T.C. Memo. 2009-64
UNITED STATES TAX COURT
SANTINI STONE, LLC, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 126-07L. Filed March 25, 2009.
Thomas H. Curran, for petitioner.
Daniel P. Ryan, for respondent.
MEMORANDUM OPINION
WELLS, Judge: Respondent’s Appeals Office determined that a
lien and proposed levy should be sustained against petitioner,
which, pursuant to section 6330,1 timely filed a petition for
1
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.
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review of the determination. We review the determination for
abuse of discretion.
Background
The parties submitted this case fully stipulated, without
trial, pursuant to Rule 122. The stipulated facts and
accompanying exhibits are incorporated herein by reference and
are found as facts. At the time the petition was filed,
petitioner’s business was in Massachusetts.
On January 17, 2003, petitioner filed a voluntary petition
with the U.S. Bankruptcy Court for the District of Massachusetts
(bankruptcy court) under chapter 11 of the Bankruptcy Code, 11
U.S.C. ch. 11, Reorganization. At the time, petitioner had
outstanding employment tax liabilities, interest, and penalties
for taxable years 1998 through 2002.2 On March 31, 2003,
respondent filed a claim against petitioner (called a “proof of
claim” in bankruptcy parlance) with the bankruptcy court for
$458,532, which included secured claims of $26,000, unsecured
priority claims of $278,399, and general unsecured claims of
$154,133. Petitioner subsequently filed the first amended plan
of reorganization (plan), which included, without objection from
petitioner, all of respondent’s aforementioned claims. On
2
Petitioner filed partnership returns (Forms 1065) for all
years at issue.
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December 18, 2003, the plan was confirmed by order of the
bankruptcy court.
Under the plan, petitioner was to pay respondent $490.77 per
month for 60 months on the secured claims and $7,086.41 per month
for 44 months on the unsecured priority claims.3 The plan
further provided that installments paid on the unsecured priority
claims were to “first be applied to any ‘trust fund’ portion of
such tax,4 then to any ‘non trust fund’ portion of said tax, and
then to any outstanding interest, in that order.” As to the
general unsecured claims, petitioner was required to pay a single
lump-sum dividend equal to 8 percent of respondent’s listed
claims of $154,133, or $12,330.64.5
On February 10, 2004, petitioner tendered a check in the
full amount owed on the general unsecured claims. Petitioner’s
3
The plan entitles respondent to collect interest on his
secured and priority claims at a rate determined under sec. 6621.
Petitioner, in calculating the installment payments due under the
plan, estimated interest at a rate of 5 percent.
4
As an employer, petitioner was required to withhold from
its employees’ paychecks the employees’ personal income taxes and
Social Security taxes. See secs. 3102(a), 3402(a). Because
Federal law requires employers to hold these funds in “trust for
the United States”, sec. 7501(a), these taxes are commonly
referred to as “trust fund” taxes, Slodov v. United States, 436
U.S. 238, 242-243 (1978).
5
The general unsecured claims represent penalties assessed
on respondent’s unsecured priority claims for taxable years 1998
through 2002, with the exception of a sec. 6721 penalty assessed
in taxable year 1998, included in respondent’s proof of claim as
an unsecured priority claim. Notably, respondent claimed zero
for the sec. 6721 penalty in his proof of claim.
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$12,330.64 check, however, was dishonored that same day. Over
the following 7 months, an additional five checks totaling
$19,366.78 were dishonored as well.6 Petitioner’s delinquency
prompted respondent to issue a default notice to petitioner.
On January 24, 2006, respondent sent petitioner a Notice of
Federal Tax Lien Filing and Your Right to a Hearing Under Section
6320 (lien notice), informing petitioner that respondent had
filed notices of Federal tax lien for tax periods ending
September 30, 1998, June 30, 1999, September 30, 1999, March 31,
2000, and September 30, 2000, through December 31, 2002, and for
a civil penalty assessed under section 6721 for taxable year
1998. The liabilities for the quarterly tax periods, as well as
the civil penalty, were listed in the plan as unsecured priority
claims.
On January 25, 2006, respondent sent petitioner a Final
Notice of Intent to Levy and Notice of Your Right to a Hearing
(levy notice), covering tax periods ending September 30, 1998,
and June 30, 2001, through December 31, 2002, advising petitioner
that respondent intended to levy to collect the unpaid employment
tax assessments set forth in the levy notice. These tax periods
were also listed in the plan as unsecured priority claims.
6
From Feb. 10, 2004, through Feb. 18, 2005, respondent
received a total of $75,059.81 in checks from petitioner. Checks
worth only $43,362.39 were honored.
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On February 13, 2006, petitioner requested a collection due
process hearing (hearing) for both the lien and levy notices.7
Respondent’s Appeals Office assigned the case to Settlement
Officer Lisa S. Boudreau (Settlement Officer Boudreau), an
impartial officer with no previous involvement with the unpaid
taxes. On July 26, 2006, Settlement Officer Boudreau held a
face-to-face hearing with petitioner’s representative, Thomas
Curran (Mr. Curran).
At the hearing Mr. Curran made the following contentions:
(1) Respondent had not abated all Form 941, Employer’s Quarterly
Federal Tax Return, penalties as required under the plan; (2) the
section 6721 civil penalty for taxable year 1998 was discharged
in the bankruptcy case; (3) respondent was not properly
designating plan payments; (4) the February 10, 2004, check was
not dishonored; and (5) respondent was not charging the
appropriate interest rate on petitioner’s outstanding liability
pursuant to the plan.8
On November 30, 2006, Settlement Officer Boudreau issued
Notices of Determination Concerning Collection Action(s) Under
7
In accordance with sec. 6320(b)(4), the lien hearing was
held in conjunction with the levy hearing.
8
In its brief petitioner did not address whether the amount
of interest being charged petitioner on its outstanding liability
is commensurate with the express terms of the plan. Accordingly,
we consider this issue to have been waived or conceded. See
Estate of Atkinson v. Commissioner, 115 T.C. 26, 35 (2000), affd.
309 F.3d 1290 (11th Cir. 2002).
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Section 6320 and/or 6330 sustaining the lien filing and the
proposed levy. In reaching her decision Settlement Officer
Boudreau concluded that all Form 941 penalties had been abated
and that the section 6721 civil penalty had not been discharged.
Settlement Officer Boudreau further concluded that respondent
was, in most cases, designating payments received as required
under the plan.9 She also found that petitioner had not met its
burden in proving that the February 10, 2004, check was not
dishonored. As to the interest charged on petitioner’s
outstanding liability, Settlement Officer Boudreau determined
that the plan expressly provided for interest to be calculated
“based on the rate established from time to time by the Secretary
of the Treasury” as provided in section 6621.10
On January 3, 2007, petitioner timely filed a petition with
the Court.
9
Settlement Officer Boudreau intimated that compliance “will
review the payments and correct any that were not properly
designated.”
10
At the hearing petitioner proposed a short-term
installment agreement as a collection alternative. Respondent
did not, however, consider petitioner’s request, given
petitioner’s failure to provide financial information and to
remain current with its income and employment tax return filing
and payment obligations. See McCorkle v. Commissioner, T.C.
Memo. 2003-34 (refusal of an installment agreement not an abuse
of discretion when taxpayer fails to provide financial
information and is not current with estimated tax payments).
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Discussion
Sections 6320 (lien notice) and 6330 (levy notice) entitle a
person to notice and the opportunity for a hearing when the
Commissioner files a lien or proposes to levy in furtherance of
the collection from the taxpayer of unpaid Federal taxes. At the
required hearing the Appeals officer conducting the hearing must
verify that the requirements of any applicable law or
administrative procedure have been met. Sec. 6330(c)(1). The
taxpayer may raise any relevant issue relating to the unpaid tax,
the filing of the lien, or the proposed levy, including spousal
defenses, challenges to the appropriateness of the collection
action, and collection alternatives. Sec. 6330(c)(2)(A). The
taxpayer may also raise challenges to the existence or amount of
the underlying tax liability “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). Following the hearing, the Appeals officer
must determine whether the collection action is to proceed,
taking into account the verification the Appeals officer has
made, the issues the taxpayer raised, and “whether any proposed
collection action balances the need for the efficient collection
of taxes with the legitimate concern of the * * * [taxpayer] that
any collection action be no more intrusive than necessary.” Sec.
6330(c)(3).
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Where the validity of the underlying tax liability is
properly in issue, the Court will review the matter de novo.
Respondent argues, and the Court agrees, that section
6330(c)(2)(B) precludes petitioner from challenging the
underlying tax liabilities because respondent’s submission of his
proof of claim in the bankruptcy case afforded petitioner the
opportunity to contest respondent’s claims. See Kendricks v.
Commissioner, 124 T.C. 69 (2005). Consequently, the validity of
the underlying tax is not properly in issue and the Court will
review Settlement Officer Boudreau’s determination for abuse of
discretion. See Sego v. Commissioner, 114 T.C. 604, 610 (2000);
Goza v. Commissioner, 114 T.C. 176, 181-182 (2000). The abuse of
discretion standard requires the Court to decide whether the
Appeals officer’s determination was arbitrary, capricious, or
without sound basis in fact or law. Middleton v. Commissioner,
T.C. Memo. 2007-120.
Petitioner asserts that Settlement Officer Boudreau abused
her discretion in sustaining the lien filing and proposed levy.
Specifically, petitioner maintains that Settlement Officer
Boudreau erroneously determined the following: (1) The plan
entitled respondent to collect $27,948.89 for the section 6721
civil penalty assessed in taxable year 1998; (2) petitioner had
the burden of proving the February 10, 2004, payment was not
dishonored; (3) petitioner’s payments under the plan were
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properly credited to trust fund taxes; and (4) respondent had
abated all preconfirmation penalties.
A. Whether Settlement Officer Boudreau Abused Her Discretion in
Determining That the Plan Entitled Respondent To Collect
$27,948.89 for the Section 6721 Civil Penalty
Petitioner claims the section 6721 penalty assessed for
taxable year 1998 was discharged in the bankruptcy case as a
general unsecured claim. Respondent contends that the penalty
was listed as an unsecured priority claim in the plan, entitling
respondent to collect the $27,948.89 penalty upon default.
The parties agree that a confirmed chapter 11 plan will bind
the debtor and all creditors to the terms of a confirmed plan.
11 U.S.C. sec. 1141(a) (2006); In re Space Building Corp., 206
Bankr. 269 (D. Mass. 1996); In re Penrod, 169 Bankr. 910 (Bankr.
N.D. Ind. 1994) (the plan is essentially a new and binding
contract between debtor and creditor) affd. 50 F.3d 459 (7th Cir.
1995); In re Stratton Group, Ltd., 12 Bankr. 471, 474 (Bankr.
S.D.N.Y. 1981) (the appropriate remedy on default of a bankruptcy
plan is enforcement of the plan promises). Upon the taxpayer’s
default the Internal Revenue Service may enforce payments due
under a bankruptcy plan through its own administrative processes.
In re Jankins, 184 Bankr. 488 (Bankr. E.D. Va. 1995).
Respondent’s proof of claim, incorporated within the plan
without objection from petitioner, lists the section 6721 penalty
as an unsecured priority claim. Respondent was therefore well
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within his rights to proceed with collection of the discharged
tax liability. However, respondent’s remedy is limited to the
obligations contained in the plan. In re Depew, 115 Bankr. 965
(Bankr. N.D. Ind. 1989). Respondent assigned a value for the
penalty at zero in the columns marked “Tax Due” and “Interest to
Petition Date.” Moreover, the total amount included for
respondent’s unsecured priority claims does not account for the
penalty. Consequently, respondent is not entitled to collect the
civil penalty. Settlement Officer Boudreau abused her discretion
in determining to proceed with collection of the section 6721
penalty.11
11
At the hearing Settlement Officer Boudreau erroneously
concluded that because the penalty maintained its character as a
tax following confirmation, In re Official Comm. of Unsecured
Creditors of White Farm Equip. Co., 943 F.2d 752 (7th Cir. 1991),
respondent could revive the original, preconfirmation debt upon
petitioner’s default. Respondent’s reliance on White Farm is
misplaced.
In White Farm, a debtor filed successive ch. 11 cases, the
second for the purpose of liquidation after the confirmed plan in
the first ch. 11 case could not be fulfilled. Despite the
intervening confirmed plan the U.S. Court of Appeals for the
Seventh Circuit found that a priority claim of the Commissioner
for trust fund taxes retained its priority status in the second
ch. 11 proceeding. In other words, the Court of Appeals
recognized that tax characteristics survive confirmation and
discharge.
White Farm does not operate, as Settlement Officer Boudreau
would have it, to permit respondent to collect $27,948.89 more
than respondent was entitled to under the plan. The creditor in
White Farm sought priority in the second ch. 11 case for trust
fund taxes that remained due under the first ch. 11 plan. The
status of the tax claim did not entitle the creditor in White
Farm, as respondent appears to argue here, to reinstate debt
discharged under the first ch. 11 plan.
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B. Whether Settlement Officer Boudreau Abused Her Discretion in
Determining That Petitioner Had the Burden of Proving the
February 10, 2004, Payment Was Not Dishonored
Petitioner argues that the February 10, 2004, check for
$12,330.64 was not dishonored. Respondent claims the check was
dishonored and that petitioner has failed to meet its burden to
prove otherwise. We agree with respondent.
Petitioner has the burden of proving that the check was not
dishonored. See Hardie v. Commissioner, T.C. Memo. 2007-335.
Respondent’s Form 4340, Certificate of Assessments, Payments, and
Other Specified Matters, shows a dishonored check of $12,330.64,
and petitioner has submitted no evidence to contradict the
inference to be drawn from that entry that the check was returned
for insufficent funds. Petitioner had ample opportunity to
produce a copy of the canceled check and failed to do so.
Consequently, petitioner failed to meet its burden. Settlement
Officer Boudreau’s determination on this issue was appropriate.
C. Whether Settlement Officer Boudreau Abused Her Discretion in
Determining That Plan Payments Were Properly Allocated
Towards Trust Fund Payments and That Respondent Had Abated
All Preconfirmation Penalties
Petitioner maintains that the plan payments were not
properly credited to trust fund taxes as required under the plan.
Respondent admits that the improper application of the payments
has not been corrected. Indeed, respondent concedes on brief
that he is currently in the process of ensuring that two payments
labeled “Undesignated Bankruptcy” of $859.41 and $3,264.48 are
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properly applied to the trust fund portion of petitioner’s
liabilities.
Petitioner also maintains that Settlement Officer Boudreau
abused her discretion in determining that respondent had abated
all penalties assessed before the confirmation of the plan.
Respondent further concedes on brief, and respondent’s Form 4340
reveals, that all penalties assessed before the confirmation of
the plan have not been abated. In particular, penalties for tax
periods ending September 30, 2001, and December 31, 2002, remain.
As to the foregoing concessions, we will remand this case to
provide respondent the opportunity to correct these erroneous
items and to comply with the terms of the plan and this opinion.
Petitioner’s request for attorney’s fees and costs will be
denied because the request is premature. See Rule 231(a)(2).
We have considered all of the parties’ contentions and
arguments that are not discussed herein, and we find them to be
without merit, unnecessary to reach, irrelevant, or moot.
To reflect the foregoing,
An appropriate order will
be issued.