Best v. Comm., (CA9 11/16/2017) 120 AFTR 2d 2017-6593, cert denied 6/25/2018
The Supreme Court has declined to review the Ninth Circuit’s affirmance of the Tax Court decisions which upheld IRS’s administrative collection determinations against the taxpayers. The Ninth Circuit found that the IRS Appeals Office properly verified that all requirements of applicable law and administrative procedure were met and that IRS didn’t err in producing only their account transcripts during their Collection due Process (CDP) hearings.
Background. Under Code Sec. 6203, an assessment is made “by recording the liability of the taxpayer in the office of the Secretary in accordance with rules or regulations prescribed by the Secretary.”
Reg. § 301.6203-1 provides that the assessment is made by an assessment officer signing the summary record of assessment. The summary record, through supporting records, is to provide identification of the taxpayer, the character of the liability assessed, the taxable period, if applicable, and the amount of the assessment. The amount of the assessment is, in the case of tax shown on a return by the taxpayer, the amount so shown, and in all other cases the amount of the assessment is the amount shown on the supporting list or record. The date of the assessment is the date the summary record is signed by an assessment officer. If the taxpayer requests a copy of the record of assessment, he or she will be furnished a copy of the pertinent parts of the assessment which set forth the name of the taxpayer, the date of assessment, the character of the liability assessed, the taxable period, if applicable, and the amounts assessed.
It is generally accepted that the government need not produce the original documentation used to make the assessment to establish that the tax has been properly assessed. (Gentry v. U.S., (CA6 1992) 69 AFTR 2d 92-1158) Instead, a certified copy of a Form 4340 (Certificate of Assessments and Payments) constitutes prima facie proof that a timely and proper assessment was made against the taxpayer. (Koff v. U.S., (CA9 1993) 72 AFTR 2d 93-5845)
IRS’s Appeals Division is responsible for conducting administrative hearings in collection matters. (Code Sec. 6330(b)(1)) Once IRS files a tax lien upon the taxpayer’s property or decides to levy to collect a penalty, it must notify the taxpayer in writing of the right to an administrative hearing under Code Sec. 6320(a)(1) and Code Sec. 6330(a)(1) (i.e., a CDP hearing). Among other requirements, IRS Appeals must verify that the requirements of any applicable law or administrative procedure have been met in processing the case. (Code Sec. 6330(c)(1))
The Tax Court may impose a penalty of up to $25,000 whenever it appears to the court that (1) the proceedings before it have been instituted or maintained by the taxpayer primarily for delay (Code Sec. 6673(a)(1)(A)); (2) the taxpayer’s position in such proceeding is frivolous or groundless (Code Sec. 6673(a)(1)(B)); or (3) the taxpayer unreasonably failed to pursue available administrative remedies. (Code Sec. 6673(a)(1)(C))
Facts. The taxpayers requested collection due process hearings when IRS notified them that levies would be imposed. During the hearings, the IRS Appeals Office appropriately verified that the requirements of any applicable law or administrative procedure had been met.
IRS Appeals sent the taxpayers a Notice of Determination Concerning Collection Actions(s) Under Section 6320 and/or 6330, informing them that the notice of intent to levy was correct and that IRS would proceed with collection.
The taxpayers challenged this determination in Tax Court.
Tax Court decisions. In Best, et ux., TC Memo 2014-72, the Tax Court upheld the IRS’s administrative determination to proceed with a levy for the unpaid tax liabilities of a married couple, Leonard and Evelyn Best, finding that the IRS settlement officer properly relied on computer transcripts to verify that unpaid liabilities had been properly assessed.
The transcripts identified the taxpayers, tax forms and years involved, and assessment dates and amounts. The Tax Court found that the transcripts, which were furnished to the taxpayers during their CDP hearing, plus Forms 4340 (Certificate of Assessments and Payments), which were provided to them after the hearing and Appeals made its determination, fulfilled IRS’s obligation under Code Sec. 6203 to furnish them assessment records.
The Tax Court found that although the Forms 4340 were accompanied by certifications as to accuracy that contained what appeared to be stamped signatures of the IRS officials making the certifications, this wasn’t a wasn’t a fatal defect because Reg § 301.6203-1 didn’t impose any signature requirement.
In addition, the Tax Court imposed a $5,000 Code Sec. 6673(a)(1) sanction on the married taxpayers for pursuing a frivolous petition primarily for delay: taxpayers’ arguments that the settlement officer abused her discretion in relying on computer transcripts to verify that their unpaid tax had been properly assessed and that collection couldn’t proceed because IRS had failed to furnish them assessment records were meritless.
In the second decision, Best, et ux., TC Memo 2016-32, the sanctions against the taxpayers were reconfirmed based on the fact that it was their decision to bring the case. The Tax Court also imposed $19,837 in sanctions under Code Sec. 6673(a)(2), based on the attorney’s fees that IRS incurred, on the taxpayers’ counsel, who clearly engaged in unreasonable and vexatious conduct within meaning of Code Sec. 6673(a)(2) when he knowingly and in bad faith raised frivolous arguments; recklessly and unreasonably disregarded authority IRS brought to his attention, and continued prosecuting taxpayers’ meritless claims; and further multiplied proceedings and vexatiously impeded case resolution by reversing course on summary judgment motions.
In May, et al., TC Memo 2014-194, the Tax Court upheld IRS’s determination to proceed with collection of the liabilities of Howard, the husband, and his since-deceased wife, Judith. The Court found that the taxpayers’ argument that the IRS settlement officer improperly relied on account transcripts when verifying that it was a proper assessment was meritless. The Court reasoned that Code Sec. 6330 only required that the IRS officer make a verification, but didn’t require her to use any particular document or provide taxpayers with copies of the same.
While the transcripts contained some errors, including erroneous notation that the wife had been provided a deficiency notice even though she had not, those errors didn’t affect the officer’s ultimate (i.e., supplemental) determination since it was issued only after errors were corrected and the taxpayers were given a remanded hearing. The Tax Court also found the taxpayers’ alternate argument that the settlement officer abused her discretion by refusing to give the taxpayers delegation orders and assessment source documents containing original signatures was also meritless.
The Court imposed a $500 Code Sec. 6673(a)(1) sanction on the taxpayers for their use of the petition to advance frivolous positions (i.e., arguments that were meritless and contrary to established law). But, because there was a “scintilla of support” for part of the taxpayers’ original position, in that as IRS acknowledged, it had made mistakes in the underlying assessment records, the sanction was relatively modest.
In May, et al., TC Memo 2016-43, the Tax Court imposed $7,188 in sanctions under Code Sec. 6673(a)(2) on the taxpayers’ attorney, based on the attorney’s fees that IRS incurred. It was clear that the attorney, who continued with same meritless arguments even after being explicitly advised that they were frivolous, did so knowingly or recklessly and therefore acted in bad faith.
Appellate decision. In consolidated cases, the Ninth Circuit found that the Tax Court did not err in sustaining levies to collect the delinquent taxes of the taxpayers Leonard Best, Evelyn Best, Howard May, the Estate of Judith A. May, and the personal representative, Marcia May.
The Court concluded that the IRS Appeals Office did not err in producing only the taxpayers’ account transcripts during their collection due process hearings. It reasoned that under Reg § 301.6203-1, a taxpayer is entitled to “the pertinent parts of the assessment which set forth the name of the taxpayer, the date of assessment, the character of the liability assessed, the taxable period, if applicable, and the amounts assessed.” As determined in Koff, this reg was a permissible interpretation of Code Sec. 6203, and as a result, the Ninth Circuit was bound to give it deference.
In additionally, the Ninth Circuit found that the taxpayers’ subsequent receipt of the Forms 4340 prior to trial in the Tax Court fulfilled IRS’s Code Sec. 6203 obligation to furnish the taxpayers with copies of the IRS records of assessment. Again citing Koff, the Court concluded that Form 4340 was sufficient to show that the assessments were proper.
The Court further determined that the IRS Appeals Office was not required to provide the taxpayers with a specific, signed delegation order for the Forms 4340. There was no requirement under IRS laws or regs that the taxpayer receive a copy of the delegation of authority order from the Secretary to the person who signed the verification required under Code Sec. 6330(c)(1).
The Ninth Circuit held that the Tax Court did not abuse its discretion in imposing penalties under Code Sec. 6673(a)(1)(B). Taxpayers maintained “frivolous or groundless” positions when they argued that they were entitled to receive particular documents. Consistent with Koff, IRS has reasonably classified these positions as frivolous. (Rev Rul 2007-21, 2007-1 CB 865, Notice 2010-33, 2010-17 IRC 609) Further, because Code Sec. 6673(a)(1)(B) is indifferent to a taxpayer’s state of mind, the taxpayers couldn’t escape this penalty by advancing a defense of good faith reliance on counsel.
No further review.On June 25, 2018, the Supreme Court refused to review the Ninth Circuit’s decision. Accordingly, that decision is now final.
References: For how IRS makes an assessment, see FTC 2d/FIN ¶T-3600 et seq.; United States Tax Reporter ¶62,034.
