Tax Law Updates | New Judicial Opinions
April 16, 2009
Tax Court Rules as Abuse of Discretion Settlement Officer’s Proceeding for Civil Penalty
Santini Stone LLC v. Commissioner
T.C. Memo. 2009-64, U.S. Tax Court, 3/25/2009
The Internal Revenue Service (“IRS”) committed abuse of discretion in collecting a section 6721 civil penalty relating to petitioner Santini Stone LLC’s voluntary bankruptcy proceedings, the U.S. Tax Court has held. Specifically, the Tax Court noted that respondent IRS’s proof of claim, incorporated within the bankruptcy plan without objection from petitioner, listed the section 6721 penalty as an unsecured priority claim. According to the Tax Court, respondent was well within its rights to proceed with collection of the discharged tax liability. Respondent’s remedy was however limited to the obligations contained in the plan. Respondent assigned a value for the penalty at zero in the columns marked “Tax Due” and “Interest to Petition Date.” Moreover, the Tax Court stated, the total amount included for respondent’s unsecured priority claims does not account for the penalty. Consequently, respondent is not entitled to collect the civil penalty. Thus, respondent abused its discretion in determining to proceed with collection of the section 6721 penalty. Further, the Tax Court remanded the case for determination regarding proper payment allocations and penalty abatements.
On January 17, 2003, petitioner filed a voluntary petition with the U.S. Bankruptcy Court for the District of Massachusetts (“bankruptcy court”) under chapter 11 of the Bankruptcy Code, 11 U.S.C. ch. 11, Reorganization. At the time, petitioner had outstanding employment tax liabilities, interest, and penalties for taxable years 1998 through 2002.
On March 31, 2003, respondent filed a claim against petitioner (called a “proof of claim” in bankruptcy parlance) with the bankruptcy court for $458,532, which included secured claims of $26,000, unsecured priority claims of $278,399, and general unsecured claims of $154,133. Petitioner subsequently filed the first amended plan of reorganization (“plan”), which included, without objection from respondent, all of respondent’s aforementioned claims.
On December 18, 2003, the plan was confirmed by order of the bankruptcy court. Under the plan, petitioner was to pay respondent $490.77 per month for 60 months on the secured claims and $7,086.41 per month for 44 months on the unsecured priority claims.
On February 10, 2004, petitioner tendered a check in the full amount owed on the general unsecured claims. Petitioner’s $12,330.64 check, however, was dishonored that same day. Over the following 7 months, an additional five checks totaling $19,366.78 were dishonored as well. Petitioner’s delinquency prompted respondent to issue a default notice to petitioner.
On February 13, 2006, petitioner requested a collection due process hearing (“hearing”) for both the lien and levy notices. Respondent’s Appeals Office assigned the case to Settlement Officer Lisa S. Boudreau (Settlement Officer Boudreau), an impartial officer with no previous involvement with the unpaid taxes. On July 26, 2006, Settlement Officer Boudreau held a face-to-face hearing with petitioner’s representative, Thomas Curran (“Mr. Curran”).
On November 30, 2006, Settlement Officer Boudreau issued Notices of Determination Concerning Collection Action(s) Under Section 6320 and/or 6330 sustaining the lien filing and the proposed levy. In reaching her decision Settlement Officer Boudreau concluded that all Form 941 penalties had been abated and that the section 6721 civil penalty had not been discharged. Settlement Officer Boudreau further concluded that respondent was, in most cases, designating payments received as required under the plan.
On January 3, 2007, petitioner timely filed a petition with the Tax Court. In this petition, the issue was whether Settlement Officer Boudreau abused her discretion in determining that the plan entitled respondent to collect $27,948.89 for the Section 6721 civil penalty.
In this petition, petitioner claimed the section 6721 penalty assessed for taxable year 1998 was discharged in the bankruptcy case as a general unsecured claim. Respondent contended that the penalty was listed as an unsecured priority claim in the plan, entitling respondent to collect the $27,948.89 penalty upon default.
The Tax Court noted that respondent’s proof of claim, incorporated within the plan without objection from petitioner, listed the section 6721 penalty as an unsecured priority claim. According to the Tax Court, respondent was therefore well within his rights to proceed with collection of the discharged tax liability.
The Tax Court however found that respondent’s remedy is limited to the obligations contained in the plan. Opinion, pp. 9-10, citing In re Depew, 115 Bankr. 965 (Bankr. N.D. Ind. 1989). Respondent assigned a value for the penalty at zero in the columns marked “Tax Due” and “Interest to Petition Date.” Moreover, the Tax Court stated, the total amount included for respondent’s unsecured priority claims does not account for the penalty. Consequently, respondent is not entitled to collect the civil penalty. Settlement Officer Boudreau abused her discretion in determining to proceed with collection of the section 6721 penalty.
The Tax Court rejected petitioner’s argument that the February 10, 2004, check for $12,330.64 was not dishonored. The Tax Court held that petitioner had ample opportunity to produce a copy of the canceled check and failed to do so. Consequently, petitioner failed to meet its burden.
Finally, petitioner maintained that the plan payments were not properly credited to trust fund taxes as required under the plan. The Tax Court noted that respondent admitted that the improper application of the payments has not been corrected. Regarding this issue, the Tax Court ordered a remand to provide respondent the opportunity to correct these erroneous items and to comply with the terms of the plan and this opinion.
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