T.C. Memo. 2011-24
UNITED STATES TAX COURT
ESTATE OF JOSEPH L. MANGIARDI, DECEASED, JOSEPH L. MANGIARDI
DECLARATION OF TRUST DATED FEBRUARY 13, 1998, MAUREEN G.
MANGIARDI, CO-TRUSTEE AND STATUTORY EXECUTOR, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 3958-08L. Filed January 27, 2011.
P filed a petition for judicial review pursuant to sec.
6330(d)(1), I.R.C., in response to R’s determination that
levy action was appropriate.
Held: R’s determination to maintain the levy to
protect the Government’s interest does not constitute
an abuse of discretion. R’s determination to proceed
with collection action is sustained.
W. Morgan Speer, for petitioner.
John T. Lortie, for respondent.
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MEMORANDUM OPINION
WHERRY, Judge: This case is before the Court on a petition
for judicial review of a Notice of Determination Concerning
Collection Action(s) Under Section 6320 and/or 6330 (notice of
determination).1 The Estate of Joseph Mangiardi, Deceased,
Joseph L. Mangiardi Declaration of Trust Dated February 13, 1998,
Maureen G. Mangiardi, Co-Trustee and Statutory Executor
(petitioner), seeks judicial review of respondent’s determination
to proceed with a proposed levy with respect to petitioner’s
estate tax liability. The sole issue for decision is whether
respondent’s determination to proceed with a proposed levy for
collection of unpaid estate tax liability constitutes an abuse of
discretion.
Background
This case was submitted fully stipulated pursuant to Rule
122. The parties’ stipulation of facts, with accompanying
exhibits, is incorporated herein by this reference. The estate’s
legal residence was Florida at the time the petition was filed.
The cotrustee of the previously referenced trust (trust) and
statutory executor of the estate, Ms. Maureen G. Mangiardi,
resided in the State of New York at the time the petition was
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code of 1986, as amended, and all Rule
references are to the Tax Court Rules of Practice and Procedure.
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filed. Dr. Joseph L. Mangiardi (decedent), who established the
trust, which was revocable during his lifetime, was a resident of
the State of Florida when he died on April 5, 2000.
On July 5, 2001, petitioner filed a Form 706, United States
Estate (and Generation-Skipping Transfer) Tax Return, showing an
unpaid estate tax liability of $2,621,810. The Form 706 stated
that the value of the gross estate was $8,050,042 but that most
of decedent’s assets were not subject to distribution thorough
probate. The nonprobate assets of decedent’s estate included the
trust, valued at $4,577,360 as of the alternate valuation date,
and individual retirement accounts (IRAs) decedent held totaling
$3,433,007. The IRAs ultimately passed by contract under
applicable State law to decedent’s nine children (the
beneficiaries).
Petitioner filed an amended Form 706 on December 28, 2001.
The Form 706 was selected for examination; however, no additional
assessment was made. Instead, an abatement of tax of $143,152
was made on December 22, 2003.
Pursuant to section 6161, petitioner requested a total of
six extensions to pay the estate tax liability, all of which
respondent granted. Petitioner’s final Form 4768, Application
for Extension of Time To File a Return and/or Pay U.S. Estate
(and Generation-Skipping Transfer) Taxes, was submitted in June
2004. The attachment to the Form 4768 requested an additional 12
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months until July 5, 2005, “to pay estate taxes under the
hardship provisions of Treasury Regulations 20.6161-1(a)(2) or in
the alternative, request is made under the reasonable cause
provisions of Treasury Regulations 20.6161-1(a)(1).” Petitioner
claimed that “the assets in the gross estate which must be
liquidated to pay the estate tax can only be sold at a sacrifice
price or in a depressed market, if the tax is to be paid on the
above referenced extended due date.” The unliquidated value of
the trust account as of May 31, 2004, was approximately
$542,713.60. Hence, “the liquidation of the securities in this
account at this time” would have resulted in a substantial loss
to the estate and the beneficiaries. The attachment to the Form
4768 provided a detailed description of the events that led to
the devaluation of the assets in the trust account.
On September 20, 2004, respondent approved petitioner’s
request for additional time to pay the estate tax liability, but
only until December 5, 2004, and advised petitioner that no
further extensions to pay the estate tax would be granted beyond
that date. Respondent’s letter warned:
The extension to pay is only being allowed until 12/5/2004
because, if the liability is not paid in full by that date,
the IRS will begin making transferee assessments against the
heirs of the estate that received assets and have not paid
to the IRS their portion of the estate tax and interest
owed. We can not provide any additional time because we
must ensure that the transferee assessments are made prior
to the assessment expiration date to make those assessments.
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The estate tax liability remained unpaid after the extended
deadline of December 5, 2004. On July 13, 2006, respondent sent
to petitioner a Final Notice of Intent to Levy and Notice of Your
Right to a Hearing (levy notice), for the unpaid estate tax
liability. Petitioner timely submitted Form 12153, Request for a
Collection Due Process Hearing (CDP hearing request), in response
to the levy notice.
Internal Revenue Service Office of Appeals (Appeals)
Settlement Officer David C. Varnerin (Mr. Varnerin), conducted
the CDP hearing through a series of conferences and/or
communications with petitioner commencing on October 11, 2007.
At the CDP hearing petitioner claimed that respondent was
precluded from collecting the estate tax liability from the IRA
beneficiaries because the time for making a transferee assessment
under section 6901 had expired. Accordingly, petitioner
requested that the estate tax liability be resolved through an
offer-in-compromise in which petitioner would offer a reduced
amount based on doubt as to collectibility of the remaining
assets in the trust.
Mr. Varnerin sought legal advice from respondent’s counsel
as to whether the unpaid estate tax liability could be collected.
Counsel responded via memo dated December 5, 2007 (counsel’s
memo), stating that the estate tax liability could be collected
either from the executor/personal representative under 31 U.S.C.
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section 3713 or from the beneficiaries by enforcing the estate
tax lien under section 6324(a)(2) without a prior assessment
against the transferees under section 6901.
On January 11, 2008, respondent sustained the proposed levy
action and issued to petitioner a notice of determination. In
issuing the notice of determination, Mr. Varnerin relied on
counsel’s memo but made a clerical error by stating that an
assessment could be made against transferee/beneficiaries under
section 6901. Mr. Varnerin intended that the notice of
determination state that a lawsuit could be brought against the
transferee/beneficiaries under section 6324(a)(2). On February
14, 2008, petitioner filed a petition in this Court to review
respondent’s intended collection action.
Discussion
I. Section 6161 Extension of Time To Pay Estate Tax Liability
The Commissioner may, pursuant to section 6161(a)(2), for
reasonable cause upon request of the executor extend the time for
payment of the tax shown on the estate tax return, for a
reasonable period not in excess of 10 years. The extension may
be granted in up to 12-month chunks if “an examination of all the
facts and circumstances discloses that such request is based upon
reasonable cause.” Sec. 20.6161-1(a)(1), Estate Tax Regs. Under
the regulations prescribed by the Commissioner, if “the district
director finds that payment on the due date * * * would impose
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undue hardship upon the estate,” he may extend the payment due
date as detailed in the applicable regulations.2 Sec. 20.6161-
1(a)(2)(i), Estate Tax Regs. “[U]ndue hardship” involves more
than mere inconvenience. A taxpayer claiming undue hardship must
show that the estate would sustain a very substantial and severe
financial loss if forced to pay a tax on the due date; i.e., that
“The assets in the gross estate which must be liquidated to pay
the estate tax can only be sold at a sacrifice price or in a
depressed market if the tax is to be paid when otherwise due.”
Sec. 20.6161-1(a)(2)(ii), Example (2), Estate Tax Regs.
A Federal agency is bound to follow its own regulations.
Twp. of S. Fayette v. Allegheny Cnty. Hous. Auth., 27 F. Supp. 2d
582, 595 (W.D. Pa. 1998) (citing United States v. Nixon, 418 U.S.
683, 695-696 (1974)), affd. without published opinion 185 F.3d
863 (3d Cir. 1999). “An agency of the government must
scrupulously observe rules, regulations, or procedures which it
has established. When it fails to do so, its action cannot stand
2
While Congress amended sec. 6161(a)(2) in the Tax Reform
Act of 1976, Pub. L. 94-455, sec. 2004(c), 90 Stat. 1867, to
substitute the words “reasonable cause” for “undue hardship”, the
regulations have never been updated to reflect this change.
Nevertheless, we refer to them here because the legislative
history indicates clearly that reasonable cause is intended to be
a less restrictive standard than undue hardship. Thus, one who
would satisfy the latter should also satisfy the former test.
Staff of Joint Comm. on Taxation, General Explanation of the Tax
Reform Act of 1976, at 555-558 (J. Comm. Print 1976), 1976-3 C.B.
(Vol. 2) 1, 555-558.
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and courts will strike it down.” United States v. Heffner, 420
F.2d 809, 811 (4th Cir. 1969).
Respondent claimed he could not grant petitioner any
additional time to pay the estate tax liability beyond December 5,
2004, because he needed to make transferee assessments against the
heirs of the estate, i.e., the beneficiaries, before the section
6901 assessment expiration date. However, respondent has never
made such assessments and now asserts that a transferee assessment
under section 6901 is not required before personal liability can
be imposed under section 6324(a)(2).
If respondent’s assertion is correct, then respondent did not
properly apply his own regulations under section 6161. Those
regulations regarding undue hardship and reasonable cause should
have been fully considered in September 2004 before denying
petitioner’s request for a 12-month extension to pay the estate
tax liability and announcing that no further extensions would be
granted without regard to any facts which might exist in the
future. However, the record indicates that respondent made no
such consideration. Instead, he did not fully allow the requested
extension and prematurely denied any additional requests by
petitioner under section 6161 for an extension to pay the estate
tax liability.
On the inconsistent and poorly developed record before us, we
are unable to decide whether respondent abused his discretion in
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denying petitioner’s request for an extension of time to pay the
estate tax liability.3 However, given that the maximum allowable
extension of time under section 6161(a)(2) (10 years) expired on
January 5, 2011, remanding the case to Appeals for further
consideration of this issue would prove unproductive, as the issue
is now moot.
II. Levy Action
Section 6331(a) authorizes the Commissioner to levy upon
property or property rights of a taxpayer liable for taxes who
fails to pay those taxes within 10 days after a notice and demand
for payment is made. Section 6331(d) provides that the levy
authorized in section 6331(a) may be made with respect to unpaid
tax liability only if the Commissioner has given written notice to
the taxpayer 30 days before the levy. Section 6330(a) requires
the Commissioner to send a written notice to the taxpayer of the
amount of the unpaid tax and of the taxpayer’s right to a section
6330 hearing at least 30 days before the first levy is made.
If an administrative hearing is requested in a levy case, the
hearing is to be conducted by Appeals. Sec. 6330(b)(1). At the
hearing the Appeals officer conducting it must verify that the
3
The Court also previously denied respondent’s May 15, 2008,
motion for summary judgment, which was predicated on essentially
the same facts as those in the stipulation which accompanied the
Rule 122 motion. In denying that motion, Judge Thornton noted
that there were material factual questions still unresolved and
thus summary judgment was inappropriate at that time.
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requirements of any applicable law or administrative procedure
have been met. Sec. 6330(c)(1).
A taxpayer may raise any relevant issue relating to the
unpaid tax or the proposed levy, including a spousal defense or
collection alternatives such as an offer-in-compromise or an
installment agreement. Sec. 6330(c)(2); sec. 301.6330-1(e)(1),
Proced. & Admin. Regs. Following the hearing, the Appeals officer
must determine, among other things, whether the proposed
collection action should proceed. In making the determination the
Appeals officer shall take into consideration: (1) Whether the
requirements of all applicable laws and administrative procedures
have been satisfied; (2) any relevant issues raised by the
taxpayer during the section 6330 hearing; and (3) whether the
proposed collection action balances the need for efficient
collection of taxes with the taxpayer’s legitimate concern that
any collection action be no more intrusive than necessary. Sec.
6330(c)(3).
This Court has jurisdiction to review the Appeals officer’s
determination. Sec. 6330(d)(1). Where the taxpayer’s underlying
liability was not properly at issue in the hearing, we review the
determination for abuse of discretion. Sego v. Commissioner, 114
T.C. 604, 610 (2000); Goza v. Commissioner, 114 T.C. 176, 181-182
(2000). An Appeals officer’s determination is not an abuse of
discretion unless the determination is arbitrary, capricious, or
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without sound basis in law or fact. Giamelli v. Commissioner, 129
T.C. 107, 111 (2007); Freije v. Commissioner, 125 T.C. 14, 23
(2005).
Petitioner claims that respondent applied the law erroneously
in sustaining the collection action and improperly determined that
a section 6901 assessment was not required before instituting
collection action against the beneficiaries under section
6324(a)(2). Petitioner further argues that respondent abused his
discretion by “refusing to consider any compromise” and denying
petitioner’s offer-in-compromise based on doubt as to
collectibilty.
Respondent argues that Mr. Varnerin did not abuse his
discretion by upholding the proposed collection action against
petitioner because respondent can collect the full estate tax
liability from the beneficiaries pursuant to section 6324(a)(2)
without a prior assessment against them under section 6901.
Respondent claims that any erroneous application of law was
harmless error and that Mr. Varnerin verified that respondent
followed all relevant legal and administrative procedures
regarding the collection of the estate tax liability before making
his determination to sustain the levy.
A. Section 6901 Assessment
Both petitioner’s and respondent’s arguments turn on whether
a section 6901 assessment is required before the initiation of
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collection action under section 6324(a)(2). Few courts have
considered this issue directly; however, the Courts of Appeals for
the Third Circuit and the Tenth Circuit have held that respondent
may collect estate tax from a transferee pursuant to section
6324(a)(2) without a prior assessment against the transferee under
section 6901. United States v. Geniviva, 16 F.3d 522, 525 (3d
Cir. 1994); United States v. Russell, 461 F.2d 605, 607 (10th Cir.
1972).
This Court has found those cases to be persuasive and well
reasoned. Ripley v. Commissioner, 102 T.C. 654, 659 (1994). In
its holding in United States v. Geniviva, supra at 525, the Court
of Appeals for the Third Circuit noted “a certain sorrow that what
seems inherently unfair is also quite in accordance with the law”.
We also sympathize with the beneficiaries of decedent’s estate in
that years later they find themselves at risk of forfeiting their
inheritance without prior notice, especially after respondent had
ample opportunity to make assessments against them. Nevertheless,
as discussed above it has previously been determined that a
section 6901 assessment is not required before initiation of
collection action under section 6324(a)(2).
B. Respondent’s Denial of Petitioner’s Offer-in-Compromise
Among the issues that may be raised at Appeals and are
reviewed for abuse of discretion are “offers of collection
alternatives” such as offers-in-compromise. Sec.
6330(c)(2)(A)(iii). The Court reviews the Appeals officer’s
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rejection of an offer-in-compromise to decide whether the
rejection was arbitrary, capricious, or without sound basis in
fact or law and therefore an abuse of discretion. Murphy v.
Commissioner, 125 T.C. 301, 320 (2005), affd. 469 F.3d 27 (1st
Cir. 2006); Woodral v. Commissioner, 122 T.C. 19, 23 (1999).
Section 7122(a) authorizes the Commissioner to compromise any
civil case arising under the internal revenue laws. In general,
the decision to accept or reject an offer, as well as the terms
and conditions agreed to, are left to the discretion of the
Commissioner. Sec. 301.7122-1(c)(1), Proced. & Admin. Regs.
However, regulations promulgated under section 7122 provide: “No
offer to compromise may be rejected solely on the basis of the
amount of the offer without evaluating that offer under the
provisions” of the law, regulations, and the Commissioner’s
“policies and procedures regarding the compromise of cases.” Sec.
301.7122-1(f)(3), Proced. & Admin. Regs.
The grounds for compromise of a tax liability are doubt as to
liability, doubt as to collectibility, and promotion of effective
tax administration. Sec. 301.7122-1(b), Proced. & Admin. Regs.
Petitioner based the offer-in-compromise on doubt as to
collectibility, which “exists in any case where the taxpayer’s
assets and income are less than the full amount of the liability.”
Sec. 301.7122-1(b)(2), Proced. & Admin. Regs.
The Commissioner will generally compromise a liability on the
basis of doubt as to collectibility only if the liability exceeds
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the taxpayer’s reasonable collection potential; “i.e., that
amount, less than the full liability, that the IRS could collect
through means such as administrative and judicial collection
remedies”. Murphy v. Commissioner, supra at 309-310. The
Commissioner has no duty to negotiate with a taxpayer before
rejecting the taxpayer’s offer-in-compromise. Fargo v.
Commissioner, 447 F.3d 706, 713 (9th Cir. 2006), affg. T.C. Memo.
2004-13; Catlow v. Commissioner, T.C. Memo. 2007-47, affd. in part
and vacated in part sub nom. Keller v. Commissioner, 568 F.3d 710
(9th Cir. 2009).
Petitioner argues that the reasonable collection potential
should not include any amount which respondent could collect from
the beneficiaries through an action in equity under section
6324(a)(2) because the statute of limitations for making a
transferee assessment under section 6901 has expired. However,
this Court determined supra that respondent is not required to
make a section 6901 assessment before initiating collection action
under section 6324(a)(2). Therefore, any amount of the unpaid
estate tax liability that respondent could collect from the
beneficiaries should be included in petitioner’s reasonable
collection potential; i.e., the amount of the IRA distributions.
Petitioner offered the remaining assets in the estate
(approximately $700,000) as an offer-in-compromise; however,
respondent determined petitioner’s reasonable collection potential
to be at least $3 million given that the beneficiaries received
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$3,433,007 in IRA distributions. Because petitioner did not offer
an acceptable amount, respondent did not abuse his discretion in
rejecting petitioner’s offer-in-compromise.
C. Harmless Error
If infected by an error of law, the determination of the
Appeals officer may be set aside. Swanson v. Commissioner, 121
T.C. 111, 119 (2003); Perkins v. Commissioner, T.C. Memo. 2008-
103. However, if the error is harmless and causes no prejudice or
does not affect the ultimate determination in the case, the Court
should not find an abuse of discretion. See, e.g., Perkins v.
Commissioner, 129 T.C. 58 (2007); Boyd v. Commissioner, 322 F.
Supp. 2d 1229 (D.N.M. 2004), affd. 121 Fed. Appx. 348 (10th Cir.
2005).
None of respondent’s questionable actions, as of the present
time, prejudice petitioner or affect respondent’s conclusion that
a lawsuit can be brought against the beneficiaries under section
6324(a)(2) to collect the unpaid estate tax liability.
The facts do not establish a currently existing abuse of
discretion on respondent’s part. The Court will therefore sustain
respondent’s proposed collection actions.
The Court has considered all of petitioner’s contentions,
arguments, requests, and statements. To the extent not discussed
herein, the Court concludes that they are meritless, moot, or
irrelevant.
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To reflect the foregoing,
Decision will be entered
for respondent.