T.C. Memo. 2019-53
UNITED STATES TAX COURT
JEVON KEARSE, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 14080-14L. Filed May 20, 2019.
Vivian D. Hoard, Scot A. Burton, and Robert B. Gardner III, for petitioner.
Ashley Y. Smith, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
ASHFORD, Judge: Petitioner commenced this collection due process
(CDP) case pursuant to sections 6320(c) and 6330(d)(1)1 in response to a
1
Unless otherwise indicated, all section references are to the Internal
Revenue Code in effect at all relevant times, and all Rule references are to the Tax
Court Rules of Practice and Procedure. Some monetary amounts are rounded to
(continued...)
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[*2] determination by the Internal Revenue Service (IRS) Office of Appeals
(Appeals) to uphold the filing of a notice of Federal tax lien (NFTL) relating to
petitioner’s unpaid Federal income tax liability for the 2010 taxable year. The
issue for consideration is whether Appeals’ determination to sustain the NFTL was
proper.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found. The stipulation of
facts, the supplemental stipulation of facts, and the attached exhibits are
incorporated herein by this reference. Petitioner resided in Florida when his
petition was filed with the Court.
Petitioner is a retired professional athlete, having played in the National
Football League from 1999 to 2010. His unpaid Federal income tax liability for
2010 stems in pertinent part from the IRS’ determination that a $1,359,000
deduction for a “business bad debt expense” he claimed on his Form 1040, U.S.
Individual Income Tax Return, for 2010 should be disallowed.2 A notice of
deficiency dated May 11, 2012, that was addressed to petitioner at his last known
1
(...continued)
the nearest dollar.
2
Petitioner now asserts (as he did during the CDP process) that he did not
suffer a business bad debt loss but rather a theft loss (of $1,679,500).
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[*3] address reflects that determination. Petitioner disputes proper mailing and
receipt of this notice of deficiency. The parties stipulated that respondent cannot
produce a United States Postal Service (USPS) Form 3877 to show proof of
mailing of the notice of deficiency or otherwise establish that it was delivered to
petitioner.
On November 5, 2012, the IRS assessed against petitioner the unpaid
balance of his 2010 Federal income tax liability which, as of that date, totaled
$432,015. On December 4, 2012, the IRS filed an NFTL in the appropriate place
and sent petitioner that same day a Letter 3172, Notice of Federal Tax Lien Filing
and Your Right to a Hearing Under IRC 6320, advising him that an NFTL had
been filed and of his right to request a hearing to appeal the collection action and
to discuss payment options.
In response to the Letter 3172, petitioner timely submitted Form 12153,
Request for a Collection Due Process or Equivalent Hearing (CDP hearing
request), along with Form 656-L, Offer in Compromise (Doubt as to Liability).
As reflected in the Form 656-L petitioner offered to pay $1, and in a document
attached to this form he explained the circumstances of his offer, including
asserting the lack of proper mailing and receipt of the May 11, 2012, notice of
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[*4] deficiency. On his CDP hearing request petitioner requested that a CDP
hearing be held with his authorized representative.
On May 6, 2014, after the Appeals officer assigned to petitioner’s CDP
hearing request conducted a CDP hearing with petitioner’s authorized
representative in which he was allowed to raise petitioner’s underlying tax
liability, Appeals sent petitioner a Notice of Determination Concerning Collection
Action(s) Under Section 6320 and/or 6330 sustaining the NFTL with respect to
petitioner’s outstanding 2010 income tax liability (notice of determination). A
summary detailing the matters considered by Appeals and its conclusions was
attached to the notice of determination and included the following explanations:
DISCUSSION AND ANALYSIS
a. Verification of legal and procedural requirements:
Appeals has obtained verification from the IRS office collecting the
tax that the requirements of any applicable law, regulation or
administrative procedure with respect to the proposed levy or NFTL
filing have been met. Computer records indicate that the notice and
demand, notice of intent to levy and/or notice of federal tax lien
filing, and notice of a right to a Collection Due Process hearing were
issued.
Assessment was properly made per IRC § 6201 for each tax and
period listed on the CDP notice.
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[*5] The notice and demand for payment letter was mailed to the
taxpayer’s last known address, within 60 days of the assessment, as
required by IRC § 6303.
There was a balance due when the CDP levy notice was issued or
when the NFTL filing was requested.
* * * * * * *
Collection followed all legal and procedural requirements and the
actions taken or proposed were appropriate under the circumstances.
b. Issues raised by the taxpayer
Collection Alternatives Offered by Taxpayer
You filed a Doubt as to Liability OIC. You were offered a reduction
to tax as a concession of 33% but would not agree to concede and the
OIC/DATL was rejected and returned to the Settlement Officer for
further review of any other alternatives to collection. No other
alternative was requested.
Challenges to the Existence of [sic] Amount of Liability
You disputed your liability stating that the amount due was the result
of theft. However, you offered no proof or further evidence that the
use of funds as loans was actually a theft. The loss did not qualify as
a Ponzi-scheme. You did not provide substantiation that the liability
was due to a bad debt deduction and failed to substantiate the debt as
claimed on your Schedule C for 12/2010. You were offered a
concession of 33% to settle the OIC/DATL. You did not agree to the
concession offered by Appeals. Your OIC is rejected.
You raised no other issues.
c. Balancing of need for efficient collection with taxpayer
concern that the collection action be no more intrusive than
necessary.
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[*6] The filing of a Notice of Federal Tax Lien is sustained. The
requirements of applicable law or administrative procedures have
been met and the action taken were appropriate under the
circumstances. The Settlement Officer had no prior involvement with
the liabilities under review.
A viable collection alternative could not be determined as you did not
furnish any financial information and delinquent returns requested.
You refused to agree to the OIC concession offered to you that would
reduce your liability and therefore, the liability for 12/2010 remains
unchanged. Your OIC was rejected. As a result you have failed to
show that the issuance of the Notice is overly intrusive or that a better
collection alternative is available; and therefore, the filing of the
Notice balances the efficient collection of the taxes with a concern
that the collection action be no more intrusive than necessary.
Petitioner timely filed a petition with this Court for review of the notice of
determination, disputing the notice of determination on the following grounds:
(1) Appeals erred in asserting that it properly mailed the May 11, 2012, notice of
deficiency; (2) Appeals erred in asserting that petitioner received a copy of the
notice of deficiency; and (3) Appeals erred in its discussion, analysis, and
conclusions with respect to the facts and law related to petitioner’s underlying tax
liability. In his answer respondent denied each of these alleged errors.
OPINION
Under section 6321, if any person liable to pay any tax neglects or refuses to
do so after notice and demand, the amount, including any interest, addition to tax,
or assessable penalty, shall be a lien in favor of the United States upon all property
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[*7] and rights to property, whether real or personal, belonging to such person.
The lien is perfected when the assessment is made. Szekely v. Commissioner,
T.C. Memo. 2013-227, at *7 (and cases cited thereat). However, the IRS’ filing of
an NFTL in the appropriate place ensures priority of the Federal tax lien over
positions of most competing creditors. See sec. 6323. Section 6320(a) requires
the Secretary (i.e., the IRS) to provide the person with written notice of and an
opportunity for an administrative hearing to review the propriety of the filing of
the NFTL.
If an administrative hearing is requested in a lien case, the hearing is to be
conducted by Appeals. Sec. 6320(b)(1). At the hearing the Appeals officer
conducting it must obtain verification that the requirements of applicable law and
administrative procedure have been met. Secs. 6320(c), 6330(c)(1). The taxpayer
may raise at the hearing any relevant issue relating to the unpaid tax or the
collection action, including spousal defenses, challenges to the appropriateness of
the collection action, and collection alternatives. Secs. 6320(c), 6330(c)(2)(A).
Following the hearing the Appeals officer must determine among other
things whether to sustain the filing of the NFTL. In reaching the determination the
Appeals officer must take into consideration: (1) whether the requirements of
applicable law and administrative procedure have been met, (2) all relevant issues
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[*8] raised by the taxpayer including offers of collection alternatives, such as an
offer-in-compromise, and (3) whether any collection action balances the need for
the efficient collection of taxes with the legitimate concern of the taxpayer that
collection be no more intrusive than necessary. Secs. 6320(c), 6330(c)(3); see also
Lunsford v. Commissioner, 117 T.C. 183, 184 (2001).
Sections 6320(c) and 6330(d)(1) grant this Court jurisdiction to review the
determination made by Appeals in a lien case. If the taxpayer files a timely
petition for such judicial review, the applicable standard of review depends on
whether the underlying tax liability is at issue. Where the taxpayer’s underlying
liability is properly at issue, the Court reviews the liability determination de novo.
Hoyle v. Commissioner, 131 T.C. 197, 199 (2008), supplemented by 136 T.C. 463
(2011); Sego v. Commissioner, 114 T.C. 604, 610 (2000); Goza v. Commissioner,
114 T.C. 176, 181-182 (2000). The Court reviews administrative determinations
made by Appeals regarding nonliability issues for abuse of discretion. Hoyle v.
Commissioner, 131 T.C. at 200; Sego v. Commissioner, 114 T.C. at 610; Goza v.
Commissioner, 114 T.C. at 182. An abuse of discretion occurs if Appeals
exercises its discretion “arbitrarily, capriciously, or without sound basis in fact or
law.” Woodral v. Commissioner, 112 T.C. 19, 23 (1999).
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[*9] A taxpayer may challenge his underlying tax liability during a CDP hearing
(and thereafter in this Court) if he did not receive a notice of deficiency with
respect to the liability or did not otherwise have an earlier opportunity to dispute
the liability. See secs. 6320(c), 6330(c)(2)(B); sec. 301.6320-1(e)(3), Q&A-E2,
Proced. & Admin. Regs.; see also Kuykendall v. Commissioner, 129 T.C. 77, 80
(2007); Sego v. Commissioner, 114 T.C. at 609; Shere v. Commissioner, T.C.
Memo. 2008-8, slip op. at 10. Although the parties have stipulated as to
petitioner’s nonreceipt of the May 11, 2012, notice of deficiency and that therefore
he may challenge his underlying tax liability in this proceeding, for the reasons
explained below it is unnecessary for us to review his underlying tax liability de
novo.
As indicated supra p. 7, the Appeals officer conducting the hearing in a lien
case must verify that the IRS has complied with the requirements of applicable law
and administrative procedure, and this verification is required, among other things,
to be a part of every Appeals determination. Secs. 6320(c), 6330(c)(1), (3)(A); see
also Hoyle v. Commissioner, 131 T.C. at 201-202. The verification must be
obtained before Appeals issues the notice of determination. Sec. 301.6320-
1(e)(1), Proced. & Admin. Regs. In cases where an assessment of tax is based on
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[*10] a defaulted3 notice of deficiency, the Appeals officer must verify, among
other things, that the notice of deficiency was duly mailed to the taxpayer before
the assessment of tax pursuant to section 6213(a). Hoyle v. Commissioner, 131
T.C. at 203; see also Internal Revenue Manual (IRM) pt. 8.22.5.4.2.1.1(1) (Nov. 8,
2013) (advising Appeals officers that for assessments requiring the issuance of a
notice of deficiency, the validity of the assessment is confirmed by verifying that
the notice of deficiency was “properly issued”, i.e., by certified or registered mail
to the taxpayer’s last known address and before the assessment of the deficiency).
In Hoyle v. Commissioner, 131 T.C. at 200-204, we considered whether
Appeals met this verification requirement where the taxpayer raised in that judicial
proceeding (but not during the CDP process) the issue of whether the IRS had in
fact mailed him a notice of deficiency before assessing the tax at issue. We held
that because verification is mandatory, we will review the propriety of that
verification regardless of whether the taxpayer challenging the collection action
raises this issue at the CDP hearing. Id. at 202-203. The record in Hoyle
3
According to IRS guidance, “[i]f the taxpayer does not petition the Tax
Court or agree to the deficiency within 105 (165 if either the taxpayer is outside
the United States when the notice is mailed or the notice is mailed to an address
outside the United States) days, the case [i.e., the notice of deficiency] is
considered to be defaulted”. Internal Revenue Manual pt. 4.8.9.26(2) (July 9,
2013).
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[*11] contained two copies of a notice of deficiency that the Commissioner
asserted were properly mailed. Id. at 203. Appeals’ notice of determination
issued to the taxpayer “summarily concluded that ‘all statutory, regulatory, and
administrative procedures have been followed”’ and noted that the taxpayer’s file
“contained a copy of a notice of deficiency ‘properly sent”’ to him; it did not,
however, indicate what documents were relied upon to verify that the notice of
deficiency was properly mailed. Id. The administrative record lacked, for
example, a properly completed USPS Form 3877, which this Court and other
Federal courts have held raises a presumption of official regularity in the IRS’
favor and is sufficient, absent evidence to the contrary, to establish that a notice of
deficiency has been properly mailed. Id. (and cases cited thereat). Thus in Hoyle,
on the basis of the record before us at that time, we concluded that it was unclear
what the Appeals officer relied on to verify that the assessment of the taxpayer’s
liability had been preceded by a duly mailed notice of deficiency, and we declined
to review the taxpayer’s underlying tax liability, remanding the case to Appeals to
clarify the record as to the basis for the Appeals officer’s verification that all
requirements of applicable law and administrative procedure had been met, i.e.,
that the notice of deficiency had been properly sent to the taxpayer. Id. at 204-
205.
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[*12] The case before us now is strikingly similar to Hoyle. In his petition
petitioner alleges that Appeals erred in asserting that it properly mailed the May
11, 2012, notice of deficiency to him, calling into question (albeit somewhat
inartfully) the propriety of Appeals’ verification that the IRS complied with
applicable law and administrative procedure, i.e., whether the May 11, 2012,
notice of deficiency was properly mailed to him before assessment of his 2010
income tax liability. In his answer respondent asserted a general denial of this
allegation.
Similarly to the record in Hoyle, the record here contains a copy of (1) the
May 11, 2012, notice of deficiency and (2) the notice of determination, which
summarily concludes that “the requirements of any applicable law, regulation or
administrative procedure with respect to the * * * NFTL filing have been met” and
that “[a]ssessment was properly made per IRC § 6201”. Similarly to the notice of
determination in Hoyle, the notice of determination here does not indicate what
documents were relied upon to verify that the May 11, 2012, notice of deficiency
was properly mailed. Additionally, the record before us does not contain a USPS
Form 3877 or equivalent IRS certified mailing list (CML) bearing a USPS date
stamp or the initials of a postal employee. Indeed, the parties stipulated that
respondent cannot produce that form (or list).
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[*13] After the trial of this case we ordered respondent to file a response
addressing in pertinent part whether the Appeals officer properly verified that the
May 11, 2012, notice of deficiency was mailed to petitioner.4 In his response
respondent contends that the Appeals officer made the proper verification
“pursuant to I.R.C. § 6330(c)(1) & Internal Revenue Manual Provision
8.22.5.4.2.1.1.” Attached to the response is, among other documents, the
declaration of the Appeals officer and the Appeals officer’s case activity record.
In her declaration the Appeals officer avers that although she was unable to secure
the USPS Form 3877 to show proof of mailing of the May 11, 2012, notice of
deficiency to petitioner, she examined the IRS’ Integrated Data Retrieval System
(IDRS) “in order to verify the validity of the assessment against Mr. Kearse from
the May 11 notice”, and more specifically, that the May 11, 2012, notice of
deficiency was issued to him. In her case activity record she states that she “did
not request the statutory notice of deficiency”. According to respondent, because
the IRM permits Appeals officers to examine IDRS to verify the validity of an
assessment from a notice of deficiency, the Appeals officer’s examination of IDRS
4
We also ordered respondent to address whether the resulting assessment
against petitioner for 2010 is invalid.
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[*14] here demonstrates that she properly verified that the May 11, 2012, notice of
deficiency was mailed to petitioner in accordance with section 6330(c).
Respondent is correct that IRS guidance does advise Appeals officers that
they may “rely” on IDRS to verify the validity of an assessment from a notice of
deficiency. See IRM pt. 8.22.5.4.2.1.1(2) (Nov. 8, 2013). But that is the
“general[]” rule. Id. Where a taxpayer alleges that the notice of deficiency was
not properly mailed to him, he has “alleged an irregularity”, id. pt.
8.22.5.4.2.1.1(5), thereby requiring Appeals officers, according to further IRS
guidance, to do more than “rely solely” on IDRS; they must review: (1) a copy of
the notice of deficiency and (2) the USPS Form 3877 or equivalent IRS certified
mail list bearing a USPS date stamp or the initials of a postal employee, id. pt.
8.22.5.4.2.1.1(6). Despite the fact that during the CDP process petitioner alleged
such an irregularity, the Appeals officer here acknowledges that she did not secure
(and accordingly review) either of these documents before the notice of
determination was issued to petitioner.
Incredibly, respondent has now produced a USPS Form 3877 dated May 11,
2012, intended to evidence the mailing of the May 11, 2012, notice of deficiency
to petitioner via USPS certified mail, which he also attaches to his response. He
states in a footnote in the response that “during the case’s pendency, respondent
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[*15] updated its systems for locating CMLs, thus, allowing them to be easily
located.” However, respondent has already stipulated that he cannot produce a
USPS Form 3877 regarding the May 11, 2012, notice of deficiency to petitioner.
We treat a stipulation “as a conclusive admission by the parties, and the Court will
not permit a party to change or contradict a stipulation, except in extraordinary
circumstances.” Shackelford v. Commissioner, T.C. Memo. 1995-484, slip op. at
15; see also Rule 91(e). We also note that respondent has not “asked to be
relieved [from the binding effect] of this stipulation, and we will therefore hold
him to it.” See Winter v. Commissioner, T.C. Memo. 2010-287, slip op. at 28.
On the basis of the record before us, it is clear that the Appeals officer failed
to properly perform the verification mandated by section 6330(c), i.e., to properly
verify that the assessment of petitioner’s unpaid 2010 income tax liability was
preceded by a duly mailed notice of deficiency. This failure constitutes an abuse
of discretion. Consequently, we conclude that Appeals abused its discretion in
sustaining the NFTL with respect to petitioner’s 2010 income tax liability.5
5
Because of our conclusion, in addition to its being unnecessary to review
petitioner’s underlying tax liability de novo, it is unnecessary for us to consider
whether Appeals’ decision to reject his offer-in-compromise constituted an abuse
of discretion.
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[*16] We have considered all of the arguments made by the parties and, to the
extent they are not addressed herein, we find them to be moot, irrelevant, or
without merit.
To reflect the foregoing,
An appropriate order and decision
will be entered for petitioner.