Allen R. Davison & Sharon L. Davison

United States Tax Court
T.C. Memo. 2023-139ALLEN R. DAVISON AND SHARON L. DAVISON,
Petitioners
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent
—————
Docket No. 13711-18L. Filed November 20, 2023.
—————
Allen R. Davison and Sharon L. Davison, pro sese.
Christina L. Holland and Martha J. Weber, for respondent.
MEMORANDUM OPINION
PARIS, Judge: This case is before the Court on a Petition for
review of Notices of Determination Concerning Collection Action(s)
Under Section 6320 1 and/or 6330 and Abatement of Interest Under
Section 6404 sustaining notices of intent to levy for petitioners’ 2004 and
2005 tax years and sustaining the filing of Notices of Federal Tax Lien
(NFTLs) for petitioners’ 2004 and 2005 tax years (collectively, Notices).
Respondent has moved for summary judgment on the grounds that the
settlement officer did not abuse his discretion in sustaining the
collection actions (Motion). For the reasons set forth below, the Court
will grant respondent’s Motion.
1 Unless otherwise indicated, statutory references are to the Internal Revenue
Code, Title 26 U.S.C. (Code), in effect at all relevant times, and Rule references are to
the Tax Court Rules of Practice and Procedure.
Served 11/20/23
2
[*2] Background
The following background is derived from the parties’ pleadings,
Motion papers, and accompanying Exhibits. It is stated only for
purposes of deciding respondent’s Motion and not as findings of fact in
this case. See Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520
(1992), aff’d, 17 F.3d 965 (7th Cir. 1994).
Petitioners resided in Kansas when they filed the Petition in this
case. Petitioners were married during the tax years at issue and
remained married through the time of the collection due process (CDP)
hearings that gave rise to the Notices. They filed joint Forms 1040,
U.S. Individual Income Tax Return, for the years at issue and all other
tax years discussed herein.
I. Tax History
A. Individual Tax Liabilities
Petitioners jointly filed their 2004 and 2005 federal income tax
returns. On their 2004 tax return petitioners reported zero tax due on
the basis of reported adjusted gross income of –$502,287 and claimed
itemized deductions totaling $30,460. On Schedule E, Supplemental
Income and Loss, petitioners reported a total net loss of $537,282 from
15 different passthrough entities. 2
On their jointly filed 2005 tax return petitioners reported zero tax
due on the basis of adjusted gross income of –$11,617 and claimed
itemized deductions of $73,758. On Schedule E, petitioners reported a
total net loss of $29,561 from 16 passthrough entities, including losses
of $135,451 and $1,425 from Six-D, LLP.
Respondent examined petitioners’ tax returns and determined
deficiencies for 2001 through 2007. See Davison v. Commissioner,
No. 23206-06 (T.C. Feb. 28, 2011) (relating to petitioners’ 2001 and 2002
liabilities); Davison v. Commissioner, No. 25670-07 (T.C. Mar. 3, 2011)
(relating to petitioners’ 2003 and 2004 liabilities); Davison v.
Commissioner, No. 2036-11 (T.C. Oct. 14, 2011) (relating to petitioners
2 Of the entities reported on Schedule E of petitioners’ 2004 and 2005 tax
returns, those relevant to the resolution of this case include Cedar Valley Bird Co.,
LLP; Six-D, LLP; Six-D Partnership, LLP; TARD Properties, LLC; TARD Plus K
Processing, Inc.; and DJAT Marketing, Inc. Despite the similarity in names, Six-D,
LLP, and Six-D Partnership, LLP, are separate entities, each with its own EIN.
3
[*3] 2005, 2006, and 2007 liabilities). Petitioners and respondent
reached stipulated decisions 3 in each of the cases as follows:
Docket No. Deficiency § 6662(a) Date Decision
Penalty Entered
2001 23206-06 — — February 28, 2011
2002 23206-06 $86,090 $17,218.00 February 28, 2011
2003 25670-07 57,427 11,485.40 March 3, 2011
2004 25670-07 58,022 11,604.40 March 3, 2011
2005 2036-11 90,240 18,048.00 October 14, 2011
2006 2036-11 1,762 352.40 October 14, 2011
2007 2036-11 379,489 75,897.88 October 14, 2011
Petitioners’ 2013 and 2014 tax years are also currently the subject
of separate litigation before this Court. See Davison v. Commissioner,
No. 180-19 (T.C. filed Jan. 28, 2019). In addition Mr. Davison has been
assessed civil penalties pursuant to sections 6700, 6701, and 6707 for
multiple periods. See Davison v. Commissioner, No. 25351-11L (T.C.
Nov. 29, 2013) (relating to 1999 through 2008); Davison v.
Commissioner, T.C. Memo. 2020-58 (relating to 2009 and 2010).
3 In the case at Docket No. 25670-07, relating to petitioners’ 2003 and 2004
liabilities, petitioners stipulated that “petitioners’ partnership items relating to Cedar
Valley Bird Company, LLP [an entity which, as discussed infra, was at that time
subject to examination and litigation pursuant to the procedures set forth in sections
6221–6232], have been treated as if they were correctly reported on petitioners’ federal
income tax returns for the tax years 2003 and 2004 and they have not been adjusted
as part of this docketed proceeding” and that “[t]o the extent that the computation of
petitioners’ tax liabilities which properly reflect the tax treatment of the partnership
items relating to Cedar Valley Bird Company, LLP, as determined in the TEFRA
partnership proceeding described [above] would also result in a change in petitioners’
tax liabilities attributable to nonpartnership items, as previously determined in this
docketed proceeding, such changes may be treated as a computational adjustment
under IR.C. § 6231(a)(6) and assessed, credited, or refunded accordingly.” Decision
at 2–3, Davison v. Commissioner, No. 25670-07 (Mar. 3, 2011); see also Munro v.
Commissioner, 92 T.C. 71 (1989).
4
[*4] B. Cedar Valley Bird Co., LLP
As noted above, during the years at issue, as well as subsequent
years, petitioners held interests, either directly or indirectly, in
numerous passthrough entities. Cedar Valley Bird Co., LLP (Cedar
Valley Bird), is a TEFRA 4 partnership, and Six-D, LLP, was its tax
matters partner. See Cedar Valley Bird Co., LLP v. Commissioner, T.C.
Memo. 2013-153. All of Cedar Valley Bird’s income and expenses flowed
through to Six-D, LLP, in 2004. Mr. and Mrs. Davison, as cotrustees of
the Sharon L. Davison Living Trust (Trust), held a 95% interest in
Six-D, LLP, and Mr. Davison individually held another 1% interest. 5
Respondent examined Cedar Valley Bird’s Forms 1065, U.S.
Return of Partnership Income, for 2004 and 2005, among other years,
and determined adjustments to its income. Respondent determined an
increase of $515,856 to its 2004 taxable income and issued a Final
Partnership Administrative Adjustment (FPAA). Six-D, LLP, as tax
matters partner, filed a petition in this Court in response to the 2004
adjustment, and the Court sustained the adjustment. See Cedar Valley
Bird, T.C. Memo. 2013-153. Because of a systemic computer error,
however, respondent did not assess the resulting flowthrough
adjustments against petitioners within the period of limitations.
Respondent issued a separate FPAA with respect to Cedar Valley
Bird’s 2005 Form 1065, increasing its total income by $665,500. No
petition was filed in response to the 2005 FPAA, 6 and as a result,
respondent determined that 96% of the adjustment, or $638,879, flowed
through to petitioners.
C. TARD Properties, LLC
TARD Properties, LLC, was another TEFRA entity indirectly
owned by petitioners. Respondent examined its 2005 Form 1065 and
issued an FPAA, which was defaulted. See Davison v. Commissioner,
4 Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. No. 97-248, § 402,
96 Stat. 324, 648.
5 Petitioners’ four children each held a 1% interest in Six-D, LLP. Petitioners
reported 100% of the flowthrough amounts from Six-D, LLP, on their individual return
for 2004. Cedar Valley Bird, T.C. Memo. 2013-153, at *3–4.
6 According to IRS guidance, when no petition for readjustment is filed
pursuant to section 6226(a) and (b), “the TEFRA case [i.e., the FPAA] is defaulted.”
Internal Revenue Manual 8.19.1.6.6.8.2.3 (Dec. 1, 2006); see also Estate of Simon v.
Commissioner, T.C. Memo. 2013-174.
5
[*5] T.C. Memo. 2019-26, at *3, aff’d per curiam, 805 F. App’x 259 (5th
Cir. 2020). The FPAA made adjustments to TARD Properties’s taxable
income totaling $50,000. Six-D Partnership, LLP, was a partner in
TARD Properties during 2005, and petitioners were partners in Six-D
Partnership, LLP. See id.As a result of the adjustments to the incomes of Cedar Valley Bird
and TARD Properties, which flowed through to petitioners, respondent
determined a deficiency of $166,474 for petitioners’ 2005 tax year, an
addition to tax pursuant to section 6651(a)(1) of $41,618.50, and an
accuracy-related penalty pursuant to section 6662 of $33,294.80.
Respondent assessed these adjustments on August 15, 2011.
Following the adjustments to petitioners’ 2005 taxable income in
the individual deficiency case, Docket No. 2036-11, the TEFRA
assessments were also increased. Respondent determined that
petitioners owed additional tax of $81,998, plus an additional section
6651(a)(1) addition to tax of $198.75. Respondent assessed these
additional TEFRA adjustments on or about November 4, 2013.
II. Amended Returns and Other Claims
A. Amended Returns
Respondent assessed the stipulated 2004 individual tax liability
and penalty on June 6, 2011, and the stipulated 2005 individual tax
liability and penalty on December 26, 2011. On or about November 15,
2012, petitioners submitted Forms 1040X, Amended U.S. Individual
Income Tax Return, for tax years 2002, 2003, 2004, 2005, and 2007. 7 On
the 2004 Form 1040X, petitioners claimed a reduction of their adjusted
gross income of $245,696, reducing their total tax from the stipulated
$58,022 to zero. In the Explanation of Changes, petitioners wrote: “[T]o
adjust 2004 tax liability for net operating loss carryforward and
carryback.” Respondent did not process the Form 1040X, and petitioners
resubmitted the Form 1040X on or about August 24, 2019.
7 In February 2009 Congress passed the American Recovery and Reinvestment
Act of 2009, Pub. L. No. 111-5, div. B, § 1211(a), 123 Stat. 115, 335, extending the
carryback period for applicable 2008 net operating losses (NOLs) from 2 years to up to
5 years. In November of that same year, Congress enacted the Worker,
Homeownership, and Business Assistance Act of 2009, Pub. L. No. 111-92, § 13(a), 123
Stat. 2984, 2992, which extended the carryback period for 2008 or 2009 NOLs from
2 years to up to 5 years. In effect, both acts potentially reopened multiple tax years for
adjustment to the tax years at issue.
6
[*6] On the 2005 Form 1040X, petitioners claimed a reduction of their
adjusted gross income of $406,900, reducing their total tax from the
stipulated $90,240 to zero. In the Explanation of Changes, petitioners
wrote: “Amended to reflect net operating loss adjustment.” Respondent
did not process the 2005 Form 1040X, and petitioners submitted another
Form 1040X on October 1, 2013.
Petitioners took a similar approach on the Forms 1040X for tax
years 2002, 2003, and 2007, zeroing out their taxable income and
claiming no tax due.
B. NOL Carryback Abatement Made in 2014
In the stipulated decision in the case at Docket No. 2036-11,
petitioners and respondent stipulated a deficiency of $379,489 and an
accuracy-related penalty of $75,897.88 for 2007. 8 The deficiency was
based on a revised adjusted gross income of $1,366,545.52 and revised
taxable income of $384,328.43, resulting in additional tax of $89,080 and
alternative minimum tax of $290,409.04. Respondent assessed these
amounts on February 6, 2012.
Between October 2012 and February 2014, petitioners submitted
a series of Forms 1040X for tax year 2007. On each of these amended
returns, petitioners asserted reductions in income tax and “other taxes”
(i.e., alternative minimum tax) from the stipulated amounts to zero. On
each of the Forms 1040X, petitioners claimed that the reduction in
income resulted from an NOL carryback originating in tax year 2009.
Petitioners additionally submitted letters alleging that there was an
error in the computation of alternative minimum tax for 2007.
On May 19, 2014, after review, respondent made an abatement of
petitioners’ 2007 tax of $375,670, reducing the outstanding tax liability
from $379,489 to $3,819. Following the abatement, petitioners
submitted yet another Form 1040X for 2007, which matched the amount
of the abatement issued by respondent.
8 Petitioners take the position that the NOL carryback originating in tax year
2009 was not fully absorbed by the outstanding 2007 liability and remains available to
offset the 2004 and 2005 liabilities. Petitioners’ position is reviewed in greater detail
infra pp. 11–12. Petitioners’ position does not appear to take into account the
stipulated decision in the case at Docket No. 2036-11, in which petitioners stipulated
deficiencies for tax years 2005 through 2007, over and above the losses claimed on their
returns. See supra Table p. 3.
7
[*7] III. Efforts to Collect Unpaid Tax
A. Notices of Federal Tax Lien and Notices of Intent to Levy
1. 2004 CDP Hearing
Petitioners did not pay the assessed tax liabilities after notice and
demand for payment. On July 28, 2016, respondent issued to petitioners
a Final Notice of Intent to Levy and Notice of Your Right to a Hearing
for the outstanding 2004 liability (2004 levy notice). On August 4, 2016,
respondent filed an NFTL for the 2004 liability and issued to petitioners
a Notice of Federal Tax Lien Filing and Your Right to a Hearing (2004
lien notice) on August 9, 2016. Petitioners timely filed Form 12153,
Request for Collection Due Process Hearing (CDP Hearing Request), in
response to the 2004 lien notice on August 12, 2016, and another CDP
Hearing Request in response to the 2004 levy notice on August 22, 2016.
The two CDP Hearing Requests were nearly identical. In both
requests petitioners asserted that they are challenging the proposed
levy action and requested discharge or withdrawal of the lien.
Petitioners did not request any other collection alternative but
requested relief from joint and several liability pursuant to section 6015
(innocent spouse relief) for Mrs. Davison. Petitioners included an
attachment to both forms, in which they additionally asserted that there
is no tax due and requesting that the IRS adjust its records to reflect the
Form 1040X submitted for 2004.
Petitioners’ 2004 CDP Hearing Requests were assigned to
Settlement Officer Marcus Morgan (SO Morgan) on September 6, 2016.
SO Morgan determined that the CDP Hearing Requests were timely,
verified the validity of the assessments, and sent petitioners a
substantive contact letter scheduling a telephone hearing for October
17, 2016. In the letter SO Morgan additionally requested that
petitioners provide a completed Form 433–A, Collection Information
Statement for Wage Earners and Self-Employed Individuals, proof of
current estimated tax payments, and their tax return for 2015.
SO Morgan held the telephone CDP hearing with Mr. Davison on
October 17, 2016, during which petitioners raised the issue of the
claimed NOL carryback. SO Morgan requested that petitioners submit
their arguments to him in writing by October 31, 2016. He further
advised that, if petitioners wished to have collection alternatives
considered, they should provide a completed Form 433–A with
8
[*8] attachments, proof of current estimated tax payments, and their
2015 tax return by October 31, as well.
On November 1, 2016, SO Morgan received a packet of
information from petitioners dated October 28, 2016, setting forth
petitioners’ position with respect to their outstanding liabilities.
Specifically, petitioners alleged the following:
1. The taxpayers [sic] net operating loss (NOL) for 2005
in the amount of $58,022.00 plus accrued statutory
interest. Through right of offset, seizure,
garnishment, lien, levy or other collection tool
available to the IRS take therefund [sic] in total and
apply it to 2004 tax and interest owed.
2. Taxpayers will pay the penalty of $11,604.40 plus
statutory interest as prescribed by the U.S. Tax
Court.
3. Restricted interest rules should apply. See, research
article enclosed.
4. No late filing penalties should apply. The 2004 tax
return was timely filed.
5. The IRS would waive any late payment penalties.
Taxpayers agree to pay applicable statutory
interest.
6. Upon taxpayers settling the 2004 tax year to the
satisfaction of the IRS, the federal tax liens would be
discharged.
Petitioners did not provide a completed Form 433–A, nor did they
provide documentation in support of their claimed NOLs. The packet did
not contain a copy of petitioners’ 2015 tax return, but SO Morgan
confirmed that petitioners filed the return on October 15, 2016. No
information was provided regarding petitioners’ estimated tax
payments.
9
[*9] 2. 2005 CDP Hearing
On September 26, 2016, respondent issued to petitioners a levy
notice for the outstanding 2005 liability. 9 Respondent filed an NFTL for
the 2005 liability on September 30, 2016, and issued to petitioners a lien
notice on October 6, 2016. Petitioners timely filed two separate but
nearly identical CDP Hearing Requests in response to the 2005 levy
notice on October 12, 2016, and another joint CDP Hearing Request in
response to the 2005 lien notice on October 21, 2016.
As with the 2004 CDP Hearing Requests, the three 2005 CDP
Hearing Requests were nearly identical in substance. On all three
forms, petitioners requested discharge or withdrawal of the lien. On the
two levy CDP Hearing Requests, petitioners requested an offer-in-
compromise but no other collection alternatives. On the lien CDP
Hearing Request and Mr. Davison’s levy CDP Hearing Request,
petitioners asserted that Mrs. Davison is entitled to innocent spouse
relief. In the levy CDP Hearing Requests, petitioners included an
attachment 10 in which they argued that their 2005 tax liability was
eliminated by NOL carryback claims filed in 2011 and that there were
numerous errors on their 2005 transcript, including the additional
TEFRA assessments and late-payment penalties.
Petitioners’ 2005 CDP Hearing Requests were initially assigned
to Settlement Officer Martin Engelbrecht (SO Engelbrecht).
SO Engelbrecht verified that the CDP Hearing Requests were timely,
but while conducting his verification, he learned of petitioners’ pending
2004 CDP hearing and transferred the 2005 matter to SO Morgan.
SO Morgan confirmed that the 2005 CDP Hearing Requests were timely
filed and began researching the 2005 assessments.
On October 24, 2016, while their 2005 CDP Hearing Requests
were still under review, petitioners submitted another Form 1040X for
2005, labeled “Protective Claim.” On this filing petitioners reduced their
adjusted gross income by $329,695 to $144,653. After itemized
deductions and exemptions, petitioners claimed their corrected taxable
9 Petitioners’ 2002 through 2007 tax years were the subject of a previous CDP
hearing in 2012 and 2013 while petitioners’ NOL claims were still under consideration.
The IRS Office of Appeals (Appeals) determined not to sustain the proposed levy
because petitioners’ NOL claims were still under review. No determination with
respect to petitioners’ NOL claims was made at that time.
10 The 2005 lien CDP Hearing Request included a note stating “see attached,”
but petitioners submitted no attachment with the form.
10
[*10] income was $64,495 and reduced their tax from $90,240 to $9,449
and eliminated the accuracy-related penalty. In the Explanation of
Changes, petitioners stated as follows:
1. Protective claim to carry back 2010 net operating
loss to 2005
2. Line 9 – No section 6662 penalty is included in 9(c)
because amended tax liability is less than $10,000
3. Other carryback claims have been filed for the tax
year 2005
By letter dated December 7, 2016, SO Morgan scheduled a
telephone CDP hearing with petitioners for January 26, 2017.
Petitioners did not call in to the hearing on January 26, but SO Morgan
discussed the case with Mr. Davison by telephone on March 13, 2017.
During that conversation SO Morgan advised Mr. Davison that an IRS
Appeals officer would consider petitioners’ NOL and interest abatement
claims.
3. Appeals Officer Review of NOL and Restricted
Interest Claims
Appeals Officer Richard Mrozek (AO Mrozek) was assigned to
petitioners’ case to review the NOL claims. AO Mrozek contacted
Revenue Agent Michael Kostelnick (RA Kostelnick), who was examining
petitioners’ 2013 and 2014 tax returns, to discuss petitioners’ NOL
claims. 11
RA Kostelnick reviewed petitioners’ NOL claims in connection
with his examination of petitioners’ 2013 and 2014 tax returns. In
considering petitioners’ NOL claims, RA Kostelnick reviewed
petitioners’ Forms 1040X for tax years 2002 through 2007, the past Tax
Court decisions relating to such years, and petitioners’ tax returns for
2008 through 2012.
Petitioners provided RA Kostelnick with copies of their tax
returns for 2004 through 2011 but did not provide copies of the NOL
calculations. When RA Kostelnick requested documentation of their
NOL calculations, petitioners provided a handwritten document
detailing their taxable income from 2002 through 2012 and NOLs
11 Petitioners’ 2013 and 2014 tax years are currently the subject of a separate
deficiency proceeding before this Court. See Davison v. Commissioner, No. 180-19.
11
[*11] claimed to be available each year. The document did not identify
the years in which the carrybacks and carryforwards originated.
RA Kostelnick reviewed petitioners’ 2008, 2009, 2010, 2011, and
2012 tax returns, and accepted them as filed, subject to certain
adjustments, as detailed below. On their joint 2008 return, petitioners
reported adjusted gross income, less deductions, totaling –$469,045,
resulting in zero tax due. Petitioners claimed an NOL carryforward of
$570,624. Because petitioners had stipulated deficiencies for tax years
2002 through 2007, RA Kostelnick determined that there was no NOL
carryforward to petitioners’ 2008 return. Accordingly, petitioners’
taxable income for 2008 was increased to $115,784.
On their joint 2009 return, petitioners reported adjusted gross
income, less deductions, totaling –$707,878, resulting in zero tax due.
Petitioners claimed an NOL carryforward of $444,164, resulting in a
claimed NOL of $263,714. On Schedule E petitioners reported income
and loss from several entities, including a nonpassive loss of $144,938
from DJAT Marketing, Inc., and a nonpassive loss of $249,447 from
TARD Plus K Processing, Inc. 12 Petitioners attached to their return an
election to carry the NOL back five years (i.e., to 2004), pursuant to
section 172(b)(1)(H).
RA Kostelnick disallowed the claimed NOL carryforward of
$444,164 because there were no losses from 2008 or earlier to carry
forward. With respect to the claimed losses from TARD Plus K
Processing and DJAT Marketing, petitioners provided RA Kostelnick
with Schedules K–1 (Form 1120–S), Shareholder’s Share of Income,
Deductions, Credits, etc., as substantiation. RA Kostelnick issued
multiple requests for documentation to substantiate petitioners’ claimed
bases in the two entities; petitioners provided copies of promissory notes
between the Trust and the two entities but did not provide copies of
canceled checks or other evidence that the funds were actually
contributed. RA Kostelnick therefore disallowed the claimed losses. As
a result of these adjustments, as well as an allowance of an additional
deduction for charitable contributions of $3,375, RA Kostelnick
determined that petitioners’ corrected taxable income for 2009 was
$119,996 and thus, no NOL was available to carryback to 2004.
12 During all relevant years, DJAT Marketing and TARD Plus K Processing
elected to be treated as S corporations for federal income tax purposes. See §§ 1361 and
1362.
12
[*12] On their joint 2010 Form 1040, petitioners reported adjusted
gross income, less deductions, totaling –$1,023,834, resulting in zero tax
due. Petitioners claimed an NOL deduction of $694,139, resulting in a
claimed NOL of $329,695 available for carryback, which RA Kostelnick
allowed. RA Kostelnick further determined that petitioners were
entitled to an additional flowthrough loss of $10,858 from Terra
Bioenergy, LLC. 13 Of the reported NOL, $100,906 arose from farming
losses reported on Schedule E and were eligible to be carried back five
years (i.e., to 2005). The NOL carryback to 2005 resulted in an
abatement of tax of $36,104 and a reduction in penalty of $8,664.96,
which respondent applied against petitioners’ account on July 9, 2018.
The abatement reduced petitioners’ 2005 tax liability from $90,240 to
$54,136. RA Kostelnick applied the remaining NOL to petitioners’ 2008
and 2009 tax years.
AO Mrozek reviewed and accepted RA Kostelnick’s conclusions
with respect to the NOL analysis, verified the 2005 TEFRA
assessments, and considered the other substantive issues petitioners
raised. On April 17, 2018, he returned the case to SO Morgan. By letter
dated April 30, 2018, SO Morgan explained that petitioners were
entitled to an abatement of tax of $36,104 as a result of the 2010 NOL
carryback, and provided petitioners with another opportunity to submit
a completed Form 433–A along with supporting documentation by May
18, 2018, in order for SO Morgan to consider collection alternatives.
Petitioners failed to provide the requested materials.
B. Notices of Determination
On June 20, 2018, respondent issued four separate Notices of
Determination Concerning Collection Action(s) Under Section 6320
and/or 6330 to each petitioner. The Notices for the 2004 lien and levy
determined that Mrs. Davison was not entitled to innocent spouse relief;
petitioners were not entitled to lien withdrawal or discharge, and no
other collection alternatives were requested; petitioners’ NOL carryback
claim was denied; petitioners’ request for abatement of late-filing
13 RA Kostelnick made further adjustments to petitioners’ 2011 and 2012 tax
years related to the disallowed NOLs and losses from Terra Bioenergy. These
adjustments are not relevant to petitioners’ 2004 or 2005 tax year, and the Court will
not further address them.
13
[*13] penalties was denied because none was assessed; and petitioners’
request for interest abatement 14 was denied.
The Notices for the 2005 lien and levy determined that Mrs.
Davison was not entitled to innocent spouse relief; petitioners were not
entitled to lien withdrawal or discharge, and no other collection
alternatives were requested; petitioners’ NOL loss carryback claim was
granted in part and denied in part; petitioners were not entitled to
abatement of late-payment penalties; and petitioners’ request for
interest abatement was allowed in part. See supra note 13.
Petitioners timely filed the Petition in this case, disputing the
Notices. In the Petition, they raised numerous claims relating to their
2004 and 2005 tax years, as well as their liabilities for other years. With
respect to their underlying tax liabilities, petitioners allege that
respondent failed to give credit for claimed NOL carrybacks and
carryforwards; that the adjustments to the income of Cedar Valley Bird
for 2002, 2003, and 2004 were “timing adjustments” that created a
“reversing deduction in tax year 2005,” which respondent failed to
consider; that respondent did not consider a flock contract deduction of
$625,000 for tax year 2005; and that respondent improperly disallowed
shareholder loans in their tax bases for TARD Plus K Processing and
DJAT Marketing for 2009. 15 Petitioners additionally claim that
respondent failed to apply the restricted interest rules to the NOL
carrybacks; that they are entitled to an abatement of interest; and that
Mrs. Davison is entitled to relief from joint and several liability
pursuant to section 6015. 16 Finally, petitioners assert that the burden
of proof should shift to respondent pursuant to section 7491(a).
14 Petitioners did not request interest abatement pursuant to section 6404 for
either year. Rather, they requested application of the restricted interest rules of section
6601(d)(1) in connection with their claimed NOLs. SO Morgan erroneously referred to
petitioners’ claim as a request for abatement of interest.
15 Petitioners additionally claimed that respondent erred in calculating their
2007 alternative minimum tax; that suspended losses from Terra Bioenergy were not
allowed; and that respondent failed to consider certain offsets related to
indemnification payments received from Grant Thornton in 2014. These issues are not
relevant to petitioners’ CDP hearing for their 2004 and 2005 liabilities, and the Court
will not further address them.
16 By Order dated September 8, 2023, the Court granted respondent’s Motion
in part, ruling that petitioners’ claim that Mrs. Davison is entitled to innocent spouse
relief was barred by the doctrine of res judicata. In the stipulated decisions resolving
14
[*14] Respondent has moved for summary judgment on the grounds
that SO Morgan correctly determined petitioners’ liabilities and did not
abuse his discretion in sustaining the collection actions.
Discussion
I. Summary Judgment
Summary judgment serves to “expedite litigation and avoid
unnecessary and expensive trials.” Fla. Peach Corp. v. Commissioner,
90 T.C. 678, 681 (1988). The Court may grant summary judgment when
there is no genuine dispute of material fact, and a decision may be
rendered as a matter of law. See Rule 121(a)(2); Sundstrand Corp., 98
T.C. at 520. The moving party bears the burden of showing the absence
of a genuine dispute as to any material fact. FPL Grp., Inc. & Subs. v.
Commissioner, 115 T.C. 554, 559 (2000). Where the moving party
properly makes and supports a motion for summary judgment, the
nonmoving party may not rest upon mere allegations or denials in their
pleadings and must set forth specific facts showing that there is a
genuine dispute for trial. Rule 121(d); see also Celotex Corp. v. Catrett,
477 U.S. 317, 324 (1986); Loube v. Commissioner, T.C. Memo. 2020-3,
at *10–11. In deciding whether to grant summary judgment, the Court
construes factual materials and inferences drawn from them in the light
most favorable to the nonmoving party. Loube, T.C. Memo. 2020-3,
at *11.
II. CDP
A. Statutory Framework
Section 6331(a) authorizes the Secretary to levy against property
and property rights where a taxpayer liable for taxes fails to pay those
taxes within 10 days after notice and demand for payment is made.
Section 6331(d) requires the Secretary to send the taxpayer written
notice of the Secretary’s intent to levy, and section 6330(a) requires the
Secretary to send the taxpayer notice of the right to a section 6330
hearing at least 30 days before any levy is begun.
petitioners’ deficiencies for 2004 and 2005, the parties specifically stipulated that Mrs.
Davison was not entitled to innocent spouse relief. The evidence showed that Mrs.
Davison received income that gave rise to the deficiencies, was involved in the business
activities, and meaningfully participated in the prior cases. The Court will not further
address this issue.
15
[*15] Section 6321 imposes a lien for unpaid federal taxes. The lien
arises when an assessment is made. § 6322. Section 6323 provides that
the lien imposed by section 6321 is not valid against certain persons
until notice thereof is filed in accordance with rules provided. Section
6320(a) provides that, after the Secretary has filed the required notice,
the Secretary must notify the taxpayer of the fact of the filing. A
taxpayer receiving a notice of NFTL filing has hearing rights similar to
the hearing rights accorded a taxpayer receiving a notice of intent to
levy. See § 6320(c).
If a CDP hearing is requested pursuant to section 6320 or 6330,
the hearing is to be conducted by Appeals to determine whether to
sustain the proposed collection action. In making that determination,
section 6330(c)(3) requires the Appeals officer to consider (1) whether
the requirements of any applicable law or administrative procedure
have been met; (2) any issues appropriately raised by the taxpayer; and
(3) whether the proposed collection action balances the need for the
efficient collection of taxes with the legitimate concern of the taxpayer
that any collection action be no more intrusive than necessary. Once an
Appeals officer makes a determination, the taxpayer may appeal that
determination to this Court. § 6330(d)(1).
B. Standard of Review
The Court has jurisdiction to review a determination by Appeals
pursuant to sections 6320(c) and 6330(d)(1). Where the underlying
liability was not properly at issue, the Court will review Appeals’
determination for an abuse of discretion. Sego v. Commissioner, 114 T.C.
604, 610 (2000); Goza v. Commissioner, 114 T.C. 176, 182 (2000). An
abuse of discretion occurs if the Appeals officer or employee conducting
the hearing exercises his discretion “arbitrarily, capriciously, or without
sound basis in fact or law.” Woodral v. Commissioner, 112 T.C. 19, 23
(1999); see also Giamelli v. Commissioner, 129 T.C. 107, 111 (2007).
A taxpayer may challenge the underlying liability at a CDP
hearing if he did not receive a statutory notice of deficiency for that
liability or did not otherwise have a prior opportunity to dispute it.
§ 6330(c)(2)(B). Where the underlying liability was properly at issue in
the CDP hearing, the Court will review the liability issue de novo and
the other administrative determinations for an abuse of discretion.
Craig v. Commissioner, 119 T.C. 252, 260 (2002). Under the de novo
standard of review, the Court is not limited by the administrative
record, but considers all relevant evidence introduced by the parties.
16
[*16] Jordan v. Commissioner, 134 T.C. 1 (2010), supplemented by T.C.
Memo. 2011-243.
The liabilities at issue in this case arose in connection with
petitioners’ stipulated decisions in their earlier deficiency cases.
Petitioners had a prior opportunity to challenge those liabilities and,
accordingly, may not challenge them here. Petitioners allege, however,
that NOL carrybacks from subsequent tax years, including 2009 and
2010, affect the outstanding liabilities for the years subject to the
collection proceedings. In such cases an exception to the general
prohibition on challenging the underlying liabilities exists with respect
to NOL carrybacks, and a taxpayer is entitled to assert NOLs in a CDP
hearing after prior deficiency litigation. See Ron Lykins, Inc. v.
Commissioner, 133 T.C. 87, 106–11 (2009); see also Laidlaws Harley
Davison Sales, Inc. v. Commissioner, T.C. Memo. 2023-90, at *9–10.
Moreover, in any case where a taxpayer claims an NOL carryforward or
carryback deduction, the Court has jurisdiction to consider facts related
to years not in issue as may be necessary for redetermination of tax
liability for the period before the Court. Amanda Iris Gluck Irrevocable
Tr. v. Commissioner, 154 T.C. 259, 269 (2020); Keith v. Commissioner,
115 T.C. 605, 621 (2000).
Accordingly, the Court reviews petitioners’ NOL claims de novo
and remaining administrative determinations for abuse of discretion.
III. Section 7491(a)
Under section 7491(a)(1), the burden of proof may shift to the
Commissioner if the taxpayer produces credible evidence with respect to
any relevant factual issue relevant to ascertaining the liability of a
taxpayer for any tax imposed by subtitle A or B and satisfies the
requirements of section 7491(a)(2). Section 7491(a)(2) requires a
taxpayer to demonstrate that he (1) complied with requirements under
the Code to substantiate any item, (2) maintained all records required
under the Code, and (3) has cooperated with reasonable requests by the
Secretary for witnesses, information, documents, meetings, and
interviews. See also Higbee v. Commissioner, 116 T.C. 438, 440–41
(2001). The burden is on the taxpayer to show that he has satisfied these
requirements. See Richardson v. Commissioner, T.C. Memo. 2005-143.
Petitioners allege in the Petition and in their Reply that the
burden of proof should shift to respondent pursuant to section 7491(a).
Section 7491(a) applies only to the burden of proof with respect to a tax
17
[*17] liability imposed by subtitle A or B and does not shift the burden
of proof with respect to petitioners’ claims for interest abatement,
restricted interest, or respondent’s determination to proceed with the
collection action. See also Kansky v. Commissioner, T.C. Memo. 2007-40.
Accordingly, the Court understands petitioners’ invocation of section
7491(a) to be limited to the question of their underlying tax liability.
Petitioners have not demonstrated that they are entitled to a shift
in the burden of proof. They do not provide any argument or evidence in
support of their argument. Petitioners have not produced credible
evidence with respect to their NOL claims; they have not shown that
they have complied with all of the substantiation requirements of the
Code; and they have not cooperated with respondent’s requests for
information or documents. Indeed, petitioners refused to comply with
respondent’s informal discovery attempts, leading respondent to issue
formal interrogatories and document requests. Accordingly, the burden
of proof remains with petitioners.
IV. Analysis
A. Verification
Section 6330(c)(1) requires that the Appeals officer conducting the
hearing obtain verification from the Secretary that the requirements of
any applicable law or administrative procedure have been followed. The
Court’s review of the administrative file establishes that SO Morgan
verified that the assessments were proper, notice and demand was
issued to petitioners’ last known address, a balance was due when the
NFTL was filed, and that he had no prior involvement with respect to
the tax period at issue. The record establishes that the verification
requirement has been satisfied.
B. Challenges to Underlying Liability
1. NOLs
a. Legal Principles
Section 172(a) allows a taxpayer to deduct NOLs for a taxable
year. The amount of the NOL deduction equals the aggregate of the NOL
carryovers and NOL carrybacks to the taxable year. See § 172(a). Section
172(c) defines an NOL as the excess of deductions over gross income,
computed with certain modifications specified in section 172(d).
18
[*18] An unused NOL is “carried to the earliest of the taxable years to
which . . . such loss may be carried.” § 172(b)(2). Any excess NOL that is
not applied in one year is carried to the next earlier year. See § 172(b)(2).
Absent an election under section 172(b)(3), an NOL for any taxable year
must be carried back to the two preceding years and then carried
forward over the next 20 years. § 172(b)(1)(A), (2), (3). Section
172(b)(1)(G) provides for an NOL carryback period of 5 taxable years in
the case of a taxpayer which has a farming loss.
For taxable years ending after December 31, 2007, and beginning
before January 1, 2010, the carryback period for certain NOLs was
increased to three, four, or five years. § 172(b)(1)(H). The election under
section 172(b)(1)(H) must be made in a manner prescribed by the
Secretary and must be made by the due date (including extensions) for
filing the return for the taxpayer’s last taxable year beginning in 2009.
§ 172(b)(1)(H)(iii)(II).
A taxpayer who claims an NOL deduction bears the burden of
establishing both the existence of the NOL and the amount that may be
carried over to the year involved. See Rule 142(a); Keith, 115 T.C. at 621.
b. Cedar Valley Bird
Petitioners claim that they are entitled to NOL carrybacks and
carryforwards that would effectively eliminate their 2004 and 2005 tax
liabilities (as well as their liabilities for other years not at issue in this
case). Petitioners cite their various claims filed with the IRS, as well as
text in a fax from an IRS Appeals officer in support of their position.
Petitioners have not presented any records or other evidence in
substantiation of their NOL claims. Petitioners submitted amended
2004 and 2005 returns in November 2012 and an amended 2005 return
in October 2016 and resubmitted the amended returns during their CDP
hearing and respondent’s examination for their 2013 and 2014 tax years.
Tax returns merely represent statements of a taxpayer’s position and
cannot be used to substantiate a claimed NOL. See, e.g., Benavides &
Co., P.C. v. Commissioner, T.C. Memo. 2019-115, at *17.
Petitioners additionally point to a fax from Appeals dated July 25,
2011, sent during the course of resolving their 2005, 2006, and 2007 tax
liabilities. The fax reads as follows:
See the attached Summary of the Settlement proposal that
we are working on. After reviewing the records and the
19
[*19] Six D Report I have adjusted your proposed settlement per
the attached summary. With regards to the NOL
deduction. [sic]. Any NOLs generated in the 2002 or 2003
docketed Cedar Valley resolution will offset the current
years income then should be carried back. There is no
immediate carryforward of an NOL available for 2005,
2006, or 2007. After the computations are completed on the
2005–2007 tax years, any resulting 2005 or 2006 NOL
would have to be carried back. Even though the prior years
have been resolved, any NOL generated in the current
years before us could still be carried back. Once we get the
final computations, you may consider filing a claim as part
of your settlement. I have also attached S-D Enterprises
report and the defaulted FPAA for T.A.R.D. Business
Trust.
At the time this fax was sent, Cedar Valley Bird’s 2002 and 2003 tax
case had not been resolved. The Appeals officer phrased the proposal in
the conditional, leaving open the possibility of applying NOLs, should
any losses exist. The Court issued its opinion in Cedar Valley Bird, T.C.
Memo. 2013-153, on June 19, 2013, finding deficiencies in Cedar Valley
Bird’s income. In other words, no losses existed to carry forward to 2005.
Petitioners next claim that the adjustments to Cedar Valley
Bird’s income were merely “timing adjustments” that should have given
rise to a commensurate “reversing deduction” in 2005. Petitioners’
position ignores or misrepresents the Court’s decision in Cedar Valley
Bird. In that case the Court sustained adjustments to Cedar Valley
Bird’s income and expenses on the basis of the taxpayer’s failure to
substantiate alleged loan guaranties related to flock contracts, as well
as certain other claimed deductions and costs of goods sold. 17
c. TARD Plus K Processing and DJAT
Marketing
Petitioners additionally dispute respondent’s disallowance of
Schedule E losses claimed on petitioners’ 2009 return and carried back
to petitioners’ 2004 tax year. Respondent disallowed the claimed losses
17 As discussed supra, respondent failed to assess against petitioners the
TEFRA adjustments resulting from Cedar Valley Bird. Even if petitioners’
characterization of the adjustments as “timing adjustment” were correct, it would be
inappropriate for petitioners to claim the deduction for 2005 while not recognizing as
income the items that gave rise to the adjustments.
20
[*20] from TARD Plus K Processing and DJAT Marketing on the
grounds that petitioners did not substantiate their basis in either entity.
Petitioners provided evidence of promissory notes between the Trust
and each of the entities, all of which are controlled by petitioners, but
did not provide copies of canceled checks or other evidence that the funds
were actually paid. In their Reply, petitioners once again provided copies
of the promissory notes (signed by Mr. Davison on behalf of both parties
to the respective note) but offer no evidence that the funds were actually
transferred. In fact, petitioners do not even address respondent’s
arguments regarding lack of substantiation. The Court concludes that
petitioners failed to substantiate their bases in TARD Plus K Processing
and DJAT Marketing and, accordingly, are not entitled to the loss
deductions claimed on their 2009 return.
d. Conclusion
Respondent allowed petitioners’ NOL claims to the extent that
they were substantiated. Specifically, respondent allowed a 2010 NOL
carryback of $100,906 to petitioners’ 2005 tax year, resulting in an
abatement of tax of $36,104 and a reduction of $8,664.96 in petitioners’
late-payment penalty. Petitioners have not shown any dispute as to any
specific material fact regarding their entitlement to any further NOLs,
resting only on allegations in the Petition and their Reply.
2. Flock Contract Deduction
In the Petition, petitioners allege that “[a] flock contract
deduction of $625,000 was not considered by the Respondent for tax year
2005.” This issue is unrelated to the claimed NOLs, and petitioners are
precluded from raising it in this proceeding. See § 6330(c)(2)(B).
Moreover, petitioners did not raise this issue during their CDP hearing,
and they may not do so now. See Giamelli, 129 T.C. at 114. Further,
petitioners have not provided any arguments or evidence in support of
the deduction. It is not even clear whether petitioners are claiming this
deduction for themselves individually or for Cedar Valley Bird. The
Court will not allow the deduction.
C. Application of Restricted Interest Rules
Interest on a federal income tax liability generally begins to
accrue from the last date prescribed for payment of that tax and
continues to accrue, compounding daily, until payment is made. See
§§ 6601(a), 6622. In the case of an income tax deficiency that is later
reduced by the carryback of an NOL, section 6601(d)(1) authorizes the
21
[*21] Commissioner to collect deficiency interest from taxpayers such as
petitioners whose deficiencies are eliminated by NOL carrybacks.
Section 6601(d)(1), which codifies the principle announced in Manning
v. Seeley Tube & Box Co. of N.J., 338 U.S. 561 (1950), that a taxpayer is
liable for interest on a deficiency until the deficiency is paid or otherwise
abated, provides that a reduction in tax by reason of a carryback of an
NOL does not affect the computation of statutory interest due for the
period ending with the filing date for the taxable year in which the NOL
arose. See also Urbano v. Commissioner, 122 T.C. 384, 394–95 (2004).
Petitioners allege in the Petition that respondent failed to
consider the so-called restricted interest rules of section 6601(d)(1) as
applied to the NOL carrybacks. This claim is without merit. The 2005
abatement of tax, which arose from the carryback of petitioners’ 2010
NOL, is the only transaction to which the restricted interest rules apply
in this case. When submitting Form 5403, Instructions to APS, in
connection with the 2005 abatement, respondent indicated that section
6601(d)(1) applies by checking “yes” to the question “Restricted Interest
Applies” and attaching Form 2285, Restricted Interest Worksheet.
Nothing in the record indicates that respondent has not applied the
restricted interest rules or otherwise abused his discretion with respect
to this issue.
D. Abatement of Interest
Section 6404(e)(1)(A) authorizes the Commissioner to abate an
assessment of interest on “any deficiency attributable . . . to any
unreasonable error or delay by an officer or employee of the Internal
Revenue Service . . . in performing a ministerial or managerial act.”
Petitioners allege that they are entitled to interest abatement and
that respondent did not consider this issue. Petitioners did not raise the
issue of interest abatement in their CDP Hearing Requests, nor at any
point during their CDP hearing. 18 As this issue was not raised in the
CDP hearing, the Court does not consider it. See Giamelli, 129 T.C.
at 114.
18 In the Notices SO Morgan erroneously refers to petitioners’ request to apply
the restricted interest rules as a claim for interest abatement. He states that the
interest abatement claim was denied for 2004 and partially allowed for 2005.
22
[*22] E. Collection Alternatives
On their 2005 levy CDP Hearing Requests, petitioners requested
an offer-in-compromise, and on all of their CDP Hearing Requests they
requested discharge or withdrawal of the NFTLs. Petitioners did not
provide a completed Form 433–A or other materials that would assist
the Appeals officer in determining petitioners’ reasonable collection
potential. Petitioners did not advance any arguments or present any
evidence that they met requirements for lien discharge or withdrawal.
SO Morgan did not abuse his discretion in denying petitioners’ requests.
Petitioners did not request any other collection alternatives.
F. Balancing of Interests
Section 6330(c)(3)(C) requires that the Appeals officer consider
whether the proposed collection actions balance the need for the efficient
collection of taxes with the legitimate concern of the taxpayers that any
collection action be no more intrusive than necessary. SO Morgan
considered the proposed collection actions, petitioners’ outstanding
balances, and their failure to substantiate their inability to pay and
concluded that the lien and levy actions were no more intrusive than
necessary. The record supports SO Morgan’s conclusion, and the Court
concludes that he did not abuse his discretion. 19
19 On October 27, 2023, petitioners lodged their First Supplemental
Amendment to Reply to Motion for Summary Judgment (Amendment). Although
petitioners’ Amendment was submitted out of time and without permission from the
Court, the Court will briefly address petitioners’ arguments here.
Petitioners contend that the so-called major question doctrine, as discussed in
the recent decision by the U.S. Supreme Court in West Virginia v. EPA, 142 S. Ct. 2587,
2607–10 (2022), somehow precludes respondent from making the determination in this
case and that the IRS is acting outside of its statutory authority in denying the NOL
claims. Petitioners misread West Virginia, and Congress clearly authorized the
Commissioner’s collection authority under chapter 64 of the Code. Moreover, as
discussed at length supra, respondent reviewed petitioners’ NOL claims and allowed
the NOL carrybacks to the extent that petitioners substantiated them.
Petitioners also argue that section 6502(a) bars collection of the liabilities at
issue because more than ten years have passed since they were assessed at various
points in 2011. Petitioners did not raise this issue during their CDP hearing and are
not entitled to raise it at this time. See Giamelli, 129 T.C. at 114. The Court notes,
first, that respondent’s assessments of 2005 tax continued into 2013. Moreover,
petitioners’ argument ignores section 6330(e)(1), which suspends the running of the
period of limitations for the period during which a CDP hearing and appeals are
pending. Petitioners filed their CDP Hearing Requests on August 12, 2016, in response
23
[*23] V. Conclusion
SO Morgan gave due consideration to all issues raised by
petitioners in their CDP Hearing Requests, including a detailed analysis
of petitioners’ claimed NOL carrybacks. The Court has reviewed
respondent’s Motion, petitioners’ Reply, the administrative file, and all
supporting documentation and concludes that there is no issue of
material fact with respect to the outstanding balance or respondent’s
determinations. The Court will grant respondent’s Motion and sustain
the collection actions set forth in the Notices.
To reflect the foregoing,
An appropriate order and decision will be entered.
to the 2004 lien notice; August 22, 2016, in response to the 2004 levy notice; October
12, 2016, in response to the 2005 levy notice; and October 21, 2016, in response to the
2005 lien notice. Pursuant to section 6330(e)(1), the statute of limitations on collection
has been suspended since those dates and, accordingly, remains open.
The remaining issues raised in the Amendment are simply a rehash or slight
variation of those arguments raised in the Petition or in petitioners’ Reply, and the
Court has addressed them supra.