T.C. Memo. 2010-269
UNITED STATES TAX COURT
HAIM REVAH AND LUCINDA REVAH, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
YAAKOV J. REVAH, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 23331-08L, 24076-08L. Filed December 9, 2010.
Edward M. Robbins, Jr., and Cory Stigile, for petitioners.
Elaine T. Fuller, for respondent.
MEMORANDUM OPINION
COHEN, Judge: Petitions were filed in response to notices
of determination sent to (1) Haim and Lucinda Revah (case at
docket No. 23331-08L) and (2) Yaakov J. Revah (case at docket No.
24076-08L) that sustained proposed levy actions with respect to
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petitioners’ unpaid Federal income taxes for 1997 and 1998. The
cases were consolidated for briefing and opinion. Pursuant to
section 6330(d), petitioners seek review of respondent’s
determinations to proceed with the collection of their 1997 and
1998 Federal income tax liabilities and the assessed additions to
tax. Unless otherwise indicated, all section references are to
the Internal Revenue Code, and all Rule references are to the Tax
Court Rules of Practice and Procedure.
Background
All of the facts have been stipulated, and the stipulated
facts are incorporated as our findings by this reference.
Petitioners resided in California at the time they filed their
petitions. Petitioners Haim Revah (Haim) and Yaakov Revah
(Yaakov) are brothers (petitioners).
The case at docket No. 23331-08L involves deficiencies in
Federal income tax that were assessed with respect to Haim’s 1997
and 1998 tax returns that designated his filing status as married
filing separately. Collection of Haim’s tax liability from the
assets and income of Mrs. Revah is permitted under California
community property law to the extent such assets and income are
community property. See Ordlock v. Commissioner, 533 F.3d 1136,
1138-1139 (9th Cir. 2008), affg. 126 T.C. 47 (2006).
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The case at docket No. 24076-08L involves deficiencies in
Federal income tax that were assessed with respect to Yaakov’s
1997 and 1998 tax returns.
Audit of Revah Holdings, Inc., and Petitioners
During 1997 and 1998, petitioners were each 50-percent
shareholders of Revatex, Inc., and SMJ American Manufacturing
Co., Inc., both S corporations. In 1998, petitioners each became
50-percent shareholders of Indigo Concepts, Inc., an S
corporation. During 1999, petitioners incorporated Revah
Holdings, Inc., and were each 50-percent shareholders through
2001. Revah Holdings, Inc., filed Forms 1120S, U.S. Income Tax
Return for an S Corporation, for tax years 1999 and 2000 on a
consolidated basis with Revatex, Inc., SMJ American
Manufacturing, Co., Inc., and Indigo Concepts, Inc.
During 2001 through 2005, the Internal Revenue Service (IRS)
audited the 1999 and 2000 tax returns of Revah Holdings, Inc.,
and petitioners, as shareholders. The IRS examiner determined
adjustments with respect to Revah Holdings related to inventory
and bad debt that resulted in increases to the 1999 and 2000
reported income. The inventory adjustment increased the amount
of ending inventory for 2000 and thus the 2001 beginning
inventory. A deduction for an uncollectible receivable in 2000
was disallowed because the examiner determined that the debts
became uncollectible in 2001 rather than 2000. Thus, as the
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examiner acknowledged, because the adjustments were timing
matters, the 2001 reported income would be reduced when
adjustments were made. Accordingly, petitioners’ representative
advised the examiner that amended returns would be filed for
2001.
The audit adjustments to Revah Holdings flowed through to
petitioners’ individual tax returns and resulted in a decrease in
the net operating losses (NOLs) that petitioners had reported on
their previously filed tax returns and had carried back to 1997
and 1998. These NOL reductions resulted in determined tax
deficiencies for petitioners for 1997 and 1998.
Petitioners accepted the results of the audit, and
accordingly their representative executed Forms 4549, Income Tax
Examination Changes, on their behalf, agreeing to tax
deficiencies for 1997 and 1998. The Forms 4549 stated:
I do not wish to exercise my appeal rights with the
Internal Revenue Service or to contest in the United
States Tax Court the findings in this report.
Therefore, I give my consent to the immediate
assessment and collection of any increase in tax and
penalties, and accept any decrease in tax and penalties
shown above, plus additional interest as provided by
law. * * *
Haim agreed to deficiencies of $1,862,036 for 1997 and $236,928
for 1998. Yaakov agreed to deficiencies of $1,862,036 for 1997
and $236,903 for 1998.
In November 2005, Revah Holdings filed an amended tax return
for 2001 in accordance with the IRS examiner’s adjustments that
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reported a net decrease in income. As a result of the
adjustments to Revah Holdings’ return, on November 8, 2005,
petitioners each filed amended tax returns to claim NOLs and also
filed resulting refund claims. These amended tax returns and
refund claims were for 2001 as well as 1996 and 1997 because
petitioners were seeking to carry back the NOLs to offset income
from the earlier years and claim the resulting refunds. The 1997
refund claims were accepted after audit, but the 1996 and 2001
claims were denied as untimely. See sec. 6511(d)(2)(A).
Accordingly, the IRS sent refund claim denial letters
informing petitioners that they had the right to appeal the
decisions to the IRS Appeals Office and/or file suit with the
appropriate U.S. District Court or with the U.S. Court of Federal
Claims within 2 years of the dates of the letters. Petitioners
protested the denial of their 1996 refund claims but did not file
suit in response to the claim denials.
Petitioners’ Protests of the Refund Claim Denials
Petitioners’ 1996 refund claim denial protests were assigned
to the same IRS Appeals officer. Because petitioners’ 1996
amended returns were being audited as a result of the Revah
Holdings examination, the Appeals officer waited for the audit
results before considering the protests. The IRS examiner
auditing petitioners’ amended 1996 returns determined that
petitioners did not qualify for relief as they requested under
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the mitigation provisions or the doctrine of equitable recoupment
and sustained the refund claim denials.
After review and evaluation of petitioners’ case files, the
Appeals officer sustained the IRS examiner’s disallowance of the
refund claims. The Appeals officer noted in the Appeals case
memo that equitable recoupment did not apply because income had
not been subjected to two taxes based on inconsistent theories.
Petitioners were informed by letters sent in January 2008 that
the Appeals Office sustained the disallowance of the 1996 refund
claims.
Section 6330 Proceedings
In December 2007, the IRS sent each petitioner a Notice of
Intent to Levy and Notice of Your Right to a Hearing with respect
to the outstanding 1997 and 1998 income tax liabilities. In
response, each petitioner submitted a timely Form 12153, Request
for a Collection Due Process or Equivalent Hearing. Petitioners’
collection due process (CDP) proceedings were assigned to
different Appeals officers.
Haim Revah
The Appeals officer handling Haim’s CDP proceeding obtained
a copy of the Appeals case memo prepared by the Appeals Office
with respect to the refund claim denial. A letter dated May 22,
2008, informed Haim that he was precluded from raising the
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underlying liability because of the opportunity to do so at the
prior proceeding.
On July 29, 2008, the Appeals officer held a CDP conference
with Haim’s representatives. During the conference, one of
Haim’s representatives stated that he agreed that the 1996 refund
claim was time barred and asserted that equitable recoupment
should apply to permit Haim to offset his 1997 and 1998 income
tax liabilities against the time-barred 1996 refund. The Appeals
officer responded that equitable recoupment cannot be applied in
CDP proceedings and is not a collection alternative. No
penalties had been assessed with respect to 1998 when the
conference was held.
During the CDP proceedings, Haim’s representatives also
raised the issue of abatement of a failure to pay addition to tax
for 1997. Haim’s representative supplied the Appeals officer
with a copy of a letter Haim’s accountant had previously
submitted to the IRS on his behalf requesting abatement of an
assessed addition to tax under section 6651(a), claiming
reasonable cause. The IRS had imposed the failure to pay
addition to tax because Haim failed to pay the tax liabilities as
agreed. The addition to tax was not imposed retroactively from
the original due date of the tax but was imposed after the tax
liability had been agreed upon and the IRS had sent a notice of
balance due.
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On August 27, 2008, the Appeals Office sent a notice of
determination to Haim and Lucinda Revah sustaining the levy with
respect to Haim’s 1997 and 1998 tax liabilities. The memorandum
attached to the notice stated that Haim’s representatives had
continued to raise the underlying liability issue by arguing the
doctrine of equitable recoupment even though there had been a
prior opportunity to dispute the underlying liabilities. The
Appeals officer noted further that the accounting errors
(including those of the S corporation) cannot be reasonable cause
for penalty abatement.
The notice of determination further explained that
The proposed levy action is deemed appropriate in
this case because Mr. & Mrs. Revah are not interested
in any collection alternatives and did not propose any
alternative to resolve their liabilities. The proposed
levy action thus balances the need for efficient
collection of taxes with Mr. & Mrs. Revah’s legitimate
concern that any collection action be no more intrusive
than necessary.
Yaakov Revah
The Appeals officer handling Yaakov’s CDP proceeding
obtained a copy of the Appeals case memo prepared by the Appeals
Office with respect to his refund claim denial. The Appeals
officer informed Yaakov’s representative that only arguments
regarding Yaakov’s 1996 refund claim that had not been raised
during the previous Appeals Office hearing would be heard.
Yaakov’s representative informed the Appeals officer that he was
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not seeking a collection alternative and therefore financial
information was not being supplied.
On July 29, 2008, the Appeals officer held a CDP conference
with Yaakov’s representatives. During the conference, one of
Yaakov’s representatives stated that he agreed with the Appeals
Office’s determination that the 1996 refund claim was time barred
and asserted that the Appeals Office had the authority to apply
equitable recoupment as a defense to collection. The Appeals
officer informed Yaakov’s representatives that equitable
recoupment was not a collection alternative. There were no
assessed additions to tax with respect to 1998 when the
conference was held.
Abatement of a failure to pay addition to tax for 1997 was
not discussed during the CDP conference. However, Yaakov’s
representative supplied the Appeals officer with a letter dated
September 28, 2005, requesting abatement of a failure to pay
addition to tax, claiming reasonable cause, that Yaakov’s
accountant had previously submitted to the IRS in response to a
notice of Federal income tax due regarding the 1997 tax
liability. A letter dated September 8, 2008, informed Yaakov
that his addition to tax abatement request was denied because he
did not meet reasonable cause criteria. The letter noted that
the failure to pay addition to tax had been imposed because he
failed to pay the 1997 tax liability as agreed and that the
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addition to tax was not retroactively charged from the original
due date of the tax.
The IRS sent a notice of determination to Yaakov on
September 17, 2008, sustaining the levy with respect to his 1997
and 1998 tax liabilities. The memorandum attached to the notice
stated in part that
the taxpayer was precluded from raising the equitable
recoupment issue for period 1996 under the CDP hearing
because the issue was raised and considered at a
previous Appeals hearing and the taxpayer’s * * *
[representative] meaningfully participated in the
hearing * * *.
* * * * * * *
Taxpayer has not proposed a collection alternative
that would satisfy the tax liability. Therefore,
Collection’s plan to levy balances the need for the
efficient collection of tax with the legitimate concern
of the taxpayer that any collection action be no more
intrusive than necessary. * * *
Discussion
Under section 6330(c)(2)(A) a taxpayer may raise any
relevant issue at a CDP hearing, including challenges to “the
appropriateness of collection actions”, and may make “offers of
collection alternatives, which may include the posting of a bond,
the substitution of other assets, an installment agreement, or an
offer-in-compromise.” The taxpayer may also challenge the
existence and amount of the underlying tax liability if no notice
of deficiency was received or the taxpayer did not otherwise have
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an opportunity to dispute such tax liability. Sec.
6330(c)(2)(B).
For purposes of section 6330(c)(2)(B), a taxpayer who has
waived the right to challenge the proposed assessments by signing
Form 4549 is deemed to have had the opportunity to dispute the
underlying tax liability and is precluded by such waiver from
challenging the underlying tax liability in the CDP hearing or
before this Court. Aguirre v. Commissioner, 117 T.C. 324, 327
(2001); see also Lance v. Commissioner, T.C. Memo. 2009-129.
Accordingly, petitioners were not entitled to contest the
underlying tax liabilities for 1997 or 1998 at their respective
CDP hearings.
Section 6330(c)(3) provides that the determination of the
Appeals officer shall take into consideration the verification
presented by the Secretary that the requirements of applicable
law and administrative procedure have been met; the issues raised
by the taxpayer; and whether the 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.
Where the underlying tax liability is properly at issue in
the hearing, we review that issue on a de novo basis. Goza v.
Commissioner, 114 T.C. 176, 181-182 (2000). However, where the
underlying tax liability is not at issue, we review the
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determination for abuse of discretion. Nicklaus v. Commissioner,
117 T.C. 117, 120 (2001). To establish an abuse of discretion,
the taxpayer must prove that the decision complained of is
arbitrary, capricious, or without sound basis in fact or law.
Giamelli v. Commissioner, 129 T.C. 107, 111 (2007) (citing
Woodral v. Commissioner, 112 T.C. 19, 23 (1999)); see Keller v.
Commissioner, T.C. Memo. 2006-166, affd. in part and vacated in
part, 568 F.3d 710 (9th Cir. 2009). In reviewing for abuse of
discretion, we generally consider only arguments, issues, and
other matters that were raised at the CDP hearing or otherwise
brought to the attention of the Appeals Office. Giamelli v.
Commissioner, supra at 115; Magana v. Commissioner, 118 T.C. 488,
493 (2002).
Petitioners argue that it was an abuse of discretion for the
Appeals Office not to consider the application of equitable
recoupment during the CDP proceeding. Petitioners assert that
consideration of equitable recoupment in the context of reviewing
their protests of the refund claim denials “has no bearing on
whether they are entitled to equitable recoupment relief as a
defense to collection” and that “any prior review of equitable
recoupment in a refund context should not deprive Appeals of
jurisdiction.” Petitioners assert that equitable recoupment
should be applied because they:
have been whipsawed and they have not been able to
exhaust their administrative remedies to address this
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whipsaw in a meaningful manner. By assessing
deficiencies in 1997 and 1998 resulting from the 1999
and 2000 examinations [of Revah Holdings], and also by
denying the amended 2001 returns and refund claims
seeking these deductions, the Service is taxing the
same item/transaction twice.
Section 6214(b) provides that this Court “may apply the
doctrine of equitable recoupment to the same extent that it is
available in civil tax cases before the district courts of the
United States and the United States Court of Federal Claims.”
The doctrine of equitable recoupment is a judicially created
doctrine that, under certain circumstances, allows a litigant to
avoid the bar of an expired statutory limitation period. The
doctrine prevents an inequitable windfall to a taxpayer or to the
Government that would otherwise result from the inconsistent tax
treatment of a single transaction, item, or event affecting the
same taxpayer or a sufficiently related taxpayer. Equitable
recoupment operates as a defense that may be asserted by a
taxpayer to reduce the Commissioner’s timely claim of a
deficiency or by the Commissioner to reduce the taxpayer’s timely
claim for a refund. When applied for the benefit of a taxpayer,
the equitable recoupment doctrine permits a taxpayer to raise a
time-barred claim in order to reduce or eliminate the money owed
on the timely claim. See Rothensies v. Elec. Storage Battery
Co., 329 U.S. 296, 299-300 (1946). Equitable recoupment cannot
be used offensively to seek a money payment, but may be used
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defensively to offset an adjudicated deficiency. United States
v. Dalm, 494 U.S. 596, 611 (1990).
As a general rule, the party claiming the benefit of an
equitable recoupment defense must establish that it applies.
Rules 39, 142(a); Menard, Inc. v. Commissioner, 130 T.C. 54, 62
(2008). Thus, a taxpayer who raises equitable recoupment as a
defense must establish that it applies by satisfying three
elements:
First, a single transaction must be the taxable event
to be considered in recoupment. Second, the single
transaction must be subject to two taxes based upon
inconsistent legal theories. Finally, the statute of
limitations must bar recoupment, while either the
government’s asserted deficiency or the taxpayer’s
claim for a refund must be timely. * * *
Catalano v. Commissioner, 240 F.3d 842, 844 (9th Cir. 2001),
affg. T.C. Memo. 1998-447.
Petitioners assert that
by rejecting as untimely Petitioners’ individual refund
claims flowing through from the 2001 amended Form 1120S
for Revah Holdings (as well as the corresponding
shareholder returns and carryback claims for 1996 and
2001), Respondent is subjecting the same items
(inventory and uncollectible receivable) to two,
inconsistent taxes. * * * By assessing deficiencies in
1997 and 1998 resulting from the 1996 and 2000
examinations, while rejecting amended 2001 returns and
refund claims seeking these deductions, Respondent is
attempting to tax the same item or transaction twice.
Equitable recoupment does not apply if the multiple bases
for a tax assessment are not inconsistent. Cf. Bull v. United
States, 295 U.S. 247 (1935) (holding that where partnership
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profits had already been subject to estate tax, they could not be
further subject to income tax); Estate of Branson v.
Commissioner, 264 F.3d 904, 917 (9th Cir. 2001) (holding that a
single item was subjected to two taxes inconsistently where stock
was taxed both as corpus of estate and income to beneficiaries),
affg. 113 T.C. 6 (1999).
The audit adjustments of Revah Holdings for its years 1999
and 2000 related to inventory and bad debt that flowed through to
petitioners’ individual tax returns. These adjustments resulted
in a decrease in the reported NOLs that had previously been
carried back to earlier years including 1997 and 1998. When
these NOLs were initially applied, the tax liabilities for those
earlier years were reduced and petitioners had overpayments.
After the audit adjustments occurred and petitioners were
assessed tax deficiencies for 1997 and 1998, they submitted
amended returns for 1996, 1997, and 2001 to claim NOLs and
resulting refunds. Respondent rejected as untimely the amended
returns for 1996 and 2001 and the corresponding submitted refund
claims.
We have noted previously that when an NOL is claimed in the
wrong year, it is not allowable and there is no inconsistent
legal theory subjecting petitioners to two taxes. See Farmer v.
Commissioner, T.C. Memo. 1998-327 (finding no inconsistent
position when a taxpayer erroneously carried forward an NOL
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without properly electing to forgo the carryback period under
section 172(b)(3) and was disallowed both the loss carryforward
in a timely deficiency proceeding and a credit or refund from the
prior years to which the losses should have originally been
carried back). The audit adjustments of Revah Holdings are
timing matters and resulted in NOL claims that flowed through to
petitioners’ individual tax returns. Petitioners’ inability to
use the NOLs to reduce tax liabilities is not the result of the
inequitable application of inconsistent theories of taxation as
contemplated by the equitable recoupment doctrine. Petitioners
simply failed to make their claims within the period allowed by
statute. Respondent has not applied two taxes based on
inconsistent theories of taxation.
Petitioners contend that the Court should remand the cases
to the Appeals Office because equitable recoupment was not
properly considered as a defense to collection during the CDP
proceedings. We have the discretion to remand a case to the
Appeals Office for consideration of a matter that was
inadequately considered in the CDP hearing, and there are
circumstances in which a remand is appropriate to clarify a
verification under section 6330(c)(1). See Hoyle v.
Commissioner, 131 T.C. 197 (2008). Without addressing whether it
was an abuse of discretion for the Appeals Office not to consider
equitable recoupment as a defense to collection, we note that the
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Appeals Office’s failure to do so constitutes harmless error
because equitable recoupment does not apply. Thus, we conclude
that a remand to Appeals for a further hearing is not necessary
and would not be productive. See Perkins v. Commissioner, 129
T.C. 58 (2007); Lunsford v. Commissioner, 117 T.C. 183, 189
(2001).
Addition to Tax
Section 6651(a)(3) imposes an addition to tax for failure to
pay any amount, in respect of any tax required to be shown on a
tax return which is not so shown, within 21 calendar days, or 10
business days when the amount exceeds $100,000, from the date of
notice and demand of payment. This addition to tax is imposed
unless the taxpayer establishes that the failure to pay was due
to reasonable cause and not willful neglect. Id.; see Burke v.
Commissioner, T.C. Memo. 2009-282. According to the regulations:
A failure to pay will be considered to be due to
reasonable cause to the extent that the taxpayer has
made a satisfactory showing that he exercised business
care and prudence in providing for payment of his tax
liability and was nevertheless either unable to pay the
tax or would suffer an undue hardship * * * if he paid
on the due date. * * *
Sec. 301.6651-1(c)(1), Proced. & Admin. Regs.
Respondent determined that petitioners are liable for an
addition to tax under section 6651(a)(3) because they have not
paid the amounts owed according to the forms they signed agreeing
to income tax deficiencies resulting from the audit of Revah
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Holdings. Petitioners requested abatement of the addition to
tax, on the basis of reasonable cause. Respondent denied their
requests.
Petitioners argue that it was an abuse of discretion for the
Appeals Office not to grant their abatement requests on
reasonable cause grounds. Petitioners assert that because their
accountant took a position that ultimately no tax would be owed,
no additions to tax should accrue (additions to tax were assessed
before petitioners’ amended returns were filed). Petitioners
assert that they relied on their accountant and that “it was
reasonable, prudent, and consistent with ordinary business care
for Petitioners to rely on their advisor’s advice when addressing
the taxes in dispute.”
At no time have petitioners claimed that they were either
unable to pay the tax or would suffer undue hardship if they
paid. Nor have they otherwise established that they had
reasonable cause under section 301.6651-1(c), Proced. & Admin.
Regs. Petitioners are liable for the additions to tax under
section 6651(a)(3) for 1997, and respondent’s decisions not to
abate the additions to tax was not an abuse of discretion.
We conclude that petitioners have not shown that it was
arbitrary, capricious, or without sound basis in fact or law for
the Appeals Office to sustain respondent’s plans to levy
regarding petitioners’ unpaid tax liabilities and additions to
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tax for the years in issue. We have considered the other
arguments of the parties, and they are either without merit or
need not be addressed in view of our resolution of the issues.
To reflect the foregoing,
Decisions will be entered
for respondent.