T.C. Summary Opinion 2007-123
UNITED STATES TAX COURT
RICHARD ALLAN AND CORINNE LUCILLE BALSER, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 19611-05S. Filed July 19, 2007.
John S. Kutscher, for petitioners.
Catherine L. Campbell, 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 (Code). Pursuant to section
7463(b), the decision to be entered is not reviewable by any
other court, and this opinion shall not be treated as precedent
for any other case.
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The petition was filed in response to a Notice of
Determination Concerning Collection Action(s) Under Section 6330
(notice of determination). Pursuant to section 6330(d),
petitioners seek review of respondent’s notice of intent to levy
relating to their tax liabilities for 1992, 1993, and 1996.1
Background
The stipulation of facts and the exhibits received into
evidence are incorporated herein by reference. At the time the
petition was filed, petitioners resided in Lynnwood, Washington.
Petitioners jointly filed for 1992, 1993, and 1996 Forms
1040, U.S. Individual Income Tax Return. Because petitioners
self-assessed their taxes for all years in issue, no statutory
notice of deficiency was issued.
During the years at issue, petitioner Richard Balser (Mr.
Balser) and petitioner Corinne Balser (Mrs. Balser) were the sole
owners of Homewood Development, Inc. (HDI). HDI was in the
business of developing residential projects.
1
Petitioners also sought the review of a Notice of
Determination Concerning Collection Action(s) Under Section 6330
issued to Mr. Balser regarding a civil penalty under sec. 6672
for the third quarter of 1996. The Court’s jurisdiction to
review the Commissioner’s determination regarding a collection
matter is limited to cases where the underlying tax liability is
of the type over which the Court normally has jurisdiction. See
Moore v. Commissioner, 114 T.C. 171, 175 (2000). By order dated
Jan. 25, 2006, the Court granted respondent’s motion to dismiss
for lack of jurisdiction to the extent that petitioners seek a
review of the collection activity regarding the sec. 6672
penalty.
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The Bankruptcy Proceedings
In June of 1995, three involuntary bankruptcy proceedings
under chapter 7 of the Bankruptcy Code, 11 U.S.C. sections 101-
1330 (2000), were commenced against Mr. Balser, Mrs. Balser, and
HDI, respectively, in the U.S. Bankruptcy Court for the Western
District of Washington (bankruptcy court). Subsequently, the
bankruptcy court substantively consolidated the involuntary
bankruptcy proceedings and converted them into proceedings under
chapter 11 of the Bankruptcy Code (consolidated bankruptcy
cases). Mr. Balser was the president of HDI at the time the
consolidated bankruptcy cases were filed.
Respondent filed with the bankruptcy court proofs of claim
and amended proofs of claim against petitioners for unpaid income
taxes for 1992 and 1993. Respondent also requested payment for
administrative expenses relating to postpetition income taxes,
including 1996.
On May 12, 1999, HDI filed an objection to “tax
liabilities”. Petitioners did not file any other objections to
respondent’s claims or requests for payment of administrative
expenses. No order disallowing respondent’s claims was entered
in the consolidated bankruptcy cases.
On June 18, 1999, the bankruptcy court confirmed the
Debtors’ Joint Plan of Reorganization (plan). Respondent
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subsequently notified petitioners that they were in default of
the prepetition taxes under the terms of the confirmed plan.
The Section 6330 Administrative Process
On March 1, 2003, respondent sent two Letters 1058, Final
Notice of Intent to Levy and Notice of Your Right to a Hearing,
one to each of petitioners, regarding their tax liabilities for
1992, 1993, and 1996. According to the notice of determination,
as of August 15, 2005, petitioners’ unpaid liabilities, including
statutory additions, were $22,858.53, $8,595.61, and $366.25 for
1992, 1993, and 1996, respectively.
Petitioners timely submitted a Form 12153, Request for a
Collection Due Process Hearing, for 1992 through 2002, along with
a letter explaining why they did not agree with the proposed
levy.
Petitioners’ case was assigned to Appeals officer Celia
Cleveland (AO Cleveland), and petitioners were afforded a
collection hearing via several telephone calls. At the hearing,
petitioners did not dispute the amount of underlying tax
liabilities self-assessed on the returns. Petitioners instead
contended that their tax liabilities should have been paid in
full by the funds that were available in the estate of the
consolidated bankruptcy cases.
Petitioners did not submit to respondent an offer-in-
compromise or any other collection alternatives during the
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Appeals hearing. AO Cleveland reviewed petitioners’
administrative file and transcripts for the years in issue, and
she verified that the requirements of all applicable laws and
administrative procedures had been met.
On September 13, 2005, the Appeals Office issued to
petitioners a notice of determination for 1992, 1993, and 1996
sustaining as appropriate respondent’s proposed levy action. The
Appeals Office further determined that the levy action should
proceed because petitioners had not made any arrangements to pay
the taxes.
On October 20, 2005, petitioners filed with the Court a
petition for lien or levy action.
Discussion
Procedure Under Section 6330
Section 6331 authorizes the Secretary to levy upon property
and property rights of a taxpayer liable for taxes who fails to
pay those taxes within 10 days after notice and demand for
payment. Section 6331(d) provides that the levy authorized in
section 6331(a) may be made with respect to any “unpaid tax” only
after the Secretary has notified the person in writing of his
intention to make the levy and of the taxpayer’s right to a
section 6330 hearing at least 30 days before any levy action is
begun.
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If a section 6330 hearing is requested, the hearing is to be
conducted by the Appeals Office of the Internal Revenue Service
(IRS), and at the hearing, the Appeals officer conducting it must
verify that the requirements of any applicable law or
administrative procedures have been met. Sec. 6330(b)(1),
(c)(1). The person 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. Sec. 6330(c); see Sego v.
Commissioner, 114 T.C. 604, 609 (2000); Goza v. Commissioner, 114
T.C. 176, 180 (2000).
In making a determination, the Appeals officer is required
to take into consideration issues properly raised, the
verification that the requirements of applicable law and
administrative procedures have been met, and whether any proposed
collection action balances the need for efficient collection of
taxes with the legitimate concern of the person that any
collection action be no more intrusive than necessary. Sec.
6330(c)(3). Within 30 days after the Appeals Office issues a
notice of determination, the person may appeal the determination
to the Tax Court, if the Court has jurisdiction over the
underlying tax liability. Sec. 6330(d)(1)(A). The Court has
jurisdiction in this case.
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Standard of Review
Where the underlying tax liability is properly at issue, the
Court reviews the determination de novo. See Goza v.
Commissioner, supra at 181-182. Where the underlying tax
liability is not properly at issue, the Court reviews the
determination for abuse of discretion. Id.
Section 6330(c)(2)(B) provides that the existence or the
amount of the underlying tax liability can be contested at an
Appeals Office hearing if the person did not receive a statutory
notice of deficiency or did not otherwise have an earlier
opportunity to dispute such tax liability. Sego v. Commissioner,
supra at 609; Goza v. Commissioner, supra at 180-181.
Because petitioners self-assessed their taxes for all years
at issue, respondent did not issue to petitioners a statutory
notice of deficiency. See sec. 6201(a)(1).
Respondent contends that the appropriate standard of review
for the years at issue is the abuse of discretion standard and
not review de novo. Respondent argues that although a deficiency
notice was not issued, petitioners had a prior opportunity to
dispute those tax liabilities before the bankruptcy court.
The Court agrees with respondent. In Kendricks v.
Commissioner, 124 T.C. 69, 77 (2005), the Court held that when
the IRS submits a proof of claim in a taxpayer’s bankruptcy
action, the taxpayer has an opportunity to dispute the liability
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within the meaning of section 6330(c)(2)(B). Respondent
submitted proofs of claim and amended proofs of claims in the
consolidated bankruptcy cases for unpaid Federal taxes for 1992,
1993, and 1996. Petitioners were therefore precluded from
challenging the amounts of the underlying liabilities for the
years in issue both at the Appeals Office hearing and in this
case.
Petitioners, however, claim that they are not seeking to
dispute the amounts of the underlying tax for 1992 and 1993.
Petitioners contend that they are seeking only an abatement of
interest and relief from the penalties for the years in issue.
But unless otherwise specified under the Code, both interest and
penalties are treated as “tax”. See secs. 6601(e)(1), 6665(a).
Since petitioners are precluded from raising these issues, the
Court need not address them.
Challenges to Collection Action
Since the validity of the underlying tax liabilities for the
years at issue was not properly part of the appeal, the Court
will review the notice of determination for abuse of discretion.
See Goza v. Commissioner, supra at 181-182.
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
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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). An abuse of discretion occurs when a decision
is based upon an erroneous legal standard or on a clearly
erroneous finding of fact. Smith v. Marsh, 194 F.3d 1045, 1049
(9th Cir. 1999).
In response to their request for an Appeals hearing,
petitioners were afforded a conference with AO Cleveland via
several telephone calls. Petitioners contended during the
conference that the collection was inappropriate because all
outstanding taxes were paid in accordance with the confirmed plan
in the consolidated bankruptcy case.
In support of their argument, petitioners presented as
evidence a statement of account dated September 21, 1999, in
which the IRS determined that petitioners had an overpayment of
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tax for 1997 (1997 overpayment).2 The statement indicates that
$11,270.34 is the “amount to be refunded to you if you owe no
other taxes or other debts we are required to collect.”
Petitioners subsequently received a refund check from the Federal
Government which they claim is evidence that all outstanding
Federal taxes are fully paid.
Respondent disagrees, contending that petitioners’ tax
liabilities for 1992, 1993, and 1996 remain outstanding.
Respondent argues that a refund check was sent to petitioners
despite their having outstanding tax liabilities because a lack
of mutuality precluded the IRS’s offsetting the 1997 overpayment
against the taxes owed.
Generally, section 6402(a) provides that the IRS has the
right to offset an overpayment against any outstanding tax
liabilities of the taxpayer. This right to offset is preserved
in a bankruptcy proceeding by 11 U.S.C. section 553 (2000),
Setoff, which provides in relevant part:
(a) Except as otherwise provided in this section * * *,
this title does not affect any right of a creditor to
offset a mutual debt owing by such creditor to the
debtor that arose before the commencement of the case
under this title against a claim of such creditor
against the debtor that arose before the commencement
of the case, * * *.
Respondent’s right to offset is subject to the mutuality
requirement under 11 U.S.C. section 553. See, e.g., Aetna Cas. &
2
Taxable year 1997 is not at issue in this case.
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Sur. Co. v. LTV Steel Co. (In re Chateaugay Corp.), 94 F.3d 772,
781-782 (2d Cir. 1996); United States v. Jones, 230 Bankr. 875,
878 (M.D. Ala. 1999). Mutuality means that the creditor and the
debtor must be mutually indebted in order to exercise the right
of offset. 11 U.S.C. sec. 553; see In re O.P.M. Leasing Servs.,
Inc., 68 Bankr. 979, 985-986 (Bankr. S.D.N.Y. 1987). “The
mutuality requirement is satisfied if the debts at issue are
‘owing between the same parties, in the same right or capacity,
and ... [are] of the same kind and quality.’” In re O.P.M.
Leasing Servs., Inc., supra at 986 (quoting In re Braniff
Airways, Inc., 42 Bankr. 443, 449 (Bankr. N.D. Tex. 1984)).
Accordingly, obligations owing between a creditor and a
prepetition debtor may not be offset against obligations owing
between that same creditor and the debtor’s estate since the
requisite mutuality of obligations is absent. Id.
The 1997 overpayment is a postpetition debt that the IRS
owed to petitioners’ bankruptcy estate. The tax liabilities for
1992 and 1993 are prepetition debts that petitioners owed to the
IRS. Therefore, respondent is correct that the IRS lacked the
requisite mutuality to offset the refund for 1997 against the
1992 and 1993 taxes of petitioners. The tax liability for 1996,
however, is a postpetition debt. Respondent could have exercised
his right to offset but chose not to do so. Therefore,
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petitioners’ receipt of the refund check is insufficient to show
that their outstanding tax liabilities are paid in full.
Respondent presented as evidence certified copies of Forms
4340, Certificate of Assessments, Payments and Other Specified
Matters, with respect to 1992, 1993, and 1996 to show that
petitioners’ tax liabilities were properly assessed and that the
amounts remained outstanding as of September 29, 2003. A Form
4340 satisfies the verification requirements of section
6330(c)(1). See Burke v. Commissioner, 124 T.C. 189, 195-196
(2005). Petitioners have not alleged any irregularity in the
assessment procedure that would raise a question about the
validity of the assessment or the information contained in the
Forms 4340.
Petitioners did not submit an offer-in-compromise or offer a
collection alternative to the Appeals Office. At trial,
petitioners’ counsel requested that petitioners be allowed an
opportunity to enter into an installment agreement. Respondent
asserts that AO Cleveland raised the possibility of an
installment agreement during the conference. Petitioners,
however, apparently declined to entertain collection alternatives
because they wanted respondent to issue a notice of determination
to allow them to come before the Court.
The Court does not find that a remand is necessary or would
be productive. See Lunsford v. Commissioner, 117 T.C. 183, 188-
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189 (2001); Martin v. Commissioner, T.C. Memo. 2003-288.
Respondent, however, has expressed a willingness to discuss an
installment agreement with petitioners pursuant to proper
procedures. Under section 6330(d)(2), the IRS retains
jurisdiction of the collection action after the determination is
made, and a taxpayer may “request an installment agreement * * *
at any time before, during, or after the Notice of Intent to Levy
hearing.” H. Conf. Rept. 105-599, at 266 (1998), 1998-3 C.B.
747, 1020.
The Court has considered the remaining arguments raised in
petitioners’ pretrial memorandum and finds that they are
unconvincing.
Accordingly, the Court holds that the Appeals Office did not
abuse its discretion in determining that respondent’s proposed
levy should be sustained.
To reflect the foregoing,
Decision will be entered
for respondent.