DocketNumber: Case No: C 17-01523 SBA
Citation Numbers: 323 F. Supp. 3d 1119
Judges: Armstrong
Filed Date: 6/20/2018
Status: Precedential
Modified Date: 7/25/2022
The United States brings the instant action against Defendant Tom Gonzales *1122("Defendant"), as personal representative for the Estate of Thomas J. Gonzales, II (the "Estate"), and as successor trustee of THE THOMAS J. GONZALES II 2001 TRUST, under agreement dated November 26, 2001, as amended and restated on November 28, 2001 (the "Trust"), to collect unpaid interest assessed against Thomas J. Gonzales, II, deceased ("Taxpayer"). Presently before the Court is the United States' motion for summary judgment. Dkt. 35. Having read and considered the papers filed in connection with this matter and being fully informed, the Court hereby GRANTS IN PART and DENIES IN PART the United States' motion, for the reasons stated below. The Court, in its discretion, finds this matter suitable for resolution without oral argument. See Fed. R. Civ. P. 78(b) ; N.D. Cal. Civ. L.R. 7-1(b).
I. BACKGROUND
A. THE PRIOR ACTION
Taxpayer sold shares of stock resulting in a capital gain of $132,521,496 in the 2000 tax year. Dkt. 174 at 2, Tom Gonzales v. United States, Case No. 08-03189 SBA (N.D. Cal. Mar. 4, 2011) ("Refund Action" or "R.A."). To avoid the income tax attendant to such a gain, Taxpayer participated in a tax shelter. Id. at 14. In April 2001, he filed a tax return for the 2000 tax year, wherein he reported capital losses from the tax shelter. Id. at 5.
Taxpayer died in December 2001. Compl. ¶ 2. Upon his death, Defendant became the personal representative of the Estate and successor trustee of the Trust. Id. ¶¶ 3-4. Thereafter, Defendant signed a series of consent forms (i.e., the Consents) that purported to extend, through December 31, 2006, the deadline for the Internal Revenue Service ("IRS") to assess taxes against Taxpayer for the 2000 tax year. Gonzales Decl. ¶ 2.
On December 6, 2006, the IRS issued a notice of deficiency to Defendant, in his capacity as the representative of the Estate, for underpayment of income taxes in the amount of $26,231,835 and an accuracy-related penalty in the amount of $5,246,367. SNOD at US000064. On April 12, 2007, the IRS assessed the aforementioned sums, as well as $13,361,360.50 in interest. Compl. ¶ 16; Form 4340 at US000003. On or about April 13, 2007, the IRS gave notice of the assessment and made demand for payment. Compl. ¶ 17; Form 4340 at US000004.
The Estate paid the tax and penalty under protest on August 17, 2007. Compl. ¶ 11. Defendant, as the personal representative of the Estate, then filed an administrative claim for refund. Id. The IRS abated the penalty in full because the Estate had complied with the IRS's disclosure initiative regarding abusive tax shelters, but otherwise disallowed the claim. Id. ¶ 12. The IRS did not refund the penalty, however, but retained the funds as a setoff against a portion of the interest owed on the additional tax liability for 2000. Id.
On July 2, 2008, Defendant, as personal representative of the Estate, filed suit in this Court for a refund. Dkt. 1, R.A.
*1123Among other issues raised by the parties and decided by the Court was whether the IRS had properly credited the refund of the accuracy-related penalty against Taxpayer's unpaid statutory interest. Dkt. 174 at 19-20, R.A. The action was resolved in the United States' favor on summary judgment ("SJ Order"), id., and the Court entered judgment for the United States, Dkt. 175, R.A. The Ninth Circuit affirmed the judgment ("USCA Memo"), Dkt. 186, R.A., and the Supreme Court denied a petition for writ of certiorari ("USSC Order"), Dkt. 190, R.A. See Compl. ¶ 13.
B. THE INSTANT ACTION
Although Defendant satisfied the underpayment of income tax and penalty prior to filing the Refund Action, he failed to pay the interest assessed against Taxpayer for tax year 2000. Compl. ¶¶ 14, 18. As of August 29, 2016, Taxpayer remained indebted to the United States "in the amount of $8,749,116.09, plus such additional amounts, including interest and penalties, which accrued and continue to accrue as provided by law." Id. ¶ 19.
On March 21, 2017, the United States filed the instant action against Defendant-in his capacity as the personal representative of the Estate and as successor trustee of the Trust-to collect unpaid interest assessed against Taxpayer. The United States brings a single cause of action for reduction of interest to judgment.
On January 9, 2018, the United States filed the instant Motion for Summary Judgment, seeking judgment against Defendant, as personal representative of the Estate and successor trustee of the Trust, "in the amount of $9,234,440.14, for unpaid interest associated with the tax liability of [Taxpayer] for tax year 2000, less any additional credits according to proof, plus interest and other statutory additions as provided by
Defendant opposes the motion, arguing: (1) the IRS fails to establish the liability of either the Trust or the Estate; (2) the IRS's claim is barred by the statute of limitations; (3) the IRS did not give the requisite notice of the assessment of interest (4) the IRS's claim is barred by estoppel; and (5) the IRS cannot rely on the Form 4340 to carry its burden of proving the amount owed. Opp'n, Dkt. 38.
The United States filed a reply. Dkt. 41. After the close of briefing, the Court issued an order directing the parties to file supplemental briefs on two issues: (1) the liability of the Trust; and (2) the effect, if any, of the Refund Action on Defendant's statute of limitations claim. Dkt. 44. The parties submitted their respective briefs, and the motion is ripe for adjudication. U.S.'s Supp. Br., Dkt. 45; Def.'s Supp. Br., Dkt. 46.
II. LEGAL STANDARDS
A. SUMMARY JUDGMENT
A party may move for summary judgment on some or all of the claims or defenses presented in an action. Fed. R. Civ. P. 56(a). "Summary judgment is appropriate only where 'there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.' " Salazar-Limon v. City of Houston, Tex., --- U.S. ----,
In evaluating a motion for summary judgment, "the court must 'view the facts and draw reasonable inferences in the light most favorable to the [non-moving party].' " Salazar-Limon,
B. TAX LIABILITY
"In an action to collect taxes, the government bears the initial burden of proof." Palmer v. United States,
III. DISCUSSION
The United States moves to reduce outstanding interest to judgment. Interest accrues by operation of law upon the underpayment of any tax.
As discussed above, Defendant argues that the United States is not entitled to summary judgment for the following reasons: (1) it fails to establish the liability of either the Trust or the Estate; (2) its claim is barred by the statute of limitations; (3) it did not give the requisite notice of the assessment of interest; (4) its claim is barred by estoppel; and (5) it cannot rely on the Form 4340 to carry its burden of proving the amount owed. The Court addresses these arguments seriatim.
*1125A. LIABILITY OF THE ESTATE AND/OR TRUST
Defendant argues that the Estate and the Trust are distinct, and that the United States has failed to establish that the Trust (or any portion of it) is liable for the Taxpayer's outstanding indebtedness. The Court agrees.
Little information regarding the Trust is before the Court. Defendant asserts, and the United States does not dispute, that the Trust became irrevocable upon Taxpayer's death, and thus, is taxable as an entity separate from its grantor. After the United States failed to respond adequately to Defendant's argument in its reply brief, the Court directed the United States to file a supplemental brief addressing the issue. The supplemental brief fares no better. In conclusory fashion, the United States asserts:
For purposes of reducing the outstanding unpaid interest assessment to judgment, the tax liability of Thomas Joel Gonzales for tax year 2000 extends to Defendant Tom Gonzales as both the Personal Representative of [the Estate] and the Trustee of [the Trust]. See Sequoia Property and Equipment Ltd. Partnership v. United States, No. CV-F-97-5044,2002 WL 32388132 , *2 (E.D. Cal. June 3, 2002) (stating that an executor, administrator, or distributee of a distributed estate are proper parties for substitution of a deceased party). The Trust, as a beneficiary of the pour-over-will of Thomas Joel Gonzales, is a distributee of the Estate and therefore Defendant as Trustee is a property [sic ] party.
U.S.'s Supp. Br. at 1-2.
The Court finds that Sequoia, which concerns identification of a proper party to be substituted for a deceased litigant, is not directly on point.
Because the United States fails to demonstrate that the Trust is a proper party to this action, summary judgment as to the Trust is DENIED. In light of that determination, the Court focuses its remaining analysis solely on the Estate.
B. STATUTE OF LIMITATIONS
Defendant next argues that the Government's claim is barred by the three-year statute of limitations. Opp'n at 8 (citing
1. Validity of the Consents
Defendant notes that the statute of limitations was initially set to expire in 2004. Although the Consents purported to extend the statute of limitations to December 31, 2006, Defendant claims that the forms are "ambiguous." Opp'n at 8. Noting that the Consents are signed, "Tom Gonzales TTEE [i.e., trustee]," Defendant argues that he signed the consents in his capacity as the trustee of the Trust, not in his capacity as the personal representative of the Estate.
The Court finds this argument foreclosed by the Refund Action. Under the doctrine of res judicata, "a final judgment on the merits of an action precludes the parties from relitigating issues that were or could have been raised in that action." In re Baker,
In the Refund Action, the parties litigated the issue of the Taxpayer's liability for the 2000 and 2001 tax years. It is evident that Defendant could have raised the issue of the statute of limitations in that action. In fact, in the refund claim submitted to the IRS prior to the filing of the Refund Action, Defendant argued that "the statute of limitations for additional assessment had expired as of the date [the SNOD] was issued on December 6, 2006." Dkt. 28-1 at 32, R.A. For any of a number of reasons (e.g., because he deemed the argument meritless or because he explicitly relied on the validity of the consents in arguing that his refund claim for 2001 was timely, see Dkt. 91 at 21-22, R.A.), Defendant later omitted the statute of limitations argument from his complaint. Nevertheless, res judicata bars the Court from revisiting the legality of the underlying tax deficiency and assessment for which Defendant was found liable in the Refund Action.
2. The Limitations Period
Even if the Consents are valid, Defendant asserts that "the time period for assessing the tax and interest was extended only through December 31, 2006." Opp'n at 9. Noting that interest was not *1127assessed until April 12, 2007, Defendant argues that the assessment was time-barred. Defendant makes two material errors.
First, by operation of sections 6503(a)(1) and 6213(a), the statute of limitations was suspended for 150 days after the SNOD was issued on December 6, 2006.
Second, although a tax deficiency must be assessed within three years after a return is filed, interest "may be assessed and collected at any time during the period within which the tax to which such interest relates may be collected."
C. NOTICE
The Complaint alleges that notice of the assessment of interest and demand for payment thereof was given in April 2007. Compl. ¶ 17. Defendant asserts that the IRS failed to provide the alleged notice. As evidence of this purported failure, Defendant notes that he requested in discovery all notices and assessments sent to Taxpayer. Subject to and without waiving its general objections, the IRS responded that it had already produced responsive documents, identified as: (a) the SNOD; (b) the Form 4340; (c) the SJ Order; (d) the USCA Memo; and (e) the USSC Order. Defendant asserts that, "[o]bviously, none of these documents include any notice allegedly sent ... on or about April 13, 2007, for the interest assessment." Opp'n at 12. He argues that the allegation regarding notice is therefore "unsubstantiated," and it is "safe to conclude that no such notices exist."
The Government's response is somewhat unsatisfactory. It responds: "Defendant seems to believe that he was entitled to receive a notice, separate from the [SNOD], about the assessment of interest. This is simply not the case. Because the application of interest is automatic under [ section 6601 ] in the case of an underpayment, his notice was the [SNOD]. Defendant certainly cannot claim that he did not receive proper notice of the tax liability for which he has already received a complete adjudication." Reply at 2-3.
The SNOD issued in December 2006 did not include interest. To be sure, a notice of deficiency need not-and, according to IRS rules, should not-include interest. See
The Government's perfunctory and unsupported argument aside, the Court nevertheless finds that notice was proper. As stated above, "Form 4340 is probative evidence in and of itself and, 'in the absence of contrary evidence, [is] sufficient to establish that notices and assessments were properly made.' " Hansen,
Moreover, the Court notes that Defendant did, in fact, receive notice of the assessment of interest. In the Refund Action, the Estate itself alleged that, "on or about July 28, 2008, Defendant's [sic ] Internal Revenue Service credited the $5,246,367 [accuracy-related penalty] against asserted interest allegedly due of $13,361,360.50." Dkt. 28 ¶ 12 n.*, R.A. The propriety of crediting the accuracy-related penalty against the outstanding interest was litigated in the Refund Action. See Dkt. 174 at 19-20, R.A. It is therefore apparent that notice of the assessment of interest was given-and received-sometime before July 28, 2008.
D. ESTOPPEL
Defendant further argues that the Government should be estopped from asserting its claim of interest because the IRS twice represented that "no interest was due." Opp'n at 16. Specifically, on December 6, 2006 and again on June 11, 2008-attached to the SNOD and Disallowance, respectively,-the IRS provided a Form 4549-A, "Income Tax Discrepancy Adjustments," that reflected "Interest ( IRC § 6601 )" in the amount of $0.00. SNOD at US000069; Disallowance at US000198. Although acknowledging that estoppel is applied sparingly against the government, Defendant argues that the *1129IRS's misstatements are the "sort of 'official misconduct' that can be considered sufficient to estop the government."
"The traditional elements of an equitable estoppel claim include (1) the party to be estopped must know the facts; (2) he must intend that his conduct shall be acted on or must so act that the party asserting the estoppel has a right to believe it is so intended; (3) the latter must be ignorant of the true facts; and (4) he must rely on the former's conduct to his injury. Additionally, a party asserting equitable estoppel against the government must also establish that (1) the government engaged in affirmative misconduct going beyond mere negligence; (2) the government's wrongful acts will cause a serious injustice; and (3) the public's interest will not suffer undue damage by imposition of estoppel." Baccei v. United States,
Defendant fails to establish the elements of estoppel. The fact that no outstanding interest was shown on two forms is not necessarily an affirmative representation that no interest would be due. Rather, it may simply have been the case that the notices to which those forms were attached, i.e., the SNOD and Disallowance, did not address the matter of statutory interest. Moreover, even if the forms are construed as such a representation, Defendant has not shown that the IRS engaged in affirmative misconduct. Although the IRS may have been negligent in failing to accurately report the amount of interest owed, "negligence alone will not support a claim of equitable estoppel against the government." Baccei,
E. THE FORM 4340
Finally, Defendant contends that the Government is not entitled to rely on the Form 4340's presumption of correctness to "prove" the amount of interest owed. Opp'n at 12. As a threshold matter, Defendant errs in asserting that the United States must "prove" the amount of interest. "Although establishing the amount of tax liability is a matter of evidence, the amount of interest accrued on such tax liability is a matter of law." United States v. Sarubin,
In any event, Defendant's arguments challenging the Form 4340 are without merit. First, Defendant relies on Stallard v. United States,
Second, Defendant argues that the presumption of validity is rebutted here because "evidence shows the information in the forms to be erroneous." Opp'n at 14. Specifically, he asserts that, "in 2007, the Form 4340 would have said ... that the [$5.2 million penalty] was owed," even though the IRS subsequently abated the penalty on the ground that it was "wrongfully charged."
In view of the forgoing, the Court finds that the Government may rely on the Form 4340 to establish the amount of interest owed. The Form 4340, together with the Form INTSTD, shows a balance due of $9,234,440.14 as of January 4, 2018. See Palmer Decl. ¶ 7. Defendant offers no evidence to dispute this sum. Consequently, the Court finds that the Estate remains indebted to the United States in the sum of $9,234,440.14, plus interest as provided by
IV. CONCLUSION
In view of the forgoing,
IT IS HEREBY ORDERED THAT:
1. The Government's motion for summary judgment (Dkt. 35) is GRANTED IN PART and DENIED IN PART. The motion is DENIED as to the Trust, and GRANTED as to the Estate. Judgment shall be entered in favor of the United States and against Tom Gonzales, as Personal Representative for the Estate of Thomas J. Gonzales, II, in the amount of $9,234,440.14, plus interest as provided by
2. Given that the Government has failed to establish the liability of the Trust, and that the Court has already provided the Government an opportunity to file a supplemental brief on the issue, the Government shall SHOW CAUSE why the action against the Trust should not be *1131dismissed. The Government shall file a written response, not to exceed 5 pages, within 7 days of the date this Order is entered. Failure to comply with this Order will result in the dismissal of the action against the Trust without further notice.
IT IS SO ORDERED.
In support of the summary judgment motion, the United States provides the Declaration of David B. Palmer, IRS Revenue Officer ("Palmer Decl."), Dkt 35-1; Form 4340, Certificate of Assessments, Payments, and Other Specified Matters ("Form 4340"),
In opposition to the motion, Defendant provides, inter alia, the Declaration of Tom Gonzales ("Gonzales Decl."), Dkt. 38 at 18; the Declaration of Mark Wray ("Wray Decl."), Dkt. 38 at 19-20; Statutory Notice of Deficiency ("SNOD"),
In conclusory fashion, Defendant also disputes the liability of the Estate. Opp'n at 7 ("the moving papers fail to establish any basis for liability as the taxpayer of either the Trust or the Estate"). There is no doubt that Defendant, in his capacity as personal representative of the Estate, is a proper party, however. As a personal obligation of a decedent existing at the time of his or her death, unpaid income taxes are properly recovered as claims against the estate. See
Defendant posits: "In reality, if claim preclusion applies in this case to anyone, it should apply to the United States. In the [Refund] Action, the IRS could have, but did not, pursue the claim for additional interest." Def.'s Supp. Br. at 9. This issue was not raised in the opposition, and is beyond the scope of the supplemental briefing order. Moreover, an action to reduce unpaid tax assessments to judgment is not a compulsory counterclaim in a refund action. Caleshu v. United States,
The IRS is prohibited from making an assessment for 90 days after a notice of deficiency is issued.
A statutory notice of balance due constitutes a notice and demand for payment. See United States v. Scott,
In the Refund Action, the Government also produced a Form 4340, dated August 19, 2009, showing assessed interest in the amount of $13,361,360.50. Dkt. 170-2 at 4, R.A.
Brandt, cited by Defendant, is inapt and does not control. The Court in Brandt held that due process was violated where an agency provided misinformation (i.e., that no adverse action would be suffered) such that notice of an adverse proceeding was effectively deprived.
Nevertheless, the government may (and should) provide documentation to assist the Court in establishing the amount of interest owed. See Schroeder,