T.C. Memo. 2006-171
UNITED STATES TAX COURT
J. JEAN MOORE, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 11634-05L. Filed August 17, 2006.
Timothy W. Tuttle and D. Anthony Gaston, for petitioner.
Karen Nicholson Sommers, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
SWIFT, Judge: Petitioner seeks review of respondent’s
notice of determination sustaining a notice of Federal tax lien
filing relating to petitioner’s outstanding 1997 through 2002
individual Federal income taxes. The issue for decision is
whether respondent’s Appeals Office conducted prohibited ex parte
communications, and if so what remedy is appropriate.
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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.
FINDINGS OF FACT
This case was submitted under Rule 122, but other than
establishing the residence of petitioner in San Diego,
California, the stipulation of the parties relates only to
exhibits.
During the 1990s and until at least the end of 2003,
petitioner solely owned and operated, through a limited liability
company (LLC), an eldercare business in California and in
Oregon.1
In addition to the income petitioner received relating to
the eldercare business, petitioner received rental income
relating to residential and commercial real property that
petitioner owned in California and in Oregon.
In 2001, after an audit and a criminal tax investigation by
respondent relating to petitioner’s individual Federal income
taxes for 1992 through 1995, petitioner was charged with and was
convicted on several counts of tax evasion. As a condition of
1
References in our findings of fact to ownership, and to
transfers, of real property and of other assets are not intended
to constitute ultimate findings of fact as to the true legal and
equitable ownership of the real property and other assets
involved in this case.
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her probation, petitioner was ordered to pay $250,000 toward her
outstanding 1992 through 1995 Federal income taxes, penalties,
and interest.
On her 1997 through 2001 individual Federal income tax
returns, which she late filed on November 7, 2002, and on her
timely filed 2002 individual Federal income tax return,
petitioner reported a cumulative total tax liability of
approximately $1 million. Petitioner made no payments to
respondent with her filed tax returns, nor had petitioner made
any payments via withholding or estimates.
Respondent did not audit and did not otherwise dispute
petitioner’s 1997 through 2002 Federal income taxes as reported
by petitioner on her tax returns.2
For 2003 and 2004, petitioner apparently has timely filed
her individual Federal income tax returns, and for purposes of
this collection action respondent has not questioned the tax
liabilities and tax payments reported thereon.
On September 23, 2003, respondent filed a Federal tax lien
against petitioner relating to petitioner’s assessed and unpaid
1997 through 2002 cumulative total tax liability of approximately
$1 million, and on September 26, 2003, respondent mailed to
2
Information relating to petitioner’s 1996 individual
Federal income tax return is not in the record.
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petitioner a notice of tax lien filing with regard to the tax
lien that respondent had filed.
On October 24, 2003, petitioner timely requested a section
6320 collection due process (CDP) hearing with respondent’s
Appeals Office for the purpose of securing the release of
respondent’s filed tax lien against petitioner.
On January 1, 2004, petitioner organized a corporation and
transferred her eldercare business to the new corporation.
Ownership of the new corporation was placed 51 percent in
the name of petitioner and 49 percent in the name of petitioner’s
son and daughter-in-law. At some point, petitioner transferred
some of the real property she owned to her daughter.
On March 11, 2004, during the CDP hearing, petitioner
submitted to respondent an offer-in-compromise (OIC). In her
OIC, petitioner offered to make a payment of $258,000 in full
settlement and compromise of her cumulative total then accrued
and outstanding approximate $1.8 million in Federal income taxes,
additions to tax, and interest for 1992 through 1995 and for 1997
through 2002.
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With the filing of her OIC, petitioner did not make any
payment to respondent, but petitioner did offer to pay the
$258,000 within 90 days of respondent’s acceptance of her OIC.3
Petitioner planned to sell assets in order to obtain the
$258,000.
On April 15, 2004, petitioner paid respondent the final
$79,166 she owed relating to her criminal conviction, and
petitioner asked that the $79,166 be credited toward the $258,000
she would owe under the pending OIC.
In connection with the Appeals Office’s consideration of
petitioner’s OIC, a number of communications about petitioner
occurred among respondent’s Appeals officer, an offer specialist
assigned to work on petitioner’s OIC, and two of respondent’s
revenue officers, one of whom worked in California and one of
whom worked in Oregon. Before petitioner’s CDP hearing with
respondent’s Appeals officer, both of these revenue officers had
been involved in attempting to collect petitioner’s outstanding
taxes for the years in issue. The communications between
respondent’s Appeals officer and the offer specialist, on the one
hand, and respondent’s two revenue officers, on the other,
3
By Mar. 11, 2004, petitioner had paid respondent $170,834
due as a result of the criminal conviction relating to her 1992
through 1995 Federal income taxes, which amount is separate from
the $258,000 petitioner offered to pay respondent under the
offer-in-compromise.
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occurred in person, over the telephone, and via e-mail and
without petitioner’s participation.
Among other communications, the revenue officers in
California and Oregon communicated to the Appeals officer concern
about assets that petitioner may have transferred to a nominee.
Also, the revenue officer in Oregon suggested to the Appeals
officer and to the offer specialist that they should “probe and
inquire if there were any links or money stream to * * *
[petitioner]” relating to a home in Oregon.
On May 27, 2004, the offer specialist recommended that the
Appeals Office reject petitioner’s OIC, explaining that
petitioner had paid insufficient individual estimated taxes and
that the eldercare business had paid insufficient payroll taxes.
The offer specialist also explained that petitioner’s OIC should
be rejected because the outstanding taxes petitioner owed related
to what the offer specialist described as “nominee, transferee,
fraud issues –- case is filled with them as it is the basis of
the assessments.”
On May 26, 2005, the Appeals Office issued a notice of
determination (notice) sustaining the tax lien filed against
petitioner. Attached to the notice was the Appeals officer’s
general statement that petitioner’s OIC was not in the best
interest of the Government because of, among other things,
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alleged nominee transfers of petitioner’s real property and
assets.
Petitioner timely petitioned the Tax Court for review of the
notice.
OPINION
When underlying taxes are not in dispute, as in the instant
case, we review respondent’s adverse CDP determinations for abuse
of discretion. Speltz v. Commissioner, 454 F.3d 782, 784-785
(8th Cir. 2006), affg. 124 T.C. 165 (2005); Sego v. Commissioner,
114 T.C. 604, 610 (2000); Goza v. Commissioner, 114 T.C. 176,
181-182 (2000). Respondent will be regarded as abusing his
discretion when he acts without a sound basis in fact or law.
Freije v. Commissioner, 125 T.C. 14, 23 (2005); Woodral v.
Commissioner, 112 T.C. 19, 23 (1999).
In prior years, and with a great deal of effectiveness and
propriety, respondent’s Appeals officers generally were allowed
to communicate with respondent’s revenue agents and officers
concerning a taxpayer’s outstanding taxes.
In 1998, however, after a series of hearings relating to
respondent’s collection practices,4 Congress enacted and the
4
For news reporting on the 1997 and 1998 congressional
hearings on tax collection reform, see Taxes at the Top, The
Newshour with Jim Lehrer (PBS television broadcast Jun. 4, 2004)
(transcript available at http://www.pbs.org/newshour/bb/business
/jan-june04/tax_6-04.html).
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President signed into law the Internal Revenue Service
Restructuring and Reform Act of 1998, Pub. L. 105-206, 112 Stat.
685 (RRA 1998).5
In RRA 1998, Congress provided, among other things, in new
section 6320 that respondent’s Appeals officers conducting CDP
hearings are to be impartial and are not to have had prior
involvement in a taxpayer’s outstanding taxes for the years
involved in a CDP hearing. See sec. 6320(b)(3). The language of
section 6320(b)(3) provides as follows:
SEC. 6320(b). Right to Fair Hearing.--
* * * * * * *
(3) Impartial officer.--The hearing
under this subsection shall be conducted by
an officer or employee who has had no prior
involvement with respect to the unpaid tax
specified in subsection (a)(3)(A) before the
first hearing under this section or section
6330. A taxpayer may waive the requirement
of this paragraph.
In RRA 1998 sec. 1001(a)(4), 112 Stat. 689, Congress also
directed that respondent’s Appeals officers should exercise
independent judgment, and Congress prohibited respondent’s
Appeals officers from engaging in ex parte communications with
other employees of respondent that would appear to compromise the
5
See generally 144 Cong. Rec. 14688-14689, 14694-14717,
14719-14722, 14726-14727, 14730-14733, 14735-14737, 14739, 14789-
14795 (1998).
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Appeals officers’ judgment. The relevant language of RRA 1998
sec. 1001(a) provides as follows:
(a) In General.--The Commissioner of 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 independence of the appeals officers.
Under authority of the above flush language of RRA 1998 sec.
1001(a), respondent promulgated Rev. Proc. 2000-43, 2000-2 C.B.
404, effective for administrative CDP appeals initiated after
October 23, 2000. Id., sec. 4, 2000-2 C.B. at 409. Therein ex
parte communications are defined as written or oral
communications that occur between Appeals officers and other
employees of respondent without the taxpayer, or his or her
representative, being able to participate in the communications.
Id., sec. 3, Q&A-1 and 2, 2000-2 C.B. at 405.
Rev. Proc. 2000-43, sec. 3, Q&A-5, 2000-2 C.B. at 405-406,
makes it clear that ex parte communications about substantive
matters, such as a taxpayer’s credibility and the accuracy and
importance of alleged facts, are to be treated as improper ex
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parte communications and are prohibited under RRA 1998 sec.
1001(a)(4).
Rev. Proc. 2000-43, supra, specifies that respondent’s
Appeals officers should not communicate with respondent’s revenue
agents and officers if the communications would, or would appear
to, compromise the independent judgment of the Appeals Office.
Id. sec. 3, Q&A-29, 2000-2 C.B. at 409.
An exception is provided to the prohibited ex parte
communications rule of Rev. Proc. 2000-43, supra, for
communications that relate only to administrative, ministerial,
or minor procedural matters. Communications between an Appeals
officer and a revenue officer about the location of missing file
documents are listed as an example of ex parte communications
that would be allowed. Id. sec. 3, Q&A-5.
In Drake v. Commissioner, 125 T.C. 201, 210 (2005), we
remanded a CDP case to respondent’s Appeals Office because of
documents that were regarded by the Court as ex parte and
prohibited.
Herein, the Appeals officer and the offer specialist should
have carefully restricted the communications they had with the
revenue officers relating to the collection of petitioner’s taxes
to mere administrative, ministerial, or minor procedural matters.
The suggestions by the California and Oregon revenue
officers to the Appeals officer and to the offer specialist to
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consider a nominee theory and to look at petitioner’s “money
stream” were substantive in nature and clearly constituted
prohibited ex parte communications that were per se prejudicial
to petitioner.
Respondent argues that grounds independent of the ex parte
communications would support the Appeals Office’s adverse
determination (namely, petitioner’s conviction for tax evasion
and noncompliance by petitioner’s eldercare business with certain
Federal employment tax laws). These alleged grounds do not
overcome or render moot the prohibited ex parte communication
rules, as respondent appears to argue.
Respondent also argues that because petitioner eventually
learned from the Appeals officer the content of the ex parte
communications, petitioner was not kept in the dark with regard
thereto and was not harmed. Nothing, however, in either RRA 1998
or Rev. Proc. 2000-43, supra, allows respondent’s Appeals officer
to avoid the rule against prohibited ex parte communications by
later informing the taxpayer about the communications.
Respondent characterizes the ex parte communications as
“routine factual investigation.” We disagree. Although the ex
parte communications may have been in good faith and intended to
assist in the development of relevant facts, they were ex parte
and substantive, and they were covered by the prohibition
discussed above.
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Respondent points out that Rev. Proc. 2000-43, sec. 3,
Q&A-10, 2000-2 C.B. at 406, allows Appeals officers to pass on to
respondent’s other employees new information received by an
Appeals officer. Q&A-10, however, addresses new information
“presented by the taxpayer,” not new information obtained by
the Appeals Officer via ex parte communications from other of
respondent’s employees. Respondent misreads Q&A-10.
We recognize that under section 7122(a) respondent is given
broad discretion to consider and to reject offers-in-compromise,
and we defer to respondent’s discretion when it is properly
exercised. Mailman v. Commissioner, 91 T.C. 1079, 1082 (1988).
However, the communications before us clearly constituted
prohibited ex parte communications.
We turn to the appropriate remedy.
In Robert v. United States, 364 F.3d 988 (8th Cir. 2004),
affg. 91 AFTR 2d 2003-602, 2003-1 USTC par. 50,212 (E.D. Mo.
2003), the District Court and the Court of Appeals for the Eighth
Circuit refused to quash administrative third-party summonses
that were issued based on information respondent obtained through
prohibited ex parte communications. The Court of Appeals for the
Eighth Circuit explained that it affirmed the District Court’s
order enforcing summonses because “The Supreme Court has stated
that courts should be slow to erect barriers to enforcement of
[respondent’s] summonses where the summonses are being used to
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further [respondent’s] mission of effectively investigating
taxpayer liabilities”, id. at 996 (quoting United States v. Euge,
444 U.S. 707,711 (1980)), and because Congress did not provide in
RRA 1998 a specific remedy for prohibited ex parte
communications.
Under Rev. Proc. 2000-43, sec. 3, Q&A-28 and 29, 2000-2 C.B.
at 409, the availability of administrative and personnel remedies
for violations of ex parte communications is acknowledged.
Herein, in light of the prohibited ex parte communications that
occurred, respondent’s Appeals Office should have addressed the
prejudice caused by these communications by providing some
administrative remedy, such as reassignment to a new Appeals
officer. Respondent’s failure to do so constituted a failure on
the part of respondent to give petitioner an impartial hearing
and constituted an abuse of respondent’s discretion.
On the facts before us in this case, remand of this case to
respondent’s Appeals Office is appropriate. By remand, we allow
respondent to cure the defect that occurred in petitioner’s CDP
hearing in accordance with respondent’s existing administrative
procedures.
We acknowledge that where ex parte communications have
occurred but where the taxpayer is making frivolous underlying
arguments, it may not be appropriate to grant any relief to the
taxpayer. For example, in Sapp v. Commissioner, T.C. Memo. 2006-
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104, ex parte communications allegedly occurred in which the
taxpayer was referred to disparagingly as a tax protester.
Because the taxpayer relied solely on underlying frivolous
arguments, we refused to remand the case to the Appeals Office,
and we entered a decision for respondent.
Although petitioner was convicted of tax fraud for earlier
years, there is no indication that petitioner herein relies on
frivolous arguments.
For the reasons stated, we shall remand this case to
respondent’s Appeals Office. Respondent’s Appeals Office is to
identify and apply an appropriate administrative remedy to avoid
prejudice attaching to petitioner as a result of the prohibited
ex parte communications that occurred. If respondent determines
that the appropriate remedy to offer petitioner is a new CDP
hearing with respondent’s Appeals Office, all references to the
prohibited ex parte communications that occurred herein are to be
deleted from respondent’s administrative file, including any copy
of this opinion that itself would inform a new Appeals officer of
the prohibited ex parte communications.
To reflect the foregoing,
An appropriate order will
be issued.