Tax Court Rules as Abuse of Discretion Settlement Officer’s Proceeding for Civil Penalty

Holding:

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.

Detailed Summary:

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…

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