Haubrich v. Comm'r ( 2009 )

T.C. Memo. 2009-45
UNITED STATES TAX COURT
GREGORY H. HAUBRICH, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 26422-06L. Filed February 24, 2009.
Frederick J. O’Laughlin, for petitioner.
William F. Castor, for respondent.
MEMORANDUM OPINION
MARVEL, Judge: Pursuant to section 6330(d),1 petitioner
seeks review of respondent’s determination to proceed with the
collection of petitioner’s 2002 Federal income tax liability.
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 issues for decision are: (1) Whether respondent abused his
discretion in issuing a Final Notice of Intent to Levy and Notice
of Your Right to a Hearing for 2002 (final notice) while
petitioner’s bankruptcy case was pending, and (2) whether
respondent abused his discretion in rejecting petitioner’s
installment agreement offer.
Background
The parties submitted this case fully stipulated under Rule
122. We incorporate the stipulated facts into our findings by
this reference. Petitioner resided in Oklahoma when his petition
was filed.
I. Petitioner’s Bankruptcy Proceedings
On June 12, 2002, petitioner and his former wife, Betty A.
Haubrich (Ms. Haubrich), filed a bankruptcy petition under
chapter 7 of the Bankruptcy Code with the U.S. Bankruptcy Court
for the Western District of Oklahoma (bankruptcy court).2 On
January 28, 2003, the bankruptcy trustee filed an adversary
complaint to compel petitioner to turn over bankruptcy estate
property; the bankruptcy trustee also objected to petitioner’s
discharge. On June 27, 2003, the bankruptcy court issued an
Order Approving Compromise of Controversy, pursuant to which
petitioner was to pay $22,000 to the bankruptcy trustee in
2
On Jan. 8, 2003, the bankruptcy court discharged Ms.
Haubrich from all dischargeable debts.
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settlement of the adversary proceeding. However, petitioner paid
only $1,700 of the compromise amount.3 On February 24, 2004, the
bankruptcy court entered a $20,300 judgment against petitioner,
which was nondischargeable.
Petitioner was neither granted nor denied a discharge in the
bankruptcy case. On August 6, 2005, the bankruptcy case was
closed.
II. Petitioner’s Tax Collection Proceeding
Petitioner filed his 2002 Form 1040, U.S. Individual Income
Tax Return, but failed to pay $6,578 of the $6,879 tax liability
reported on the return. On January 28, 2005, respondent issued
petitioner the final notice.4 On February 25, 2005, respondent
received petitioner’s timely Form 12153, Request for a Collection
Due Process Hearing. In an attachment to his Form 12153
petitioner stated that he disagreed with the proposed levy
because it would cause him extreme hardship and also because
respondent issued the final notice after petitioner had filed a
bankruptcy petition.
3
The parties stipulated that the bankruptcy court found that
petitioner had paid $3,700 to the trustee. However, the
bankruptcy court’s judgment stated that petitioner had paid
$1,700.
4
The record contains only the first page of the final
notice, which does not state to which year the final notice
relates.
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On August 30, 2006, Settlement Officer Minnie L. Banks (Ms.
Banks) mailed petitioner a letter scheduling a telephone hearing
for October 12, 2006.5 Ms. Banks requested that petitioner
provide a completed Form 433-A, Collection Information Statement
for Wage Earners and Self-Employed Individuals, Form 433-B,
Collection Information Statement for Businesses, and supporting
documents. Ms. Banks also stated that petitioner must have filed
all required Federal tax returns to be eligible for alternative
collection methods, such as an installment agreement or offer-in-
compromise. On September 19, 2006, Ms. Banks sent petitioner a
letter rescheduling the telephone conference to October 31, 2006,
pursuant to a request of petitioner’s representative, Frederick
J. O’Laughlin (Mr. O’Laughlin).6
On October 31, 2006, Mr. O’Laughlin submitted petitioner’s
Form 433-A, Form 433-B, and supporting documents, which showed
that petitioner was an attorney and sole owner of the Haubrich
Law Firm, P.C. Mr. O’Laughlin also submitted to Ms. Banks
5
Although the final notice related to 2002 only, on his Form
12153 petitioner requested a hearing with respect to “200 [sic],
2002, and 2003”. The header of the Aug. 30, 2006, letter from
Ms. Banks to petitioner mistakenly stated: “Tax Period(s) Ended:
12/2001 12/2003”. However, in the letter Ms. Banks stated that
petitioner’s hearing request was timely only with respect to
2002.
6
Mr. O’Laughlin again requested to reschedule the hearing,
but Ms. Banks denied the request.
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petitioner’s offer to enter into an installment agreement to pay
his unpaid tax liability.
Ms. Banks reviewed the Form 433-A and Form 433-B petitioner
submitted and determined that petitioner had received income from
his corporation as distributions rather than wages and,
consequently, had incorrectly reported the payments on his
Federal income tax returns. Ms. Banks also concluded that
petitioner’s corporation was not making Federal tax deposits and
had not filed required Forms 941, Employer’s Quarterly Federal
Tax Return, Forms 940, Employer’s Annual Federal Unemployment
(FUTA) Tax Return, and Forms 1120S, U.S. Income Tax Return for an
S Corporation.7
On October 31, 2006, Ms. Banks held a telephone hearing with
Mr. O’Laughlin. Ms. Banks stated that the installment agreement
offer faxed earlier that day could not be considered because
petitioner was not in compliance. Ms. Banks then temporarily
transferred the call to the Appeals team manager who explained
that an installment agreement could not be considered because
petitioner reported income from his law practice as distributions
rather than wages.
7
According to Ms. Banks’s case activity record, which is
part of the record, Ms. Banks also reviewed respondent’s
transcripts of petitioner’s account. In the case activity record
Ms. Banks stated that petitioner was “not in compliance with
estimated tax payment.” However, the case activity record does
not state for which years petitioner was not in compliance with
the estimated tax payment requirement.
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During the October 31, 2006, hearing Mr. O’Laughlin argued
that the final notice was invalid as it was issued during
petitioner’s bankruptcy proceeding. Ms. Banks explained that
respondent’s records showed that petitioner filed a bankruptcy
petition in June 2002 and the bankruptcy case was closed in April
2004. Mr. O’Laughlin stated that the case closing date was
incorrect. On November 13, 2006, Mr. O’Laughlin sent to Ms.
Banks a copy of the final decree in petitioner’s bankruptcy case
establishing that the bankruptcy case was closed on August 6,
2005.8
On November 17, 2006, respondent issued petitioner a Notice
of Determination Concerning Collection Action(s) Under Section
6320 and/or 6330 (notice of determination) with respect to 2002
sustaining the proposed levy action. The notice of determination
stated that Ms. Banks verified that all applicable laws and
procedures were met, considered all issues raised, and balanced
8
During the hearing Mr. O’Laughlin also argued that
petitioner’s Form 12153 was timely for 2001, 2002, and 2003. Ms.
Banks explained that the final notice was issued by respondent’s
Oklahoma City office, and it was for 2002 only. On Mar. 14,
2005, respondent’s Philadelphia office issued petitioner a Final
Notice of Intent to Levy and Notice of Your Right to a Hearing
for 2001 and 2003. Consequently, petitioner’s Form 12153 was
premature with respect to 2001 and 2003 because he submitted it
on Feb. 25, 2005. On May 30, 2006, Mr. O’Laughlin submitted to
respondent’s Philadelphia office a copy of the same Form 12153.
During the hearing Ms. Banks explained that the second submission
of the Form 12153 was not a timely request for a hearing with
respect to 2001 and 2003 because respondent did not receive it
within the 30-day deadline.
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the efficiency and intrusiveness of the proposed collection
action. In the notice of determination respondent’s Appeals
Office determined that the proposed levy was appropriate and the
installment agreement could not be considered because “the
taxpayer is not [in] compliance according to the law.” With
respect to issues petitioner raised, the attachment to the notice
of determination stated that petitioner had offered a collection
alternative in the form of an installment agreement. The
attachment also stated that the Appeals team manager had
explained to Mr. O’Laughlin during the October 31, 2006, hearing
that petitioner’s installment agreement
was not a viable option because the income Mr.
Haubbrich [sic] receives from his Corporation was
incorrectly reported on Mr. Haubrich’s 1040 tax
returns. The income received by Mr. Haubrich was
reported as distributions whereas it should have been
reported as wages because Mr. Haubrich is the sole
owner and employee of the Corporation. * * *
The attachment to the notice of determination also described Ms.
Banks and Mr. O’Laughlin’s conversation regarding the correct
date when the bankruptcy case was closed.
Discussion
I. Section 6330
Section 6330(a) provides that no levy may be made on any
property or right to property of any person unless the Secretary
has notified such person in writing of the right to a hearing
before the levy is made. If the person requests a hearing, a
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hearing shall be held before an impartial officer or employee of
the Internal Revenue Service Office of Appeals. Sec. 6330(b)(1),
(3). At the hearing a taxpayer may raise any relevant issue,
including appropriate spousal defenses, challenges to the
appropriateness of the collection action, and collection
alternatives. Sec. 6330(c)(2)(A). A taxpayer may contest the
existence or amount of the underlying tax liability at the
hearing if the taxpayer did not receive a notice of deficiency
for the tax liability or did not otherwise have an earlier
opportunity to dispute the tax liability. Sec. 6330(c)(2)(B);
see also Sego v. Commissioner, 114 T.C. 604, 609 (2000).
Following a hearing, the Appeals Office must determine
whether the proposed levy action may proceed. The Appeals Office
is required to take into consideration: (1) Verification
presented by the Secretary that the requirements of applicable
law and administrative procedure have been met, (2) relevant
issues raised by the taxpayer, and (3) whether the proposed levy
action appropriately balances the need for efficient collection
of taxes with a taxpayer’s concerns regarding the intrusiveness
of the proposed levy action. Sec. 6330(c)(3).
Section 6330(d)(1) grants this Court jurisdiction to review
the determination made by the Appeals Office in connection with
the section 6330 hearing. Where the underlying tax liability is
not in dispute, the Court will review the determination of the
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Appeals Office for abuse of discretion. Lunsford v.
Commissioner, 117 T.C. 183, 185 (2001); Sego v. Commissioner,
supra at 610; Goza v. Commissioner, 114 T.C. 176, 182 (2000). An
abuse of discretion occurs if the Appeals Office exercises its
discretion “arbitrarily, capriciously, or without sound basis in
fact or law.” Woodral v. Commissioner, 112 T.C. 19, 23 (1999).
Petitioner does not dispute the underlying tax liability for
2002. Accordingly, we review respondent’s determination for
abuse of discretion. See Lunsford v. Commissioner, supra at 185.
II. Petitioner’s Automatic Stay Argument
Petitioner contends that respondent abused his discretion in
upholding the levy because the notice of determination was based
on an invalid final notice. He asserts that the final notice was
invalid because respondent issued it on January 28, 2005, which
was after June 12, 2002, the date petitioner had filed his
bankruptcy petition, and before August 6, 2005, the date
petitioner’s bankruptcy case was closed. Accordingly, petitioner
argues, respondent issued the final notice in violation of the
automatic stay.
Title 11 U.S.C. sec. 362(a)(1) (2006) provides that after a
bankruptcy petition is filed all entities are stayed from
commencing or continuing “a judicial, administrative, or other
action or proceeding against the debtor that was or could have
been commenced before the commencement of the case under this
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title, or to recover a claim against the debtor that arose before
the commencement of the case under this title”. Title 11 U.S.C.
sec. 362(a)(6) (2006) provides that a bankruptcy petition also
operates as a stay of “any act to collect, assess, or recover a
claim against the debtor that arose before the commencement of
the case under this title”. Title 11 U.S.C. sec. 362(b)(9)
(2006) provides that the following actions are not violations of
an automatic stay: “(A) an audit by a governmental unit to
determine tax liability; (B) the issuance to the debtor by a
governmental unit of a notice of tax deficiency; (C) a demand for
tax returns; or (D) the making of an assessment for any tax”.
We have previously held that a final notice of intent to
levy after a taxpayer has failed to pay his taxes constitutes a
commencement of an administrative action against a taxpayer
within the meaning of 11 U.S.C. sec. 362(a)(1). See Smith v.
Commissioner, 124 T.C. 36, 43 (2005); Beverly v. Commissioner,
T.C. Memo. 2005-41. However, an administrative action against a
taxpayer is not affected by the automatic stay if such action
pertains to a claim arising after a bankruptcy petition is filed.
See Parker v. Commissioner, T.C. Memo. 2006-43. For this purpose
Federal income tax liability arises no sooner than the end of the
taxable year. See id.; Dixon v. United States ex. rel. IRS, 210
Bankr. 610, 614 (Bankr. W.D. Okla. 1997), affd. 218 Bankr. 150
(Bankr. 10th Cir. 1998). Therefore, the Government’s claim to
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petitioner’s 2002 Federal income tax liability arose no earlier
than December 31, 2002, which is after June 12, 2002, the date on
which petitioner filed his bankruptcy petition. Because the
claim to the tax liability arose after petitioner filed his
bankruptcy petition, it is a postpetition claim, and the final
notice was not subject to the automatic stay provisions of the
Bankruptcy Code. See Parker v. Commissioner, T.C. Memo. 2006-
117; Parker v. Commissioner, T.C. Memo. 2006-43. Accordingly,
respondent did not abuse his discretion in issuing the final
notice while petitioner’s bankruptcy case was pending.
III. Rejection of the Installment Agreement Offer
Petitioner contends that respondent abused his discretion by
rejecting petitioner’s request for an installment agreement on
the ground that “another taxpayer distributed money to
petitioner”. Petitioner also contends that respondent abused his
discretion by using another taxpayer’s filing noncompliance as a
ground for rejecting petitioner’s installment agreement. For the
reasons described below, we will remand this case to respondent’s
Appeals Office for reconsideration of petitioner’s installment
agreement proposal.
Section 6159(a) authorizes the Secretary “to enter into
written agreements with any taxpayer under which such taxpayer is
allowed to make payment on any tax in installment payments if the
Secretary determines that such agreement will facilitate full or
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partial collection of such liability.” Accepting or rejecting an
installment agreement proposed by a taxpayer is within the
discretion of the Commissioner. See sec. 301.6159-1(b)(1)(i),
Proced. & Admin. Regs. We review the Commissioner’s rejections
of installment agreement proposals for abuse of discretion. See
Orum v. Commissioner, 123 T.C. 1, 12-13 (2004), affd. 412 F.3d
819 (7th Cir. 2005); Schulman v. Commissioner, T.C. Memo. 2002-
129.
Respondent’s Appeals Office stated in the notice of
determination that Ms. Banks was unable to consider petitioner’s
installment agreement because petitioner was “not [in] compliance
according to the law.” The attachment to the notice of
determination explains that petitioner’s noncompliance consisted
of incorrect reporting of income from his law practice. The
record does not suggest that petitioner failed to report income
from his professional corporation; rather, Ms. Banks rejected the
installment agreement proposal because she determined that “The
income received by Mr. Haubrich was reported as distributions
whereas it should have been reported as wages because Mr.
Haubrich is the sole owner and employee of the Corporation.”
Part 5 of the Internal Revenue Manual (IRM) contains
guidelines and instructions for Internal Revenue Service
employees with respect to collection process. IRM pt. 5.1.11.6.7
provides that the Employment Tax Program is responsible for
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determining when income of corporate officers should be reported
as wages.9 1 Administration, IRM (CCH), pt. 5.1.11.6.7(1), at
15,300 (May 27, 1999). The IRM instructs reviewing officers to
refer a case to the Employment Tax Program “when it is determined
during an investigation that a taxpayer may be treating employees
as independent contractors or officers may be taking draws,
loans, dividends, professional or administrative fees, etc., to
avoid reporting taxable wage.” Id. pt. 5.1.11.6.7(2). Although
it appears that Ms. Banks, the reviewing officer, should have
referred the case to the appropriate Employment Tax Program for a
determination of whether petitioner’s professional corporation
and/or petitioner were properly classifying and reporting income
distributed by the professional corporation to petitioner, Ms.
Banks did not make the referral. Instead she concluded that
petitioner10 was not in compliance, and as a result, she refused
to consider petitioner’s request for an installment agreement.
Ms. Banks’s concern about the behavior of petitioner and his
professional corporation is understandable given the emphasis
9
The Employment Tax Program responsibilities involve, inter
alia, determining the appropriateness of income tax on wages of
employees, employer tax and employee Social Security tax, and tax
for unemployment insurance. See 1 Administration, IRM (CCH), pt.
5.1.11.6.7(1), at 15,300 (May 27, 1999).
10
An entry in Ms. Banks’s activity record states that Ms.
Banks also determined that petitioner’s corporation was not in
compliance with the requirements to file Forms 941, 940, and
1120S and was not making Federal tax deposits.
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that the IRM places on present and future compliance in
evaluating collection alternatives. However, it appears that Ms.
Banks attributed the alleged noncompliance of a separate but
related professional corporation to petitioner in a manner that
may be contrary to the provisions of the IRM. In general the IRM
instructs the reviewing officer to consider the taxpayer’s
compliance with all filing requirements before granting an
installment agreement. See, e.g., IRM pt. 5.14.1.5.1(1) (“Filing
and paying compliance must be considered prior to determining
that the best manner of paying delinquent taxes is through an
installment agreement.”), 5.14.1.2(9)(E) (the taxpayer must file
current tax returns and pay current deposits), 5.14.1.3(4)(D)
(the taxpayer must be in compliance with filing requirements),
5.14.1.5.1(4) (the taxpayer must be in compliance with all filing
requirements before an installment agreement can be approved)
(July 12, 2005). However, the IRM draws a distinction between
noncompliance by the taxpayer seeking a collection alternative
and noncompliance by a related taxpayer. For example, IRM pt.
5.14.4.3 (July 12, 2005) addresses the issue of noncompliance by
a related entity and the impact of that noncompliance on a
request for an installment agreement made by the taxpayer and the
related entity. It provides that “If the person or entity that
is missing the returns does not file the required returns, a
recommendation for rejection can be given * * * regarding only
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the person or entity that is not in compliance, and the taxpayer
that is in compliance may be granted an installment agreement (if
appropriate).” IRM pt. 5.14.4.3(1) (July 12, 2005).
The Appeals Office did not determine that petitioner failed
to file a required return or that he failed to report the
distributions he received from his professional corporation
during 2002 and later years. The Appeals Office also did not
determine that petitioner reported the distributions he received
in a manner that was inconsistent with the way the professional
corporation classified and paid the distributions. We fail to
see how petitioner was not in compliance with a filing obligation
when he filed his 2002 return and reported the distributions he
received in a manner consistent with the classification and
payment of the distributions by the professional corporation.11
The noncompliance that the notice of determination identified was
the alleged noncompliance of a related taxpayer. The IRM appears
11
In her case activity record Ms. Banks states that
petitioner “is not in compliance with estimated tax payment.”
However, the notice of determination contains no finding with
respect to whether petitioner has a current obligation to make
estimated tax payments or that he was failing to comply with that
obligation. If petitioner is continuing to receive distributions
from his professional corporation that are not being treated as
wages, petitioner may well have an obligation to make estimated
tax payments, and a failure to do so is grounds for refusing to
consider collection alternatives. See Schwartz v. Commissioner,
T.C. Memo. 2007-155 (upholding the Commissioner’s determination
to proceed with the proposed collection action when the Appeals
Office determined that the taxpayer was not in compliance with
the estimated tax payment requirement).
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to require that the alleged noncompliance be referred to the
Employment Tax Program for investigation, but Ms. Banks
apparently did not do so. Instead she summarily concluded that
petitioner had failed to report his income from his professional
corporation as wages and that this failure was sufficient to
reject his collection alternative. Absent some explanation as to
why the Appeals Office was entitled to consider the alleged
noncompliance of a related taxpayer as the noncompliance of
petitioner, we cannot conclude on this record that the Appeals
Office did not abuse its discretion in refusing to consider
petitioner’s proffered installment agreement and in concluding
that collection action could proceed.
Accordingly, we shall remand this case to respondent’s
Appeals Office to consider whether petitioner is in compliance
within the meaning of relevant IRM provisions and, if so, whether
petitioner’s request for an installment agreement is appropriate.
We have considered the remaining arguments made by the
parties, and to the extent not discussed above, we conclude those
arguments are irrelevant, moot, or without merit.
To reflect the foregoing,
An appropriate order will
be issued.