T.C. Memo. 2011-120
UNITED STATES TAX COURT
ION AND PAULINA SEMEN, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 11577-09L. Filed June 2, 2011.
Ion and Paulina Semen, pro sese.
Robert H. Berman, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
VASQUEZ, Judge: Pursuant to section 6330(d)(1),1
petitioners seek review of respondent’s Appeals Office’s
(Appeals) determination to treat petitioners’ outstanding Federal
income tax liabilities for 2001 and 2002 as currently not
1
All section references are to the Internal Revenue Code,
and all Rule references are to the Tax Court Rules of Practice
and Procedure.
- 2 -
collectible (CNC) and to not proceed with collection activity.
The issues for decision are: (1) Whether petitioners are liable
for failure to timely pay additions to tax under section
6651(a)(3) for 2001 and 2002; and (2) whether Appeals’
determination constitutes an abuse of discretion.
FINDINGS OF FACT
There are no stipulations of facts. However, respondent’s
Exhibits 1-R through 6-R and petitioners’ Exhibit 7-P were
received in evidence and are incorporated herein by this
reference. Petitioners resided in California at the time they
filed their petition.
Petitioners’ 2001 and 2002 tax years previously were before
the Court on petitions for redetermination of deficiencies. On
April 19, 2007, the Court entered a stipulated decision setting
forth an agreed-upon deficiency in petitioners’ 2001 Federal
income tax of $15,780 and an addition to tax pursuant to section
6651(a)(1) of $708.75. On April 17, 2007, the Court entered a
stipulated decision setting forth an agreed-upon deficiency in
petitioners’ 2002 Federal income tax of $8,516 and an addition to
tax pursuant to section 6651(a)(1) of $1,115.25. Both stipulated
decisions stated that interest would be assessed on the
deficiencies and additions to tax as provided by law.
In August 2007 respondent assessed petitioners’ 2001 and
2002 Federal income tax liabilities in the amounts stated in the
- 3 -
decision documents. Respondent then mailed to petitioners
statutory notices of balance due covering the foregoing
assessments (notice and demand letter). Petitioners did not pay
their liabilities, and in February 2008 respondent mailed to
petitioners a Final Notice of Intent to Levy and Notice of Your
Right to a Hearing (levy notice). The levy notice included an
account summary showing that petitioners owed “late payment
[penalties]” of $946.80 and $420.75.2 The levy notice explained
that petitioners had a right to request a hearing with Appeals to
challenge the proposed collection action and to discuss payment
method options by submitting Form 12153, Request for a Collection
Due Process or Equivalent Hearing.
Petitioners timely submitted Form 12153, on which Mr. Semen
stated: “The decision made by the United States Tax Court on the
amount owed for 2001 and 2002 does not match what the I.R.S. has
sent to me. I am asking that they fix it. The U.S. Tax Court
decision also states there is no penalty due.” On July 11, 2008,
Appeals sent to petitioners a letter with copies of the
stipulated decisions for 2001 and 2002 and petitioners’ account
transcripts for 2001 and 2002.
Appeals and petitioners held a telephone conference to
discuss the proposed collection activity. Petitioners argued
2
The late payment penalties referred to in the account
summary were failure to timely pay additions to tax under section
6651(a)(3).
- 4 -
that the stipulated decisions for 2001 and 2002 stated that they
were not liable for a penalty, yet the account summary included
with the levy notice showed that petitioners owed late payment
penalties. Petitioners did not offer any collection
alternatives. However, Appeals analyzed petitioners’ financial
situation and determined that their 2001 and 2002 liabilities
were eligible for CNC status.3
On February 6, 2009, Appeals sent to petitioners a letter
informing them that respondent added only the section 6651(a)(1)
“penalties” petitioners agreed to.4 The letter also explained
the possibility of CNC status and asked petitioners whether they
would accept this option. Petitioners did not respond, and
Appeals issued a notice of determination stating that
petitioners’ liabilities would be treated as CNC and levy action
was not appropriate. Petitioners then filed a petition with the
Court stating that they disagree with “interest and penalty”.5
3
Appeals determined that petitioners’ monthly expenses
exceeded their monthly income by $960. Appeals calculated
petitioners’ income by averaging the amounts of income reported
on petitioners’ 2005, 2006, and 2007 Federal income tax returns.
4
It is not clear whether Appeals explained to petitioners
why they were liable for the sec. 6651(a)(3) additions to tax.
5
With respect to petitioners’ disagreement with
“interest”, it is not clear whether petitioners are arguing that
interest should begin to accrue on the date they signed the
decision documents and not from the date petitioners’ 2001 and
2002 tax liabilities were originally due, see sec. 6601(a),
(e)(2)(B), or whether petitioners feel that no interest should be
(continued...)
- 5 -
OPINION
Section 6330(a) provides that the Secretary shall furnish
taxpayers with written notice of their right to a hearing before
any property is levied upon. Section 6330(a) and (b) further
provides that the taxpayer may request administrative review of
the matter (in the form of a hearing) within a 30-day period.
Pursuant to section 6330(c)(2)(A), a taxpayer may raise at
the section 6330 hearing any relevant issue with regard to the
Commissioner’s collection activities, including spousal defenses,
challenges to the appropriateness of the Commissioner’s intended
collection action, and alternative means of collection. Sego v.
Commissioner, 114 T.C. 604, 609 (2000); Goza v. Commissioner, 114
T.C. 176, 180 (2000). If a taxpayer received a statutory notice
of deficiency for the years in issue or otherwise had the
opportunity to dispute the underlying tax liability, the taxpayer
is precluded from challenging the existence or amount of the
underlying tax liability. Sec. 6330(c)(2)(B); Sego v.
Commissioner, supra at 610-611; Goza v. Commissioner, supra at
182-183. The phrase “underlying tax liability” includes the tax
5
(...continued)
charged. At trial the Court explained to petitioners that they
had agreed to the assessments of interest by signing the
stipulated decisions. The Court also explained that Congress
determines when interest begins to accrue and at what rate, not
the Court or the Commissioner.
- 6 -
deficiency, additions to tax, penalties, and statutory interest.
Katz v. Commissioner, 115 T.C. 329, 339 (2000).
Petitioners received notices of deficiency for 2001 and
2002, challenged the Commissioner’s determinations for each year
before the Court, and agreed to the stipulated decisions for each
year. Accordingly, they cannot challenge the existence or amount
of the underlying liabilities for the years at issue. See sec.
6330(c)(2)(B); Sego v. Commissioner, supra at 610-611; Goza v.
Commissioner, supra at 182-183. With respect to the section
6651(a)(3) additions to tax, however, petitioners did not have a
prior opportunity to dispute that determination. Thus,
petitioners were entitled to challenge the section 6651(a)(3)
additions to tax during the section 6330 hearing and to litigate
them here. See Burke v. Commissioner, T.C. Memo. 2009-282.
Where the validity of the underlying tax liability is
properly at issue, the Court will review the matter de novo.
Sego v. Commissioner, supra at 610; Goza v. Commissioner, supra
at 181-182. The Court reviews any other administrative
determination regarding the proposed levy action for abuse of
discretion. Sego v. Commissioner, supra at 610; Goza v.
Commissioner, supra at 182. Appeals abuses its discretion if its
determination “has been exercised arbitrarily, capriciously, or
without sound basis in fact.” Mailman v. Commissioner, 91 T.C.
1079, 1084 (1988).
- 7 -
I. Petitioners’ Liability for the Section 6651(a)(3) Additions
to Tax
Section 6651(a)(3) imposes an addition to tax in the case of
a failure to pay a tax required to be shown on a return, which
was not so shown, within 21 days after the date of the IRS’
notice and demand letter. The Commissioner has the burden of
production with respect to a taxpayer’s liability for the
addition to tax. Sec. 7491(c). To meet that burden, respondent
must come forward with sufficient evidence indicating that it is
appropriate to impose the addition to tax. See Higbee v.
Commissioner, 116 T.C. 438, 446 (2001). Petitioners failed to
pay the tax required to be shown on their 2001 and 2002 returns
within 21 days after the date of the IRS’ notice and demand for
payment. Therefore, respondent has met his burden.
However, the section 6651(a)(3) addition to tax is not
imposed if the taxpayer proves that the failure to pay is due to
reasonable cause and not willful neglect. Sec. 301.6651-1(a)(3),
Proced. & Admin. Regs. Reasonable cause is shown if the taxpayer
“exercised ordinary 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.
Whether the taxpayer has shown reasonable cause is a question of
fact to be decided on the entire record. Duncan v. Commissioner,
T.C. Memo. 2000-269.
- 8 -
We believe petitioners’ failure to timely pay is due to
reasonable cause and not willful neglect. At the time
petitioners’ 2001 and 2002 tax liabilities became due,
petitioners’ monthly expenses (as adjusted by Appeals) exceeded
their monthly income by $960. Petitioners were therefore unable
to pay the tax liabilities on the due dates and would have
suffered an undue hardship if they had. Significantly, this
inability to pay is the reason Appeals treated petitioners’
outstanding liabilities as CNC. Accordingly, we find that
petitioners are not liable for the section 6651(a)(3) additions
to tax.
II. Whether Appeals Abused Its Discretion
Petitioners did not argue that Appeals abused its discretion
in treating petitioners’ liabilities as CNC and determining that
collection activity should not proceed, nor did they offer any
other collection alternatives. In making its determination,
Appeals verified that the requirements of all applicable law and
administrative procedure had been met.
Under these circumstances, Appeals did not abuse its
discretion when it determined that petitioners’ liabilities
should be reported as CNC and collection activity should not
proceed.
- 9 -
To reflect the foregoing,
An appropriate decision
will be entered.