Nichols v. Comm'r

T.C. Memo. 2007-5
UNITED STATES TAX COURT
RICHARD NICHOLS AND LISA NICHOLS, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 1384-05L. Filed January 9, 2007.
David B. Shiner, for petitioners.
Gregory J. Stull, for respondent.
MEMORANDUM OPINION
HOLMES, Judge: In 2001, Richard Nichols and his wife Lisa
reached a compromise with the IRS on their 1994 tax liability.
The Nicholses agreed that the IRS could immediately assess and
collect an agreed amount, but they reserved the right to sue for
a refund. The Nicholses then learned that they had net operating
losses from later years. They asked the Commissioner to let them
use these losses to reduce their 1994 tax liability; they also
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asked for a partial abatement of interest. The Commissioner took
the position that a deal’s a deal, and moved to collect the
unpaid 1994 tax.
There are only two issues for us to decide: (1) may the
Nicholses use the net operating losses to fend off the
Commissioner’s collection effort?; and (2) are they entitled to
an abatement of interest? The Commissioner has moved for summary
judgment on both.
Background
This case began with the Commissioner’s audit of the
Nicholses’ 1994 tax return. The audit was prolonged, but in May
2001 the parties finally negotiated a compromise and executed a
standard IRS Form 870, entitled “Waiver of Restrictions on
Assessment and Collection of Deficiency in Tax and Acceptance of
Overassessment.” As the name states, a taxpayer who signs this
form waives any restrictions on assessment of a disputed tax by
the Commissioner. Waiving restrictions on assessment may seem a
minor detail--assessment is little more than a recording of a tax
liability in the IRS’s records, sec. 6203,1 but it is an
important milestone in tax procedure because, once the IRS
assesses a liability, it can then begin to try to collect.
Signing a Form 870 and agreeing to immediate assessment and
1
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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collection of a specific deficiency is not the same as agreeing
that the deficiency agreed to is accurate. A taxpayer who signs
the form may later claim a refund after paying. But he gives up
the right to come to Tax Court: “If you later file a claim and
the Service disallows it, you may file suit for refund in a
district court or in the United States Claims Court, but you may
not file a petition with the United States Tax Court.” Just to
make sure that point is clear, the form also states--directly
above the signature line--“I understand that by signing this
waiver, I will not be able to contest these years in the United
States Tax Court, unless additional deficiencies are determined
for these years.”
The Commissioner assessed the tax as agreed, but the
Nicholses never paid because they learned later in 2001 that one
of their businesses had produced net operating losses (NOLs) for
the tax years 1995 and 1997. This spurred them to file an
amended 1994 tax return (Form 1040X) in December 2002, claiming
these NOLs as deductions that they could carry back to the 1994
tax year. The IRS treated their 1040X as a refund claim and
rejected it as untimely.2 The filing and rejection of a Form
1040X is often the prelude to a refund action, but the Nicholses
2
The rejection letter stated that no credit or refund would
be allowed for a claim filed more than three years after the due
date of the returns which established the NOLs; i.e., the 1995
and 1997 tax returns.
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never filed one. With no voluntary payment in sight, the
Commissioner sent a collection due process (CDP) notice in
February 2003, which warned the Nicholses that he intended to
levy their property to collect the still unpaid 1994 taxes. The
Nicholses did not request a CDP hearing after getting the notice,
but instead sent a letter in March requesting reconsideration of
the IRS’s decision to deny them the benefit of the NOLs that they
had claimed on their 1040X.3
In April 2003, the IRS sent the Nicholses a CDP notice of
the filing of a federal tax lien. This time, the Nicholses did
request a CDP hearing, arguing that the filing of a lien was
premature as there were still “significant issues that remain
unresolved.” Foremost among these open issues was their March
2003 request to the IRS that it reconsider its decision denying
them the NOL carrybacks. Their CDP request also mentioned that
they planned to seek an abatement of interest, though they didn’t
actually ask for one in their CDP request.4
3
At about the same time, they also sent a letter to the IRS
asking for an installment payment plan, conditioned on a
reduction in the 1994 deficiency. However, at that time they had
not filed a tax return for any tax year after 1997, and the
Commissioner will not consider giving installment agreements to
taxpayers who are not current in their filing obligations. See
Orum v. Commissioner, 412 F.3d 819, 820 (7th Cir. 2005), affg.
123 T.C. 1 (2004); Internal Revenue Manual sec. 5.14.1.5.1(4) and
(5).
4
The Nicholses raised several other procedural arguments in
their CDP request which they have since conceded.
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The Nicholses finally requested interest abatement on
October 31, 2003, in a letter sent to an IRS agent not involved
in the CDP process. In that letter, they asked for an abatement
of 75% of the accrued interest because of “numerous lengthy spans
of time during which the files just sat on the respective
personnel’s desks.” They also claimed that the initial audit
took six years to complete and that this was an unreasonable
amount of time. The letter didn’t offer any other reasons for
the interest abatement, nor did it explain why they decided to
ask for an abatement of only 75 percent of the interest charged.
The first IRS agent to consider the matter denied the request
quickly, but the Nicholses asked the IRS Appeals Office to review
that denial, arguing that the acts complained of were
“managerial” under section 301.6404-2 of the Procedure and
Administration Regulations. The Appeals Office has not yet held
a conference to consider their request.
Although the Nicholses had not listed either the NOL
carryback or the interest abatement issues as reasons to release
the lien, the Appeals officer who held the CDP hearing considered
the NOL carryback issue and noted in the record that the
Nicholses were pursuing interest abatement. In June 2004, that
officer tentatively agreed with the Nicholses to allow all the
NOLs. In a letter confirming their understanding of this
agreement, the Nicholses also asked him to abate all interest and
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penalties “to expedite the closure of the 1994 tax year.” All
this fell through, though, when the Appeals team manager looked
at the arrangement and nixed both the tentative settlement and
the Nicholses’ plea for interest abatement.
In October 2004, the Appeals officer faxed a draft version
of the notice of determination to the Nicholses at their request.
This draft included the NOLs as a separate issue “raised by the
taxpayer” and concluded that the 1994 Form 1040X needed to be
directed to a different division within the IRS if it was to lead
to a reconsideration of the 1994 tax liability. The final notice
of determination, issued on December 22, 2004, no longer included
the NOLs as a separate issue, noting them only as part of a
collection alternative offered by the Nicholses--one which “may
be considered by other functions within the Service.” (This may
refer to the IRS’s audit reconsideration group.) The Nicholses
filed a timely petition to review this final notice of
determination, and the Commissioner has now moved for summary
judgment. The Nicholses were Illinois residents when they filed
their petition, and we put the case on a Chicago trial calendar.
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). If there
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are any factual inferences to be made, we make them in favor of
the party opposing summary judgment--in this case, the Nicholses.
See Adickes v. S.H. Kress & Co., 398 U.S. 144, 157 (1970). The
Nicholses may not, however, rest on their pleadings but “must set
forth specific facts showing that there is a genuine issue for
trial.” Rule 121(d); Dahlstrom v. Commissioner, 85 T.C. 812,
820-21 (1985).
A. Challenge to Deficiency
The first issue is whether the Nicholses can apply their
NOLs to reduce the tax liability that they agreed the
Commissioner could assess when they signed the Form 870. If this
case was one under section 6213(a) to redetermine a deficiency,
the answer would be easy: The Supreme Court itself has ruled
that a waiver of assessment, signed before the Commissioner sends
a notice of deficiency, is fully effective and allows the
Commissioner to begin collection immediately after assessment.
See United States v. Price, 361 U.S. 304, 313 (1960). Courts
uniformly understand that signing a Form 870 means giving up the
right to come to Tax Court with a deficiency suit. See Smith v.
United States, 328 F.3d 760, 766-767 (5th Cir. 2003); Phila. &
Reading Corp. v. United States, 944 F.2d 1063, 1067 (3d Cir.
1991); Kalil v. Enochs, 295 F.2d 467, 469 (5th Cir. 1961) (and
cases cited there); Webster v. Commissioner, T.C. Memo. 1992-538.
The Nicholses claim that they are not trying to rewrite the
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deal they made but only apply additional deductions to the agreed
upon deficiency. To support their argument, they rely on Urbano
v. Commissioner, 122 T.C. 384, 392 (2004), where we held that the
parties’ agreement that a particular amount could be assessed did
not bar us from reviewing that amount when the reason for review
was not part of the original agreement and was unknown by either
party at the time the agreement was signed. The Nicholses claim
that their situation is just like the one in Urbano because their
NOLs weren’t included in the Form 870 and neither party knew of
their availability when they signed the form.
The problem with this argument is that Urbano featured a
different IRS form, Form 4549-CG. Id. at 387. The consent-to-
assessment language on a Form 4549-CG states: “I do not wish to
* * * contest in the United States Tax Court the findings in this
report. Therefore, I give my consent to the immediate assessment
and collection of any increase in tax and penalties * * * .”
This waiver, which extends only to “the findings in this report,”
is plainly more limited than the waiver on a Form 870. And in
Urbano, we heard the taxpayers’ challenge to the amount of
interest that they owed because the “findings” reported on the
Form 4549-CG did not include a finding on that issue. Id. at
392. A Form 870 has a different purpose--it memorializes an
agreement that the Commissioner can assess a particular amount of
tax. Someone signing a Form 870 is not even agreeing that he
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owes the extra tax--only that the Commissioner can assess and
collect it, leaving him with the right to sue for a refund.
Likewise, from the Commissioner’s perspective, signing a Form 870
isn’t his agreement that no more extra tax might be owed; the
“General Information” section of Form 870 states: “[Your consent]
will not prevent us from later determining, if necessary, that
you owe additional tax * * *.”
But the Nicholses have another argument. They contend that,
even if the Form 870 would bar them from opening the front door
to Tax Court to challenge the deficiency assessed against them,
they can still sneak in the back door by challenging the
Commissioner’s decision to try to collect on the assessment
because they never got a notice of deficiency. And section
6330(c)(2)(B) gives their argument a superficial plausibility--
that section allows taxpayers to challenge their underlying tax
liability if they “did not receive any statutory notice of
deficiency for such tax liability or did not otherwise have an
opportunity to dispute such tax liability.”
The Nicholses, it is undisputed, did not receive a notice of
deficiency. But of course the reason they didn’t receive one is
that they voluntarily waived their right to do so when they
signed the Form 870. We have held that section 6330 “provides no
consolation to petitioners who themselves made the choice not to
receive * * * [a notice of deficiency].” Aguirre v.
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Commissioner, 117 T.C. 324, 327 (2001); see also Deutsch v.
Commissioner, T.C. Memo. 2006-27. And that’s just the choice the
Nicholses made.
The Nicholses’ claim must also fail for a second reason.
Before the Commissioner tried collecting the disputed 1994
liability via a lien under section 6320, he had sent them a CDP
notice saying that he intended to collect via a levy under
section 6330. Even if the Nicholses hadn’t signed the Form 870,
failing to request a CDP hearing after getting a notice of intent
to levy would bar them from contesting their tax liability. The
regulation states:
Where the taxpayer previously received a CDP
Notice under section 6330 with respect to the
same tax and tax period and did not request a
CDP hearing with respect to that earlier CDP
Notice, the taxpayer already had an
opportunity to dispute the existence or
amount of the underlying tax liability.
Sec. 301.6320-1(e)(3), A-E7, Proced. & Admin. Regs; see also Bell
v. Commissioner, 126 T.C. 356, 358 (2006); Mays v. Commissioner,
T.C. Memo. 2006-197.
The Nicholses finally argue that the Commissioner forfeited
the right to invoke the above regulation--section 301.6320-
1(e)(3), A-E7, Proced. & Admin. Regs.--when he actually
considered the NOLs during their later CDP hearing. See sec.
301.6320-1(f)(2), A-F5, Proced. & Admin. Regs. (allowing Tax
Court review of any issue raised in the taxpayer’s CDP hearing).
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This argument hearkens to the liberal rules of pleading that
treat issues actually tried as if they had been raised in the
pleadings. See Rule 41(b)(1); Fed. R. Civ. P. 15(b). And the
Nicholses might even be able to tease such an argument out of the
regulations themselves. Consider the regulation as it stood when
they had their hearing:
In seeking Tax Court or district court review
of Appeals’ Notice of Determination, the
taxpayer can only request that the court
consider an issue that was raised in the
taxpayer’s CDP hearing.
Sec. 301.6320-1(f)(2), A-F5, Proced. & Admin. Regs. (as amended
in 2002) (emphasis added). And compare it to the recent
revision:
In seeking Tax Court review of a Notice of
Determination, the taxpayer can only ask the
court to consider an issue, including a
challenge to the underlying tax liability,
that was properly raised in the taxpayer’s
CDP hearing.
Sec. 301.6320-1(f)(2), A-F3, Proced. & Admin. Regs. (effective
Nov. 16, 2006) (emphasis added).
The problem with this reasoning is that the revised
regulation states existing law; it doesn’t change it. We had
already held before this revision that the Code itself limits the
power of the Commissioner (and on appeal, us) to reconsider
liability issues. De novo review such as the Nicholses are
requesting is appropriate only “[w]here the validity of the tax
liability was properly at issue in the hearing * * *.” H. Conf.
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Rept. 105-599, at 266 (1998), 1998-3 C.B. 770, 1020; see Sego v.
Commissioner, 114 T.C. 609-610 (2000). Because they gave up
their right to come to Tax Court to redetermine their deficiency
before collection, they can’t successfully complain when the
Commissioner tries to collect.
B. Abatement of Interest
The Nicholses also ask us to review their request for
interest abatement, either as a direct appeal of the
Commissioner’s denial of their request under section 6404 or as
part of their CDP hearing under section 6320. Under either
theory, we must decide whether the Commissioner abused his
discretion. Sec. 6404(h)(1); Sego, 114 T.C. 609-610.
Direct review under section 6404(h)(1) requires a taxpayer
to petition this Court within 180 days of the Secretary’s final
determination not to abate interest. The problem for the
Nicholses is that the Secretary has not yet issued a final
determination. The first request for interest abatement, which
the Nicholses included in a letter dated October 31, 2003, was
denied on November 20, 2003. The Nicholses then filed an appeal
with the IRS in December 2003, but that appeal has not yet run
its course. Even if we treat the initial rejection as a final
determination, they did not meet the Code’s 180-day deadline. We
thus have no independent jurisdiction under section 6404.
We may, however, have jurisdiction under section 6320. In
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Katz v. Commissioner, 115 T.C. 329, 340-341 (2000), we held that
we have jurisdiction to review the Commissioner’s determination
not to abate interest that is the subject of his collection
effort. That we have jurisdiction to review the Commissioner’s
refusal to abate interest after a CDP hearing doesn’t relieve
taxpayers from the usual requirement that they raise the issue.
Sec. 301.6320-1(f)(2), A-F5, Proced. & Admin. Regs. (as amended
in 2002); see Magana v. Commissioner, 118 T.C. 488, 493 (2002)
(only issues raised during the CDP hearing or otherwise brought
to the Appeals Office’s attention generally considered on
review). The Nicholses claim they raised interest abatement as
an issue, the Commissioner claims they didn’t, and the record
doesn’t provide a clear indication either way. Because this is
the Commissioner’s summary judgment motion, we assume that the
Nicholses properly raised the issue, and ask whether the
Commissioner has shown that there is no genuine dispute that his
refusal to abate interest was an abuse of discretion. Rule 121.
We begin with the Code: Section 6404(e)(1) states that
interest may be abated for “any deficiency attributable * * * to
any error or delay by an officer or employee of the Internal
Revenue Service * * * in performing a ministerial act,” though
only when “no significant aspect of such error or delay can be
attributed to the taxpayer * * *.” Sec. 6404(e).5
5
Section 6404(e) was amended in 1996 to allow relief from
(continued...)
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Regulations define “ministerial act” as “a procedural or
mechanical act that does not involve the exercise of judgment or
discretion, and that occurs during the processing of a taxpayer’s
case after all prerequisites to the act, such as conferences and
review by supervisors, have taken place.” Sec. 301.6404-
2T(b)(1), Temporary Proced. & Admin. Regs., 52 Fed. Reg. 30163
(Aug. 13, 1987). The regulations illustrate how the Commissioner
applies this definition with numerous examples. See sec.
301.6404-2T(b)(2), Temporary Proced. & Admin. Regs., supra. A
consistent theme in the examples is that decisions on allocating
IRS personnel are “managerial,” not “ministerial,” meaning that
delays caused by the Nicholses’ file sitting “on the respective
personnel’s desk”--even if we assume on a summary judgment motion
that those delays are completely the IRS’s fault--from the onset
of the audit until the execution of the Form 870 are not
ministerial. This is not new--we have held in the past that the
“mere passage of time” does not “establish error or delay * * *
in performing a ministerial act.” Lee v. Commissioner, 113 T.C.
145, 150 (1999). And, as the Commissioner argues, once the Form
870 was signed, the Nicholses themselves were directly
responsible for the interest accrual by choosing not to pay the
5
(...continued)
interest that piled up because of “managerial acts” by the IRS,
but that amendment is effective only for tax years beginning
after July 30, 1996. Taxpayer Bill of Rights 2, Pub. L. 104-168,
sec. 301(a)(2), 110 Stat. 1457.
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tax liability they agreed to or at least posting a bond or
remitting a deposit. See Chan v. Commissioner, T.C. Memo. 2001-
268. We therefore conclude that the Commissioner did not abuse
his discretion by refusing to abate the interest that the
Nicholses owe.
Summary judgment for the Commissioner being appropriate on
both of the issues before us,
An order and decision in favor
of respondent will be entered.