Kindred, David H. v. CIR ( 2006 )

In the
United States Court of Appeals
For the Seventh Circuit
____________
Nos. 05-1424 & 05-1435
DAVID and LYNETTE KINDRED,
Petitioners-Appellants,
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent-Appellee.
____________
Appeals from an Order of the
United States Tax Court.
Nos. 5658-04L & 5860-04L.
____________
ARGUED OCTOBER 25, 2005—DECIDED JULY 20, 2006
____________
Before COFFEY, MANION, and KANNE, Circuit Judges.
COFFEY, Circuit Judge. After their income tax return was
reviewed, taxpayers David and Lynette Kindred (collec-
tively the “taxpayers”) were determined by the Internal
Revenue Service (“IRS” or “the Service”) to be deficient in
their payments for the tax year 1999. The taxpayers were
informed of this when they were sent a statutory notice of
deficiency, which provided them the opportunity to chal-
lenge the IRS’ determination in the United States Tax
Court (“Tax Court”). They failed to do so, and the tax was
assessed as due in owing on December 16, 2002. Shortly
thereafter, the Kindreds were sent a demand for payment
via certified mail and informed that, if they failed to satisfy
2 Nos. 05-1424 & 05-1435
the tax obligation, a lien in favor of the United States
government would attach to all of their real and personal
property. See IRC § 6321.1 The assessment went unpaid,
and in an effort to prevent a lien from attaching, the
Kindreds promptly notified the IRS that they wished to
exercise their right to request a hearing pursuant to IRC
§ 6330, challenging inter alia their underlying tax liability.
The IRS sustained the lien holding that the Kindreds’
claims were barred by statute, see § 6330(c)(2)(B), and the
Kindreds filed a petition with the Tax Court. After the close
of the pleadings, the IRS moved for summary judgment
pursuant to Rule 121(b) of the United States Tax Court
Rules of Practice and Procedure and the Tax Court granted
the motion. We affirm.
I. BACKGROUND
On July 15, 1999, David and Lynette Kindred filed a joint
income tax return, Form 1040, for the tax year 1998.
Suspecting that the Kindreds had under-reported their
taxable income by approximately $628,000, the IRS flagged
the return for examination, more commonly referred to
as an audit. See generally IRC § 7602; Treas. Reg.
§§ 301.7602-1 et seq. According to the record, the Kindreds
failed to communicate with the IRS concerning their return
and refused to take part in the examination process.2 The
1
Citations using the abbreviation “IRC” refer to the Internal
Revenue Code, which can be found at 26 U.S.C. § 1 et seq. In
addition, citations found in this opinion using the abbrevia-
tion “Treas. Reg.” refer to regulations promulgated by the
Department of the Treasury pursuant to authority conferred in
the IRC, which may be found at Treas. Reg. 1.1-1 et seq.
2
Although the IRS is entitled to summon taxpayers and to
“examine any books, papers, records, or other data which may
be relevant or material” in order to perform an audit, it ap-
(continued...)
Nos. 05-1424 & 05-1435 3
IRS thereafter determined, without the Kindreds participa-
tion, that the couple had attempted to avoid paying taxes on
their income by placing their assets into various trusts;
something the Service has characterized in the past as an
“abusive tax trust scheme.” See, e.g., Muhich v. Commis-
sioner, 238 F.3d 860, 863 (7th Cir. 2001).
Accordingly, on May 9, 20023 the IRS sent the Kindreds
a statutory “notice of deficiency” informing them that they
owed $991,096.43 in tax, penalties and interest. See IRC
§§ 6211(a), 6212(a), 7522(a), 6601(a), 6662(a); Treas. Reg.
§§ 301.6211-1 et seq. Included in the notice of deficiency was
information advising them of their statutory right to
challenge the proposed assessment of tax deficiency by
filing a petition with the Tax Court within 90 days. See IRC
§ 6503(a); Treas. Reg. § 301.6503(a)-1.4
2
(...continued)
pears that the IRS did not choose to do so in this case. IRC
§ 7602(a)(1)-(3).
3
It is undisputed that the statutory notice of deficiency was
sent via certified mail on May 9, 1999 and that the Kindreds
received said notice.
4
Section 6501 of the Internal Revenue Code provides inter alia
that “the amount of any tax imposed by this title shall be assessed
within 3 years after the return was filed (whether or not such
return was filed on or after the date prescribed) . . . .” The mailing
of a statutory notice of deficiency tolls the running of the three-
year limitations statute “for the period during which the Secretary
is prohibited from making the assessment or from collecting by
levy or proceeding in court . . . and for 60 days thereafter.” IRC
§ 6503(a)(1). Pursuant to IRC § 6213, once the Kindreds were sent
a statutory notice of deficiency, they had 90 days in which to file
a petition with the Tax Court. This, in addition to the 60-day
waiting period proscribed by § 6503(a)(1), means that the IRS was
precluded from actually assessing the tax liability until approxi-
mately December 12, 2002.
4 Nos. 05-1424 & 05-1435
The Kindreds failed to contest the IRS’ determination,
and on December 16, 2002, the tax was statutorily assessed
as due in owing. See IRC §§ 6201 et seq.; Treas. Reg.
§ 301.6203-1. The same day, the Kindreds were sent a
notice of payment, stating that, in order to avoid further
collection efforts by the Service, they should immediately
remit $991,096.43, the amount in arrears. See IRC
§ 6303(a). Similar notices were sent on January 19, 2003,
June 8, 2003 and July 6, 2003, advising the Kindreds that
if they failed to pay the outstanding tax balance immedi-
ately, the IRS would seek a federal tax lien against their
assets.
The Kindreds once again refused to either remit payment
or to acknowledge the IRS’ collection efforts in any manner.
At that point, the IRS assigned a revenue officer5 to the
Kindreds’ case in order to ensure payment of the tax and
oversee any future collection activities. See Treas. Reg.
301.7430-1(g), Example 8. On September 9, 2003, the
designated revenue officer paid a visit to the Kindreds’
home in order to discuss their tax liability and to inquire as
to how they would like to proceed. The revenue officer found
5
Revenue officers represent the collection arm of the United
States Department of the Treasury. See, e.g., Tennessee v. Davis,
100 U.S. 257, 261 (1879); Barnes v. Philadelphia & R.R. Co., 84
U.S. 294, 304 (1872). According to the Internal Revenue Manual
§ 5.1.1.2, revenue officers working for an IRS field officer under-
take the following assignments: (1) managing “balance
due accounts”; (2) undertaking “delinquent return investigations”;
(3) performing “courtesy investigations”; (4) investigating “Federal
Tax Deposit alerts”; (5) taking part in “compliance initiative
projects”; and (6) evaluating “Offers in Compromise.” All revenue
officers are to discharge their duties in “[c]ompliance with Service
policy and guidelines” and “results achieved are to be commensu-
rate with the resources expended.” Internal Revenue Manual
§ 5.1.1.3.2.
Nos. 05-1424 & 05-1435 5
the Kindreds to be unavailable at their residence and they
did not attempt to get in contact with him after the visit.6
With the tax liability unliquidated and no other options
available, the IRS sent the Kindreds a notice entitled:
“Notice of Federal Tax Lien Filing and Your Right to a
Hearing Under IRC § 6320.” See IRC §§ 6320, 6321. This
notice informed the Kindreds of the amount owed as well as
their right to challenge the lien, within 30 days, by request-
ing an administrative proceeding known as a “Collection
Due Process” (“CDP”) hearing. See IRC §§ 6320, 6330.
After receiving the required statutory notice of the filing
of a levy, the Kindreds timely exercised their statutory right
to request a CDP hearing pursuant to IRC § 6330. When
they completed the required CDP hearing request form, IRS
Form 12153, the Kindreds were asked to explain why they
did not agree with the IRS’ filing of a federal tax lien. In
response, they stated: “We disagree with the determination
of the taxes and additions owed and the calculation of the
amounts, if any.” The IRS responded by assigning an
appeals officer to the case and scheduling a hearing for
January 15, 2004.7
6
Although the record is unclear, it appears that the revenue
officer left some type of notification at the Kindreds’ residence
advising them that he wanted to speak with them regarding
their unpaid taxes.
7
Collection Due Process hearings are informal affairs. Indeed,
the regulations provide that no transcript need be created and
that the hearing itself may be conducted via telephone or the mail.
See Treas. Reg. § 301.6330-1(d)(2)A-D6. As Treas. Reg.
§ 301.6330-1(d)(2)A-D6 states: “The formal hearing procedures
required under the Administrative Procedure Act, 5 U.S.C. 551 et
seq., do not apply to CDP hearings. CDP hearings are much like
Collection Appeal Program (CAP) hearings in that they
(continued...)
6 Nos. 05-1424 & 05-1435
In the documents that the Kindreds submitted to the
appeals officer prior to the hearing, they maintained their
objection to the accuracy of the taxes, penalties and interest
which had been assessed by the IRS. In addition, they
argued that instead of being subject to a levy, they should
be entitled to pursue collection alternatives pursuant to IRC
§ 6330(c)(2), such as “the posting of bond, the substitution
of other assets, or an offer in compromise.” In particular,
the Kindreds sought to submit an offer in compromise
which, if accepted, could have reduced the amount deter-
mined to be owed to the IRS. See generally Young v. United
States, 535 U.S. 43, 53 (2002). In response, the appeals
officer requested additional financial information and
documentation from the Kindreds in order to ascertain
whether it would be in the IRS’ interests to pursue collec-
tion alternatives. See Treas. Reg. 301.6330-1(e)(1); IRC
§ 7122. However, the Kindreds failed to submit a formal
written offer in compromise or the financial information
required for an appeals officer to entertain collection
alternatives.8 Indeed, the Kindreds refused to submit any
7
(...continued)
are informal in nature and do not require the Appeals officer or
employee and the taxpayer, or the taxpayer’s representative, to
hold a face-to-face meeting. A CDP hearing may, but is not
required to, consist of a face-to-face meeting, one or more writ-
ten or oral communications between an Appeals officer or em-
ployee and the taxpayer or the taxpayer’s representative, or some
combination thereof. A transcript or recording of any face-to-face
meeting or conversation between an Appeals officer or employee
and the taxpayer or the taxpayer’s representative is not re-
quired. The taxpayer or the taxpayer’s representative does not
have the right to subpoena and examine witnesses at a CDP
hearing.”
8
Furthermore, the Kindreds also failed to appear at their
scheduled CDP hearing on January 15, 2004. When they did not
appear, the appeals officer sent a follow up letter, giving them yet
(continued...)
Nos. 05-1424 & 05-1435 7
financial information at all.
As such, the appeals officer refused to consider collec-
tion alternatives and was left with only the question of
whether the Kindreds could challenge the Service’s mathe-
matical calculation and/or the accuracy of the taxes,
penalties and interest assessed. The appeals officer con-
cluded that the Kindreds were precluded from doing so
because such an argument could be properly classified as a
challenge to the underlying liability, which is barred in a
CDP hearing by IRC § 6330(c)(2)(B). Accordingly, the levies
were sustained.
Unhappy with this determination, David and Lynette
Kindred individually filed petitions in the United States
Tax Court,9 arguing that the appeals officer had abused his
discretion by refusing to entertain their arguments chal-
lenging the mathematical accuracy of the IRS’ assessments
and by failing to entertain any collection alternatives, such
as an offer in compromise or “innocent spouse” relief.10 See
8
(...continued)
another opportunity to submit financial information which would
allow him to consider collection alternatives. The appeals officer
requested that they do so by January 29, 2004. The Kindreds
failed to respond and, on February 13, 2004, the determination
was rendered and filed.
9
David and Lynette Kindred filed separate petitions in the Tax
Court although both petitions raised essentially the same
issues. As a result, the Tax Court issued two separate decisions in
the cases. However, since the issues raised and the Tax
Court’s determinations were essentially identical, we discuss
the two cases as one unless otherwise noted.
10
In general, taxpayers filing joint returns are joint and severally
liable for any deficiencies, penalties and interest assessed against
them regarding the return. See Grossman v. Commissioner, 182
F.3d 275, 278 (4th Cir. 1999); Shea v. Commissioner, 780 F.2d
(continued...)
8 Nos. 05-1424 & 05-1435
IRC § 6015(b)(1). Also, they averred that, in addition to
being inaccurate, the assessments made by the Service were
untimely pursuant to the three-year limitations period set
forth in IRC § 6501.11 At the close of pleadings, the IRS
moved for summary judgment pursuant to Rule 121(a) of
the Tax Court Rules of Practice and Procedure. The Tax
Court granted the IRS’ motion, finding that the IRS appeals
officer had not abused his discretion in sustaining the
respective levies, that the petitioners had failed to present
a question of material fact and that entry of judgment in
favor of the IRS was proper as a matter of law. See Kindred
v. Commissioner, No. 5658-04L (Nov. 5, 2004); Kindred v.
Commissioner, No. 5860-04L (Nov. 5, 2004). The court
concluded that: (a) the petitioners were barred from chal-
lenging their underlying tax liability during the CDP
hearing pursuant to IRC § 6330(c)(2)(B); (b) although no
offer in compromise was ever proposed or formally submit-
ted by the Kindreds, they were precluded from proffering
one “under [the] guise of an offer in compromise based on
doubt as to liability”; (c) failure to raise an “innocent
spouse” defense during the administrative process pre-
cluded them from doing so for the first time in a petition to
the Tax Court;12 and (d) the petitioners’ arguments that the
IRS’ assessment of tax was outside the three-year limita-
10
(...continued)
561, 564 (6th Cir. 1986). As discussed infra, IRC § 6015 consti-
tutes an exception to this rule and provides that where one spouse
fails to report income, an “innocent” spouse may seek relief from
joint and several liability as long as certain conditions set forth in
§ 6015(b)(1) are met.
11
The Kindreds raised this argument for the first time in the Tax
Court, explaining that they had not been provided Form 4340,
which lists the date of assessment of the tax, until after their
petition in Tax Court had been filed.
12
Only Mrs. Kindred raised the issue of “innocent spouse” relief
in her petition in the Tax Court.
Nos. 05-1424 & 05-1435 9
tions period of § 6501 were entirely without merit. The
Kindreds appealed pursuant to the jurisdiction conferred on
this court under IRC § 7482(a).13
II. ISSUES
On appeal, the Kindreds challenge the Tax Court’s grant
of summary judgment in favor of the IRS based on three
perceived errors. Initially, they contend that, contrary to
the Tax Court’s determination, the IRS appeals officer
abused his discretion when he failed to allow them to
introduce proposed “collection alternatives” such as an offer
in compromise during the CDP proceedings. IRC
§ 6330(c)(2)(A)(iii). They also maintain that they should
have been allowed to introduce evidence during the CDP
proceedings which, they argue, would have entitled them to
an “innocent spouse” defense. See Grossman, 182 F.3d at
278; IRC §§ 6330(c)(2)(A)(i), 6015(a). Finally, the Kindreds
take exception with the Tax Court’s determination that the
IRS’ assessment of tax liability was timely within the
meaning of IRC § 6501.
III. ANALYSIS
We review the Tax Court’s grant of summary judgment in
favor of the IRS, “in the same manner and to the same
extent as decisions of the district courts in civil actions tried
without a jury.” IRC § 7482(a)(1). The material facts are
undisputed and petitioners present only questions of law.14
13
David and Lynette Kindred lodged separate appeals from the
Tax Court. This court, on its own motion, consolidated the appeals
in an Order issued on March 15, 2005.
14
Much like Rule 56(c) of the Federal Rules of Civil Procedure,
Rule 121(b) of the United States Tax Court Rules of Practice
(continued...)
10 Nos. 05-1424 & 05-1435
Thus, we review the Tax Court’s decision to grant summary
judgment de novo. See Krukowski v. Commissioner, 279
F.3d 547, 550 (7th Cir. 2002); Connor v. Commissioner, 218
F.3d 733, 736 (7th Cir. 2000). See L & C Springs Assocs. v.
Commissioner, 188 F.3d 866, 869 (7th Cir. 1999). In addi-
tion, because it is evident from the record before us that the
petitioners’ underlying tax liability is not at issue,15 we
review the administrative determinations of the IRS
appeals officer during the CDP hearing process under an
abuse of discretion standard. See Orum v. Commissioner,
412 F.3d 819, 820 (7th Cir. 2005); Sego v. Commissioner,
114 T.C. 604, 610 (2000) (holding that “where the validity
of the underlying tax liability is not properly at issue, the
Court will review the Commissioner’s administrative
determination for abuse of discretion”); Craig v. Comm’r,
119 T.C. 252, 260 (2002), cf. Jones v. Comm’r, 338 F.3d 463,
466 (5th Cir. 2003) (stating that: “In a collection due process
case in which the underlying tax liability is properly at
issue, the Tax Court (and hence this Court) reviews the
underlying liability de novo and reviews the other adminis-
trative determinations for an abuse of discretion.”). Put
14
(...continued)
and Procedure proscribes that summary judgment is only
proper where “the pleadings, answers to interrogatories, deposi-
tions, admissions, and any other acceptable materials, together
with the affidavits, if any, show that there is no genuine issue
as to any material fact and that a decision may be rendered as
a matter of law.”Spellman v. Commissioner, 845 F.2d 148, 152
(7th Cir. 1988) (noting that “the pertinent language in the Tax
Court’s summary-judgment rule . . . is materially identical to
that of Rule 56”).
15
During the administrative process neither of the petitioners
ever disputed the fact that they received a statutory notice of
deficiency. Thus, they were statutorily precluded from challenging
their underlying tax liability at the CDP hearing stage. See IRC
§ 6330(c)(2)(B).
Nos. 05-1424 & 05-1435 11
simply, if we conclude that the IRS appeals officer did not
abuse his discretion in upholding the levy imposed on the
petitioners, then summary judgment was properly granted
and we will affirm the Tax Court’s decision.16
A. Collection Due Process Hearings
As mentioned above, IRC § 6321 authorizes the Secretary
of the Treasury to levy against “any person liable to pay any
tax [who] neglects or refuses to pay the same after demand.”
The lien, when in place, attaches to “all property and rights
to property, whether real or personal, belonging to such
person.” § 6321. In order for the IRS to collect overdue tax
via lien, however, a notice and demand for payment must be
served on the taxpayer17 within 60 days of the assessment
of the tax. IRC § 6303. If payment is not remitted by the
taxpayer, a lien may be sought as soon as the tenth day
following transmittal of the notice and demand. Treas. Reg.
§ 301.6331-1.
Prior to 1998, the abovementioned service of a notice
and demand for payment, along with a failure or refusal by
the taxpayer to pay the assessed amounts, was all that was
procedurally required prior to an IRS lien attaching to a
person’s property. See, e.g., Commissioner v. Shapiro, 424
U.S. 614, 617-18, 629-32 (1976). Taxpayers were entitled to
post-deprivation proceedings to challenge a levy, see id., but
16
As the Sixth and First Circuits have acknowledged, while
§ 6330 was intended to guard against taxpayer harassment at
the hands of the IRS, it does not strip the Service of the right
to undertake legitimate tax collection activities. See Living
Care Alternatives of Utica, Inc. v. United States, 411 F.3d 621, 625
(6th Cir. 2005); Olsen v. United States, 414 F.3d 144, 151 (1st Cir.
2005). Accordingly, the standard of review is highly deferential as
Congress intended.
17
Or taxpayers if married and filing jointly.
12 Nos. 05-1424 & 05-1435
there was no procedure in place for a taxpayer to challenge
the IRS’ decision to levy against their property prior to the
lien attaching, as long as the IRS could demonstrate that
either: (a) the underlying liability was not properly at issue;
or (b) where the IRS would have been “jeopardized by delay”
in collecting the tax due. See Shapiro, 424 U.S. at 617-18;
Living Care, 411 F.3d at 624; see also Phillips v. Commis-
sioner, 283 U.S. 589, 595-97 (1931) (holding that where
“adequate opportunity [was] afforded for a later determina-
tion of [ ] legal rights, summary proceedings to secure
prompt performance of pecuniary obligations to the govern-
ment” were entirely consistent with the Due Process Clause
of the Fifth Amendment).
On July 22, 1998, Congress enacted the IRS Restructur-
ing and Reform Act of 1998, Pub.L. No. 105-206, § 3401, 112
Stat. 685,18 which was specifically intended to pro-
vide taxpayers with additional pre-deprivation opportuni-
ties to oppose IRS collection actions. See Pub.L.
No. 105-206, § 1001, 112 Stat. 685, 689 (stating that inter
alia the bill is intended to “ensure an independent appeals
function within the Internal Revenue Service”). Section
6330 of the IRC was enacted as part of that bill and
grants taxpayers the right to request a pre-deprivation
hearing19 in order to allow them to present arguments as to
why the filing of a lien would not constitute an appropriate
collection device, before that lien actually attaches. In
particular, IRC § 6330(c)(2)(A) authorizes the Secretary of
the Treasury to consider “any relevant issue relating to the
unpaid tax or the proposed levy” during a CDP hearing.
18
The bill was also popularly known by the pseudonym “Taxpayer
Bill of Rights.” See Preslar v. Commissioner, 167 F.3d 1323, 1327
n.2 (10th Cir. 1999).
19
While taxpayers have a right to a “hearing,” such proceedings
may be conducted either in a formal setting with all the parties
present or via written or oral communications.
Nos. 05-1424 & 05-1435 13
This includes “offers of collection alternatives, which may
include the posting of a bond, the substitution of other
assets, an installment agreement, or an offer in compro-
mise.” § 6330(c)(2)(A)(iii). The statute does, however, limit
challenges to the “existence or amount of underlying tax
liability” to situations in which a taxpayer has “not
receive[d] any statutory notice of deficiency for such tax
liability or did not otherwise have an opportunity to dispute
such tax liability.” § 6330(c)(2)(B).
1. The Kindreds’ Right to Submit an Offer in Compromise
The Kindreds initially argue that they should have been
permitted to submit an offer in compromise premised on
“doubt as to liability” during the CDP hearing process under
IRC § 6330(c)(2)(A)(iii). The failure to entertain such an
offer, they assert, constitutes an abuse of discretion on the
part of the appeals officer. In addition, they take issue with
the Tax Court’s determination that the Kindreds, by
attempting to introduce collection alternatives, were simply
trying to challenge their underlying tax liability under the
“guise of an offer in compromise based on doubt as to
liability.”
As stated above, IRC § 6330(c)(2)(A) gives taxpayers faced
with an IRS levy the right to proffer collection alternatives
at the CDP hearing stage, including offers-in-compromise.20
This right, however, carries with it certain obligations on
the part of the taxpayer. For instance, Treas. Reg.
20
Section 301.6330-1(e)(3)A-E6 of the Treasury Regulations gives
some additional examples of collection alternatives, such as “a
proposal to withhold the proposed or future collection action in
circumstances that will facilitate the collection of the tax liability,
an installment agreement . . . the posting of a bond, or the
substitution of other assets.”
14 Nos. 05-1424 & 05-1435
§ 301.6330-1(e)(1) states that “[t]axpayers will be expected
to provide all relevant information requested by [the
appeals officer], including financial statements, for its
consideration of the facts and issues involved in the hear-
ing.” In addition, the regulations implore taxpayer partici-
pation in the CDP hearing process. Indeed, Treas. Reg.
§ 301.6330-1(e)(3)A-E8(ii) specifically provides that,
“taxpayers are encouraged to discuss their concerns with
the IRS office collecting the tax.” Suggested collection plans
submitted during a CDP hearing are weighed according to
“whether [the] collection action balances the need for the
efficient collection of taxes with the legitimate concern of
the person that any collection be no more intrusive than
necessary.” Treas. Reg. § 301.6330-1(e)(3)A-E8(i). The
decision to entertain, accept or reject an offer in compromise
is squarely within the discretion of the appeals officer and
the IRS in general. See IRC § 7122; Treas. Reg. § 301.7122-
1(c)(1).
The Kindreds’ argument that they should have been
allowed to submit an offer in compromise is frivolous. To
begin with, the Tax Court’s review, as well as our review, is
strictly confined to only those issues which were originally
raised during the CDP hearing. See Treas. Reg.
§ 301.6330-1(f)(2), Q-F5 & A-F5; Living Care v. United
States, 411 F.3d 621, 625 (6th Cir. 2005). Although the
record of the CDP hearing proceedings in this case is
sparse,21 it is clear that the Kindreds failed to ever actu
21
As the Sixth Circuit noted in Living Care, review of CDP
hearings is often based on a particularly scant record which
consists mainly of “parties’ appellate briefs and the Notice of
Determination letter . . . . No transcript or official record of the
hearing is required and, accordingly, one rarely exists.” 411 F.3d
at 625.
While the record consists of some additional information—such
as exhibits provided by the IRS concerning when certain events
(continued...)
Nos. 05-1424 & 05-1435 15
ally make an offer in compromise, much less submit one to
the IRS appeals officer for consideration in accordance with
the requirements set forth in IRC §§ 6330(c)(3) and 7122.
Without an actual offer in compromise to consider, it would
be most difficult for either the Tax Court or this court to
conclude that the appeals officer might have abused his
discretion; for the appeals officer could not mistakenly
reject something which has not been presented to him. See
Kendrics v. Commissioner, 124 T.C. 69, 79 (2005) (holding
that: “Since there was no offer in compromise before [the
appeals officer], there was no abuse in discretion in [the
officer] failing to consider an offer in compromise.”); Magna
v. Commissioner, 118 T.C. 488, 493 (2002) (holding that it
would be “anomalous . . . to conclude that [an] Appeals
Office abused its discretion under section 6330(c)(3) in
failing to grant relief, or in failing to consider arguments,
issues, or other matters not raised by the taxpayers or not
otherwise brought to the attention of [an] Appeals Office”
during a CDP hearing).
The Kindreds attempt to dodge the proverbial bullet,
however, by stating that the IRS appeals officer “would not
permit” them to submit an offer in compromise. However,
we have been unable to discern anything in the record
which would lend support to this statement or lead us to
believe that the appeals officer did any such thing. Indeed,
it is eminently clear that the Kindreds failed to participate
21
(...continued)
took place—the Kindreds’ case is no exception. Indeed, because
the Kindreds failed to ever show up to their scheduled CDP
hearing, obviously no transcript exists. In addition, the communi-
cations that transpired between the appeals officer and the
Kindreds prior to a determination was made are not included
in the record on appeal. Therefore, aside from the appeals officer’s
actual written decision, which is in the record, we are left with
little outside the pleadings to parse.
16 Nos. 05-1424 & 05-1435
in the CDP hearing process in any meaningful way. For
example, it is undisputed that, when asked to do so, the
Kindreds failed to provide financial information of any kind
to the appeals officer as required by Treas. Reg. § 301.6330-
1(e)(1). This alone would have provided the appeals officer
with a reason to refuse to consider any proffered offer in
compromise. See Olsen, 414 F.3d at 151 (stating that
“failure to respond to inquiries for information in a timely
manner constitutes grounds for giving no further consider-
ation to an offer in compromise.”).
What’s more, the Kindreds even failed to attend their
scheduled hearing in Las Vegas, Nevada, on January 15,
2004. The appeals officer, if he had seen fit, could have
issued a determination that day sustaining the levy and
denying the Kindreds any additional time to submit an offer
in compromise. However, he did not do so and in-
stead offered the Kindreds another fourteen days—until
January 29, 2004—to submit the requested financial
information along with an offer in compromise. True to
form, the Kindreds failed to do so and, thus, on February
13, 2004 a determination sustaining the levy was issued.22
The only explanation given for this complacency was offered
by the Kindreds’ representative during the administrative
proceedings, who stated: “I explained to [the appeals officer]
that I would require adequate time, based upon the near
lack of records and need to acquire information from the
Service itself, to prepare any [offer in compromise]. He [(the
appeals officer)] extended the hearing until January 29,
2004 but would not give any additional time for preparing
the [offer in compromise]. I was unable to submit an [offer
in compromise].” This statement, at the very least, serves to
22
It should be noted that this represents yet another two-week
period prior to the appeals determination in which the Kindreds
could have, but did not, submit financial information and/or
an offer in compromise.
Nos. 05-1424 & 05-1435 17
undermine the veracity of the Kindreds’ claim that they
were not “permitted to submit” an offer in compromise. To
the contrary, their own representative’s statement illus-
trates the fact that they were given numerous opportunities
to submit the required financial information and/or an offer
in compromise, but failed to do so. The fact that the
Kindreds were unable, or unwilling, to timely supply the
financial information that the regulations require in order
for the IRS to consider an offer in compromise, see Treas.
Reg. § 301.6330-1(e)(1), falls far short of establishing that
the appeals officer’s determination was hasty under the
circumstances23 and certainly does not mean that he abused
his discretion by “refusing” to allow the Kindreds to submit
such an offer.24 See, e.g., Olsen, 414 F.3d at 151; Murphy v.
Commissioner, 125 T.C. 301, 323 (2005) (holding that it was
reasonable for appeals officer to sustain levy where the
taxpayer had a two month period of time to submit a
reasonable offer in compromise, but failed to do so); Chan-
dler v. Commissioner, T.C. Memo 2005-99 (2005) (when
petitioner failed to supply requested financial information
after being given six weeks to do so it was not an abuse of
discretion for the appeals officer to issue a determination
sustaining a levy); Roman v. Commissioner, T.C. Memo
2004-20 (2005) (reasonable for appeals officer to sustain
levy where, after being give six weeks to do so, the taxpayer
23
They had approximately three months from the date they
requested a hearing, October 30, 2003, until the determination
was rendered on February 13, 2004, to submit the requisite
financial information along with an offer in compromise.
24
As the appeals officer stated in his written decision sustaining
the lien against the Kindreds, they “were offered the opportunity
to discuss alternative methods of collection, whether administra-
tive procedures [were] properly followed by the IRS, and the
degree of intrusiveness caused by the filing of the Notice of
Federal Tax Lien,” but failed to do so.
18 Nos. 05-1424 & 05-1435
failed to supply the requisite financial information in
conjunction with an offer in compromise).
Also, while our review of the Tax Court’s decision is
de novo, we pause for the sake of completeness and note
that the Tax Court had good reason to believe that the
Kindreds wished to submit an offer in compromise only as a
“guise” to lodge an impermissible collateral attack on their
underlying liability. As recently as their brief before this
court the Kindreds maintained their former intention to
introduce an offer which would be predicated on “doubt as
to liability.” It is true that the Kindreds would be precluded
from challenging their underlying liability during a CDP
proceeding, see infra p. 20-22. However, as discussed above
we are convinced that there are more fundamental reasons
for concluding that the appeals officer did not abuse his
discretion in not considering an offer in compromise, e.g.,
because no offer was in front of him and because the
Kindreds failed to supply the necessary financial informa-
tion.
2. Innocent Spouse Defense
The Kindreds next argument on appeal closely tacks their
claims regarding the consideration of an offer in compro-
mise. It is their assertion that the appeals officer “ignored
Appellant Lynette Kindred’s spousal defense.” See IRC
§ 6015. Nevertheless, the Kindreds maintain that “Lynette
Kindred’s spousal defense [would have been] part and
parcel of the [offer in compromise],” which, as discussed
above, was never properly before the appeals officer.
Innocent spouse relief or “relief from joint and several
liability,” such as that claimed by the Kindreds, falls under
the provisions of IRC § 6015(b)(1). That section requires
that: “(A) a joint return has been made for a taxable year;
(B) on such return there is an understatement of tax
attributable to erroneous items of one individual filing the
joint return; (C) the other individual filing the joint re-
Nos. 05-1424 & 05-1435 19
turn establishes that in signing the return he or she did not
know, and had no reason to know, that there was
such understatement; (D) taking into account all the facts
and circumstances, it is inequitable to hold the other
individual liable for the deficiency in tax for such taxable
year attributable to such understatement; and (E) the other
individual elects (in such form as the Secretary may
prescribe) the benefits of this subsection not later than the
date which is 2 years after the date the Secretary has begun
collection activities with respect to the individual making
the election.” However, in order to be eligible for relief
under § 6015, a taxpayer is first required to submit IRS
Form 8857, “Request for Innocent Spouse Relief.” See Treas.
Reg. § 6015-5(a). Form 8857 must be filed with the IRS
within two years of the date of the first collection activity
and requires that the taxpayer make certain statements
regarding their tax liability and marital status under
penalties of perjury. Id. at 6015-5(b).
Not surprisingly, the Kindreds did not submit a Form
8857. Nor did they even inform the appeals officer that they
wished to seek innocent spouse relief under § 6015(b).
Indeed, the first mention of a possible innocent spouse
defense is on Lynette Kindred’s petition in the Tax Court.
We agree with the Tax Court’s conclusion that this was
far too late to introduce such an argument. See Kindred v.
Commissioner, No. 5860-04L, at *2 (Nov. 5, 2004). The
regulations clearly state that, “[a] taxpayer may raise any
appropriate spousal defenses at a CDP hearing,” however,
“the taxpayer must do so in writing according to the rules
prescribed by the Commissioner or the Secretary.” Treas.
Reg. § 301.6330-1(e)(2). The Kindreds’ failure to submit
Form 8857 or any notice whatsoever of their intention to
raise a spousal defense during the CDP hearing process
is thus fatal to their claim that the appeals officer abused
his discretion by not considering such a defense. See supra
p. 13; Living Care, 411 F.3d at 625; Magna v. Commis-
20 Nos. 05-1424 & 05-1435
sioner, 118 T.C. 493; see also Treas. Reg. § 6330-1(f)(2) A-
F5 (stating that: “In seeking Tax Court . . . review of Ap-
peals’ Notice of Determination, the taxpayer can only ask
the court to consider an issue that was raised in the tax-
payer’s CDP hearing.”). In addition, if it is the Kindreds’
contention that their spousal defense was to be included in
their non-existent offer in compromise, that argument
would also fail for the reasons outlined above. See supra.
p. 11-15.
B. Petitioners’ Challenge to the Timeliness of the IRS’
Assessment of an Income Tax Deficiency
In their final argument on appeal, the Kindreds claim
that “the Tax Court erred in determining that the assess-
ment by the [IRS] on December 20, 2002 for tax year 1998
was timely because it violates the [IRC § 6501].” We
disagree.
Contrary to the Kindreds’ statement, the Tax Court did
not determine that the assessment of the tax by the IRS
was timely under IRC § 6501. Instead, what the Tax Court
found was that “[b]ecause petitioner received a statutory
notice of deficiency for 1998, she is precluded from challeng-
ing her underlying tax liability.” There was good reason for
this determination.
As noted above, IRC § 6330(c)(2)(B) limits challenges as
to the “existence or amount of underlying tax liability” to
situations in which a taxpayer has “not receive[d] any
statutory notice of deficiency for such tax liability or did not
otherwise have an opportunity to dispute such tax liability.”
It is well settled law that a challenge to the IRS’ ability to
assess a tax under the statute of limitations codified at IRC
§ 6501 constitutes a “challenge to the underlying tax
liability.” See Pomerantz v. Commissioner, T.C. Memo 2005-
295 (2005); Jensen v. Commissioner, 87 T.C.M. 1340, 1343
(2004); Wolk v. Commissioner, T.C. Summ.Op. 2003-173
(2003); Hoffman v. Commissioner, 119 T.C. 140, 145 (2002).
Nos. 05-1424 & 05-1435 21
The Kindreds do not dispute the fact that they received a
statutory notice of deficiency. Thus, their claim that the IRS
was barred from assessing the tax based on the expiration
of the three-year statute of limitations in IRC § 6501, which
constitutes a challenge to the underlying tax liability, is
barred by IRC § 6330(c)(2)(B). The proper time to challenge
the amount, existence or timeliness of the IRS’ proposed
assessment would have been to file a petition with the Tax
Court within 90 days of receipt of the statutory notice of
deficiency. See IRC § 6213(a).25 The Kindreds failed to do
this and are thus precluded from doing so at this stage. See
IRC § 6330(c)(2)(B). In addition, this is yet another claim
that the Kindreds failed to present to the appeals officer
during CDP hearing proceedings, therefore they were
precluded from raising it either in a petition before the Tax
Court or in this court. Living Care, 411 F.3d at 625; Magna
v. Commissioner, 118 T.C. 493; see also Treas. Reg.
§ 6330-1(f)(2) A-F5.
IV. CONCLUSION
We are convinced that the Tax Court properly concluded
25
In fact, Treas. Reg. 301.6330-1(e)(4) Example 1, specifically
states that if the IRS sends a statutory notice of deficiency to
a taxpayer, and that taxpayer “receives the notice of deficiency in
time to petition the Tax Court for a redetermination of the
asserted deficiency . . . . [and] [t]he taxpayer does not timely file
a petition with the Tax Court . . . [he/she] is precluded from
challenging the existence or amount of the tax liability in a
subsequent CDP hearing.” That is precisely what happened here.
The Kindreds have never disputed that they received the statu-
tory notice of deficiency in time to petition the Tax Court
for redetermination of the underlying tax liability. In addition,
they never disputed the IRS’ assessment in any way, that is, until
the CDP hearing; something that is specifically disallowed by the
regulations.
22 Nos. 05-1424 & 05-1435
that the IRS appeals officer did not abuse his discretion
during the Kindreds’ CDP hearing. Accordingly, summary
judgment was properly granted in favor of the IRS and the
decision of the Tax Court is
AFFIRMED.
A true Copy:
Teste:
________________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—7-20-06