T.C. Summary Opinion 2009-116
UNITED STATES TAX COURT
DOROTHY SMITH-IRVING, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 18234-07S. Filed July 27, 2009.
Dorothy Smith-Irving, pro se.
Cindy Park, for respondent.
GERBER, Judge: This case was heard pursuant to the
provisions of section 7463 of the Internal Revenue Code in effect
when the petition was filed.1 Pursuant to section 7463(b), the
decision to be entered is not reviewable by any other court,
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for period under
consideration.
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and this opinion shall not be treated as precedent for any other
case.
Respondent determined to proceed to collect petitioner’s
unpaid tax liabilities for tax year 1997 by filing a notice of
Federal tax lien (NFTL). Petitioner seeks review of that
determination under sections 6320(c) and 6330(d).
The issue for consideration is whether respondent’s
determination to proceed with collection was an abuse of
discretion.
Background
Some of the facts have been stipulated and are so found.
The stipulation of facts and the attached exhibits are
incorporated herein by this reference. Petitioner resided in
California when she filed her petition.
Petitioner began a prolonged and complex journey when she
filed her 1997 Form 1040, U.S. Individual Income Tax Return, on
April 19, 1999. On that return she reported a $27,411 tax
liability (original liability). Petitioner did not remit payment
with her 1997 return. Respondent assessed the reported liability
(original assessment) and also applied a $1,396 withholding tax
credit. Additionally, respondent determined additions to tax of
$458.15 for failure to pay estimated tax, $5,853.37 for failure
to file timely the return, and $1,690.97 for failure to pay the
tax shown on the return. On July 26, 1999, respondent notified
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petitioner of his intent to levy, but petitioner did not request
a collection due process (CDP) hearing.
On December 20, 1999, petitioner filed a Form 1040X, Amended
U.S. Individual Income Tax Return, for 1997 showing reduced
taxable income because of a reduction in the amount reported as
an early withdrawal distribution from her individual retirement
account (IRA). She claimed a $74,012 reduction of her adjusted
gross income and, in turn, a $13,910 reduction of her tax
liability. On December 23, 1999, petitioner submitted an offer
to compromise her outstanding tax liability (first OIC). On
March 26, 2002, respondent rejected petitioner’s first OIC.
On March 8, 2000, respondent notified petitioner that her
1997 return had been selected for examination. On January 18,
2001, respondent notified petitioner that the claimed reduction
in adjusted gross income had been disallowed and that additional
tax was due. The letter was accompanied by a Form 2297, Waiver
of Statutory Notification of Claim Disallowance, with
respondent’s request that petitioner sign and return it if she
agreed with the examination results. In a February 21, 2001,
letter, respondent asked petitioner to sign a Form 4549-CG,
Income Tax Examination Changes, with the request that petitioner
sign and return it if she agreed with respondent’s determination
of $59,301 of additional taxable income. The increase was mostly
due to the disallowance of petitioner’s charitable contribution
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deduction for lack of substantiation. Respondent’s determination
obviated the $13,910 reduction in tax liability petitioner
claimed on her amended return and resulted in a $17,038 tax
increase (audit liability). Respondent also determined an
additional late filing addition to tax of $4,909.88.
By cover letter dated March 5, 2001, petitioner signed and
returned the Forms 4549-CG and 2297. However, she did so under
the mistaken belief that respondent was proposing to reduce her
outstanding tax liability to $17,038 rather than increasing it by
that amount. Petitioner’s cover letter revealed the
misunderstanding and provided respondent with petitioner’s new
address as of April 13, 2001.
Because it appeared to respondent that petitioner did not
understand the Form 4549-CG, petitioner was issued a notice of
deficiency on May 31, 2001. The notice of deficiency, however,
was mailed to petitioner’s old address. There is no indication
that she received the notice, and she did not file a petition
with this Court. On September 3, 2001, respondent assessed the
deficiency and the addition to tax (audit assessment).
On December 5, 2001, petitioner filed a chapter 7 bankruptcy
petition. On March 18, 2002, the bankruptcy court granted a
partial discharge of her 1997 tax liability, abating the
$21,447.83 remaining on the original liability and all associated
penalties and interest. The audit liability was not abated
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because the audit assessment had been made within 240 days before
the bankruptcy petition’s filing date.
Pursuant to the bankruptcy court’s order, respondent
adjusted petitioner’s account to reflect the abatement of the
additions to tax for estimated tax, late filing, and failure to
pay. Respondent, however, did not reduce the original assessment
and the associated interest in accordance with the amounts
abated.
On August 24, 2005, respondent sent petitioner a second
notice of intent to levy concerning petitioner’s outstanding 1997
tax liability. Because respondent had not applied the abatement
of the tax liability from the original assessment and its
associated interest, the notice erroneously stated petitioner’s
unpaid tax liability as $35,534.95. Petitioner did not request a
CDP hearing.
On January 9, 2006, petitioner offered to compromise her
outstanding tax liabilities2 for $31,500 (second OIC) on the
basis of doubt as to liability and doubt as to collectibility.
On April 19, 2006, respondent rejected the second OIC and filed
an NFTL with respect to petitioner’s unpaid tax liabilities. On
April 21, 2006, respondent notified petitioner of the NFTL
2
Petitioner also had unpaid tax liabilities for 2002, 2003,
and 2004.
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filing. On May 22, 2006, petitioner made a timely request for a
CDP hearing.
On June 20, 2007, Settlement Officer Nathan August (Mr.
August) conducted a telephone CDP hearing with petitioner. He
told petitioner that she could not contest the underlying tax
liability because she had had a prior opportunity to do so. He
also informed her that the abatement of the original liability
had not been posted to her account. He estimated that she would
have a remaining liability of approximately $20,000 to $25,000
after the abatement was applied because the audit liability had
not been discharged.
Mr. August also reviewed respondent’s decision to reject
petitioner’s second OIC. He stated that there was no doubt as to
liability because she had consented to the audit assessment by
signing the Form 4549-CG. He also stated that there was no doubt
as to collectibility because she had sufficient assets and/or
monthly income to fully pay the liability. Because Mr. August
believed there was no doubt as to liability or collectibility, he
informed petitioner that he would be sustaining the rejection of
the second OIC.
Petitioner argued that the NFTL was invalid because the
amount of the 1997 liability reflected on the NFTL was incorrect.
Mr. August explained that an incorrect amount did not provide a
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basis to amend the NFTL. He therefore indicated that he would be
sustaining the filing of the NFTL.
Petitioner also requested abatement of interest and
additions to tax, stating that she had not been aware of the
nondischargeability of the audit liability. Mr. August advised
her that the interest and addition to tax accruals resulted from
petitioner’s failure to pay rather than from any errors or delays
by respondent. As a result, Mr. August did not find cause for
abatement.
On July 16, 2007, respondent sent petitioner a notice of
determination sustaining the NFTL filing. Respondent also sent
petitioner a letter informing her of the rejection of her request
for abatement of interest for the period from September 3, 2001,
to June 20, 2007. On August 14, 2007, petitioner filed a
petition with the Court for review of the notice of
determination.
Discussion
If a taxpayer neglects or refuses to pay a tax owed after
demand for payment, the unpaid tax will be a lien in favor of the
United States upon all property and rights to property belonging
to that person. Sec. 6321.
Upon request, the taxpayer is entitled to an administrative
review hearing before an impartial officer or employee of the
Appeals Office. Sec. 6320(b). The hearing is conducted
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according to the procedures under section 6330(c), (d), and (e).
Sec. 6320(c). At the hearing, the taxpayer may raise any issue
relevant to the unpaid tax or the Commissioner’s collection
activities. Sec. 6330(c)(2)(A). However, if a taxpayer received
a statutory notice of deficiency for the year in issue or
otherwise had a prior opportunity to dispute the underlying tax
liability, the taxpayer is precluded from challenging the
existence or amount of the liability. Sec. 6330(c)(2)(B). A
taxpayer who has signed a Form 4549-CG is deemed to have had an
opportunity to dispute the underlying tax liability. Zapara v.
Commissioner, 124 T.C. 223, 228 (2005); see Aguirre v.
Commissioner, 117 T.C. 324, 327 (2001). A taxpayer who
previously received a notice under section 6330 for the same tax
and tax periods and did not request a hearing has already
received an opportunity to challenge the existence and amount of
the underlying liability. Sec. 301.6320-1(e)(3), Q&A-E7, Proced.
& Admin. Regs.
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 at the hearing, and whether the 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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For determinations made after October 16, 2006, this Court
has jurisdiction to review the determination irrespective of the
type of tax liability involved. Pension Protection Act of 2006,
Pub. L. 109-280, sec. 855, 120 Stat. 1019; Callahan v.
Commissioner, 130 T.C. 44 (2008). When the validity of the
underlying tax liability is properly at issue, we review the
determination de novo. Goza v. Commissioner, 114 T.C. 176, 181-
182 (2000). When the underlying tax liability is not in issue,
we review for abuse of discretion. Id. at 182. Under the abuse
of discretion standard, the taxpayer is required to show that the
Commissioner’s actions were arbitrary, capricious, or without
sound basis in fact. See Knorr v. Commissioner, T.C. Memo. 2004-
212.
Respondent contends that petitioner was not entitled to
dispute her underlying tax liability at the CDP hearing because
she: (1) Signed the Form 4549-CG; (2) was sent a notice of
deficiency and did not petition the Court; and (3) received the
second notice of intent to levy and did not request a CDP
hearing.
Petitioner argues that the Form 4549-CG was invalid because
she signed it under the mistaken belief that her tax liability
had been reduced to $17,038 rather than increased. Petitioner
further contends that the notice of deficiency was also invalid
because it was not sent to her last known address.
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Though the Form 4549-CG and the notice of deficiency were
invalid (discussed infra), petitioner did have an opportunity to
dispute her underlying tax liability when she received the second
notice of intent to levy. Accordingly, we will review
respondent’s determination for abuse of discretion.
Section 6330(c)(1) and (3) requires the Appeals officer to
obtain verification that the requirements of any applicable law
or administrative procedure have been met. In order to collect a
tax owed by the taxpayer, the Commissioner generally must assess
the liability within 3 years after the return is filed. Secs.
6303(a), 6501(a). Section 6503(h) extends that 3-year period of
limitations for the time the Commissioner is precluded from
assessing the tax because of the filing of a bankruptcy petition,
plus 60 days. The Commissioner is generally precluded from
assessing a deficiency until after the mailing of a notice of
deficiency, unless the taxpayer waives that restriction. Sec.
6213(a), (d).
The audit assessment was made after petitioner had submitted
a signed Form 4549-CG and after respondent had issued her a
notice of deficiency. Petitioner claims the Form 4549-CG and the
notice of deficiency were invalid.
Form 4549-CG includes a waiver under which a taxpayer
consents to immediate assessment and collection and waives the
right to receive a notice of deficiency. We apply contract
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principles in determining the enforceability of waiver documents.
Horn v. Commissioner, T.C. Memo. 2002-207. In California a
party’s unilateral mistake is ground for relief where the other
party knew or had reason to know of the mistake. Libby, McNeil &
Libby, Cal. Canners & Growers v. United Steelworkers of Am., 809
F.2d 1432, 1434 (9th Cir. 1987); 1 Restatement, Contracts 2d,
sec. 153(b) (1981).
When petitioner signed the Form 4549-CG, she believed that
the audit examiner had told her that her tax liability would be
reduced. The accompanying cover letter communicated her
confusion as to the amount of her tax liability: “I am a little
skeptic [sic] in signing this because it looks like $27,000 is
the amount due instead of $17,000.” (Emphasis added.) The cover
letter put respondent on notice that petitioner did not
understand she was consenting to the assessment of an additional
tax liability, and respondent accordingly issued petitioner a
notice of deficiency. Because respondent was aware of
petitioner’s unilateral mistake, there was no meeting of the
minds and the Form 4549-CG waiver is invalid.
Petitioner also claims the notice of deficiency is invalid
because it was sent to the wrong address. A notice of deficiency
is sufficient if mailed to the taxpayer’s last known address.
Sec. 6212(b); Frieling v. Commissioner, 81 T.C. 42, 52 (1983). A
taxpayer’s last known address is the address shown on the
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taxpayer’s most recently filed return, absent clear and concise
notice of a change of address. Sec. 301.6212-2(a), Proced. &
Admin. Regs.
Petitioner’s March 5, 2001, cover letter provided respondent
with such notice of her change of address. The letter informed
the audit examiner that she would be moving to her new address on
April 13, 2001. Respondent issued the notice of deficiency after
that date on May 31, 2001, but nevertheless mailed it to
petitioner’s old address. Because the notice of deficiency was
not sent to petitioner’s last known address and there is no
evidence she actually received it, the notice is invalid.
Because the Form 4549-CG and the notice of deficiency were
invalid, the September 3, 2001, assessment was improper.
Respondent did not make a valid assessment of the audit liability
before the period for assessment, as extended by the bankruptcy
filing, expired. Because respondent’s assessment was invalid on
account of the expiration of the assessment period, Mr. August’s
verification that the requirements of applicable law had been met
was incorrect. Respondent’s determination to sustain the NFTL
filing was therefore in error as a matter of law and was an abuse
of discretion.
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Accordingly, respondent cannot proceed with collection.
To reflect the foregoing,
Decision will be entered
for petitioner.