administrative hearing under section 6320 is
conducted in accordance with the procedural requirements of
section 6330. Sec. 6320(c). At the administrative hearing, a
taxpayer is entitled to raise any relevant issue relating to the
unpaid tax, including a spousal defense or collection
alternatives such as an offer-in-compromise or an installment
agreement. Sec. 6330(b) and (c)(2); sec. 301.6320-1(e)(1),
Proced. & Admin. Regs.
A taxpayer also may challenge the existence or amount of
the underlying tax liability, including a liability reported on
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the taxpayer’s original return, if the taxpayer “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); see also Montgomery v. Commissioner, 122 T.C.
1, 9-10 (2004); Urbano v. Commissioner, 122 T.C. 384, 389-390
(2004). Section 6330(d) provides for judicial review of the
administrative determination in the Tax Court or a Federal
District Court, as may be appropriate. Where the validity of the
underlying tax liability is properly at issue, the Court will
review the matter on a de novo basis. However, where the
validity of the underlying tax liability is not properly at
issue, the Court will review the Commissioner’s administrative
determination for abuse of discretion. Goza v. Commissioner, 114
T.C. 176, 181-182 (2000).
Here, petitioner seeks to challenge only his underlying tax
liabilities. Respondent concedes that petitioner can dispute the
underlying tax liabilities for the taxable years 1994, 1997, and
1998. With respect to the taxable years 1995 and 1996, however,
respondent argues that petitioner received a notice of deficiency
for each year and, therefore, is precluded from disputing the
underlying tax liabilities.
Petitioner concedes receiving the notice of deficiency for
the taxable year 1995. He therefore cannot challenge his
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underlying tax liability for that year, and respondent’s
determination is sustained. Sec. 6330(c)(2)(B).
Regarding the taxable year 1996, the stipulation of facts
states that the notice of deficiency was “mailed by respondent on
May 13, 1999, and received by petitioner.” At trial, however,
petitioner testified that he had not received the notice of
deficiency for 1996. Respondent’s counsel appeared to
acknowledge petitioner’s position, stating that “it is
respondent’s understanding as well that petitioner disputes his
actual receipt of that notice.”
“Generally, a stipulation of fact is controlling on the
parties, and the Court is bound to enforce it.” Stamos v.
Commissioner, 87 T.C. 1451, 1454-1455 (1986). “We do not lightly
disregard facts to which the parties have stipulated; however,
where such facts are clearly contrary to facts disclosed by the
record, we refuse to be bound by the stipulation.” Jasionowski
v. Commissioner, 66 T.C. 312, 318 (1976); see also Rule 91(e).
Because respondent did not object to petitioner’s testimony and
did not seek to enforce the stipulation, we do not bind
petitioner to the stipulation to the extent it states that the
notice of deficiency was received by petitioner.
The question remains whether petitioner did in fact receive
the notice of deficiency. We note that the taxable years 1996,
1997, and 1998 involve the same issue. Based on our discussion
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of and resolution of that issue infra, the result in this case
will not change if the Court considers the underlying tax
liability for the taxable year 1996. We therefore assume,
without deciding, that petitioner did not receive the notice of
deficiency and we review de novo his underlying tax liabilities
for the taxable years 1994, 1996, 1997, and 1998.
1994
Petitioner concedes receiving taxable wage income in 1994
and does not dispute the tax liability resulting from the wage
income. Petitioner’s sole contention is that respondent failed
to properly credit him for withholding of Federal income taxes.
Petitioner introduced an earnings statement for 1994 showing
$8,747.27 of withholding. This amount is reflected on
respondent’s Form 4340, Certificate of Assessments, Payments, and
Other Specified Matters, and is not in dispute. The earnings
statement also shows that respondent levied petitioner’s wages in
the amount of $14,274.50, which is not reflected on the Form
4340. Petitioner believes he should be credited with that amount
and, in support of his claim, introduced a letter from
respondent’s Appeals officer dated March 10, 2004.
Although the Appeals officer’s letter acknowledges the levy,
it explains that the levied funds were applied to petitioner’s
outstanding liabilities for the taxable year 1983. Petitioner
offered no evidence to rebut the explanation contained in the
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letter, and there is no indication that the levy was improper.
In any case, the Court lacks subject-matter jurisdiction to
review the levy of petitioner’s wages in 1994 because the
collection action began prior to January 19, 1999, which was the
effective date of sections 6320 and 6330. See Meehan v.
Commissioner, 122 T.C. 396, 399 (2004) (“if a collection action
is initiated before January 19, 1999, section 6330 is
inapplicable and this Court has no jurisdiction to review the
propriety of the collection action”); Bullock v. Commissioner,
T.C. Memo. 2003-5.
In sum, there is no indication that respondent incorrectly
determined petitioner’s tax liability for 1994 or that petitioner
made additional payments that are not reflected in the Form 4340.
Respondent’s determination on this issue is sustained.
1996, 1997, and 1998
Section 61(a) provides that, except as otherwise provided,
gross income includes all income from whatever source derived.
Section 402(a) provides that the amounts distributed under a plan
described in section 401(a), such as a qualified defined benefit
plan, shall be taxable to the distributee under section 72.
A defined benefit plan is any plan that is not a defined
contribution plan. Sec. 414(j). “The retirement benefit
provided by a defined benefit plan is fixed, typically by
reference to a formula based on salary and years of service.”
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Emmons v. Commissioner, T.C. Memo. 1996-265. Furthermore, “the
employer bears the risk of loss because the employer is
contractually obligated to pay the retirement benefit specified
in the plan.” Id.
At one point during his testimony, petitioner referred to
the plan as a defined contribution pension plan. This may have
been inadvertent.4 In any case, petitioner’s testimony was
contradicted by that of Alyce Wong, benefits supervisor for the
San Francisco City and County Employees Retirement System (the
retirement system).
Ms. Wong testified that the plan to which petitioner belongs
is a defined benefit plan. She explained that petitioner’s
monthly retirement benefits were calculated based on his age at
retirement, years of service, and highest average rate of
compensation. She also explained that petitioner’s contributions
to the plan do not affect the amount of retirement benefits he
receives. Thus, even if petitioner’s contributions to his
retirement fund were exhausted, his retirement benefits would
continue unchanged. Accordingly, we conclude that the plan is a
qualified defined benefit plan under section 401(a).
In general, section 72(a) requires amounts received as an
4
A publication produced by the retirement system describes
the plan as a defined benefit plan. This publication is included
as an exhibit to the stipulation of facts, and petitioner made
frequent reference to it during trial.
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annuity to be included in gross income. Section 72(b)(1)
excludes from gross income “that part of any amount received as
an annuity * * * which bears the same ratio to such amount as the
investment in the contract (as of the annuity starting date)
bears to the expected return under the contract (as of such
date).” As mentioned above, petitioner’s investment in the
contract was $71,244.41.5 His annuity starting date was February
1, 1996, the date on which he received his first payment from the
plan. See sec. 72(c)(4).
Under section 72(c)(3), employers can determine the expected
return under the contract by reference to actuarial tables.
Alternatively, they can use a simplified “safe-harbor” method,
under which “Investment/Number of Monthly Payments = Tax free
portion of monthly annuity”. See Notice 88-118, 1988-2 C.B. 450,
451.6 For distributees aged 56 to 60 on the annuity starting
date, the total number of monthly payments is 260. Id.
Ms. Wong testified that the city and county followed
precisely the method set forth in Notice 88-118, supra to
5
Petitioner testified that he contributed $137,293.29 to
the plan. The plan’s records show, however, that petitioner
contributed only $71,244.41. The remaining $66,048.88 of his
retirement account balance represented accumulated interest,
which is not part of his investment in the contract. See sec.
72(c)(1); Newman v. Commissioner, 68 T.C. 433 (1977).
6
Notice 88-118, 1988-2 C.B. 450, was replaced by Notice
98-2, 1998-1 C.B. 266, which applies to annuities with an annuity
starting date after Nov. 18, 1996. Because petitioner’s annuity
starting date was Feb. 1, 1996, Notice 88-118, supra controls.
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calculate petitioner’s taxable retirement benefits and generate
the appropriate Forms 1099-R. Her testimony was corroborated by
the retirement plan’s records, which also reflect accurate use of
the safe-harbor method and which correspond to the taxable
distributions reported on the Forms 1099-R. Respondent’s
determination with respect to this issue is sustained.
Additions to Tax Under Section 6651(a)(1) for 1994, 1996, 1997,
and 1998
If a Federal income tax return is not timely filed, an
addition to tax will be assessed “unless it is shown that such
failure is due to reasonable cause and not due to willful
neglect”. Sec. 6651(a)(1). The Commissioner has the burden of
production with respect to the liability of any individual for an
addition to tax under section 6651(a)(1). Sec. 7491(c). The
burden of showing reasonable cause under section 6651(a) remains
on petitioner. Higbee v. Commissioner, 116 T.C. 438, 446-448
(2001).
Respondent has met his burden of production. Petitioner
failed to file a tax return for 1994 and filed late tax returns
for 1996, 1997, and 1998. Petitioner introduced no evidence
establishing reasonable cause. Respondent’s determination on
this issue is sustained.
Additions to Tax Under Section 6651(a)(2) for 1996, 1997, and
1998
Section 6651(a)(2) imposes an addition to tax for failure to
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pay the tax reported on a return “unless it is shown that such
failure is due to reasonable cause and not due to willful
neglect”. The Commissioner has the burden of production with
respect to the liability, and petitioner bears the burden of
showing reasonable cause. Higbee v. Commissioner, supra.
Respondent has met his burden of production because
petitioner did not pay the tax he reported on his 1996, 1997, and
1998 tax returns. Petitioner introduced no evidence establishing
reasonable cause. Respondent’s determination on this issue is
sustained.
Additions to Tax Under Section 6654(a) for 1994, 1996, and 1997
Section 6654(a) provides for an addition to tax “in the case
of any underpayment of estimated tax by an individual”. This
addition to tax is mandatory unless one of the statutorily
provided exceptions applies. See sec. 6654(e); Grosshandler v.
Commissioner, 75 T.C. 1, 20-21 (1980). There is no exception for
reasonable cause or lack of willful neglect. Estate of Ruben v.
Commissioner, 33 T.C. 1071, 1072 (1960).
Respondent bears the burden of production with respect to
the addition to tax under section 6654(a). David v.
Commissioner, T.C. Memo. 2005-160. The burden remains upon
petitioner to establish the applicability of any exceptions.
Higbee v. Commissioner, supra; Spurlock v. Commissioner, T.C.
Memo. 2003-248.
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Respondent has met his burden of production because
petitioner failed to remit, in whole or in part, estimated tax
payments for 1994, 1996, and 1997. Petitioner has not shown that
any of the statutory exceptions are applicable. Respondent’s
determination as to the addition to tax under section 6654(a) is
sustained.
Reviewed and adopted as the report of the Small Tax Case
Division.
To reflect the foregoing,
Decision will be entered
for respondent.