Estate of Anthony La Sala v. Comm'r

T.C. Memo. 2016-42

UNITED STATES TAX COURT

ESTATE OF ANTHONY LA SALA, DECEASED, KENNETH LA SALA,
EXECUTOR, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 20773-13L. Filed March 8, 2016.

Richard Joseph Sapinski, for petitioner.

Robert W. Mopsick, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

LAUBER, Judge: In this collection due process (CDP) case we are asked to

review, pursuant to sections 6320(c) and 6330(d)(1),1 the determination by the In-

1
All statutory references are to the Internal Revenue Code in effect at all
relevant times. We round all monetary amounts to the nearest dollar.
 -2-

[*2] ternal Revenue Service (IRS or respondent) to uphold a notice of Federal tax

lien (NFTL) filing. The lien relates to unpaid interest on a Federal gift tax liability

for the taxable year 2003. The Estate of Anthony La Sala, through executor Ken-

neth La Sala, agreed that it was liable for this gift tax when it settled an earlier Tax

Court case, Estate of La Sala v. Commissioner, T.C. Dkt. No. 12409-08 (stipulated

decision entered October 27, 2010). The estate contends that, under the terms of

that settlement, no interest was payable on the 2003 gift tax liability. We disagree

and uphold respondent’s determination.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. The stipulation of

facts and the attached exhibits are incorporated by this reference.

In August 2001 Anthony La Sala (Anthony), then age 93, formed ALS Fam-

ily LLC (ALSF). In exchange for a 100% ownership interest, Anthony contribu-

ted to ALSF cash, marketable securities, and fractional equity shares in two other

companies: a 25% share in La Sala Holding Co. and a 10% share in M.H. Partners

(fractional equity shares). On January 1, 2003, Anthony, then age 95, sold to his

daughter and his two grandchildren, in exchange for an annuity, a 99% interest in

ALSF. Anthony retained a 1% interest.
 -3-

[*3] In exchange for his 99% interest, Anthony was to receive an annuity of

$913,986 per year to be paid for the rest of his life. For purposes of effecting this

transaction, Anthony valued the transferred 99% interest at $2,781,900 and his

remaining 1% interest at $28,100. In determining these values he applied dis-

counts of 50% and 35%, respectively, to the values of the fractional equity shares

held by ALSF.

Anthony died on January 9, 2004, having received one annuity payment,

which was made by his daughter and his grandchildren with funds distributed to

them by ALSF. Kenneth La Sala, as executor of Anthony’s estate, timely filed

Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return.

The Form 706 reported Anthony’s 1% interest in ALSF as an asset of the estate

with a value of $28,100. The Form 706 reported the sale of his 99% interest on

Schedule I, Annuities. The estate took the position that Anthony’s life expectancy

exceeded one year on January 1, 2003; if that were so, the private annuity trans-

action would be respected and the value of the 99% interest in ALSF would be

excluded from the gross estate. See sec. 1.7520-3(b)(3), Income Tax Regs.

The IRS selected the estate’s return for examination and determined a defi-

ciency in Federal estate tax of $1,999,045. The IRS concluded that the estate had

used excessive discounts in valuing the fractional equity shares held by ALSF and
 -4-

[*4] that the date-of-death value of its assets was $4,368,534. The IRS further

determined that, under section 2036, the full value of ALSF’s assets was in-

cludible in the gross estate as opposed to the 1% interest the estate had reported.

The estate timely petitioned this Court for review of the estate tax defici-

ency, Estate of La Sala v. Commissioner, Docket No. 12409-08, and that case was

calendared for trial in December 2009. Robert J. Alter served as counsel to the

estate, and Joseph Boylan represented respondent. Before trial the parties reached

a basis of settlement. The IRS conceded that Anthony, as of January 1, 2003, was

reasonably expected to survive for at least one year. The estate conceded that the

fair market values of the fractional equity shares held by ALSF were understated

by the claiming of excessive discounts. And the parties agreed that, to the extent

the value of the transferred 99% interest exceeded the consideration paid therefor--

i.e., the value of the annuity--the excess constituted under section 2503 a taxable

gift to Anthony’s daughter and grandchildren for the taxable year 2003.

Mr. Boylan attended the calendar call and lodged with the Court a stipula-

tion of settled issues. Although this stipulation recited that the parties had re-

solved all issues in the case, it did not state all terms of the settlement explicitly.

While reciting the parties’ agreement that the values of the fractional equity shares

held by ALSF “were understated by claiming excessive discounts of 35% * * *
 -5-

[*5] and 50%,” the stipulation did not specify what discounts were appropriate.

And while reciting the parties’ agreement that “the amount by which the

determined value of those two assets exceeds the consideration paid constitutes a

taxable gift pursuant to I.R.C. § 2503,” the stipulation did not specify the amount

of that taxable gift. Noting these omissions, the Court gave the parties 60 days to

file decision documents.

Before entry of decision, Mr. Boylan left respondent’s employ. Robert

Mopsick replaced him as IRS counsel in the case at docket No. 12409-08.

Because the terms of the stipulation did not explicitly resolve all relevant issues,

Mr. Mopsick initially questioned whether a settlement had actually been reached.

On June 4, 2010, the estate filed a motion for entry of decision seeking to enforce

the settlement. Representing that the parties had agreed to apply a 25% discount

in valuing the fractional equity shares held by ALSF, the estate urged the Court to

enter a decision “that there is a deficiency in Estate Tax due from the petitioner in

the amount of $177,418 and Gift Tax in the amount of $234,976.” The proposed

decision document stipulated that, “effective upon the entry of the decision by the

Court, petitioner waives the restriction contained in I.R.C. §6213(a) prohibiting

assessment and collection of the deficiency (plus statutory interest).”
 -6-

[*6] On June 24, 2010, Mr. Mopsick notified Mr. Alter of respondent’s conces-

sion that a settlement had indeed been reached, and the estate thereupon withdrew

its motion for entry of decision. The parties then began to exchange documents

and calculations to compute the estate tax deficiency and gift tax liability to which

the settlement gave rise. Employing a 25% discount for valuing the fractional

equity shares, the parties calculated a gift tax liability for taxable year 2003 of

$235,207. Although interest on that gift tax liability would have been a deductible

expense in computing the estate tax, neither the estate’s nor respondent’s calcula-

tions took account of any interest on the gift tax.

In September 2010 Mr. Mopsick requested that the estate execute and file a

Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return,

reporting the agreed gift tax liability. In October 2010 the estate executed and sent

to the IRS a Form 709 reporting a taxable gift for 2003 of $1,025,343 and a gift

tax liability of $235,207. This gift tax return included the following notation:

“The filing of this return is conditioned on the concurrent filing of a Decision with

the U.S. Tax Court in Estate of Anthony La Sala, Docket No. 12409-08, reflecting

an estate tax settlement reached by the Estate and the Internal Revenue Service.”

The parties’ attorneys executed a decision document showing a recalculated

estate tax deficiency of $160,176. This deficiency reflected the treatment of the
 -7-

[*7] 2003 gift as a prior taxable gift and the allowance of deductions for additional

attorney’s fees. This Court on October 27, 2010, entered a stipulated decision

accordingly. (This decision did not mention the 2003 gift tax liability because the

notice of deficiency in the case at docket No. 12409-08 determined a deficiency in

estate tax only.) On November 15, 2010, the estate sent the IRS a check for

$230,838, representing the estate tax due plus interest of $70,662, thus discharging

the estate tax liability in full.

On November 18, 2010, the estate sent the IRS a check for $235,207, repre-

senting the 2003 gift tax liability but without interest. On January 3, 2011, the

IRS processed the Form 709 and assessed the gift tax as reported plus penalties for

late filing and late payment. That same day the IRS Cincinnati Service Center sent

the estate a Notice CP161, Request for Payment--Federal Gift Tax, showing an

unpaid balance due of $484,683. This comprised gift tax of $235,207, a late filing

penalty of $52,922, a late payment penalty of $58,802, and statutory interest (in-

cluding interest on penalties) of $137,752.

On February 1, 2011, counsel for the estate sent a letter to the IRS

Cincinnati Service Center, noting that the gift tax liability had already been paid

and objecting to the imposition of interest and penalties. That letter apparently
 -8-

[*8] elicited no response. On January 17, 2012, the IRS sent the estate by certified

mail a Notice of Federal Tax Lien Filing and Your Right to a Hearing.

The estate timely requested a CDP hearing and, on June 22, 2012, a settle-

ment officer (SO) from the IRS Appeals Office conducted a telephone hearing

with counsel for the estate. The estate pointed out that the gift tax liability had

already been paid; contended that no penalties were justified because the gift tax

was paid pursuant to a settlement; and argued that no interest was due because the

gift tax was allegedly a mere “notational amount” used in calculating the estate tax

deficiency. The estate did not request a collection alternative.

The SO verified that the gift tax for 2003 had been properly assessed and

that the provisions of applicable law and administrative procedure had been fol-

lowed. She ensured that the estate’s gift tax payment was correctly posted to its

account as of November 18, 2010. She abated in full the late filing and late pay-

ment penalties, as well as all interest attributable to the penalties. However, she

determined that the estate was liable for statutory interest on the 2003 gift tax lia-

bility and found no justification for abating that interest. On August 6, 2013, the

IRS issued the estate a notice of determination sustaining the NFTL. Kenneth La

Sala, as executor of the estate then residing in New York, timely petitioned for

review of that determination.
 -9-

[*9] OPINION

I. Standard of Review

Section 6330(d)(1) provides a person with the right to obtain Tax Court re-

view of an IRS administrative determination in a CDP case. Where the amount of

the taxpayer’s underlying tax liability is properly at issue, we review the IRS’ de-

termination de novo. Goza v. Commissioner, 114 T.C. 176, 181-182 (2000). Sec-

tion 6330(c)(2)(B) permits a taxpayer to challenge the existence or amount of his

underlying liability only if he did not receive a notice of deficiency or otherwise

have a prior opportunity to contest it. We review the IRS’ determinations regard-

ing nonliability issues for abuse of discretion. Hoyle v. Commissioner, 131 T.C.

197, 200 (2008); Goza, 114 T.C. at 182.

The estate has not had a prior opportunity to contest its liability for interest

on the 2003 gift tax, and the estate properly raised during the CDP hearing the

question whether interest was properly imposed. We will examine de novo the

estate’s liability for interest and review the SO’s other determinations for abuse of

discretion. See Urbano v. Commissioner, 122 T.C. 384, 390-391 (2004). Abuse

of discretion exists when a determination is arbitrary, capricious, or without sound

basis in fact or law. See Murphy v. Commissioner, 125 T.C. 301, 320 (2005),

aff’d, 469 F.3d 27 (1st Cir. 2006).
 - 10 -

[*10] II. The Estate’s Liability for Interest

Section 2001(a) imposes a tax on the transfer of the taxable estate of a dece-

dent who is a U.S. citizen or resident. The estate tax is computed by first deter-

mining a tentative tax on the sum of the taxable estate and adjusted taxable gifts

and then by reducing that tentative tax by the amount of gift tax that would have

been payable on those gifts, using the rates in effect at the decedent’s death. Sec.

2001(b). The term “adjusted taxable gifts” means the total amount of taxable gifts

(within the meaning of section 2503) made by the decedent after December 31,

1976, other than gifts that are includible in the gross estate. See sec. 2001(b)(2).

Section 2501(a) imposes a tax on the transfer of property by gift during the

year. Interest accrues on a Federal gift tax liability at the rate specified by section

6621 from the last date prescribed for payment until the date on which the tax is

actually paid. Sec. 6601(a). Unless a statutory exception applies, the courts lack

discretion to excuse a taxpayer from payment of interest. See Johnson v. United

States, 602 F.2d 734, 738 (6th Cir. 1979). “Congress intended the United States to

have the use of the money lawfully due when it became due.” Manning v. Seeley

Tube & Box Co., 338 U.S. 561, 566 (1950). If a tax is not paid by the date pre-

scribed therefor, interest is assessed to compensate the Government for loss of the
 - 11 -

[*11] time value of money, irrespective of the reason for the late payment. See

Suffness v. United States, 974 F.2d 608, 610 (5th Cir. 1993).

A stipulation of settlement is a contract by which each party grants to the

other a concession of some rights as consideration for the rights secured. Saigh v.

Commissioner, 26 T.C. 171, 177 (1956). As a contract, a settlement is subject to

judicial interpretation as to its meaning in the light of the language used and the

circumstances surrounding its execution. Dorchester Indus. Inc. v. Commissioner,

108 T.C. 320, 330 (1997), aff’d, 208 F.3d 205 (3d Cir. 2000). In the absence of a

mutual mistake, an affirmative misrepresentation by one of the parties, or other

similar circumstances, this Court will enforce the settlement the parties reached.

See Stamm Int’l Corp. v. Commissioner, 90 T.C. 315, 322-325 (1988); McMullen

v. Commissioner, T.C. Memo. 2015-219, at *7-*9.

The estate asks us to interpret the stipulation of settlement to include, as an

implied term, that no interest would be due on the 2003 gift tax liability. The es-

tate advances two contentions to support that conclusion. Neither is persuasive.

First, the estate argues that it did not have, under the settlement agreement,

an actual delinquent gift tax liability for 2003. Rather, it says that the $235,207

figure was a mere “notational amount” that was used in calculating the estate tax

deficiency and generating an overall settlement of the estate tax case. The estate
 - 12 -

[*12] asserts that it filed the Form 709, not to acknowledge an actual gift tax

liability, but simply to create, at Mr. Mopsick’s request, an account entry to which

the $235,207 payment could be posted. In support of the latter argument, the

estate cites its notation on the Form 709 that “[t]he filing of this return is condi-

tioned on the concurrent filing of a Decision with the U.S. Tax Court * * * re-

flecting [the] estate tax settlement.”

We are not convinced. Through negotiations with IRS counsel the estate se-

cured a settlement ensuring that the private annuity transaction would be respec-

ted. In exchange for that concession, the estate conceded that it had undervalued

the fractional equity shares held by ALSF and that “the amount by which the de-

termined value of those two assets exceeds the consideration paid constitutes a

taxable gift pursuant to I.R.C. § 2503.” It is true that the 2003 gift, as a prior tax-

able gift, generated an input in calculating the estate tax. But it also established an

independent gift tax liability for the taxable year 2003; if that is not what the estate

intended, it should not have signed a stipulation conceding that Anthony had

made, on January 1, 2003, “a taxable gift pursuant to I.R.C. § 2503.” See Apple-

stein v. Commissioner, T.C. Memo. 1989-42, 56 T.C.M. (CCH) 1169, 1170-1171.

The estate voluntarily filed a Form 709 reporting a gift tax liability for 2003.

That this return was filed at the request of respondent’s counsel did not make it
 - 13 -

[*13] any less voluntary; the filing of this return was a necessary step in securing a

settlement that the estate desired to secure. The appended notation that the filing

of the gift tax return was conditioned on entry of a decision in the estate tax case

did not render the Form 709 a “non-return.” That notation simply indicated, cor-

rectly, that the estate’s reporting of a 2003 gift tax liability had as a quid pro quo

the concessions the IRS made in the estate tax case.

The estate’s explicit concession that Anthony made a taxable gift in 2003

established a gift tax liability for that year. That concession was binding even

though no gift tax liability was determined in the notice of deficiency commencing

the estate tax case. The estate owes interest on this gift tax liability, just as it

would owe interest on any other tax liability not paid at the prescribed time. Sec.

6601; see Gen. Dynamics Corp. v. United States, 562 F.2d 1201 (Ct. Cl. 1977).

Assuming arguendo that there was a delinquent gift tax liability for 2003,

the estate contends that the stipulation of settlement included an agreement that

this liability would not bear interest. This contention is equally unpersuasive.

There is nothing in the stipulation of settlement or the parties’ subsequent cor-

respondence addressing interest on the gift tax liability, much less evidencing a

mutual understanding that no interest would be due.
 - 14 -

[*14] Mr. Boylan at trial credibly testified to his belief that he lacked authority to

waive interest and that he could never have gotten approval for a settlement that

purported to waive interest. See Internal Revenue Manual pt. 35.8.2.5.1 (Aug. 11,

2004) (“The Service does not settle Tax Court cases by waiving statutory inter-

est.”). Mr. Alter, an experienced attorney on the other side of the negotiations,

testified that he was unaware of any other instance in which the IRS had waived

statutory interest as part of a settlement. Under these circumstances, we cannot

construe the stipulation of settlement to include as an implied term a waiver of

interest on the 2003 gift tax liability. See Smith v. Commissioner, T.C. Memo.

2009-33, 97 T.C.M. (CCH) 1134, 1137 (“In a tax deficiency suit, deficiency

interest is not at issue, and a settlement of the suit that makes no mention of

interest should not be construed to somehow settle the issue of interest sub

silentio.”).2

2
We have no occasion to decide whether the IRS would have the authority
to waive statutory interest in settling a Tax Court case. See Smith, 97 T.C.M.
(CCH) at 1137 & n.11 (“It is even theoretically possible, though it would be un-
usual, for the IRS to enter into a settlement in which it waives interest * * * .”
(citing Anthony v. United States, 987 F.2d 670, 674 (10th Cir. 1993))). Our hold-
ing is based on our finding that the parties to this settlement neither reached nor
expressed a mutual agreement that interest would be waived on the gift tax lia-
bility.
 - 15 -

[*15] The attorneys who represented the estate during 2009-2010 testified that

their internal calculations concerning the cost of the settlement left no room for

payment of interest on the gift tax liability. The evidence concerning their subjec-

tive understanding was ambiguous; for example, the motion for entry of decision

they filed in June 2010 asked this Court to find “a deficiency in * * * Gift Tax in

the amount of $234,976” and proposed to the waive restrictions on “assessment

and collection of the deficiency (plus statutory interest).” In any event, one party’s

unilateral misunderstanding or misapprehension of the cost of a settlement does

not justify reforming the settlement or setting it aside. See McMullen, at *7-*9;

Revell v. Commissioner, T.C. Memo. 2007-37, 93 T.C.M (CCH) 913, 914; Estate

of Mitchell v. Commissioner, T.C. Memo. 1993-110, 65 T.C.M. (CCH) 2157,

2159.

The estate contends that upholding its liability for interest on the 2003 gift

tax would be inequitable because it is now prevented by the statute of limitations

from claiming a deduction for that interest against the estate tax. Although we

have some sympathy for the estate’s position, the responsibility for claiming de-

ductions lies with the taxpayer. The estate’s failure to claim a timely deduction for

interest does not justify setting aside the statutory interest to which the Govern-

ment is entitled. See Carlson v. United States (In re Carlson), 126 F.3d 915, 920
 - 16 -

[*16] (7th Cir. 1997) (noting that a court may not use its equitable powers to

circumvent the statute’s mandatory imposition of interest).

III. Nonliability Issues

Having determined that statutory interest accrued as a matter of law on the

2003 gift tax liability, we now address whether the SO abused her discretion in

sustaining the NFTL. We accordingly consider whether she: (1) properly verified

that the requirements of applicable law and administrative procedure had been

met; (2) considered any relevant issues the estate raised; and (3) determined whe-

ther “any proposed collection action balances the need for the efficient collection

of taxes with the legitimate concern of * * * [the estate] that any collection action

be no more intrusive than necessary.” See sec. 6330(c)(3).

Our review of the record establishes that the SO conducted a thorough

review of the estate’s account, determined that the gift tax liability was properly

assessed, and verified that other requirements of applicable law and administrative

procedure were followed. In particular, the SO ensured that the estate’s gift tax

payment was properly credited to its account as of November 18, 2010; correctly

abated the penalties for late filing and late payment; and correctly abated all

interest associated with the penalties. The SO did not abuse her discretion in

declining to abate interest on the gift tax liability because there was no error or
 - 17 -

[*17] delay attributable to “erroneous or dilatory” performance of a ministerial or

managerial act by an officer or employee of the IRS. See sec. 6404(e)(1). Since

the estate did not request a collection alternative, the SO properly sustained the

NFTL as a means of collecting the unpaid interest on the 2003 gift tax liability.

To reflect the foregoing,

Decision will be entered for respondent.