Peter P. Baltic and Karen R. Baltic v. Commissioner , 129 T.C. No. 19 ( 2007 )

129 T.C. No. 19
UNITED STATES TAX COURT
PETER P. BALTIC AND KAREN R. BALTIC, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No 2826-06L. Filed December 27, 2007.
Bs received a notice of deficiency but filed no
petition in this Court. R assessed the tax reported and
then sent Bs CDP Notices that he had filed notices of
federal tax lien and intended to collect the unpaid tax
by levy. Bs requested a CDP hearing, at which they
presented an offer-in-compromise based on doubt as to
liability. R’s officer who conducted the hearing issued
a notice of determination sustaining the filing of the
lien and postponing the levy but refused to consider
Bs’ proposed offer herself.
Held: R committed no abuse of discretion in
issuing the notice of determination, because section
6330(c) bars taxpayers who’ve received a notice of
determination from challenging their underlying tax
liability, and an offer-in-compromise based only on
doubt as to liability is a challenge to that underlying
liability.
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Joe Alfred Izen, Jr., for petitioners.
Wesley J. Wong, for respondent.
OPINION
HOLMES, Judge: The Code encourages taxpayers to settle their
differences with the IRS by compromise rather than litigation.
One type of compromise is a compromise based on doubt as to
liability, and that’s the kind that Peter and Karen Baltic
offered to the IRS. But they made their offer just as the IRS
was poised to begin seizing their property--and after they had
had a chance to contest their liability in our court. Section
63301 says that taxpayers like the Baltics can’t challenge their
“underlying tax liability.” The main question in this case--
which we’ve apparently never quite squarely answered--is whether
their making an offer-in-compromise based on doubt as to
liability (an OIC-DATL) is a challenge to the “underlying tax
liability.”
Background
In February 2003, the Commissioner sent the Baltics a notice
of deficiency saying they owed over $100,000 in income tax and
penalties for 1999. The Baltics don’t dispute that they received
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code, and all Rule references are to the Tax
Court Rules of Practice and Procedure.
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the notice, and don’t dispute that they never filed a petition in
this Court to challenge it. Since the Baltics didn’t challenge
the deficiency, the Commissioner assessed it. The Baltics didn’t
pay and so, in June 2004, the Commissioner sent them a notice
under section 6320 that he had filed a federal tax lien against
their property, and a notice under section 6330 that he intended
to levy their property to collect the unpaid tax. The Baltics
promptly requested a collection due process (CDP) hearing. Their
request stated that “We disagree with the determination of taxes
and additions owed, and the calculations of the amounts, if any.”
Before the hearing was scheduled, they submitted an OIC-DATL that
covered not just 1999, but all tax years from 1997 through 2003,
offering $18,699 to compromise their entire income tax liability
for all those years. They also submitted amended tax returns for
1997-19992 and 2003, and original tax returns for the years 2000-
2002.3
2
As with the Baltics’ 1999 tax year, the Commissioner had
already assessed deficiencies for the Baltics’ 1997 and 1998 tax
years after they failed to respond to a notice of deficiency for
those years.
3
The Baltics enclosed a cashier’s check for the proposed
settlement amount with their OIC-DATL, noting on it that cashing
the check meant acceptance of the OIC. This is not how the IRS
does business. An OIC is accepted only when the taxpayer is
notified in writing. Sec. 301.7122-1(e)(1), Proced. & Admin.
Regs. Cashing a check does not mean that the IRS has accepted
the offer. Colebank v. Commissioner, T.C. Memo. 1977-46; Howard
v. Commissioner, T.C. Memo. 1956-219. The Commissioner took the
check and applied it to the 1998 tax debt that the Baltics owed
(continued...)
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The settlement officer who held the CDP hearing told the
Baltics that they couldn’t challenge the amount or existence of
their tax liability for 1999 because they had had a chance to
challenge the liability when they received a notice of deficiency
and hadn’t done so. She also explained to them that, even though
she herself couldn’t consider the OIC-DATL as part of the CDP
hearing, an Appeals officer within another part of the IRS would
consider it and a revenue officer in yet a third part of the IRS
would examine the Baltics’ amended 1999 return in what is called
an “audit reconsideration.” The settlement officer then ended
the CDP hearing, and sent the Baltics a notice in which she
determined that collection by levy would be postponed until the
IRS both decided whether to accept the OIC-DATL and finished its
“audit reconsideration,” but that the lien would be sustained.
3
(...continued)
and then sent them a letter explaining that partial payment
doesn’t defeat a tax lien. His reason for doing so is
unclear--section 301.7122-1(h), Proced. & Admin. Regs., says the
Commissioner should treat such checks as deposits, not payments;
implying the Baltics should ultimately get the money refunded if
their offer is rejected. (Section 7122(c)(1) was recently
amended, Tax Increase Prevention and Reconciliation Act of 2005,
Pub. L. 109-222, sec. 509, 120 Stat. 362, to require partial
payment to be submitted with an OIC, but the amendment doesn't
affect the Baltics, because they submitted their OIC before the
amendment's effective date.)
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(Sustaining the lien protects the government’s priority over
other creditors.) The Baltics offered no other collection
alternatives.
The Baltics now argue that the settlement officer’s refusal
to consider the OIC-DATL herself,4 or at least to wait before
issuing the notice of determination until the other parts of the
IRS finished looking at the OIC-DATL and amended return, was an
abuse of discretion. The Commissioner moved for summary
judgment, and the motion was argued during a trial session in Las
Vegas.5
Discussion
Summary judgment is appropriate where it is shown that
“there is no genuine issue as to any material fact and that a
decision may be rendered as a matter of law.” Rule 121(b); Fla.
Peach Corp. v. Commissioner, 90 T.C. 678, 681 (1988). Summary
judgment is proper here since the parties don’t dispute the facts
at all, but disagree only about the law: Did the settlement
4
Sec. 6133(k)(1) generally blocks the IRS from collecting
taxes by levy (though not by lien) while an OIC is pending. The
Baltics’ very narrow challenge is not to the IRS’s decision to
collect by levy--any levy to collect taxes owed for any of the
years covered by their OIC is postponed by sec. 6331(k)(1)--but
to the settlement officer’s decision that she herself would not
consider their OIC-DATL as a collection alternative during the
CDP process.
5
The Baltics were residents of Ohio when they filed their
petition, though they chose Las Vegas as their place of trial.
Unless the parties stipulate to the contrary, any appeal will go
to the Sixth Circuit. Sec. 7482(b)(1)(A) and (2).
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officer abuse her discretion by issuing the notice of
determination without considering the Baltics’ pending OIC-DATL
or amended 1999 return?
Section 6330(c)(2)(B) allows a taxpayer to challenge the
existence or amount of his underlying tax liability if he neither
received a notice of deficiency nor otherwise had an opportunity
to dispute it. The Baltics’ first line of attack is that they
should have been allowed to challenge their underlying liability
because section 6330(c)(2)(B)--though it allows challenges to
“the underlying tax liability for any tax period if the person
did not receive any statutory notice of deficiency”--doesn’t say
that it allows such challenges “only if the person did not
receive any statutory notice of deficiency.”
This parsing has no support in any caselaw, as the Baltics’
counsel admitted at oral argument. And we won’t be creating any
here: Congress used section 6330(c)--and only section 6330(c)--
to describe how a CDP hearing would work. We find no authority
elsewhere in the Code to read that section’s command that the IRS
allow challenges to liability in some situations to mean that the
IRS must allow challenges to liability in all situations.
The Baltics’ next sally looks more effective. They claim
that making an OIC-DATL is not a challenge to their underlying
liability. If it’s not, then it should have been considered at
the CDP hearing, because section 6330(c)(2)(A)(iii) lists OICs as
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a collection alternative that a taxpayer may raise at the
hearing. We have, however, already come very close to holding
that OIC-DATLs are a prohibited challenge to the underlying tax
liability. In Hajiyani v. Commissioner, T.C. Memo. 2005-198, we
wrote in a footnote that an OIC-DATL “would address the merits of
the underlying liability. Since petitioner is precluded from
questioning the underlying liabilities, his offer would not
provide him any relief....” But the Baltics are right in noting
that Hajiyani--in the text--held that the Commissioner was
justified in not considering an OIC-DATL because the taxpayers
hadn’t even submitted one before the notice of determination came
out. The same is true of the taxpayers in Jones v. Commissioner,
T.C. Memo. 2007-142, and in Kindred v. Commissioner, 454 F.3d
688, 696 (7th Cir. 2006) (affirming an unpublished order granting
the Commissioner summary judgment).
We’ve also held that the Commissioner didn’t abuse his
discretion in rejecting an OIC-DATL where the underlying tax
liability was previously stipulated in a Tax Court decision,
because a stipulated tax liability can’t validly be considered a
“doubtful liability” under the applicable regulation. Sec.
301.7122-1(b)(1), Proced. & Admin. Regs.; Oyer v. Commissioner,
T.C. Memo. 2003-178, affd. 97 Fed. Appx. 68 (8th Cir. 2004).
We recognize that the Baltics’ case is a bit different.
They plausibly distinguished their situation from cases like
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Hajiyani by having made sure that the IRS employee conducting
their CDP hearing had an OIC-DATL sitting in front of her. And,
though they didn’t discuss Oyer, the Baltics could likewise
distinguish that case from theirs by saying that they never
signed a stipulated decision, but simply chose not to start a Tax
Court case when they had a chance.
The Baltics also have one case, Siquieros v. United States,
94 AFTR 2d 2004-5518, 2005-1 USTC par. 50,244 (W.D. Tex. 2004),
affd. 124 Fed. Appx. 279 (5th Cir. 2005), that they argue
supports them. Or at least one sentence in that case that
supports them: “Her [i.e., Siquieros’s] offer based on doubt as
to liability is not synonymous with a challenge to the underlying
liability.” Id. at 2004-5524, 2005-1 USTC par. 50,244, at
87,570.
The quote is accurate, but Siquieros remains the thinnest of
supports for any general proposition that an OIC-DATL is not a
challenge to an “underlying tax liability.”6 It is, for one
thing, a responsible-party, trust-fund case.7 And Siquieros was
6
The court held that the IRS did not abuse its discretion
in refusing to accept Siquieros’s OIC. Siquieros, 94 AFTR 2d at
2004-5518, 2005-1 USTC at 87,570-87,571. It’s in the court’s
discussion of why the rejection wasn’t an abuse of discretion
that it noted that an OIC-DATL wasn’t synonymous with a challenge
to the underlying liability. Neither side had actually disputed
the point. Id.
7
Taxes that employers withhold from their employees’ wages
are known as “trust fund taxes” because they are deemed a special
(continued...)
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challenging underlying liability only in the sense that she was
contesting her own responsibility for the tax, not in the sense
of challenging the amount of that tax. Siquieros had not had an
opportunity before her CDP hearing to challenge her
responsibility for the unpaid tax; the Baltics did. And we
conclude that that is an important--indeed decisive--difference.
The word “liability” in section 6330(c)(2)(B) and section
301.7122-1(b)(1), Proced. & Admin. Regs., refers not just to an
amount of tax owed for a particular period but also the amount
owed by a particular person for a particular period. Section
6203, defining a tax assessment, states that an assessment is the
formal recording of a taxpayer’s tax liability, and the
accompanying regulation requires the summary record of assessment
to "provide identification of the taxpayer, the character of the
liability assessed, the taxable period, if applicable, and the
7
(...continued)
fund in trust for the United States under section 7501(a).
Slodov v. United States, 436 U.S. 238, 243 (1978). One remedy
that the Commissioner has against a business that fails to pay
these withheld taxes is to collect them from a “responsible
person” within the company; i.e., someone who was required to pay
over the tax. Sec. 6672. A section 6672 penalty is payable on
notice and demand, without issuance of a notice of deficiency.
See sec. 6212(a). Our court therefore has no jurisdiction to
review the penalty, Moore v. Commissioner, 114 T.C. 171, 175
(2000), and a taxpayer must usually pay and sue for a refund to
get judicial review. Sec. 6672(c)(2); Steele v. United States,
280 F.2d 89 (8th Cir. 1960). A key issue in such cases is often
whether the person suing for a refund is a “responsible person”
within the meaning of section 6672(a). See, e.g., McGlothin v.
United States, 720 F.2d 6 (6th Cir. 1983).
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amount of the assessment." Sec. 301.6203-1, Proced. & Admin.
Regs. Siquieros was arguing only that she herself shouldn’t be
liable for her employer’s failure to pay over the taxes because
she was only a secretary.
The Baltics are not arguing that the IRS is going after the
wrong person. Neither Baltic, for example, is claiming innocent-
spouse relief; they dispute only the amount of tax due. Which
is, of course, exactly what they could have challenged by filing
a petition when they got their notice of deficiency. We
therefore unequivocally hold that a challenge to the amount of
the tax liability made in the form of an OIC-DATL by a taxpayer
who has received a notice of deficiency is a challenge to the
underlying tax liability. Because the Baltics already had their
chance to challenge that liability, section 6330(c)(2)(B) bars
them from challenging it again.8
That leaves only the settlement officer's refusal to wait
until the IRS reviewed the OIC-DATL and completed its audit
8
The Baltics also argue that section 301.6330-1(e)(3), Q&A-
E9, Proced. & Admin. Regs., grants discretion to IRS employees to
consider challenges to liability despite section 6330(c)(2)(B)
and ask us to review for abuse of discretion the decision by the
settlement officer not to review their liability. We've already
held that the Code itself limits the power of both the
Commissioner and our Court to reconsider liability issues.
Nichols v. Commissioner, T.C. Memo. 2007-5. Here, the
determination did not address the precluded issue of liability,
and the Baltics’ challenge amounts to nothing more than a
roundabout effort to challenge what they’re prevented from
challenging on appeal.
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reconsideration (which, we should note, no one doubts is a form
of challenge to their underlying tax liability). The Baltics
contend that the Commissioner’s refusal was itself an abuse of
discretion. We have already rejected this argument when a
taxpayer urged waiting for an audit reconsideration. Jones v.
Commissioner, T.C. Memo. 2007-142. Adding a desire to wait for
consideration of an OIC-DATL as well adds nothing to the
argument: The settlement officer here was just heeding the
exhortation of the applicable regulation to issue a notice of
determination as expeditiously as possible. Sec. 301.6330-
1(e)(3), Q&A-E9, Proced. & Admin. Regs.
The purpose of a CDP hearing is to balance the government’s
requirement for effective tax administration with the taxpayer’s
concern that collection be minimally intrusive. By deciding to
hold off on collection by levy but preserve the government’s lien
priority while other employees of the IRS considered the Baltic’s
OIC-DATL and various late-filed returns, the Commissioner
exercised discretion in a completely reasonable way, and so
An order and decision in favor
of respondent will be entered.