Offer in Compromise – 7122 - Breach of agreementThe IRS may not unilaterally default a joint offer in compromise in the case of a taxpayer-husband that breached his obligations under a separate, but related, offer in compromise on the basis of an oral agreement tying the two offers together. The regulations specifically require that offers in compromise be reduced to writing and thus cannot be altered by an oral agreement.
Field Service Advice Memorandum 200130043, June 25, 2001.
UIL No. 7122.03-00 Compromises, Breach, Field Service Advice 200130043
IRS Letter Rulings Report No. 1274, 08-01-01
IRS REF: Symbol: CC:PA:CBS:Br2
Uniform Issue List Information:
UIL No. 7122.03-00
Compromises
- Breach
[Code Sec. 7122]
INTERNAL REVENUE SERVICE NATIONAL OFFICE FIELD SERVICE ADVICE
MEMORANDUM FOR ASSOCIATE AREA COUNSEL (SBSE), AREA 4, DETROIT, MICHIGAN
FROM: Lawrence H. Schattner, Chief, Branch 2 (Collection, Bankruptcy & Summonses)
SUBJECT: Default of Offer-in-Compromise
This Chief Counsel Advice responds to your memorandum dated May 8, 2001. In accordance with I.R.C. §6110(k)(3), this Chief Counsel Advice should not be cited as precedent.
ISSUES
Whether the Internal Revenue Service ("Service") may unilaterally default a joint offer in compromise when Taxpayer-Husband breached his obligations under a separate but related offer in compromise on the basis of an oral agreement tying the two offers together.
CONCLUSIONS
No. Treasury Regulations specifically require that offers in compromise be reduced to writing and thus cannot be altered by an oral agreement.
FACTS
A joint offer in compromise was accepted by the Service to resolve Taxpayers' outstanding income tax liabilities. The notice of acceptance stated, "our acceptance is subject to the terms and conditions on the enclosed form 656, Offer in Compromise." Taxpayers fulfilled their obligations under the offer in compromise by paying the total due plus interest.
The Service also accepted Taxpayer-Husband's individual offer in compromise to resolve his outstanding employment tax liabilities. The notice of acceptance contained the same language as above. Taxpayer-Husband never made any payments under his offer in compromise and the Service defaulted both compromise agreements.
According to your memo, it was the practice of the local offer in compromise group to inform taxpayers orally that individual and joint agreements were tied together. Your memo does not state if Taxpayers in this case were specifically told that default of one offer would result in default of the other and whether Taxpayers agreed. Your memo also states that current practice is to make agreements tying the two offers together in writing.
LAW AND ANALYSIS
The Nature of an Offer in Compromise
An offer in compromise is a statutory creation. I.R.C. section 7122(a) states:
The Secretary may compromise any civil or criminal case arising under the internal revenue laws prior to reference to the Department of Justice for prosecution or defense; and the Attorney General or his delegate may compromise any such case after reference to the Department of Justice for prosecution or defense.
I.R.C. §7122(a). Thus, any offer in compromise is to be strictly construed according to the statutory requirements. Botany Worsted Mills v. United States, 278 U.S. 282 (1929) [1 USTC ¶348]; Klien v. Commissioner, 899 F.2d 1149 (11th Cir. 1990) [90-1 USTC ¶50,251]; Bowling v. United States, 510 F.2d 112 (5th Cir. 1975) [75-1 USTC ¶9333];
It has also been said that an offer in compromise is a contract and is subject to the general rules governing contracts. United States v. Feinberg, 372 F.2d 352 (3rd Cir. 1967) [67-1 USTC ¶9176]; United States v. Lane, 303 F.2d 1 (5th Cir. 1962) [62-1 USTC ¶9467]; Kurio v. United States, 429 F.Supp. 42 (S.D. Tex. 1970) [71-1 USTC ¶9112]. However, the rules of contracts cannot abrogate the statutory requirements governing offers in compromise. Bowling, 510 F.2d at 113 [75-1 USTC ¶9333].
Requirement of a Writing
Temporary Treasury Regulation section 301.7122-1T(c)(1) requires that all offers in compromise be submitted in writing on forms prescribed by the Service.1 In accordance with this regulation the Service now requires that all offers must be submitted on Form 656. IRM 5.8.1.4(1)
In Boulez v. Commissioner, 810 F.2d 209 (D.C. Cir. 1987) [87-1 USTC ¶9177] a taxpayer challenged the Treasury regulation's writing requirement, arguing that he had a binding oral compromise agreement. Pierre Boulez ran afoul of U.S. tax law by failing to include certain income on his tax returns. Id. at 210. After extensive negotiations, Boulez reached an oral compromise agreement with the Service. Id. In an unrelated audit, the Service discovered more tax deficiencies and issued a notice of deficiency. Id. at 211. Boulez argued that the oral agreement settled all of his tax liabilities, including these newly discovered deficiencies, and was binding on the Service. Id. The court of appeals disagreed and found that Treasury Regulation section 301.7122-1(d) (1960) required an offer in compromise to be set out in writing and that this requirement was "entirely reasonable, and a wholly permissible interpretation of Section 7122." Boulez, 810 F.2d at 214 [87-1 USTC ¶9177]. In addition the court stated that the writing requirement could not simply be overlooked as it is "a fundamental tenet of formalizing agreements." Id. at 216. Thus, because the agreement did not conform to statutory requirements it was not binding on the Service.
The holding of Boulez was followed in In re Aberl, 159 B.R. 792 (Bankr. N.D. Ohio 1993), aff'd, 175 B.R. 915 (N.D. Ohio 1994), aff'd, 78 F.2d 241 (6th Cir. Ohio 1996). The Aberl court refused to find that oral negotiations between a taxpayer and the Service constituted an offer in compromise. "This Court agrees...that '[Treas. Reg. §301.7122-1(d)], which requires that all compromises be reduced to writing, has the force and effect of law, and that the [IRS] lacked authority to waive it." In re Aberl, 159 B.R. at 799, citing Boulez, 810 F.2d at 211 [87-1 USTC ¶9177] (alteration in original) (citations omitted).
The issue you have presented, however, deals with an oral term within a written offer in compromise rather than an entirely oral agreement. In Keating v. United States, 794 F.Supp. 888 (D. Neb. 1992) [92-2 USTC ¶50,413] the district court concluded that an oral agreement could not supersede the written terms of Form 656. The Keatings submitted a written offer in compromise on Form 656, which expressly informed taxpayers that the United States would retain any tax refunds that arose within the period of the offer. Id. at 889. The Keatings then negotiated with the Service to increase the amount of their offer with the oral understanding that the Service would refund any tax overpayments, notwithstanding the language of Form 656. Id. The Service kept the Keatings' refund and applied it to their tax liability. Id. at 888.
The District Court stated:
Even assuming that an oral agreement existed between the parties that attempted to supersede Form 656, an oral agreement with the Internal Revenue Service with respect to federal income tax liability cannot bind the government...The Internal Revenue Code and the Treasury regulations specifically require a written offer and acceptance of an offer in compromise. (citations omitted)
Id. at 891. Thus, according to the statutory scheme and regulations governing offers in compromise, an oral term cannot be added to a written offer2 But see, Engelken v. United States, 823 F.Supp. 845 (D. Colo. 1993) (denying summary judgment because plaintiffs should have been allowed to show an oral modification to their offer in compromise). Without a contract term tying the two offers together, they must each stand alone. The joint offer in compromise has been fully paid. Assuming Taxpayers have complied with all of the filing and payment requirements of the I.R.C. for the five year period following acceptance of their offer as required by condition (d) of Form 656 (Rev. 9-93), the liability has been extinguished. See, Temp. Treas. Reg. §301.7122-1T(d)(5); Treas. Reg. §301.7122-1(c) (1960).
Contract Rules Governing Oral Terms
It is our position that I.R.C. section 7122(a) and the regulations thereunder govern the requirements of an offer in compromise and that pursuant to these authorities all the terms of the offer and acceptance of the offer must be in writing. Even under general contract principles, we believe the conclusion would be the same
At the outset, in considering an offer in compromise a court should look to "the rules applicable to contracts generally." Lane, 303 F.2d at 4 [62-1 USTC ¶9467]; see also, United States v. Wainer, 211 F.2d 669, 673 (7th Cir. 1954) [54-1 USTC ¶49,032] (applying common law when analyzing a compromise agreement with the Service).
The parole evidence rule governs when testimony will be allowed to prove an oral term of a written contract. The general rule is that evidence of a prior or contemporaneous agreement, not included in an integrated writing, is not admissible to prove the existence of that agreement. Restatement (Second) of Contracts §§215, 216 (1981); Samuel Williston, 4 Williston on Contracts §631 (3d ed. 1961).3 Parole evidence is admissible to prove: (1) that the writing is not integrated; (2) the writing is only partially integrated; (3) the meaning of the writing; (4) illegality, fraud, duress, mistake, lack of consideration, or other invalidating cause; (5) grounds for recission, reformation, specific performance, or other remedy. Restatement (Second) of Contracts §214 (1981). Thus, parole evidence may be used to show that an agreement is not integrated. If the Service were able to prove that Form 656 is not integrated then it could introduce evidence of a contemporaneous oral agreement to tie the two offers in compromise together.
An agreement is determined to be integrated when the writing constitutes "a final expression of one or more terms of an agreement." Restatement (Second) of Contracts §209 (1981). Whether an agreement is integrated is to be determined by the court, however, written agreements are presumed to be integrated. Id.; Samuel Williston, 4 Williston on Contracts §633 (3d ed. 1961). This presumption is particularly strong when the parties use a standardized agreement. Restatement (Second) of Contracts §211 (1981). Even if an agreement is not fully integrated courts generally will not allow parole evidence of an additional term if that term would normally be included in that type of agreement. Arthur Linton Corbin, 3 Corbin on Contracts §583 (1960).
A further hazard for the Service is the rule that "in choosing among the reasonable meanings of a promise or agreement or a term thereof, that meaning is generally preferred which operates against the part who supplies the words or from whom a writing otherwise proceeds." Restatement (Second) of Contracts §206 (1981).4 A court is particularly likely to construe a contract against the government as the drafting party. Restatement (Second) of Contracts §207 cmt. a (1981).
The use of parole evidence is decided on a case by case basis by the courts, however, given the rules of contracts as discussed above it is unlikely that the Service would prevail in proving that Form 656 is an unintegrated agreement and that evidence of an oral agreement should be admitted.
This writing may contain privileged information. Any unauthorized disclosure of this writing may have an adverse effect on privileges, such as the attorney client privilege. If disclosure becomes necessary, please contact this office for our views.
If you have any further questions please contact the attorney assigned to this matter at (202) 622-3620.
1 Acceptances must also be in writing. Temp. Treas. Reg. §301.7122-1T(d)(1). These writing requirements were also in effect when the offers at issue were accepted. See, Treas. Reg. §301.7122-1(d) (1960).
2 It does not matter that the Keating court dealt with an attempt to supersede a written term of the offer whereas this case deals with an attempt to add a consistent term because the analysis under the statutory scheme is the same. Oral agreements are not enforceable.
3 Michigan law is in accord with the common law on parole evidence. NAG Enterprise, Inc. v. All State Industries, Inc. 407 Mich. 407 (1979); UAW-GM Human Resource Center v. KSL Recreation Corp., 228 Mich. App. 486 (1998).
4 Michigan law is in accord. Hanley v. Porter, 238 Mich. 617 (1927); Stark v. Kent Products, Inc. 62 Mich. App. 546 (1975); Elby v. Livernois Eng'g Co., 37 Mich. App. 252 (1971).
Where the taxpayer failed to plead in the District Court the three-year statute of limitations on assessment as a defense to the Government's suit on an assessment to collect taxes, after the taxpayer had defaulted on payments to be made under a compromise agreement entered into after the three-year limitations period had passed, he could not raise for the first time on appeal the question of whether the compromise agreement was an effective waiver of the limitations period. A waiver of the statute of limitations found in the compromise agreement was fully effective against the taxpayer.
B. Feinberg, CA-3, 67-1 USTC ¶9176, 372 F2d 352.
Similarly, where the taxpayer failed to meet the monthly installment payments under an agreement for compromise of his tax liability. The doctrines of estoppel and modification of contract by subsequent conduct were not applicable merely because the Government did not bring action immediately after the breach of the first installment and before the taxpayer made any other payments.
S. Saladoff, CA-3, 65-2 USTC ¶9645.
On retrial, the trial court properly entered summary judgment for the Government for the amount of taxes proved to be due, where the taxpayer offered no counter proof, and also properly dismissed a separate injunction suit.
R.C. Lane, CA-5, 64-1 USTC ¶9273, 328 F2d 602.
Where the taxpayer failed to file sworn statements of annual income pursuant to the terms of a collateral income agreement which accompanied an agreement for compromise of his tax liability, the compromise agreement was breached and the Government was entitled to revive the original tax liability, subject to credit for previous payments made under the compromise agreement.
R.C. Lane, CA-5, 62-1 USTC ¶9467, 303 F2d 1.
The IRS was not liable for a breach of contract claim with respect to a settlement agreement because the individual bringing suit failed to show the existence of an enforceable contract to settle his outstanding tax liabilities. The IRS agent's written reply to the individual's offer did not constitute a valid offer or counteroffer that could be accepted by the individual to create a binding contract with the IRS. Moreover, the IRS agent was not authorized to enter into any such contract with the individual.D.W. Jordan, FedCl, 2007-2 USTC ¶50,601. Dennis W. Jordan, Plaintiff v. The United States, Defendant. U.S. Court of Federal Claims; 06-96C, July 30, 2007, 77 FedCl 565.
[ Code Sec. 7122]
Jurisdiction: Settlement offer: Breach of contract. --
The IRS was not liable for a breach of contract claim with respect to a settlement agreement because the individual bringing suit failed to show the existence of an enforceable contract to settle his outstanding tax liabilities. The IRS agent's written reply to the individual's offer did not constitute a valid offer or counteroffer that could be accepted by the individual to create a binding contract with the IRS. Moreover, the IRS agent was not authorized to enter into any such contract with the individual.
The Court of Federal Claims lacked jurisdiction over an individual's claims seeking a refund and injunctive and declaratory relief. The court had no authority to grant the individual's requests for declaratory judgment or for specific performance of a contract, and the Anti-Injunction Act barred his claims to enjoin the IRS's tax collection activities. Further, the individual did not satisfy the jurisdictional prerequisites before filing his suit for refund.
.
[ Code Sec. 7421]
Injunctive relief: Declaratory relief: Anti-Injunction Act. --
The Court of Federal Claims lacked jurisdiction over an individual's claims seeking injunctive and declaratory relief. The Anti-Injunction Act barred his claims seeking to enjoin IRS's collection of his outstanding tax liabilities for the years at issue. Moreover, the Claims court had no authority to grant the individual's requests for a declaratory judgment or for specific performance of any contract entered with the IRS to settle his tax liability.
[ Code Sec. 7422]
Jurisdiction: Refund claim. --
The Court of Federal Claims lacked subject matter jurisdiction over an individual's claim for refund. The individual had not paid the full amount of his tax liability and filed an administrative claim with the IRS before filing his suit for refund.
OPINION AND ORDER ON DEFENDANT'S MOTION TO DISMISS
WHEELER, Judge: This case is before the Court on Defendant's August 4, 2006 motion under Rules 12(b)(1) and (b)(6) to dismiss for lack of subject matter jurisdiction and for failure to state a claim upon which relief can be granted. Plaintiff Dennis Jordan brought this suit against the United States on February 7, 2006, alleging that the Internal Revenue Service ("IRS") breached an express contract to settle his outstanding tax liabilities for the years 1999 and 2000. Following the briefing of Defendant's motion to dismiss, the Court requested supplemental briefs regarding the authority of the pertinent IRS representatives to bind the United States to the alleged settlement agreement. Order, Dec. 5, 2006. Thereafter, the parties requested a stay of proceedings to discuss a compromise of this action. When those discussions proved unsuccessful, the parties filed their supplemental briefs with the Court on May 1, 2007. Defendant's motion to dismiss now is ready for decision.
Mr. Jordan claims that he entered into a binding settlement agreement with the IRS to pay $12,721.00 in full satisfaction of $38,200.87 in tax liabilities for the years 1999 and 2000. Mr. Jordan asserts that IRS representatives with delegated authority extended a counteroffer to him in May 2003 which he promptly accepted. Mr. Jordan states that the IRS breached the settlement contract by failing to discharge the balance of Mr. Jordan's tax liabilities, and he asks for "money damages for such breach equal to the balance of such tax liabilities." Plaintiff's Sept. 6, 2006 Response at 2. Mr. Jordan, however, has not paid any portion of his tax liability to the IRS for the years 1999 and 2000, and he has not filed an administrative claim for refund with the IRS.
Defendant contends that no such settlement contract was formed with Mr. Jordan, and that, in any event, the IRS employee with whom Mr. Jordan corresponded lacked the authority to bind the IRS. Defendant further asserts that the absence of a contract leaves Mr. Jordan without an actionable claim and deprives this Court of subject matter jurisdiction. Lacking a binding contract, Mr. Jordan's action could only be for an income tax refund. However, since Mr. Jordan has not paid any of his taxes and has not filed an administrative claim for refund, the Court is without jurisdiction to hear such a claim. To the extent Mr. Jordan is requesting specific performance, a declaratory judgment, or injunctive relief, Defendant asserts that the Court similarly does not possess jurisdiction.
For the reasons explained below, the Court finds that the IRS did not enter into a binding settlement contract with Mr. Jordan. As the parties' correspondence demonstrates, the IRS did not make a counteroffer to Mr. Jordan, and thus Mr. Jordan was not in a position to accept a counteroffer. Instead, the Court finds that Mr. Jordan submitted an amended offer to the IRS, which the IRS did not accept. Further, the Court agrees with Defendant that the IRS employee who corresponded with Mr. Jordan did not possess authority to bind the IRS. Without a contract claim, Mr. Jordan cannot maintain a tax refund action, because he has not fulfilled any of the necessary jurisdictional prerequisites.
In reaching this decision, the Court has considered and relied upon supporting materials beyond the pleadings from both parties. In such circumstances, Rule 12(b) provides that Defendant's motion should be treated as one for summary judgment under Rule 56. Accordingly, the Court grants summary judgment for Defendant.
Factual Background 1
Plaintiff Mr. Jordan has outstanding federal tax liabilities for 1999 ($20,946.04) and 2000 ($17,254.83), plus penalties and interest. Complaint, ¶ ¶3, 4. On March 12, 2002, the IRS received a Form 656 "Offer in Compromise" from Mr. Jordan to settle these tax liabilities for $10,000. Defendant's Appendix ("Deft's App.") at 1-4. Mr. Jordan claimed that he was unable to pay the tax liabilities in full. Id. at 3. On May 19, 2003, an IRS Offer Specialist, Ms. Marianna Caldera, responded to Mr. Jordan by stating that "we cannot accept an offer for less than $12,721.00 for a cash offer (payable within 90 days)." Ms. Caldera further stated that "[i]f you do not respond to this letter within 14 days of the date of this letter, your offer cannot be recommended for acceptance, and a Federal Tax Lien will be filed." Id. at 5 (emphasis in original).
By letter dated May 30, 2003, Mr. Jordan submitted a revised Form 656 "Offer in Compromise" to the IRS stating that he would pay $12,721.00 to settle his 1999 and 2000 tax liabilities. Complaint, Exh. C. Mr. Jordan also sent a check to the IRS for $12,721.00 on August 18, 2003 representing what he believed was the agreed upon payment. Deft's App. at 18-20. Thereafter, from a review of records provided by Mr. Jordan, Ms. Caldera learned that Mr. Jordan's financial condition would improve as of October 2003 when his obligation to pay his former wife monthly support payments of $3,000.00 expired. Deft's App. at 24-27. By letter dated August 15, 2003, Ms. Caldera informed Mr. Jordan of the IRS's preliminary analysis that Mr. Jordan had "the ability to pay [his] liability in full within the time provided by law." Id. at 14-15. For this reason, the IRS considered but ultimately rejected Mr. Jordan's $12,721.00 offer. IRS Transcript History, Plaintiff's Appendix ("Pltf's App.") at 19-20, 22.
On March 2, 2004, an IRS Group Manager, Ms. Donna Seibel, officially rejected Mr. Jordan's $12,721.00 offer, stating that "[b]ased on the financial information you submitted, we have determined you can pay the amount due in full." Deft's App. at 21. On May 6, 2004, the IRS sent a check to Mr. Jordan for $12,721.00 drawn upon the United States Treasury. Complaint ¶18. On May 24, 2004, through his counsel, Mr. Jordan appealed the IRS's rejection of his offer. Id. ¶19. The IRS Office of Appeals sustained the rejection of Mr. Jordan's offer on February 23, 2005. Deft's App. at 28.
Discussion
A. Standards for Decision
In deciding a motion to dismiss for lack of subject matter jurisdiction under Rule 12(b)(1), the Court accepts as true the undisputed allegations in the Complaint, and draws all inferences in favor of the non-moving party. Scheuer v. Rhodes, 416 U.S. 232, 236 (1974); Reynolds v. Army & Air Force Exch. Serv., 846 F.2d 746 (Fed. Cir. 1988). Plaintiff bears the burden to establish by a preponderance of the evidence the facts sufficient to invoke the Court's jurisdiction. See Reynolds, 846 F.2d at 748. In determining whether Plaintiff has met his burden, the Court may look "beyond the pleadings and 'inquire into jurisdictional facts' in order to determine whether jurisdiction exists." Lechliter v. United States, 70 Fed.Cl. 536, 543 (2006) (citing Rocovich v. United States [ 91-1 USTC ¶60,072], 933 F.2d 991, 993 (Fed. Cir. 1991)). In the present case, both Plaintiff and Defendant have submitted documents in support of their pleadings. The Court refers to these materials "to the extent that they allow the court to determine whether it has jurisdiction over this case." Id.
The standard for dismissal under Rule 12(b)(6) parallels the standard for review of jurisdictional issues under Rule 12(b)(1). Baird v. United States, 71 Fed.Cl. 536, 542 (2006). However, where "matters outside the pleading" are before the Court on a motion to dismiss for failure to state a claim, the Court regards the motion as one for summary judgment. Rule 12(b) provides:
If, on a motion...to dismiss for failure of the pleading to state a claim upon which relief can be granted, matters outside the pleading are presented to and not excluded by the court, the motion shall be treated as one for summary judgment and disposed of as provided in RCFC 56.
As noted, the Court has accepted from both parties supporting materials beyond the pleadings, and therefore it is appropriate to convert Defendant's Rule 12(b)(6) motion into a motion for summary judgment under Rule 56. District of Columbia v. United States, 67 Fed.Cl. 292, 301-02 (2005) (citing De Brousse v. United States, 28 Fed.Cl. 187, 188 (1993) and Schultz v. United States, 5 Cl.Ct. 412, 416 (1984)). In such circumstances, Rule 12(b) directs the Court to provide the parties with "a reasonable opportunity to present all material made pertinent to such a motion by RCFC 56." The parties in the present case have had this opportunity. The Complaint, Defendant's Motion to Dismiss, and Plaintiff's Response each include attached exhibits that the Court has accepted and relied upon in reaching this decision. See District of Columbia, 67 Fed.Cl. at 301 ("In this instance, because defendant moved in the alternative for summary judgment, plaintiff has had ample time to submit materials and arguments opposing summary judgment. This is evidenced most clearly by the exhibits submitted by plaintiff with its original motion for summary judgment and its opposition briefs.").
Under Rule 56, the moving party is entitled to summary judgment "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Rule 56(c). A genuine issue of material fact is one that would change the outcome of the litigation. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). The burden to establish the absence of disputed genuine issues of material fact in this case belongs to Defendant. Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986). This initial burden may be discharged, however, if Defendant can demonstrate "an absence of evidence to support the nonmoving party's case." Buesing v. United States [ 99-1 USTC ¶50,246], 42 Fed.Cl. 679, 693 (1999) (citing Celotex, 477 U.S. at 325). If Defendant succeeds, "the burden then shifts to the nonmoving party to demonstrate that a genuine factual dispute exists[.]" Id. (citations omitted).
B. Whether The Parties Formed An Enforceable Contract
Setting aside the jurisdictional question of whether Mr. Jordan has properly stated a complaint for money damages, the Court will first consider Defendant's Rule 12(b)(6) motion for failure to state a claim upon which relief can be granted. For purposes of this discussion, the Court will assume that Plaintiff has properly alleged a breach of contract within the Court's jurisdiction. See, e.g., Gould, Inc. v. United States, 67 F.3d 925, 929 (Fed. Cir. 1995) ("[T]he court must assume jurisdiction to decide whether the allegations state a cause of action on which the court can grant relief as well as to determine issues of fact arising in the controversy. Jurisdiction, therefore, is not defeated...by the possibility that the averments might fail to state a cause of action on which petitioners could actually recover[.]") (citations omitted). With this assumption, the question to be decided is whether the IRS and Mr. Jordan entered into an enforceable contract settling Mr. Jordan's tax liability for 1999 and 2000.
A review of the relevant correspondence reveals that the IRS did not at any time make an offer or counteroffer to Mr. Jordan, and thus Mr. Jordan was not in a position to create a binding contract through his acceptance. Although Mr. Jordan refers to Ms. Marianna Caldera's May 19, 2003 letter as a "counteroffer," and his response as an "acceptance" (Complaint ¶ ¶9, 10), the exchange between the parties does not support Mr. Jordan's contention. Ms. Caldera's letter on behalf of the IRS contains the following statements:
If the payment terms of your amended offer exceed ninety days, a notice of Federal Tax Lien will be filed....You may also provide any other information you believe we should consider in making a final determination as to whether to accept your offer ....Also, if your offer is accepted, your compliance will be monitored for 5 years. In that time, if you do not comply with all filing and paying requirements... your offer will be defaulted....If you do not respond within 14 days of the date of this letter, your offer cannot be recommended for acceptance ....[If] your offer is rejected you will receive information regarding how to appeal....
Complaint, Exh. B; Deft's App. at 5-6 (emphasis added). This letter on its face solicited an amended offer from Mr. Jordan, and did not itself constitute an IRS offer or counteroffer. Indeed, the IRS Form 656 that Mr. Jordan sent back to Ms. Caldera is entitled "Offer in Compromise." Deft's App. at 7. This exchange did not constitute a valid offer and acceptance. The IRS formally rejected Mr. Jordan's amended offer through the March 2, 2004 letter from an IRS Group Manager, Ms. Donna Seibel. Deft's App. at 21-23.
Even if the May 19 and 30, 2003 exchanges between Ms. Caldera and Mr. Jordan could be regarded as a contract, the Court must examine whether Ms. Caldera possessed the authority to bind the IRS. In addition to the standard elements of offer, acceptance, and consideration, a valid contract with the Unites States requires authority "on the part of the government representative who entered or ratified the agreement to bind the United States in contract." Total Medical Management, Inc. v. United States, 104 F.3d 1314, 1319 (Fed. Cir. 1997). See also Trauma Serv. Group v. United States, 104 F.3d 1321, 1325 (Fed. Cir. 1997) ("A contract with the United States also requires that the Government representative who entered or ratified the agreement had actual authority to bind the United States.") (emphasis added).
As Defendant notes, a government agent's apparent authority "is not sufficient to bind the government...even where the agent in question believed that he held such authority[.]" See Arakaki v. United States, 71 Fed.Cl. 509, 515 (2006) (citing City of El Centro v. United States, 922 F.2d 816, 820 (Fed. Cir. 1990)). When negotiating a contract with the Government, therefore, it is incumbent on a private party to determine whether his public counterpart has the necessary authority to bind the United States. See, e.g., Brooks v. United States, 70 Fed.Cl. 479, 486 (2006) (citing Fed. Crop Ins. Corp. v. Merrill, 332 U.S. 380 (1947)). Moreover, the risk of accurately assessing the scope of a government agent's authority is squarely on the private party. Merrill, 332 U.S. at 384 ("[A]nyone entering into an arrangement with the Government takes the risk of having accurately ascertained that he who purports to act for the Government stays within the bounds of his authority."). The private party retains this risk even where a Government agent displays apparent authority. Trauma Serv. Group, 104 F.3d at 1325) ("this risk remains with the contractor even when the Government agents themselves may have been unaware of the limitations on their authority."). This rule shields the Government from the acts of its own agents. Brooks, 70 Fed.Cl. at 486 (citing Flexfab, LLC v. United States, 424 F.3d 1254, 1263 (Fed. Cir. 2005) ("Surely the assurances from a government agent, having no authority to give them, cannot expose the government to risk of suit for the nonperformance of an obligation that it did not intentionally accept.")). Commensurate with this risk is a plaintiff's burden to prove the scope of the authority asserted. See Arakaki, 71 Fed.Cl. at 516.
Here, as the IRS previously explained to Mr. Jordan, Ms. Caldera did not have the authority to enter into a contract with Mr. Jordan. Deft's App. at 28. The IRS Group Manager, Ms. Seibel, possessed the requisite authority, but in her only correspondence with Mr. Jordan, she rejected Mr. Jordan's amended offer. Id. at 21-23, March 2, 2004 letter. Thus, no person with authority to bind the IRS entered into a binding contract with Mr. Jordan.
C. The Court Lacks Jurisdiction Over Plaintiff's Other Claims
Upon the rejection of Plaintiff's breach of contract claim, the Court is without jurisdiction to consider Mr. Jordan's other claims for relief. In general, the Court does possess jurisdiction to adjudicate Federal tax refund suits. See New York Life Ins. Co. v. United States [ 97-2 USTC ¶50,569], 118 F.3d 1553, 1558 (Fed. Cir. 1997); Fisher v. United States, 69 Fed.Cl. 193, 196 (Fed.Cl. 2006); Hunsaker v. United States [ 2005-2 USTC ¶50,474], 66 Fed.Cl. 129 (2005). A plaintiff may assert a tax refund claim in this Court, provided the taxpayer has made full payment of the tax liability, penalties, and interest. See Flora v. United States [ 60-1 USTC ¶9347], 362 U.S. 145, 163 (1960); Hunsaker [ 2005-2 USTC ¶50,474], 66 Fed.Cl. at 131. Moreover, the taxpayer in this Court also must have "duly filed" a tax refund claim with the IRS for the tax year(s) in controversy. 26 U.S.C. §7422(a) (no tax suit or proceeding shall be maintained until a claim for refund or credit has been duly filed with the Secretary of the Treasury); 26 U.S.C. §6532(a)(1) (tax suit or proceeding may not be commenced until six months after the date of filing the required claim).
To the extent that Mr. Jordan's Complaint could be construed as a suit for tax refund, the Court lacks jurisdiction to consider it because Mr. Jordan has failed to satisfy the prerequisites to filing such a suit.
Similarly, the Court lacks jurisdiction over any action to enjoin the IRS from collecting assessed taxes. The Anti-Injunction Act, 26 U.S.C. §7421, precludes the Court from exercising jurisdiction over Mr. Jordan's apparent claim to prevent the IRS from collecting $38,200.87, plus interest and penalties, for 1999 and 2000. The Anti-Injunction Act states in relevant part:
[N]o suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person, whether or not such person is the person against whom such tax was assessed.
26 U.S.C. §7421(a).
The Supreme Court has held that "the manifest purpose of §7421(a) is to permit the United States to assess and collect taxes alleged to be due without judicial intervention, and to require that the legal right to the disputed sums be determined in a suit for refund." Enochs v. Williams Packing & Navigation Co. [ 62-2 USTC ¶9545], 370 U.S. 1, 7 (1962). Our Court has explained that "[i]n order to bring suit in this Court, the plaintiff must pay the taxes assessed, file a claim for refund with the IRS in accordance with [Internal Revenue Code] §7422(a), and then wait six months[.]" Lyashenko v. United States [ 98-2 USTC ¶50,674], 41 Fed.Cl. 626, 630 (1998). Thus, any apparent effort by Mr. Jordan to enjoin the IRS from collecting properly assessed taxes is contrary to law and must be rejected.
The claim for relief in Mr. Jordan's Complaint also might be construed as seeking a declaratory judgment that he had a valid contract with the IRS which ought to be enforced, such as through specific performance. However, our Court is not authorized to grant a declaratory judgment or to direct specific performance in the circumstances presented here. Id. (explaining that the Court is generally proscribed from issuing declaratory judgments); Rig Masters, Inc. v. United States, 42 Fed.Cl. 369, 373 (1998) (citing United States v. King [ 69-1 USTC ¶9410], 395 U.S. 1, 3-4 (1969) (Court does not possess jurisdiction over claims for specific performance)). The Anti-Injunction Act, explained above, prevents the Court from entertaining suits for a declaratory judgment or specific performance in tax matters.
Conclusion
Based upon the foregoing, Defendant's motion to dismiss under Rules 12(b)(1) and (b)(6) is GRANTED. For the reasons stated, the Court is treating Defendant's motion for failure to state a claim as a motion for summary judgment under Rule 56, and accordingly, summary judgment is entered for Defendant. The Clerk is directed to enter judgment for Defendant. No costs are awarded to either party.
IT IS SO ORDERED.
1 The facts in this matter are derived from the documents provided as attachments to Plaintiff's complaint, and in the appendices accompanying Defendant's motion and Plaintiff's response. The Court is satisfied that the facts necessary to decide this matter are not in dispute.
The IRS properly terminated an offer in compromise (OIC) submitted by the president and majority shareholder of S corporations in connection with his delinquent taxes for five tax years and a trust fund recovery penalty imposed with respect to one of the entities. The taxpayer materially breached his obligation under the OIC when he incurred a delinquent tax liability for a subsequent tax year. As a result, the government was authorized, under the terms of the OIC, to declare the taxpayer in default of the agreement and to pursue collection activities against him. The substantial performance doctrine was irrelevant because the taxpayer failed to timely pay his taxes in order to offset his tax liability for that year with his losses from the following year.Michael J. Roberts, Plaintiff v. United States of America, Defendant
U.S. District Court, East. Dist. Mo., East. Div., 4:99CV489 ERW , 12/10/2001, Previous decisions in this same case, 99-2 USTC ¶50,959, 2001-1 USTC ¶50,306
[ Code Sec. 7122]
Offers in compromise: Rescission: Material breach: Failure to timely pay taxes: Default: Substantial performance doctrine inapplicable. --
The IRS properly terminated an offer in compromise (OIC) submitted by the president and majority shareholder of S corporations in connection with his delinquent taxes for five tax years and a trust fund recovery penalty imposed with respect to one of the entities. The taxpayer materially breached his obligation under the OIC when he incurred a delinquent tax liability for a subsequent tax year. As a result, the government was authorized, under the terms of the OIC, to declare the taxpayer in default of the agreement and to pursue collection activities against him. The substantial performance doctrine was irrelevant because the taxpayer failed to timely pay his taxes in order to offset his tax liability for that year with his losses from the following year.
BACK REFERENCES: ¶41,130.20 and ¶41,130.55
MEMORANDUM AND ORDER
WEBBER, District Judge:
This matter is before the Court on Defendant's Motion to Dismiss [doc. #46] and Defendant's Motion for Summary Judgment [doc. #46]. Plaintiff has filed his Acquiescence in Defendant's Limited Motion to Dismiss, indicating that he consents to the motion to dismiss filed by the Government. Therefore, Plaintiff's claim for tax refund relative to the 1993 tax year will be dismissed based on the fact that Plaintiff's claim for a refund of federal income taxes for the 1993 taxable year is time-barred under §6511 of the Internal Revenue Code.
I. Statement of Facts.
A. Circumstances Leading up to the Offer in Compromise.
Plaintiff Michael J. Roberts, the plaintiff and taxpayer in this case, resides at 10428 Jade Forest Drive in St. Louis, Missouri and has lived there since 1991. Before that, he lived at 10627 Tesshire, St. Louis, Missouri. In 1984 or 1985, Plaintiff started two businesses: (1) M.J. Roberts Construction, which provided demolition and excavation services, and (2) Roberts Disposal, Inc., a construction debris trash company. Both of these were formed as sub-chapter S-Corporations, and were located at 10627 Tesshire, St. Louis, Missouri. Plaintiff was the president and majority stockholder in both businesses, and his brother, Thomas E. Roberts, was an employee. Arnold J. Lohbeck, a certified public accountant in Fenton, prepared corporate income tax returns (Forms 1120) for M.J. Roberts Construction, Inc. He has known Plaintiff since he was sixteen years old, and has prepared Plaintiff's personal income tax returns (Forms 1040) since the 1983 taxable year. Plaintiff was divorced from his former wife, Diane, in 1988.
By 1989, both of Plaintiff's businesses, according to Plaintiff, "were on real shaky ground," and went out of business around 1990. On January 7, 1992, IRS Revenue Agent Donna R. Mecey sent Plaintiff a letter informing him that his 1989 federal income tax return had been selected for examination by the Internal Revenue Service. After Plaintiff received the January 7, 1992 IRS letter, he asked his CPA, Mr. Lohbeck, to help with the IRS audit. Lohbeck then prepared Plaintiff's 1989, 1990 and 1991 federal income tax returns. The first page of Plaintiff's 1989 tax return shows that Agent Mecey received his 1989 return on May 4, 1992. The IRS subsequently received Plaintiff's 1990 and 1991 tax returns on September 2, 1993. Following her examination of Plaintiff's 1989-1991 tax returns, Agent Mecey prepared a Revenue Agent Report (RAR) which proposed the assessment of the following income tax deficiencies against Plaintiff: for the taxable year 1989, a proposed tax deficiency of $25,067; for the taxable year 1990, a proposed tax deficiency of $53,903; for the taxable year 1991, a proposed tax deficiency of $1,350. Together with statutory interest, the amounts which the IRS determined Plaintiff owed for each of the taxable years under examination were: $34,686 (1989), $68,089 (1990), and $1,521 (1991). During the IRS examination of Plaintiffs' 1989-1991 federal income tax returns, CPA Lohbeck and attorney Charles M. Locke represented Plaintiff under a "Power of Attorney and Declaration of Representative" (IRS Form 2848). This "Power of Attorney" form covered Plaintiff's 1989-1993 federal income tax liabilities. Using the authority given him under the "Power of Attorney" form, Lohbeck signed the RAR prepared by Agent Mecey on November 17, 1993 to agree with her findings that Plaintiff was liable for unpaid federal income taxes and interest for the taxable years 1989-1991. Before signing the RAR, Lohbeck discussed the RAR with Plaintiff. By signing this RAR, Lohbeck waived Plaintiff's right to contest the proposed 1989-1991 income tax deficiencies with the United States Tax Court and consented to the immediate assessment and collection of the deficiencies. On the following dates, a delegate of the Secretary of the Treasury properly and timely made assessments against Plaintiff for unpaid federal income taxes and statutory interest:
Unpaid
Balance of
Accruals as
of
Date of Amount of November 1,
Taxable Period Ending Assessment Assessment 1 2001
$
12/31/89 ................. 10/05/92 24,585.79(1)
1,809.40(2)
1,008.30(3)
2,599.92(4)
12/20/93 25,067.00(5)
9,733.04(4)
1,512.45(2)
1,336.09(5)
06/09/97 2,305.15(3)
$32,214.81
$
12/31/90 ................. 12/20/93 54,903.00(5)
13,407.43(4)
05/09/94 1,445.25(3)
05/13/96 7,312.00(5)
04/28/97 10,323,26(3)
41,293.00(5)
$55,797.81
$
12/31/91 ................. 12/27/93 2,873.00(5)
377.78(4)
12/20/93 1,350.00(5)
174.59(4)
04/13/98 3,128.00(5)
$ 2,703.43
$
12/31/92 ................. 3/14/94 78,228.00(1)
2,859.21(6)
9,038.79(2)
3,682.47(3)
4,678,67(4)
04/13/98 2,859.21(6)
9,038.79(2)
66,954.00(5)
68,947.68
1(1) Refers to tax assessed per tax return
(2) Refers to the late tax return filing penalty
(3) Refers to the late payment of tax penalty
(4) Refers to the statutory interest
(5) Refers to the additional tax assessed after IRS examination
(6) Refers to the underpayment of estimated tax penalty
The IRS also assessed a $9,953.75 penalty against Plaintiff under 26 U.S.C. §6672 of the Internal Revenue Code in connection with Plaintiff's wilful failure, as a person responsible for withholding, collecting and paying over to the IRS the federal income and social security taxes which were withheld from the wages of the employees of Plaintiff's company, Roberts Disposal, Inc., to pay over the withheld taxes for the fourth quarter of 1989 to the IRS. 2
B. Plaintiff Enters into the Offer in Compromise.
On or about August 24, 1994, Plaintiff submitted an Offer in Compromise (the "settlement agreement" or "OIC") (Form 656) to the IRS with respect to his unpaid federal income tax liabilities for 1989-1993 and a Trust Refund Recovery Penalty (also referred to as a "100-percent penalty" or "Section 6672 penalty") with respect to Roberts Disposal, Inc., for the taxable quarter ending December 31, 1989. Plaintiff's OIC provided, in pertinent part, that he was to pay $30,000 to the IRS to compromise his 1989-1993 federal income tax liabilities and the Trust Fund Recovery Penalty (TFRP) assessed against him. The OIC specifically provided that the $30,000 was to be paid within sixty days following notice of its acceptance by the IRS. Paragraph 6 of the OIC stated that "I/we submit this offer for the reason(s) checked below:"
[X] Doubt as to collectibility ("I can't pay.").
As additional consideration for the Government's acceptance of the OIC, Plaintiff agreed, in a collateral agreement to the OIC, to waive the benefit of any net capital losses that he might be entitled to claim in connection with the failure, demise or sale of M.J. Roberts Construction, Inc., and Roberts Disposal, Inc. Paragraph (d) of the "Terms and Conditions" printed on the reverse side of the Form 656 OIC signed by Roberts provided as follows: "I/we will comply with all provisions of the Internal Revenue Code relating to my filing my/our returns and paying my/our required taxes for five (5) years from the date IRS accepts the offer." Paragraph (o) of the "Terms and Conditions" printed on the reverse side of the Form 656 OIC signed by Plaintiff provided as follows:
If I/we fail to meet any of the terms and conditions of the offer, the offer is in default, and IRS may:
(i) immediately file suit to collect the entire unpaid balance of the offer;
(ii) immediately file suit to collect an amount equal to the original amount of the tax liability as liquidated damages, minus any payments already received under the terms of this offer;
(iii) disregard the amount of the offer and apply all amounts already paid under the offer against the original amount of tax liability;
(iv) file suit or levy to collect the original amount of the tax liability, without further notice of any kind.
IRS will continue to add interest, as required by section 6621 of the Internal Revenue Code, on the amount IRS determines is due after default... .
At the time he submitted the OIC on August 24, 1994, Plaintiff was represented by his attorney, Mr. Locke. Plaintiff paid $30,000 to the IRS at the time he submitted the OIC in August 24, 1994. The $30,000 was a loan from his brother's company, Commercial Development Company, Inc. By letter dated September 28, 1994, the IRS notified Plaintiff that the OIC had been accepted. This letter stated, in pertinent part, that "We have accepted the offer in compromise (Form 656) you submitted, subject to the terms and conditions outlined in the enclosed document(s). These terms including filing and paying all taxes due for the next five years." When asked at his deposition about the significance or importance to him of the September 28, 1994 IRS letter accepting the OIC, Plaintiff stated that he had "to pay taxes on time over the next five years and forfeit any refunds for M.J. Roberts Construction or Roberts Disposal."
C. Plaintiff's Payment of his 1995 Tax Return.
Plaintiff obtained two extensions of time to file his 1995 U.S. Individual Income Tax Return (Form 1040), prepared by CPA Ronald J. Kanterman of the accounting firm of Brown, Smith & Wallace LLC. Plaintiff signed his 1995 income tax return on October 15, 1996. Plaintiff's 1995 federal income tax return reported total income of $726,902.00. This included a salary of $81,923 from Commercial Development Company, Inc., business income of $23,204, capital gain of $479,292, and $137,214 from "rental real estate, royalties, partnerships, S corporations, trusts, etc." Plaintiff's 1995 Form 1040 also reported that he underpaid his federal income tax liabilities by $246,254. Plaintiff testified that he was aware of this underpayment when he signed his 1995 tax return on October 15, 1996. Plaintiff also testified that he was concerned about the $246,254 tax liability when he signed his 1995 tax return because "[a]t the time I don't believe we had money to pay that." When asked why he was unable to pay his 1995 tax liability, Plaintiff stated that he though "it was invested in other projects."
Prior to signing his 1995 Form 1040, Plaintiff discussed with his accountant, Ronald Kanterman, the extent of his income tax liability for the 1995 taxable year. Kanterman was aware of the amount of Plaintiff's 1995 tax liability at least thirty days prior to October 15, 1996, the date on which Plaintiff signed his 1995 tax return. Kanterman was also aware of the OIC which Plaintiff entered into with the IRS, and that the OIC required Plaintiff to file his returns and pay his taxes for five years from the date the OIC was accepted by the IRS. At the time Plaintiff signed his Form 1040 for 1995, he told Kanterman that he would be unable to pay the $246,000 tax liability shown as due and owing on that return. Plaintiff's 1040 shows that he paid no estimated tax payments for the 1995 taxable year, despite Kanterman having discussed Plaintiff's need to do so. Plaintiff told Kanterman that he could not afford to make the estimated payments.
The Government states that Kanterman explained the reasons for delaying the filing of Plaintiff's 1995 tax return until October 15, 1996, the maximum time permitted by law. The Government contends that Kanterman stated the first reason for the delay was that Plaintiff lacked the financial resources to pay his 1995 tax liability in full. However, Plaintiff disputes this contention, stating that Kanterman stated that Plaintiff needed the six month extension because "the company was short of money at the time... ." Plaintiff's Response to Defendant's Statement of Uncontroverted Facts ¶37. This, according to Plaintiff, means that Plaintiff did not have the cash on hand to pay the bill, but could have borrowed the money to do so. Plaintiff states in his Declaration, attached as Plaintiff's Exhibit 2 to Plaintiffs opposition to Defendant's Motion for Summary Judgment, that although he lacked "any appreciable amount of cash as of October 15, 1996, I did have the capacity to borrow sums at this time. As of January 1, 1997, I stood ready, willing, and able to pay the IRS the amount shown as due upon my 1995 federal tax return after all offsets were given for the carryback of my 1996 net operating losses. Id. The other reasons that Kanterman expressed when explaining the reason for the delay in filing the 1995 return are not contested, and are (2) the unavailability of records and the need to complete tax returns for other entities; and (3) Kanterman's concern that his firm would not be paid its accounting fees.
Kanterman also prepared the 1996 Form 1040 for Roberts and his wife, filed with the IRS on or about January 8, 1997. Kanterman testified that the reason for filing the 1996 return early was that "[t]here was an amount due on the 1995 return to the IRS that was known by the taxpayer that there would be a loss for 1996, 1996 taxable year that would reduce the amount due for the 1995 year. It was the taxpayer's wish that we complete the return as fast as possible so that the taxpayer could make payment to the IRS vis-a-vis the net operating loss carryback." Plaintiff received notice and demand for payment of his 1995 federal income tax liabilities from the IRS prior to the preparation and filing of the 1996 return in January of 1996. Plaintiff's 1996 return indicated a negative total income of $485,087 and a negative adjusted gross income of $488,159. Plaintiff's net operating loss for the 1996 tax year was reported on an Application for Tentative Refund (Form 1045) which was filed simultaneously with Plaintiff's 1996 Form 1040, and carried back, in order, to the 1993, 1994 and 1995 tax years.
Paragraphs 42 and 43 of Defendant's Statement of Uncontroverted Facts are not disputed by Plaintiff, but he attempts to clarify them in his response. Paragraphs 42 and 43 read:
42. Although plaintiff carried back a net operating loss of nearly half a million dollars from the 1996 tax year to the 1993, 1994 and 1995 tax years, he remained indebted to the United States (according to his accountant's calculations) for unpaid 1995 federal income taxes in the amount of $129,539.00 after the 1996 loss had been carried back to the preceding three taxable years.
43. Even after the income tax refunds generated by the carryback of the 1996 net operating loss to the 1993-1995 tax years were applied to Robert's 1995 tax liability, an unpaid balance of $101,076 remained for that taxable year.
Plaintiff states the following to clarify these two statements:
In January and, again, in April of 1997, Plaintiff made two separate Form 1045 filings carrying back losses from 1996 to the three preceding tax years --i.e., 1993, 1994, and 1995 --as required by the Internal Revenue Code §172 3 . Both of these filings separately generated credits and offsets against the 1995 tax liability as originally reported by Plaintiff. Also, Plaintiff's 1996 individual income tax return showed a refund due which constitutes a third source of offsets against Plaintiff's 1995 tax liability. A reading of [Defendant's] paragraphs 42 and 43 ... , when read separated [sic], appear to contradict each other. Also, they do not clearly indicate that Mr. Kanterman is giving subtotals in the process of determining Mr. Robert's 1995 tax liability after application of all credits and offsets generated by his 1996 losses. To recap, there were three sources of credits and offsets for use to decrease the 1995 tax liability generated by Mr. Roberts' 1996 individual income tax return: (a) January 1997 form 1045 tentative carryback application, (b) April 1997 form 1045 tentative carryback application and (c) the tax refund reported on the 1996 return itself (as originally filed in January 1997 and amended in April of 1997). Although not stated (which leads to confusion), paragraph 42 of Defendant's Statement of Material Facts is a recitation by Mr. Kanterman of a subtotal of his calculation of the amount due by Mr. Roberts for his 1995 tax year after application of the credits and offsets made available by the first named source of said credits and offsets: i.e., the January 1997 form 1045 tentative carryback application. This is just one of three sources for credits and offsets against Mr. Robert's 1995 tax liability. Paragraph 43 of Defendant's Statement of Material Facts is again a recitation by Mr. Kanterman of a second subtotal of his calculation of the amount due by Mr. Roberts for his 1995 tax return after application of both the first and second named sources of said credits: i.e., both the January and April 1997 form 1045 tentative carryback applications. Paragraphs 42 and 43 do not clearly indicated [sic] their status as merely subtotals, not final tabulations. Paragraph 46 of Defendant's Statement of Material Facts gives Kanterman's final calculation of Roberts' 1995 tax liability after application of the three sources of offsets and credits generated by Roberts' 1996 tax losses: $61,682.00.
Plaintiff's Response to Defendant's Statement of Material Facts §42-43.
By letter dated April 4, 1997, the IRS notified Plaintiff that he had not complied with the terms of the OIC, and "therefore your offer is declared in default and the arrangements to compromise the liability are terminated." In April of 1997, Plaintiff filed an amended 1996 federal income tax return (Form 1040X) and an amended Application for Tentative Refund (form 1045) to carry back an additional net operating loss of $99,481 from 1996 to the 1995 taxable year. Even after Plaintiff's amended 1996 tax return and Application for Tentative Refund were filed with the IRS in April of 1997, Plaintiff remained indebted for unpaid 1995 federal income taxes (according to Kanterman) in the amount of $61,682. To pay this amount, Kanterman sent the IRS in Kansas City, Missouri a check drawn on the account of Commercial Development Co. in the amount of $65,000 to be applied to Plaintiff's 1995 federal income tax liabilities. The letter accompanying the check stated, in pertinent part:
Enclosed is the estimated balance due on the above-named taxpayer's 1995 tax filing after carrybacks of 1996 net operating losses. If the amount due the [IRS] is different than the amount estimated, please contact me and we will provide an additional check.
On the same day that Kanterman sent the $65,000 check to the IRS, he mailed another letter to the IRS in Kansas City which stated, in pertinent part:
We received a communication last month from your office that the taxpayers [sic] Offer in Compromise would be revoked as a result of having unpaid 1995 tax. We responded by calling the indicated person requesting the remaining balance due after the carryback claim [for the 1996 tax year]. I was told that this amount was unknown.
We are forwarding today to the Kansas City Service Center our estimate of the remaining tax due in 1995 for the taxpayer --$65,000. Any amount that remains we will pay when you contact us.
We request that you reconsider the revocation of the taxpayers [sic] previous offer based on our effort to determine the net tax due through the Service and the taxpayers [sic] obvious attempt to comply with all required tax payments.
D. THE IRS Dedclares the OIC to be in Default on April 4, 1997.
Three months after Plaintiff filed his 1995 Form 1040 showing an unpaid income tax liability of $246,254, and two weeks after he filed his 1996 Form 1040 tax return and Application for Tentative Refund (form 1045) which carried back a NOL from 1996 to the 1993-1995 tax years, the IRS sent him a letter dated January 21, 1997 which demanded that he pay his reported 1995 income tax liability within thirty days. The letter stated, in pertinent part:
When your Offer in Compromise was accepted, you agreed to comply with all provisions of the Internal Revenue Code relating to the filing and paying of required taxes due for five years from the date we accepted the offer.
However, a review of your account indicates the following:
Our records show that you have a balance owing for the tax period ending December 31, 1995. To remain in compliance with offer, you must pay the balance within 30 days of the date of this letter. The balance owed, with penalty and interest computed to February 10, 1997, is $2777,143.512.
If you do not comply with our request, we will refer your offer to the Missouri District Office for possible termination of the Offer in Compromise and reinstatement of the original tax liability.
The "contact person" on the January 21, 1997 letter described above was Clara Jacobs. The figure of $2777,143.512, as set forth in the January 21, 1997 letter was erroneous. Plaintiff was not indebted to the United States for unpaid 1995 federal income tax (and statutory additions to tax) in the amount of $2777,143.512 on January 21, 1997. On April 4, 1997, six days before Plaintiff's representatives sent a $65,000 check to the IRS to pay off the balance of his 1995 federal income tax liabilities, the IRS sent Roberts a letter which declared his OIC to be in default and terminated the arrangements previously made to compromise his 1989-1993 federal income tax liabilities and his TFRP. The April 4, 1997 letter stated, in pertinent part:
This refers to our letter of September 28, 1994 accepting your offer of $30,000 in compromise of your Individual Income Tax liability plus statutory additions for December 31, 1989, 1990, 1991, 1992, and Trust Fund Recovery Penalty as a responsible person of Roberts Disposal, Inc. for the period ended December 31, 1989.
Under the terms of your offer $30,000 was to be paid within sixty (60) days of acceptance. On November 28, 1994, $30,000 was paid as agreed but as part of the consideration for the offer you agreed to comply with all the provisions of the Internal Revenue Code relating to the filing of returns and the paying of taxes for a period of five (5) years following acceptance of the offer. As a conditional consideration of the offer, you agreed to waive any net capital losses for which you would be entitled personally for all taxable years after 1993.
Our records indicate that you have now incurred a delinquent liability for your 1995 individual income tax. You have also filed Form 1045, Application for Tentative Refund to carry back capital losses to years 1993, 1994 and 1995.
You have not complied with the terms of the offer, therefore your offer is declared in default and the arrangements to compromise the liability are terminated. All payments made toward the offer will be applied to the liability.
The letter dated April 4, 1997 erroneously stated or implied that Plaintiff had improperly filed Form 1045, Application for Tentative Refund, to carry back capital losses to years 1993, 1994, and 1995, when in fact he had filed the Form 1045 to carry back a net operating loss from the 1996 taxable year to the 1993-1995 tax years. After the OIC was declared in default, the IRS reassessed the amounts of the federal income taxes which Plaintiff (through his authorized representative, Lohbeck) agreed that he owed for 1989 through 1993, together with the TFRP.
E. Evants Following the Declaration of Default by the IRS.
On May 19, 1997, approximately six weeks after the IRS declared Plaintiff's OIC to be in default, CPA Arthur M. Seltzer, a colleague of CPA Kanterman at the accounting firm of Brown, Smith and Wallace, submitted a sworn "Application for Taxpayer Assistance Order (ATAO)" to the IRS on behalf of the Plaintiff, their client. Attached to the ATAO was a narrative "Description of Significant Hardship" prepared by Seltzer. The ATAO stated, in pertinent part:
As the taxpayer's accountant and preparer of his 1995 and 1996 returns, colleague Ronald J. Kanterman, CPA was aware that the taxpayer's inability to pay the 1995 taxes in a timely fashion constituted a technical breach of the terms of the 1994 Offer, and might well result in an effort by the IRS to rescind the Offer and attempt to collect the compromised taxes. He was aware that the unpaid balance due for 1995 would be substantially, if not completely, offset by the carryback of 1996 losses. He therefore directed his efforts to minimizing the economic impact of the breach by arranging for prompt filing of the taxpayer's 1996 return and related carryback claim, and full payment of the 1995 tax liability as promptly as possible... .
On April 4, 1997, the taxpayer received a letter form [sic] the Service Center ... advising that, because of the delinquent liability for 1995 and because of a purported breach of the terms of the Offer, the Service has declared in default... .
We suggest that, although the Service has the right to rescind the Offer because of the technical breach committed by the taxpayer in failing to pay his 1995 taxes in full in [sic] timely fashion, rescission is not mandated but is optional with the Service. We believe that if the Service successfully persists in sustaining the rescission of the Offer, unwarranted injury totally disproportionate to the extent of the offense would be sustained by a taxpayer who has acted in good faith in a difficult situation, and in fact at this time has overpaid his 1995 taxes.
On July 30, 1998, Plaintiff filed administrative claims for refund with the IRS with respect to certain federal income taxes, penalties and interest allegedly paid by him for the 1989-1993 taxable years following the termination of the OIC on April 4, 1997. Plaintiff also filed an administrative claim for refund with respect to that portion of the TFRP which he allegedly paid following the termination of the OIC on April 4, 1997. Plaintiff commenced the instant civil action in this Court on March 26, 1999.
II. Summary Judgment Standards.
The standards applicable to summary judgment motions are well settled. Pursuant to Federal Rule of Civil Procedure 56(c), a court may grant a motion for summary judgment if all of the information before the court shows "there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law." See Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). The United States Supreme Court has noted that "[s]ummary judgment procedure is properly regarded not as a disfavored procedural shortcut, but rather as an integral part of the federal rules as a whole, which are designed to 'secure the just, speedy and inexpensive determination of every action.' " Id. At 327 (quoting Fed. R. Civ. P. 1).
In order to obtain summary judgment, the moving party must demonstrate "an absence of evidence to support the non-moving party's case." Celotex, 477 U.S. at 325. Once the moving party carries this burden, the nonmoving party must "do more than simply show there is some metaphysical doubt as to the material facts." Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986). The nonmoving party may not rest on allegations or denials in the pleadings, but must "come forward with 'specific facts showing that there is a genuine issue for trial.' " Id. at 587 (quoting Fed .R .Civ .P. 56(3)).
In analyzing summary judgment motions, the Court is required to view the facts in a light most favorable to the non-moving party, and must give the non-moving party the benefit of any inferences that can logically be drawn from those facts. Matsushita, 475 U.S. at 587; Buller v. Buechler, 706 F.2d 844, 846 (8th Cir. 1983). Moreover, this Court is required to resolve all conflicts in favor of the non-moving party. Robert Johnson Grain Co. v. Chemical Interchange Co., 541 F.2d 207, 210 (8th Cir. 1976). The trial court may not consider the credibility of the witnesses or the weight of the evidence. White v. Pence, 961 F.2d 776, 779 (8th Cir. 1992).
Under the standards applicable to summary judgment motions, before ruling on the legal issues presented, the Court must find that there are no genuine issues of material fact. See Celotex Corp., 477 U.S. at 322.
[T]he plain language of Rule 56(c) mandates the entry of summary judgment, after adequate time for discovery and upon motion, against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial. In such a situation, there can be "no genuine issue as to any material fact," since a complete failure of proof concerning an essential element of the nonmoving party's case necessarily renders all other facts immaterial. The moving party is "entitled to a judgment as a matter of law" because the nonmoving party has failed to make a sufficient showing on an essential element of her case with respect to which she has the burden of proof.
Id. at 322-23. "By its very terms, [Rule 56(c)(1)] provides that the mere existence of some alleged factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment; the requirement is that there be no genuine issue of material fact." Hufsmith v. Weaver, 817 F.2d 455, 460 n. 7 (8th Cir. 1987) (quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48 (1986) (emphasis supplied by Supreme Court)). Material facts are "those 'that might affect the outcome of the suit under the governing law... .' " Id. "'While the materiality determination rests on the substantive law, it is the substantive law's identification of which facts are critical and which facts are irrelevant that governs.' " Id. Rule 56 requires also that the material fact be genuine. Id. A genuine material fact is one such that "'a reasonable jury could return a verdict for the nonmoving party.' " Id.
III. Analysis.
The Plaintiff states, in his Memorandum in Opposition to Plaintiff's Motion for Summary Judgment, that "[t]his entire case turns upon the propriety of the IRS's termination of the OIC under contract law." Plaintiff's Memorandum in Opposition at 7. The ground upon which the IRS terminated the OIC and declared Plaintiff in default is "a delinquent liability for [his] 1995 individual income tax." Id. Plaintiff argues that his failure to pay his 1995 income tax on time was at most an immaterial breach of the OIC, and, as such, the IRS wrongfully declared him in default of the OIC, terminated the OIC, and began the process of collecting all taxes, plus penalties, originally owed by Plaintiff.
"It has long been settled that an agreement compromising unpaid taxes is a contract and, consequently, that it is governed by the rules applicable to contracts generally. The cardinal rule of contract construction 'is to ascertain the intention of the contracting parties and to give effect to that intention if it can be done consistently with legal principles.' " United States v. Lane [62-1 USTC ¶9467], 303 F.2d 1, 4 (5th Cir. 1962) (citations omitted). The Government, based on the Court's review of the undisputed facts in this case and the relevant precedent, had the right to terminate the OIC based on Plaintiff's failure to pay his 1995 taxes until April 10, 1997. Federal income taxes are due, and constitute a liability as of, the date the tax return is required to be filed. See United States v. Ressler [77-1 USTC ¶9459], 433 F.Supp. 459, 463 (S.D. Fla. 1977) ("Regardless of when federal taxes are actually assessed, taxes are considered as due and owing, and constitute a liability, as of date the tax return for the particular period is required to be filed.") (citing Hartman v. Lauchli [57-1 USTC ¶9571], 238 F.2d 881, 887 (8th Cir. 1956) ("by the terms of the Internal Revenue Code income tax liability matures on the day the return is required to be filed, and the correct amount of the tax liability becomes due at that time, regardless of when the deficiency assessment may be made... ."), cert. denied, 353 U.S. 965 (1957)). This means that Plaintiff breached his obligation to pay his federal income taxes in 1995 when he failed to pay them by April 15, 1996. See Ott v. United States [98-1 USTC ¶50,331], 141 F.3d 1306, 1309 (9th Cir. 1998) (in a case involving the non-payment of estate taxes owed, the Ninth Circuit stated "The Tax Code provides: 'when a return of tax is required under this title or regulations, the person required to make such return shall, without assessment or notice and demand from the Secretary ... pay such tax at the time and place fixed for filing the return (determined without regard to any extension of time for filing the return).' ") (quoting 26 U.S.C. §6151(a)). According to the specific terms of the OIC, entered into by the Government and the Plaintiff, Plaintiff promised to "comply with all provisions of the Internal Revenue Code relating to filing my[] returns and paying my[] required taxes for five (5) years from the date the IRS accepts the offer." When Plaintiff failed to pay his 1995 federal income tax liability of $246,354.00 when it became due, he violated this provision of the OIC, authorizing the Government to declare Plaintiff in default of the express terms of the OIC and "file suit or levy to collect the original amount of tax liability, without further notice of any kind." See Statement of Facts, supra at 6 (quoting Offer in Compromise at ¶(o)). The right of the Government to terminate the Offer in Compromise where there has been a breach by the taxpayer of its provisions has been upheld in United States v. Feinberg [67-1 USTC ¶9176], 372 F.2d 352, 357-58 (3d Cir. 1967). The Third Circuit stated that "By the clear language of the offer in compromise Mr. Saladoff agreed that, upon his default, the Commissioner of Internal Revenue could terminate the compromise agreement." Feinberg [67-1 USTC ¶9176], 372 F.2d at 357-58. As in Feinbeirg, the default by the Plaintiff is undisputed. Plaintiff has admitted that he failed to pay his 1995 income taxes until April 10, 1997. Despite Plaintiff's argument that the Government lacked authority to terminate the OIC upon his default of any of the provisions, the OIC specifically empowered the Government to declare him in default and pursue collection of his original tax liability, effectively terminating the OIC.
With respect to Plaintiff's argument that he did not materially breach the OIC, the Court finds this argument unpersuasive. Plaintiff promised and agreed in the OIC that he would abide by the terms of the Internal Revenue Code for the next five years. Failure to abide by this promise allowed the Government to declare him in default and collect his original tax liability. Nothing in the OIC allowed him to delay payment of his 1995 tax liability until April 10, 1997 under the guise of the substantial performance doctrine. While it is true that contract principles guide the Court in interpreting and OIC, this Court is not persuaded that the Government, in this case, lacked authority to declare Plaintiff in default of the OIC when he failed to timely pay his 1995 income taxes. See Lane [62-1 USTC ¶9467], 303 F.2d at 4 (holding that the language of the compromise agreement allowing the Government to terminate the OIC upon default was "so precise, and the intention which it manifests is so evident, as to leave no doubt that the course of action taken by Government here was fully authorized by the compromise agreement."). The doctrine of substantial performance has no relevance in this case as the Plaintiff completely failed to timely pay his 1995 federal income tax liability, and instead waited to pay it until April 10, 1997 so that he could offset his tax liability for 1995 with his losses in 1996.
Finally, with respect to Plaintiff's argument that the Government's termination of the OIC will cause him to suffer a forfeiture, the Court finds United States v. Lane on point.
There was nothing illegal, immoral or inequitable in the compromise agreement. It did not provide for any 'forfeiture'. By express provision, the amounts to be paid under the compromise agreement, including both the Form 656- C and the collateral agreement, could not exceed the aggregate amount which the taxpayer conceded that he owed the Government from the start. By allowing the Government to revive the taxpayer's original liability, the taxpayer will not forfeit the amounts he has already paid, for those amounts will be applied to reduce the original liability. The agreement was precise, it was fair, and it was freely consented to by the taxpayer. There is no reason why it should not be enforced as written.
Lane [62-1 USTC ¶9467], 303 F.2d at 4. The Court finds Plaintiff's argument that he will suffer a forfeiture if the OIC is enforced as written is without merit.
Accordingly,
IT IS HEREBY ORDERED that Defendant's Motion to Dismiss and Motion for Summary Judgment [doc. #46] are GRANTED.
2 At this point in Defendant's statement of material facts, Defendant details certain facts concerning a residence purchased by Michael Roberts that was transferred to his brother's company. However, Plaintiff objects to the inclusion of these facts as immaterial because they are not mentioned nor referred to in the argument portion of Defendant's briefs. The Court therefore will not include these facts in the Court's statement of facts as they appear not to be material to the issues involved in Defendant's Motion for Summary Judgment.
3 IRC §172, as in effect in 1996, required carryback of NOLs 3 years. It has since been amended to require NOL carrybacks of 2 years.
The mere fact that the IRS had cashed money orders tendered by a taxpayer was insufficient to support his claim that the government had breached a settlement agreement. A letter from his counsel indicating that an IRS agent had requested a payment in the amount of those money orders was insufficient to state a claim for breach of settlement agreement absent proof that the taxpayer had been notified in writing of the IRS's acceptance of his offer of compromise.
[98-2 USTC ¶50,827] L.R. Ousley, Plaintiff v. J.F. Gritis, et al., Defendants
U.S. District Court, Dist. Nev., CV-S-97-427-DWH(LRL), 10/6/98
[Code Sec. 7122 ]
Compromises: Settlement agreement: Breach of agreement.--The mere fact that the IRS had cashed money orders tendered by a taxpayer was insufficient to support his claim that the government had breached a settlement agreement. A letter from his counsel indicating that an IRS agent had requested a payment in the amount of those money orders was insufficient to state a claim for breach of settlement agreement absent proof that the taxpayer had been notified in writing of the IRS's acceptance of his offer of compromise.
[Code Sec. 7402 ]
Suits by taxpayers: Jurisdiction: District court: Sovereign immunity: Constitutionality: Due process: Intentional violations.--An individual's action seeking to enjoin IRS agents from collecting taxes was dismissed for lack of jurisdiction. His claims against the agents were essentially claims against the government, which had not waived its immunity from suit. The taxpayer's conclusory allegations that the agents had acted outside of their authority were insufficient to establish that intentional constitutional violations had occurred.
[Code Sec. 7421 ]
Suits to enjoin assessment: Anti-Injunction Act: Basis for equitable relief: Exceptional circumstances not proven.--An individual's action seeking to enjoin IRS agents from collecting taxes was barred by the Anti-Injunction Act since he established no basis for equitable relief.
[Code Sec. 7422 ]
Suits by taxpayers: Refund action: Condition of suit: Payment of entire tax.--Jurisdiction was lacking over an individual's suit seeking to enjoin IRS agents from pursuing tax collection efforts because he failed to pay the disputed taxes in full prior to filing the action.
ORDER
HAGEN, District Judge:
Before the court is defendants' motion (#34) to dismiss or, in the alternative, for summary judgment.
I. Factual Background
In this action, plaintiff seeks to stop agents of the Internal Revenue Service ("IRS") from collecting taxes under Form 940, 941, and 1040 tax returns that plaintiff contends are not due and owing and to enforce a settlement agreement between plaintiff and the IRS. First Amended Complaint (#20) at 1. Plaintiff alleges that individual defendants J.F. Gritis, Ron Smith and Bryon P McMahon, employees of the IRS, have acted outside the scope of their employment by assessing and levying taxes and by forcibly collecting taxes that were not due and owing. Id. at 2. He also contends that defendants failed to give notice of a deficiency as required by 26 U.S.C. §§6212(a) and 6213(a) and that the IRS has refused to grant plaintiff's request for a formal hearing.
In his complaint, plaintiff alleges the following causes of action: (1) denial of due process; (2) unlawful assessment and collection of taxes; (3) breach of settlement agreement; (4) interference with contract advantage; (5) slander of title; (6) conspiracy to deny civil rights; (7) intentional infliction of emotional distress: and (8) injunctive relief. Id. at 2-10. Plaintiff asserts that this court has jurisdiction over his complaint based upon 28 U.S.C. §§1331, 1340, 1343, 1346(a)(1), 1355, 1356, 1361, and 1367, 42 U.S.C. §§1985 and 1986, and Amendments 4, 5, and 16 of the United States Constitution.
On January 5, 1998, the court denied (#31) plaintiff's motion for a preliminary injunction. Defendants now move (#34) to dismiss or, in the alternative, for summary judgment based on lack of subject matter jurisdiction and plaintiff's failure to state claims upon which relief can be granted.
II. Analysis
A. Motion to Dismiss Standard
In considering a motion to dismiss, all material allegations in the complaint must be accepted as true and construed in the light most favorable to the nonmoving party. Russell v. Landrieu, 621 F.2d 1037, 1039 (9th Cir. 1980). The purpose of a motion to dismiss under Fed.R.Civ.P. 12(b)(6) is to test the legal sufficiency of the complaint. North Star Inter'l v. Arizona Corp. Comm'n, 720 F.2d 578, 581 (9th Cir. 1983). If the motion is to be granted, it must appear to a certainty that the plaintiff will not be entitled to relief under any set of facts that could be proven under the allegations of the complaint. Rae v. Union Bank, 725 F.2d 478, 479 (9th Cir. 1984).
B. Sovereign Immunity As a Bar to Plaintiff's Claims
The government and the individual defendants (all IRS employees) assert that plaintiff's First Amended Complaint fails to allege a proper basis for the court's subject matter jurisdiction because it does not identify any specific statutory provisions waiving the immunity of the United States as to plaintiff's claims. The United States may be sued only to the extent that it has consented to suit by statute. United States v. Dalm [90-1 USTC ¶50,154; 90-1 USTC ¶60,012], 494 U.S. 596, 608 (1990). Any waiver of sovereign immunity cannot be implied but must be unequivocally expressed and is strictly construed in favor of the sovereign. United States v. Testan, 424 U.S. 392, 399-400 (1976). Thus, no suit may be maintained against the United States unless the suit is brought in compliance with the terms of a specific statute under which the United States has consented to be sued. Id. Where the United States has not consented to suit or the plaintiff has not met the terms of the statute, the court lacks jurisdiction and the action must be dismissed. See Fed.R.Civ.P. 12(h)(3); Dalm [90-1 USTC ¶50,154; 90-1 USTC ¶60,012], 494 U.S. at 608.
Plaintiff has the burden of identifying specific statutes waiving the government's sovereign immunity and showing that the requirements of such statues have been met. Holloman v. Watt, 708 F.2d 1399, 1401 (9th Cir. 1983). In his First Amended Complaint, plaintiff based jurisdiction on 28 U.S.C. §§1331, 1340, 1343, 1346(a)(1), 1355, 1356, 1361, and 1367, 42 U.S.C. §§1985 and 1986, and Amendments 4, 5, and 16 of the United States Constitution. Most of the statutory provisions relied upon by plaintiff confer general jurisdiction and, without more, do not constitute a waiver of sovereign immunity. See 28 U.S.C. §1331 (federal question jurisdiction), §1340 (jurisdiction over actions arising under the Internal Revenue Code), §1343 (jurisdiction over actions arising under the Civil Rights Act), §1355 (jurisdiction over actions by public officers on behalf of public treasury to collect fines and penalties), §1356 (jurisdiction over seizures made pursuant to any law of the United States not within admiralty or maritime jurisdiction), §1367 (supplemental jurisdiction over certain state claims); see also Hughes v. United States [92-1 USTC ¶50,086], 953 F.2d 531, 539 n. 5 (9th Cir. 1992) (general jurisdictional statutes such as sections 1331 and 1340 cannot waive the government's sovereign immunity); Sipe v. Amerada Hess Corp., 689 F.2d 396, 405-07 (9th Cir. 1982) (section 1355 only authorizes suit by public officer on behalf of public treasury to collect fines and penalties); Smith v. Grimm, 534 F.2d 1346, 1352 n.9 (9th Cir. 1976) (section 1361 not a waiver); Rhyne v. Henderson County, 973 F.2d 386 (5th Cir. 1992) (section 1367 only provides for supplemental jurisdiction, not original jurisdiction); Brian v. Gugin, 853 F.Supp. 358, 363 (D. Idaho 1994) (section 1343 "cannot be used to waive the government's sovereign immunity and the government cannot be sued for damages for alleged violations of the Constitution").
Other statutory provisions and Constitutional amendments cited by plaintiff do not operate to waive sovereign immunity in this case. For example, 42 U.S.C. §§1985 and 1986 are inapplicable to actions against the United States and therefore cannot provide a basis for finding a waiver of sovereign immunity. Hohri v. United States, 782 F.2d 227, 245 n. 43) (D.C. Cir. 1986), vacated on other grounds, 482 U.S. 64 (1987); United States v. Timmons, 672 F.2d 1373, 1380 (11th Cir. 1982); Unimex v. Department of Housing and Urban Development, 594 F.2d 1060, 1061 (5th Cir. 1979). Likewise, the Constitution does not waive sovereign immunity. See Arnsberg v. United States, 757 F.2d 971, 980 (9th Cir. 1985). 1 Nor can plaintiff rely on section 1346(a)(1)'s limited waiver of sovereign immunity because plaintiff fails to show that he has meet the prerequisites of obtaining relief under this provision. 2 Relief under section 1346(a)(1) is only available where plaintiff has paid the full amount of tax assessed. United States v. Williams [95-1 USTC ¶50,218], 514 U.S. 527, 531-532 (1995); see also Latch v. United States [88-1 USTC ¶9242], 842 F.2d 1031, 1033 (9th Cir. 1988). Because plaintiff's First Amended Complaint fails to allege that he has paid the disputed taxes in full, he cannot invoke the jurisdiction of the court under section 1346(a)(1).
Despite plaintiff's failure to name a specific applicable statute and his improper reliance on other statutes, plaintiff's First Amended Complaint need not be dismissed if the court can determine the appropriate source of jurisdiction from the allegations in the complaint. Boarhead Corp. v. Erickson, 923 F.2d 1011, 1017-18 (3rd Cir. 1991) (citing 5 C. Wright & A. Miller, Federal Practice and Procedure §1209, at 112-13 (2d ed. 1990)); see also Haines v. Kerner 404 U.S. 519 (1972) (per curiam) (allegations of a pro se plaintiff's complaint are held to a less stringent standard than those drafted by a lawyer). Here, plaintiff's complaint can be characterized as an action to enjoin the collection of taxes improperly assessed, to recover sums wrongfully retained by the IRS, and to obtain damages for breach of settlement agreement. Plaintiff also alleges common law torts and constitutional violations.
Actions to enjoin the assessment and collection of taxes by the IRS are narrowly limited by the Anti-Injunction Act., 26 U.S.C. §7421. Although the court ruled on the motion for preliminary injunction that some of plaintiff's claims may fall within a statutory exception to the Act as set forth in 26 U.S.C. §6213, 3 section 6213 itself does not expressly authorize suits against the government and thus cannot form the basis for waiver of sovereign immunity. See 26 U.S.C. §6213; but see Guthrie v. Sawyer [92-2 USTC ¶50,391], 970 F.2d 733, 737 (10th Cir. 1992). Suits for a tax refund are brought pursuant to 28 U.S.C. §1346(a)(1), but, as noted above, plaintiff failed to show he meets the prerequisites to suit under that statute.
Moreover, even though the government has waived its sovereign immunity in taxpayer actions brought pursuant 26 U.S.C. §7433 and 28 U.S.C. §2410, neither statute applies in this case. Under section 7433, a taxpayer can challenge improper acts in connection with the collection of any federal tax, but may not sue for damages in connection with the determination or assessment of tax. Miller v. United States [95-2 USTC ¶50,516], 66 F.3d 220, 223 (9th Cir. 1995). Similarly, under section 2410, a taxpayer can contest the procedural validity of a tax lien, but may not attack the merits of an assessment. See Elias v. Connett [90-2 USTC ¶50,397], 908 F.2d 521, 527 (9th Cir. 1990). In addition to challenging the validity of the tax assessment, plaintiff claims that the government failed to send notices of deficiency in compliance with section 6213(a) and breached a purported settlement agreement. The Ninth Circuit has held that "claims that the IRS failed to properly notice deficiencies address the merits of an assessment." Huff v. United States [93-2 USTC ¶50,633], 10 F.3d 1440, 1445 (9th Cir. 1993). Thus, such claims are not actionable under sections 2410 or 7433. Id.; Elias [90-2 USTC ¶50,397], 908 F.2d at 527; see also Miller [95-2 USTC ¶50,516], 66 F.3d at 222-23 (finding that violation of "notice and demand" requirement in 26 U.S.C. §6303 could trigger section 7433 liability because section 6303 is contained in Chapter 64 of the Internal Revenue Code entitled "Collection"; in contrast, the deficiency notice requirement at issue here is part of section 6213 which is contained in Chapter 63 entitled "Assessment").
As to plaintiff's breach of settlement claim, the motion to dismiss must be granted because the regulations and procedures for compromises under 26 U.S.C. §7122 are the exclusive methods of settling tax disputes, see Laurins v. C.I.R. [89-2 USTC ¶9636], 889 F.2d 910, 912 (9th Cir. 1989), and plaintiff fails to demonstrate that those procedures and regulations have been followed in this case. For example, a taxpayer's offer of compromise will not be considered to have been accepted until and unless the taxpayer is notified in writing of the acceptance. Id.; 26 C.F.R. §301.7122-1(d)(1), (d)(3). Plaintiff fails to allege that he was notified in writing that the IRS accepted his offer of compromise. Instead, he relies on a letter from his own counsel indicating only that an IRS agent has requested a $5,000 payment and that plaintiff's money orders to the IRS in the amount of $5,000 were cashed. See First Amended Complaint ¶9, Exhs. D & E. This is insufficient to state a claim for breach of settlement agreement. See id.; Bowling v. United States [75-1 USTC ¶9333], 510 F.2d 112, 113 (5th Cir. 1975) ("no theory founded upon general concepts of accord and satisfaction can be used to impute a compromise settlement [in a tax case] and therefore none resulted from the government's accepting and cashing of [taxpayer's] check").
Plaintiff also alleges that the individual defendants (all IRS agents) have violated his constitutional rights. Individual IRS agents acting as employees of the United States enjoy qualified immunity for constitutional violations. Butz v. Economou, 438 U.S. 478, 507 (1978). Under the theory of qualified immunity, an IRS agent "will not be liable for mere mistakes in judgment," only intentional and knowing constitutional violations. Id. at 498. Although plaintiff alleges that the individual defendants in this case acted outside the scope of their authority, these allegations are wholly conclusory and do not meet the standard set forth in Butz.
Plaintiff's common law tort claims must also fail. The government's waiver of sovereign immunity for tort actions as set forth in the Federal Tort Claims Act expressly excludes actions involving the assessment or collection of tax. 28 U.S.C. §2680(c); Hutchinson v. United States [82-1 USTC ¶9405], 677 F.2d 1322, 1327 (9th Cir. 1982). Thus, sovereign immunity bars the plaintiff's tort claims against the United States and its agencies.
III. Conclusion
Accordingly, IT IS ORDERED that defendants' motion to dismiss (#34) be GRANTED without leave to amend.
1 The Ninth Circuit in Arnsberg noted, however, that "actions brought under the takings clause of the fifth amendment are, of course, an exception to the rule that sovereign immunity is a bar to damages against the United States for direct constitutional violations." Id. at 980 n. 7. Here, plaintiff does not seek relief under the takings clause of the Fifth Amendment.
2 Section 1346 is a limited waiver of sovereign immunity that confers federal courts with jurisdiction over tax refund lawsuits brought by the taxpayer.
3 Only plaintiffs' claims regarding the assessment of personal income taxes for the tax years 1981, 1982, and 1983 may fall within the exception of section 6213(a).
A taxpayer who breached the payment terms of his compromise agreement was not entitled to notice of the amount due thereunder before the IRS collected the balance of his original liability. The agreement specifically stated that he would not be entitled to notice in this situation.
The government was awarded summary judgment in the suit brought by the taxpayer who protested that taxes he owed were collected after the running of the statute of limitations. The government and the taxpayer had entered into a compromise agreement as to the amount of taxes owed by the taxpayer. A provision of the agreement provided that the statute of limitations would be extended if the taxpayer missed a payment, and the court concluded that, since the taxpayer showed no detriment suffered, the provision was not void as against public policy.
[82-1 USTC ¶9191]Dr. Jerry Fortenberry, Plaintiff v. United States of America, Defendant
U. S. District Court, So. Dist. Miss., Hattiesburg Div., Civil No. H 80-0119(C), 8/28/81
[Code Sec. 7122]
Compromises of tax liability: Breach of agreement: Notice.--A taxpayer was not entitled to a reasonable notice of the amount due under an offer in compromise nor was he entitled to a reasonable period of time in which to raise such amount prior to the Internal Revenue Service's declaration that his offer was in default. The taxpayer's failure to make the required payments constituted a default and under the terms of the collateral agreement, the IRS was authorized to collect the balance of the original liability without further notice of any kind.
COX, District Judge:
This cause came on for hearing before the Court on August 20, 1981, on the motion of the defendant, United States of America, for summary judgment and the Court having considered the record herein and having heard the argument of counsel now makes the following findings of fact and conclusions of law:
Findings of Fact
1. This action was instituted by the plaintiff, Dr. Jerry Fortenberry, against the defendant, the United States of America, seeking the refund of federal income taxes and statutory additions thereto for the years 1962-1967, inclusive, in the amount of $22,055.82, plus interest as provided by law.
2. For the years 1962-1967, inclusive the Internal Revenue Service assessed federal income taxes and statutory additions thereto against the plaintiff, Dr. Jerry Fortenberry, in the aggregate amount of $23,835.70.
3. Under date of June 13, 1969, the plaintiff submitted to the Internal Revenue Service an Offer in Compromise of the foregoing assessed tax liability for the total sum of $7,000, payable in installments. In the Offer in Compromise, the plaintiff stated that his offer should be accepted because he was unable to pay the tax liability assessed against him.
4. The plaintiff thereafter submitted to the Internal Revenue Service, on IRS Form 2261, a Collateral Agreement as additional consideration for the acceptance of the foregoing Offer in Compromise. By letter of July 17, 1969, the Internal Revenue Service notified the plaintiff of its acceptance of the Offer of Compromise and the Collateral Agreement.
5. Under the terms of the Offer in Compromise and Collateral Agreement, the plaintiff could, by making payments of graduated percentages of his 1969-1976 annual income in excess of $10,000, satisfy his 1962-1967 tax liability for less than the full amount assessed against him for those years. However, the plaintiff was required to make the indicated payments on a timely basis, (i. e. by April 15th of the year following the year of receipt of such annual income), and upon default in that regard, the Internal Revenue Service was authorized to disregard the amount of the offer and the Collateral Agreement, apply the amounts previously paid thereunder against the plaintiff's 1962-1967 tax liability, and without notice of any kind, proceed to collect from him the full remaining balance of such liability. 1
6. The plaintiff complied with the provisions of the offer in Compromise referred to in paragraph 3 above by making the prescribed payment of $7,000 to the Internal Revenue Service.
7. For the years 1974 and 1975, the plaintiff filed statements with the Internal Revenue Service reflecting annual income in the respective amounts of $5,744.13 and $12,838.30; and remitted a payment for the year 1975 under the Collateral Agreement in the amount of $387.93, plus interest of $1.94. However, the plaintiff's 1974 and 1975 income tax returns were subsequently audited by the Internal Revenue Service, and in December of 1974, the plaintiff agreed to certain deficiencies which increased his annual income for those years to $17,734.09 and $21,954.18, respectively.
8. Notwithstanding the plaintiff had annual income in each of the years 1974 and 1975 in excess of $10,000, he failed to pay over to the Internal Revenue Service on or before the due dates (April 15, 1975 and April 15, 1976, respectively) the percentages of such excess as required by the Collateral Agreement. Consequently, the Internal Revenue Service, by letter dated July 5, 1978, declared the plaintiff's offer to be in default, applied the payments previously made under the Offer in Compromise and Collateral Agreement to the tax liability assessed against the plaintiff for 1962-1967 and collected from him the remaining balance of such liability.
9. Even though the Collateral Agreement expressly provides that for each year his annual income for 1969-1976 was in excess of $10,000 the plaintiff was required to make an annual payment of a graduated percentage of such excess without the necessity of notice of any kind from the Internal Revenue Service, on January 18, 1978, the Internal Revenue Service, as a matter of courtesy, mailed a letter to the plaintiff advising him that the sum of $6,748.82 was due under the terms of the Collateral Agreement for the years 1974 and 1975, including interest of $26.50 for the year 1976. On June 2, 1978, when no payment was received as a result of such advice, the Internal Revenue Service mailed a second letter to the plaintiff indicating that such liability, including interest accrued to June 30, 1978, amounted to $6,897.68, and that the offer would be declared in default if the payments due under the Collateral Agreement were not made by June 30, 1978. Payment was not made by June 30, 1978, and, as heretofore noted, the Internal Revenue Service declared the offer to be in default on July 5, 1978.
10. By a Letter dated May 24, 1979, the plaintiff forwarded $22,055.82 to the Internal Revenue Service in full satisfaction of the remaining liability due for the years 1962 through 1967. Subsequently, he filed a claim for refund thereof. The instant suit, in which the plaintiff seeks to recover such amount, was thereafter timely filed.
11. The plaintiff contends that the Internal Revenue Service was without right to declare the offer in default because (1) he performed under the contract in good faith and was entitled to reasonable notice of the amount due and a reasonable period of time to raise such amount; and (2) because he substantially performed the terms of the contract.
Conclusions of Law
1. None of the plaintiff's factual contentions has any merit.
2. The Internal Revenue Service is authorized by 26 U. S. C. §7122(a) to compromise any civil case arising under the internal revenue laws (prior to reference to the Department of Justice for prosecution or defense) and as a condition to the acceptance of a taxpayer's offer in compromise, the Internal Revenue Service may require such a taxpayer to enter into any collateral agreement which it deems necessary for the protection of the interest of the United States (Treasury Regulation on Procedure and Administration (1954 Code), §301.7122-(d)(3)).
3. The law is well-settled that the Offer in Compromise and Collateral Agreement submitted by the plaintiff and accepted by the Internal Revenue Service on July 17, 1969, constitute a contract and that the plaintiff, as a party thereto, is bound by its terms. James v. First National Bldg. Corp. [46-1 USTC ¶9270], 155 F. 2d 815 (10th Cir. 1946); Colorado Milling & Elevator Co. v. Howbert, 57 F. 2d 769 (10th Cir. 1932). Accordingly, when the plaintiff failed to make the payments required thereunder with respect to 1974 and 1975, the Internal Revenue Service was authorized thereby, at its option, inter alia, to "disregard the amount of the offer and [the Collateral Agreement], and apply all amounts previously paid thereunder against the amount of the liability sought to be compromised and [could] without further notice of any kind, assess and/or collect by levy or suit [the restrictions against assessment and/or collection being specifically waived) the balance of such liability." United States v. Lane [62-1 USTC ¶9467], 303 F. 2d 1 (5th Cir. 1962). Provisions were made in both the Offer in Compromise and the Collateral Agreement for the Internal Revenue Service to notify the plaintiff of the acceptance of the offer. Such notice was given by letter of July 17, 1969, and thereafter the default provisions of the Offer in Compromise and the Collateral Agreement were effective "without further notice of any kind" from the Internal Revenue Service.
3. The plaintiff had annual income in excess of $10,000 for each of the years 1974 and 1975, but failed to pay over to the Internal Revenue Service the required percentages of such excess on or before the due dates. Therefore, in accordance with the terms of the Collateral Agreement, the defendant properly declared the contract in default and collected the full balance of the liability assessed against the plaintiff for 1962-1967.
4. In United States v. Lane, supra, a case involving facts which are very similar to those involved herein, the United States Court of Appeals for the Fifth Circuit held that the United States was, upon violation of its terms, entitled to declare in default a collateral agreement identical to the one here in question and concluded that the issue of the property of such action was appropriate for summary judgment in the Government's favor. In reaching this conclusion, the Fifth Circuit stated (p. 4):
This language is so precise, and the intention which it manifests is so evident, as to leave no doubt that the course of action taken by the Government here was fully authorized by the compromise agreement.
There was nothing illegal, immoral or inequitable in the compromise agreement. It did not provide for any "forfeiture". By express provision, the amounts to be paid under the compromise agreement, including both the Form 656-C and the collateral agreement, could not exceed the aggregate amount which the taxpayer conceded that he owed the Government from the start. By allowing the Government to review the taxpayer's original liability, the taxpayer will not forfeit the amounts he has already paid, for those amounts will be applied to reduce the original liability. The agreement was precise, it was fair, and it was freely consented to by the taxpayer. There is no reason why it should not be enforced as written.
5. The plaintiff contends that the Internal Revenue Service was without right to declare his offer in default because he substantially performed its terms, because he was entitled to reasonable notice of the amount due thereunder, and because he was entitled to a reasonable period of time to raise said amount. Such contentions, however, are without merit. The plaintiff failed to make the required payments for 1974 and 1975 on the due dates therefor. Each such failure constituted a default and, upon either such default, under the express terms of the Collateral Agreement, the Internal Revenue Service was authorized, "without further notice of any kind" to the plaintiff, to collect, as it did, the balance of the original liability.
6. The fact that the Internal Revenue Service mailed courtesy letters to the plaintiff in January and June of 1978, advising him of his past due liability for 1974 and 1975 under the Collateral Agreement, does not alter the conclusions reached herein. The Collateral Agreement provides (par. 4) that payment of the liability for each of those years should have been made, respectively, "to the District Director, without notice from him, on or before the fifteenth day of the fourth month next following the close of the calendar * * * year." As stated by the Third Circuit in United States v. Feinberg [65-2 USTC ¶9645], 372 F. 2d 353, 357 (1965), "by the clear language of the Offer in Compromise, Mr. Saladoff agreed that, upon his default, the Commissioner of Internal Revenue could terminate the Compromise Agreement. The default is undisputed. The Government cannot be held to the 'warning shot' the appellant suggests is required here."
7. The Defendant's Motion for Summary Judgment is well-taken. There is no genuine issue as to any material fact and the defendant is entitled to judgment as a matter of law. Accordingly, the defendant's motion should be, and is hereby, granted and summary judgment should, and will, be entered herein in favor of the defendant, United States of America, dismissing the plaintiff's Complaint with prejudice.
Summary Judgment
The defendant, United States of America, having moved the Court to enter summary judgment herein in its favor on the grounds that there is no genuine issue as to any material fact and that the defendant is entitled to judgment as a matter of law and the Court having entered its Findings of Fact and Conclusions of Law to the effect that said motion is well-taken, it is, in accordance with such Findings of Fact and Conclusions of Law--
ORDERED and ADJUDGED that the plaintiff, Dr. Jerry Fortenberry, take nothing, that the action be dismissed with prejudice, that the defendant, the United States of America, recover of the plaintiff, Dr. Jerry Fortenberry, its costs of action.
1 The default provision of the Collateral Agreement (par. 6) provides as follows:
That upon notice to the taxpayer of the acceptance of the offer in compromise of the liability aforesaid, the taxpayer shall have no right, in the event of default in payment of any installment of principal or interest due under the terms of the offer and this agreement, or in the event any other provision of this agreement is not carried out in accordance with its terms, to contest in court or otherwise the amount of the liability sought to be compromised; and that in the event of such default or non-compliance, or in the event the taxpayer becomes the subject of any proceeding under the Bankruptcy Act, or the subject of any proceeding whereby the affairs of the taxpayer are placed under the control and jurisdiction of a court or other party, the Commissioner or his delegate at his option, (a) may proceed immediately by suit to collect the entire unpaid balance of the offer and this agreement, or (b) may proceed immediately by suit to collect as liquidated damages an amount equal to the tax liability sought to be compromised minus any payments already received under the terms of the offer in compromise and this agreement, with interest at the rate of 6% per annum from the date of default, or (c) may disregard the amount of such offer and this agreement, and apply all amounts previously paid thereunder against the amount of the liability sought to be compromised and may, without further notice of any kind, assess and/or collect by levy or suit (the restrictions against assessment and/or collection being specifically waived) the balance of such liability.
A.J. Parenteau, DC N.J., 74-1 USTC ¶9270. 74-1 USTC ¶9270]U. S. District Court, Dist. N. J., No. 1297-72, 12/20/73
[Code Secs. 6501 and 7122]
Compromises: Breach of agreement: Statute of limitations: Waiver: Compromise as.--The government was awarded summary judgment in the suit brought by the taxpayer who protested that taxes he owed were collected after the running of the statute of limitations. The government and the taxpayer had entered into a compromise agreement as to the amount of taxes owed by the taxpayer. A provision of the agreement provided that the statute of limitations would be extended if the taxpayer missed a payment, and the court concluded that, since the taxpayer showed no detriment suffered, the provision was not void as against public policy.
Opinion and Order
BARLOW, District Judge:
This case is before the Court on cross-motions for summary judgment. FED. R. CIV. P. 56.
The plaintiff seeks to recover certain income and employment taxes which the Internal Revenue Service (IRS) collected by distraint in 1971 and 1972. The plaintiff insists that the collection was barred by the applicable statute of limitations, 26 U. S. C. A. §6502. The Government demurs, asserting that it acted in timely fashion.
The plaintiff made an offer to compromise his original tax liability, which the IRS accepted on February 23rd, 1962. 26 U. S. C. A. §7122. There is no dispute that, once accepted, the terms of the offer became binding contractual obligations on both parties. United States v. Lane [62-1 USTC ¶9467], 303 F. 2d 1, 4 (5th Cir. 1962). The agreement called for plaintiff to pay over the entire compromised sum on March 30th, 1962. Plaintiff failed to make the required payment and, on April 9th, 1962, the Government warned him, by letter, that he might be declared in default of the agreement. Plaintiff responded on April 23rd, 1962, by "withdrawing" his offer, or, in contractual terms, repudiating the agreement. 1 Plaintiff received no further communication from the IRS until February 17th, 1965, some three years later, when he was notified that the compromise agreement had been declared in default.
Of critical importance to the resolution of thses motions is Paragraph 6 of the compromise agreement (Government Form 656, entitled "Offer in Compromise"). Paragraph 6 tolls the applicable statute of limitations under certain explicit circumstances:
"6. The undersigned proponent waives the benefit of any statute of limitations applicable to the assessment and/or collection of the liability sought to be compromised, and agrees to the suspension of the statutory period of limitations on assessment and collection for the period during which the offer is pending or the period during which any installment remains unpaid, and for one year thereafter." (Emphasis added.)
It is the Government's view that the statute of limitations remained tolled until the February 17th, 1965, notification of default; however, the plaintiff argues that the statute should have commenced running once again on April 23rd, 1962, the date plaintiff sent his letter repudiating the compromise agreement.
Plaintiff's Motion for Summary Judgment
Since the Government refuses to concede, for the purpose of this motion, that the plaintiff actually sent the April 23rd letter, there exists a factual dispute which precludes resolution of the plaintiff's motion for summary judgment. FED. R. CIV. P. 56. Accordingly, that motion is denied.
Defendant's Motion for Summary Judgment
The explicit language of Paragraph 6 of Form 656, supra, supports the Government's calculation of the statutory period of limitation. The statute remains tolled, according to that paragraph, as long as ". . . any installment remains unpaid". Clearly, the one-installment payment due on March 30th, 1962, remained unpaid until February 17th, 1965, when the entire compromise agreement became a nullity as a result of the Government's declaration of default. Accordingly, we accept the contention of the United States that the statute of limitations did not expire until after the monies in question had been collected.
However, the plaintiff alternatively asks this Court to void Paragraph 6 as offensive to public policy. The fact that the Government, when confronted with a breach of the compromise agreement, has no time limit within which it must choose its remedy 2 is, the plaintiff contends, unfair to a taxpayer. We disagree.
First, despite a conclusory assertion to the contrary, the plaintiff has pleaded no specific detriment suffered as a result of the delay in the collection of the taxes. Indeed, in view of this plaintiff's history of bankruptcy and subsequent recovery, the hiatus was, in all probability, beneficial rather than detrimental. Further, the fact that plaintiff made no attempt to communicate with the IRS after his April 23rd letter also dilutes his assertion of hardship. Finally, the Third Circuit has previously upheld the default provision and, by implication, the waiver of the statute of limitations provision contained in Form 656. United States v. Feinberg [67-1 USTC ¶9176], 372 F. 2d 352, 356 (3rd Cir. 1967). In that case, the Court sustained a governmental declaration of default which was received more than four years after the initial breach of the compromise agreement.
Under all of the circumstances, we cannot accept plaintiff's contention that Paragraph 6 of Form 656 is so blatantly unfair to the taxpayer that it must be declared void as against public policy.
Accordingly, the defendant United States' motion for summary judgment must be granted, without costs.
1 The fact that plaintiff did send such a letter of repudiation is stipulated for the purpose of the Government's motion only.
2 Paragraph 4 of the compromise agreement basically allows the Government, in the event of a default, to institute action to collect either the compromised or the original liability.
"4. It is further agreed that upon notice to the proponent of the acceptance of this offer in compromise of the liability aforesaid, the proponent shall have no right to contest in court or otherwise the amount of the liability sought to be compromised; and that in the event this offer is a deferred payment offer and there is a default in payment of any installment of principal or interest due under the terms of the offer, the Commissioner of Internal Revenue (or his delegate), at his option, (a) may proceed immediately by suit to collect the entire unpaid balance of the offer, or (b) may proceed immediately by suit to collect as liquidated damages an amount equal to the liability sought to be compromised, minus any deposits already received under the terms of the offer in compromise, with interest on the unpaid balance at the rate of 6 percent per annum from the date of default, or (c) may disregard the amount of such offer and apply all amounts previously deposited thereunder against the amount of the liability sought to be compromised and may, without further notice of any kind, assess and/or collect by levy or suit the balance of such liability, the right of appeal to the Tax Court of the United States and the restrictions against assessments and/or collection being hereby waived."
Although a later, independent decision changed the time for which interest would be payable on accumulated earnings tax deficiencies, the Attorney General had authority to settle three pending cases on the understanding that other suits not filed would be disposed of on the same basis. The compromise settlement could not be abrogated.
D.D.I. Inc., CtCls, 72-2 USTC ¶9703, 467 F2d 497. Cert. denied, 414 US 830. [72-2 USTC ¶9703]D. D. I., Inc.
U. S. Court of Claims, No. 258-71, 199 CtCls 380, 467 F2d 497, 10/13/72
[Code Sec. 7122(a)]
Compromises: Authority to enter: Attorney General: Package settlement of cases pending and cases not in suit: Estoppel from opening agreement: Interest as part of compromise.--Where a compromise agreement called for the settlement by the Attorney General of three pending suits conditioned on the agreement that accumulated earnings tax deficiencies of the plaintiff corporations would be settled at the same time on the same basis, the Attorney General was found to have had the authority to enter the compromise. The plaintiffs' requirement that settlement of their deficiencies be a condition to settlement of the three tax refund suits caused their deficiency settlements to be germane to the refund suits and within the Attorney General's authority. Also, the Treasury Department authorized the Department of Justice to make the settlement. Further, the plaintiffs are estopped from opening the compromise agreement since the Commissioner cannot open the cases of the litigating corporations and, in a package deal such as this, does not have a full right of set-off or recoupment. Finally, the compromise included the payment of interest computed according to the law as both parties thought it to be at the time of the compromise (interest commencing to run from tax return due date) and not just the lawful interest according to a later decision in Motor Fuel Carriers, Inc., (Ct. Cls.) 70-1 USTC ¶9191 (taxpayer's liability for interest on accumulated earnings tax beginning 10 days after date of Notice and Demand).
On Plaintiffs' Motion and Defendant's Cross Motion for Summary Judgment
KUNZIG, Judge, delivered the opinion of the court:
Plaintiffs are suing for a refund of interest paid as part of a settlement of accumulated earnings taxes.
After audit, the Commissioner of Internal Revenue proposed to assess accumulated earnings taxes 1 of varying amounts against the plaintiffs. As a result of negotiations between plaintiffs and the Commissioner, it was agreed that the years under audit would remain "in suspense" until the outcome of three tax refund suits involving identical facts and circumstances with three other corporations.
On April 16, 1968, counsel for the litigating corporations (who was also counsel for plaintiffs) proposed to the Assistant Attorney General a settlement of the three pending suits. The offer however was conditioned upon agreement by the Commissioner to settle the plaintiffs' cases at the same time and on the same basis (twenty-five per cent of the proposed assessment plus interest).
After consultations between the Justice Department and the Commissioner, the settlement offer was accepted on December 17, 1968 conditioned on the
. . . payment of the deficiencies of the corporations not in suit within thirty days of verification of the amounts thereof by the service under the terms of settlement, plus interest.
On February 17, 1969, the Commissioner prepared and submitted verified deficiencies to plaintiffs on Form 870 in accordance with the settlement. On the same date plaintiffs duly executed and delivered to the Commissioner these Forms 870. Each plaintiff, except Volusia Locations, Inc., received a Notice and Demand dated April 18, 1969, for payment of the agreed deficiencies along with interest computed from the due date of each plaintiff's tax return for the year in respect to which the accumulated earnings tax was assessed. Each of the plaintiffs, except Volusia, paid the full amount of tax and interest shown on its Notice and Demand on Arpil 24, 1969. 2
No closing agreement or other document purporting to bind the Government or plaintiff was executed.
On July 18, 1969, pursuant to the Settlement Agreement, the three refund suits then pending were dismissed on stipulation of the parties.
On January 23, 1970, this court issued its opinion in Motor Fuel Carriers, Inc. v. United States [70-1 USTC ¶9191], 190 Ct. Cl. 385, 420 F. 2d 702 (1970), which held that a taxpayer's liability for interest on accumulated earnings tax commences ten days after the date shown on the Notice and Demand, and not on the due date of the tax return for the taxable year in respect to which the accumulated earnings tax was assessed.
Upon learning of Motor Fuel Carriers, plaintiffs filed claims for refund of the deficiency interest paid on the Section 531 compromise. These claims for refund were disallowed by Notices of Disallowances dated August 21, 1970 and September 3, 1970. Suit was thereafter timely instituted in this court.
The matter is presently before this court on motions for summary judgment by both parties. We agree with the position of the defendant.
There are three primary issues involved in this case:
(1) Whether the Attorney General had the authority to enter into a compromise with plaintiffs;
(2) Whether, assuming there were valid informal compromises, plaintiffs are estopped from opening these agreements; and
(3) Whether the interest payments were part of the compromise.
Plaintiffs first contend that the Attorney General had no authority to enter into a compromise with them, since the statute merely authorizes him to "compromise any . . . case after reference to the Department of Justice for prosecution or defense." 3 An opinion of the Attorney General 4 states that the Attorney General has authority to compromise any matters "germane to the case which the Attorney General may find it necessary and proper to consider . . .." This authority has been exercised for almost forty years. It is a reasonable interpretation of Section 7122, which divides the compromise authority between the two departments. We see no compelling reason now to disapprove of this administrative practice.
Since the plaintiffs in this case required the Attorney General to settle their cases as a basis for settling the tax refund suits (which were undeniably within the jurisdiction of the Attorney General) it may be said that it is the plaintiffs themselves who made their cases "germane." Furthermore, plaintiffs do not contest the fact that the Treasury Department authorized the Department of Justice to make this settlement.
On the basis of the above, we find that plaintiffs' case is germane to the refund suits. We, therefore, hold that the Attorney General was acting within the purview of his authority when the settlements were made.
Plaintiffs next assert that either side was free to open the case because the settlement was made only pursuant to Forms 870 and letters between the parties. There was no formal closing agreement, which plaintiffs contend is necessary in order to make a binding settlement. The Supreme Court's decision in Botany Worsted Mills v. United States [1 USTC ¶348], 278 U. S. 282, 288 (1929) made it clear that the exact requirements of the Internal Revenue Code had to be followed in order to make a compromise binding on the parties. However, the case left open the question of estoppel to be decided on an individual case basis.
This court has held that where the statute of limitations has run on the collection of further deficiencies between the time an informal compromise agreement was executed and the time the refund claim was filed, the principle of estoppel would prevent the plaintiff from pursuing the matter further. The court said:
[i]t would obviously be inequitable to allow the plaintiff to renounce the agreement . . . [since] the Commissioner cannot be placed in the same position he was when the agreement was executed. A clear case for the application of the doctrine of equitable estoppel exists . . ..
Guggenheim v. United States [48-1 USTC ¶9232], 111 Ct. Cl. 165, 182, 77 F. Supp. 186, 196 (1948), cert. denied, 335 U. S. 908, rehearing denied, 336 U. S. 911 (1949).
The Guggenheim rationale was successfully overcome by taxpayers in Morris White Fashions, Inc. v. United States [60-1 USTC ¶9146], 176 F. Supp. 760 (S. D. N. Y. 1959) where that court stated that,
[t]he key factor ignored in the Guggenheim [case] . . . is that the defense of equitable recoupment may be pleaded by the Government as a set-off to plaintiff's claim for refund, even though the statute of limitations has run against the Government. . . . Clearly equitable estoppel would not be appropriate where the Government could set off against taxpayer's claim an amount sufficient to compensate for its inability to assess additional deficiencies because of the tolling of the statute of limitations.
Id. at 765.
However valid the reasoning of Morris White might be in a case concerning an informal compromise with a single taxpayer, it is totally invalid when the compromise is a "package deal." Defendant, in this case, cannot open the cases of the litigating corporations even for use as set-offs. In a case similar to ours, a district court, in Cooper Agency v. United States [69-2 USTC ¶9560], 301 F. Supp. 871 (D. S. C. 1969), aff'd per curiam, [70-1 USTC ¶9321] 422 F. 2d 1331 (4th Cir. 1970), cert. denied, 400 U. S. 904 (1970), distinguished Morris White by stating that,
. . . where there is not a full right of set-off or recoupment by the Government, an estoppel based upon the maturing of the statute of limitations against suit by the Commission, in reliance of the agreement, may properly arise.
Id. at 877. Accord, Cain v. United States, 255 F. 2d 193 (8th Cir. 1958); see also Girard v. Gill [56-2 USTC ¶9849], 142 F. Supp. 770 (M. D. N. C 1956), aff'd per curiam, [57-1 USTC ¶9584] 243 F. 2d 166 (4th Cir. 1957). That situation clearly exists in the instant case.
We, therefore, hold that plaintiffs are estopped from opening the compromise agreement entered into between plaintiffs and the Attorney General.
The third and last issue is whether the interest was part of the compromise. Plaintiffs contend that they intended to settle their tax liability, but that they only intended to pay "lawful" interest. However, we feel that under a common sense understanding of compromise, it is not possible to believe that plaintiffs entered into a compromise settlement of $652,247.52 and totally ignored the $204,800.00 of interest which they were to pay.
This large amount of interest was assumed by both plaintiffs and defendant to be the correct amount due. Plaintiffs admit that at the time of the compromise they believed that interest was to be computed from the filing dates of the tax returns. Not until our decision in the Motor Fuel Carriers case did plaintiffs think otherwise. 5
The law to be applied in the instant case is the law as the parties thought it to be at the time of the settlement. Even if it is subsequently determined that that law would not have required payment, the settlement will be deemed binding on the parties. Trumbull Steel Co. v. United States [1932 CCH ¶9533], 76 Ct. Cl. 391, 1 F. Supp. 762 (1932). This court has clearly stated:
In testing the validity of the settlement we must consider the circumstances and the law then applicable thereto. [emphasis added.]
Id. at 400. Accord, Bankers Reserve Co. v. United States [2 USTC ¶556], 70 Ct. Cl. 379, 42 F. 2d 313, cert. denied, 282 U. S. 871 (1930); see Hord v. United States [3 USTC ¶955], 75 Ct. Cl. 516, 59 F. 2d 125 (1932).
The Attorney General properly entered into a compromise with plaintiffs, as part of a settlement with the litigating corporations. Plaintiffs are now estopped from opening that compromise. This compromise included payment of interest computed according to the law as both parties thought it to be at the time of the compromise.
Accordingly, plaintiffs' motion for summary judgment is denied and defendant's cross-motion for summary judgment is granted. Plaintiffs' petition is hereby dismissed.
1 Int. Rev. Code of 1954, §531. All Section references hereinafter are to the Internal Revenue Code of 1954.
2 In the case of Volusia Locations, Inc., payment was effected through an offset of an over-assessment from the calendar year 1961 arising from a net operating loss carryback from the calendar year 1964.
3 §7122(a).
4 38 Op. Att'y Gen. 98,102 (1934).
5 The present case is clearly distinguishable from those cases which allow a recomputation of interest based upon Motor Fuel Carriers because they do not entail compromise settlements between the parties. See generally Bardahl Mfg. Corp. v. United States [72-1 USTC ¶9158], 452 F. 2d 604 (9th Cir. 1971); Ray E. Loper Lumber Co. v. United States [71-2 USTC ¶9514], 444 F. 2d 301 (6th Cir. 1971); Alexander Proudfoot Co. v. United States, 197 Ct. Cl. 219 [72-1 USTC ¶9256], 454 F. 2d 1379 (1972).
Taxpayer was estopped from seeking recovery of a payment made in a compromise settlement of income tax assessments against it and some fourteen other parties which was assigned to the extinguishment or abatement of various tax assessments against the taxpayer as transferee. The taxpayer was barred by equitable estoppel from violating the compromise agreement since the agreement represented a so-called package deal, involving several taxpayers in addition to the taxpayer, and the Government, in reliance on the settlement, had permitted the statute to run against the claims against the other taxpayers involved in the settlement and could not recoup, through its right of set-off, against these taxpayers. There was no merit to the taxpayer's contention that all unabated assessments against it were paid in full and not compromised or settled because the Government, at the taxpayer's request, allocated the payment to all unabated transferee claims against the taxpayer.
69-2 USTC ¶9560]Cooper Agency, Plaintiff v. United States of America, Defendant
U. S. Dist. Court, Dist. S. C., Columbia Div., Civil Action No. 68-533, 301 FSupp 871, 7/16/69
[Code Sec. 7122]
Compromises: Equitable estoppel: Refund claim after execution of compromise agreement: Government's right of set-off or recoupment.--In a follow-up action to Cooper Agency, (CA-4) 65-2 USTC ¶9603, 348 Fed. (2d) 919, the taxpayer was estopped from seeking recovery of a payment made in a compromise settlement of income tax assessments against it and some fourteen other parties which was assigned to the extinguishment or abatement of various tax assessments against the taxpayer as transferee. The taxpayer was barred by equitable estoppel from violating the compromise agreement since the agreement represented a so-called package deal, involving several taxpayers in addition to the taxpayer, and the Government, in reliance on the settlement, had permitted the statute to run against the claims against the other taxpayers involved in the settlement and could not recoup, through its right of set-off, against these taxpayers. The taxpayer's contention that all unabated assessments against it were paid in full and not compromised or settled because the Government, at the taxpayer's request, allocated the payment to all unabated transferee claims against the taxpayer was without merit. The payment was made incident to a compromise agreement against fifteen separate taxpayers, including the taxpayer, and the fact that some of the assessments against the taxpayer were marked paid in full and others abated in full did not change the fact that the payment, however applied, was a part of a single settlement figure and was made as an essential part and parcel of the compromise agreement.
Opinion and Order
RUSSELL, District Judge:
This suit seeks recovery of that portion of a payment (i.e., $1,192,405.43) made in compromise settlement of certain income tax assessments against the plaintiff and some fourteen other parties which was assigned to the extinguishment or abatement of various tax assessments against the plaintiff as transferee.
[Taxpayer's Contention]
It is the contention of the plaintiff that its liability on the assessments, refund of which is sought herein, was as transferee and that such derivative liability was imperfect both because the transfers to it were for full value and because the notices of deficiency on which the assessments were based were defective. While admitting the execution of a compromise settlement by the terms of which it bound itself not to seek a refund, it urges that such compromise agreement is not a bar, since, as to it, the agreement did not represent a compromise and, even if it did, the agreement is voidable for duress and coercion.
[Government Defense]
The defendant, on the other hand, rests its defense on (1) the compromise agreement and, particularly, the express provision thereof under which the plaintiff bound itself not to seek or sue for a refund and (2) on an estoppel against the plaintiff to repudiate such settlement. It, also, asserts that a small part of plaintiff's claim was not filed within time and is accordingly barred in any event.
[Motions for Summary Judgment]
Certain interrogatories have been exchanged between the parties. In addition, both parties have filed certain affidavits. They have both cited and rely, though for different reasons, on the compromise agreement between the parties. On the basis of the record so made, both parties have moved for summary judgment.
It is obvious that, if the provision in the undisputed compromise settlement agreement proscribing any suit by the plaintiff for a refund is valid and enforceable, the motion of the defendant for summary judgment must be granted and the motion of the plaintiff denied. It is necessary, therefore, to review at the outset the undisputed facts, about which there is no genuine issue, leading up to and involved in the compromise settlement.
[Facts]
From the undisputed facts in the record before me, it appears that on September 16, 1963, there were tax assessments "in a total amount of approximately $9,000,000" outstanding against the plaintiff and "certain members of the Cooper family" and their "corporations and associations", as well as "proposed additional deficiencies * * * in substantial amounts." 1 None of the taxpayers involved either in such outstanding or proposed assessments, within the allowable period for that action, petitioned the Tax Court for a redetermination of their respective tax liabilities. To the contrary, the plaintiff and its associated interests hastened to file "ten actions", seeking of this Court injunctive relief against the outstanding or proposed assessments, contending, among other things, that the notices of deficiencies upon which the assessments were based were defective, thereby rendering "null and void" the assessments. Relief in those proceedings was denied the plaintiff and its associated interests. In the course of denying relief, the Court explicitly sustained the sufficiency of the notices of deficiency. 2
Following the dismissal of this initial injunctive action, the plaintiff and associated parties began compromise negotiations. The plaintiff contended that, during such negotiations, an agent of the Commissioner "conceded" that the plaintiff's liability was "at most, only $198,000", even though, as plaintiff's complaint thereafter alleged, the actual assessments made against the plaintiff itself at the time aggregated $1,508,033.10. The extent of liability of the other transferees, as discussed during these negotiations, was not indicated in the record. Arguing that any assessments against it in excess of $198,000 were void as a result of such alleged "concession" and renewing its objections to the assessments made in its earlier action for defect in the notices of deficiency, the plaintiff filed a second injunctive suit against the District Director on September 27, 1965. Relief was denied plaintiff in this second action on October 28, 1965. 3
[Settlement Negotiations]
Settlement negotiations on behalf of both the plaintiff and all associated parties were thereupon renewed. In the meantime, the District Director had levied upon certain property of the plaintiff and its associated interests and was in the process of advertising same for sale under levy. On November 24, 1965, the plaintiff, acting "on behalf of all taxpayers involved", and represented by four able and experienced counsel, submitted in writing an offer of $1,250,000 in compromise settlement of "all assessments made or proposed * * * including any issues now pending before the Appellate Division, Internal Revenue Service, whether assessed or not" "for all years up to and including taxable years ending in 1961" against the plaintiff and related interests or family connections. The taxpayers to be granted relief under the proposed settlement included 10 corporate parties and 5 named individuals along with "their children, wives, and grandchildren." The offer included these two specific conditions:
"1. No claims or suits for refund will be made for the years involved in the settlement.
* * *
"4. The parties shall agree upon the allocation of the payment made hereunder, upon any effect that the payment hereunder may have on basis of property and otherwise upon the basis of property which may be involved, but it is expressly stipulated and agreed that no controversy or issue of any kind or character whether as to basis or allocation or any other dispute as to mechanics or details of carrying out the agreement shall prevent or delay payment of the $1,250,000.00 beyond sixty (60) days from the date hereof."
After submission to and approval by the Commissioner of Internal Revenue and the Attorney General of the United States, 4 the offer of the plaintiff, as incorporated in its letter, was accepted and the District Director, Internal Revenue Service, duly evidenced such acceptance on their behalf by affixing his signature to a form of acceptance included in the letter of the plaintiff, copy of which was furnished the plaintiff.
After acceptance of the offer, the plaintiff paid, within the sixty days provided, the sum agreed upon and the District Director proceeded to release the federal tax liens and property seizures, to abandon any sales under advertisement and to cancel all collection activities arising out of the assessments described in plaintiff's letter of November 24, 1965. In addition, the Internal Revenue Service abandoned its claims of liability pending in the Appellate Division and agreed to Orders in the Tax Court to the same effect, thereby fulfilling that part of its agreement.
[Allocation of Compromise Payment]
After payment was made by the taxpayers, the District Director requested the plaintiff and its associated taxpayers to submit their proposed allocation of the compromise settlement payment among the various assessments as contemplated in condition 4, quoted supra, of the settlement offer. The plaintiff, acting apparently again for all the taxpayers, proposed that $1,192,405.43 be "allocated to cover full payment of any transferee liability claims against Cooper Agency" and that the remaining $57,594.57 "be allocated to the complete settlement of all tax deficiencies through the year 1961 and all transferee liabilities of all those named in the agreement except any amounts owed by Cooper Agency as transferee." As of November 24, 1965, the net outstanding assessments against the plaintiff totaled, with interest and penalties, $1,795,466.63, and the outstanding assessments against the other parties involved in the settlement were in excess of $15,000,000. An employee of the District Director thereafter advised the plaintiff that the District Director accepted the proposal for allocation of the payment as submitted by the plaintiff.
[Claim for Refund]
Exactly two years to the day after the settlement agreement (but within two years of payment of all the settlement save $70,000 thereof), the plaintiff filed a claim for refund in the amount of $1,192,405.43, being the amount of the settlement assigned to the discharge of plaintiff's tax liabilities. The basis for such claim, as assigned therein by the plaintiff, was that the plaintiff was "not liable for any amount as a transferee of property from any taxpayer at any time." Upon the rejection of that claim this action was commenced.
[Recovery Barred]
The defendant, by its motion, contends that the admitted compromise agreement and settlement between the parties, in which the plaintiff specifically waived any right to sue for a refund, bars the plaintiff from recovery herein and requires summary judgment in its favor. I agree.
[Compromise Settlement]
It is well-settled that a compromise settlement of tax liabilities, conforming to the requirements of Section 7122, 26 U. S. C. A., is a contract, governed by the rules applicable to contracts generally; 5 and its terms are to be enforced as expressed, unless they violate some public policy. And this is true, even though it later appears no tax was due. Seattle-First Nat. Bank v. United States (D. C. Wash. 1942) [42-1 USTC ¶9447] 44 F. Supp. 603, 610, aff. [43-1 USTC ¶9454] 136 F. 2d 676, aff. [44-1 USTC ¶9259] 321 U. S. 583, 64 S. Ct. 713, 88 L. Ed. 944. The instant settlement includes as one of its express terms and conditions, the explicit agreement of the plaintiff, that "No claims or suits for refund will (would) be made" by it. Such a condition does not transgress public policy. There is nothing improper or even unusual in such a condition in a tax settlement agreement. In varying phraseology, sucy a condition is a standard provision in tax settlements; and, where the settlement is properly authorized, the provision has been enforced without question. Monge v. Smyth (C. C. A. Cal. 1956) [56-1 USTC ¶9213] 229 F. 2d 361, 368, cert. den. 351 U. S. 976, 76 S. Ct. 1055, 100 L. Ed. 1493; Hamilton v. United States (Ct. Cl. 1963) [63-2 USTC ¶9829] 324 F. 2d 960, 964-5. The plaintiff does not contend that this settlement was not properly authorized. The affidavit of the District Director shows that the settlement was authorized by the Attorney General, who, since these cases had been referred to the Department of Justice, was the proper official under Section 7122 to approve and authorize it on behalf of the Government. 6 It accordingly follows that the voluntary renunciation by the plaintiff in its settlement offer of any right either to claim or to sue for a refund forecloses it from the maintenance of this suit.
Even were there some defect in the settlement agreement--even were it not properly authorized by the Attorney General 7--the plaintiff would be estopped, by its express renunciation of a right to institute this suit for refund, from maintaining this action. It is true that there is a sharp conflict in the decisions on the necessary elements of an estoppel in tax refund cases. Under one line of authorities, permitting the statute of limitations to run against the affirmative assertion of the tax liability in reliance on the finality of an imperfect settlement is deemed such prejudice to the Government as to support an equitable estoppel against the maintenance of a suit for refund by the taxpayer. 8 The other view is that, in tax refund cases, an estoppel will not arise merely because the statute of limitations, in reliance on the agreement, has matured as a bar to any claim by the Government; there must have been an actual misrepresentation by the taxpayer, inducing the prejudicial inaction of the Government. 9 But to a substantial extent this second view is influenced, it would appear from observations made in a number of opinions sustaining such view, by a circumstance peculiar to tax refund cases. In any such action, the Government, even though the statute has run, may, by way of equitable recoupment, set-off its otherwise barred claim against that asserted by the taxpayer. Cuba Railroad Co. v. United States (C. C. A. N. Y. 1958) [58-1 USTC ¶9461] 254 F. 2d 280, 282, cert den. 358 U. S. 840, 79 S. Ct. 64, 3 L. Ed. 2d 5. In such a situation, of course, the Government cannot be prejudiced; and it is that want of prejudice which lies at the heart of this "strict" rule as to estoppel in tax refund cases. 10
[Right of Set-off v. Recoupment]
But, even in those jurisdictions in which the "strict" rule is applied, it would seem that where there is not a full right of set-off or recoupment by the Government, an estoppel based upon the maturing of the statute of limitation against suit by the Commission, in reliance of the agreement, may properly arise. Thus, where the settlement agreement (invalid for want of approval as required under Section 7122) represents a so-called "package deal", involving several taxpayers in addition to the plaintiff, and the Government, in reliance on the settlement, has permitted the statute to run against the claims against the taxpayers involved in the settlement other than the plaintiff-taxpayer and cannot recoup, through its right of set-off, against these other taxpayers in the suit filed by the plaintiff-taxpayer, 11 then the running of the statute will bar, by way of an equitable estoppel, any right of the plaintiff-taxpayer to violate his agreement. This principle is illustrated in the well-reasoned opinion in Girard v. Gill (D. C. N. C. 1956) [56-2 USTC ¶9849] 142 F. Supp. 770, 772, aff. [57-1 USTC ¶9584] 243 F. 2d 166. And this principle is applicable to this case.
[Settlement on Behalf of All Taxpayers]
The Government had tax assessments against the plaintiff and some fourteen other persons and corporations. This settlement agreement was made on behalf of all of them and settled, by compromise, the tax claims for the years stated against all of them. The Government relied on the agreement, particularly the agreement not to seek a refund, and permitted the statute to run against its claims against each of the fifteen taxpayers involved in the settlement; indeed, as to some of such taxpayers (but not including the plaintiff) it abandoned proceedings in the Appellate Division and consented to adverse decrees in the Tax Court. Only one of the taxpayers, the plaintiff, has sued for a refund. The Government has, by operation of the statute of limitations, thus lost its right to collect from the fourteen other taxpayers embraced in the settlement and has no right of recoupment against them in this action. This prejudice is sufficient to support an estoppel under either statement of the essential elements of an estoppel in a tax refund action, as set forth in the two lines of authority outlined above.
[Allocation of Settlement Payment]
Actually, as has been noted already, the plaintiff does not challenge the settlement or question its validity, including the prohibition against a suit for refund. The theory of its claim follows an entirely different line. It points to its request of the District Director that "the $1,192,405.43 paid by Cooper Agency (be applied) to the payment of any of these transferee claims you choose; however, we assume that you will abate the excessive claims above this amount, under Section 6404 of the Internal Revenue Code, so that your records will show full payment of all unabated, transferee claims against Cooper Agency, which will of course be in accordance with our agreement of November 24, 1965." (Italics added.) This request followed the language of paragraph 4 of the compromise agreement. The District Director agreed to this request. As a result of these allocations, the plaintiff argues in its brief herein that "all unabated assessments against the plaintiff, totaling $1,192,405.43, were paid in full, and not compromised or settled", and that, so far as any valid assessments against it were concerned, there was no compromise, it has paid all it validly owed. It would thus deny any application of the conditions of the settlement agreement to its suit. Accordingly, it asserts the basis for the defendant's motion for summary judgment (i.e., the settlement agreement) passes from the picture, and the plaintiff is entitled to contest in this action the validity of the tax assessments asserted originally against it.
Such argument overlooks the fact that the payment of $1,250,000 was made pursuant to and as an incident of the compromise agreement involving well over $9,000,000 in assessments against fifteen separate taxpayers, including approximately $1,900,000 in assessments against the plaintiff, and that the allocation of such payment among the assessments against these fifteen parties was, by the plaintiff's own language, "in accordance with our agreement of November 24, 1965." It is impossible, under these circumstances, to isolate that portion of the settlement figure, which, for bookkeeping purposes, was thereafter allocated to the tax liabilities of the plaintiff from the over-all compromise agreement covering all the taxpayers. The mere fact that, as a result of the manner of application and of bookkeeping entries, some of the assessments against the plaintiff were marked paid in full and others abated in full--not, on the basis of the respective merits of the assessments but simply because plaintiff requested it that way--cannot obscure the fact that the payment, however, applied, was a portion of a single settlement figure of $1,250,000 and was made as an essential part and parcel of the compromise agreement, indeed, of section 4 of that very agreement, under which the Government released tax assessments in excess of $9,000,000. The argument of the plaintiff is thus based on fiction, not reality. It cannot, by such an argument, escape from the conditions it proposed and the defendant accepted.
Plaintiff's argument really boils down to the contention that, by its inducing the District Director to apply the compromise payment in a particular way on the books of the Commissioner, it could transform what was a part payment, made by way of a compromise settlement, into a payment in full of a portion of the assessments. Such an agreement would make a nullity of the settlement and the intention of the parties and would invest a bookkeeper in the office of the District Director with the power to create a liability for refund on the part of the Government, where, by the very agreement under which the payment was made by authority of the Attorney General, there was no such right. This would be creating a right where none existed before. It would elevate form over substance.
[Compromise Under Duress]
Equally without merit is plaintiff's point that its compromise payment was made under duress. One who seeks to void a contract for duress must show that he was without other remedy. This plaintiff had two plain remedies whereby it could legally have contested the validity of the assessments against it. By acting in due time, the plaintiff could have tested the noticed deficiencies in the Tax Court, as Judge Martin remarked in 235 F. Supp. 283. The plaintiff was not ignorant of this right. Several of the parties involved in this settlement, including this plaintiff, and represented by the same counsel as appears for the plaintiff here followed this procedure in connection with earlier assessments against the plaintiff and parties associated with it. See, Biltmore Homes, Inc. v. C. I. R. (C. A. S. C. 1961) [61-1 USTC ¶9344] 288 F. 2d 336, cert. den. 368 U. S. 825, 82 S. Ct. 46, 7 L. Ed. 2d 30, and Cooper's Estate v. C. I. R. (C. A. S. C. 1961) [61-2 USTC ¶9548] 291 F. 2d 831, cert. den. 368 U. S. 919, 82 S. Ct. 241, 7 L. Ed. 2d 135. Perhaps its previous lack of success under this procedure induced the plaintiff to avoid this remedy. But, even after it had foregone this remedy, the plaintiff could have paid the assessments against it. It is true that this would have required a payment greater than that paid under the compromise agreement (assuming, of course, that the plaintiff's share of the compromise payment was $1,192,405.43). It may have been a hardship, but, "Hardship in raising money with which to pay taxes is now common to all taxpayers", (Reams v. Vrooman-Fehn Printing Co. (C. A. Ohio 1944) 140 F. 2d 237, 241) and does not represent duress. 12 The plaintiff chose to follow neither of these remedies; it compromised the assessments. Under such circumstances, the plaintiff may not avoid its compromise settlement. Little v. Bowers (1889) 134 U. S. 547, 556, 10 S. Ct. 620, 33 L. Ed. 1016; cf., however, Girard v. Gill (C. C. A. N. C. 1958 [59-1 USTC ¶9144] 261 F. 2d 695, 699. Moreover, even if this right existed on the part of the plaintiff, it is ordinarily the rule that the plaintiff is required promptly to disaffirm the agreement and, as a condition of relief, restore the opposite party to its former position. Without question, the plaintiff in this case could not restore the defendant to the position it enjoyed against all the fifteen taxpayers involved in the settlement. The defendant has lost its claims against these other taxpayers and the plaintiff cannot revive such claims.
[Unfair Dealings]
While unnecessary to the decision I have reached, one additional argument of the plaintiff might be noted. Even if sound, it probably would not invalidate the settlement. It would indicate, however, that the Government had been unfair in its dealings with the plaintiff. Thus, the plaintiff argues that, as evidenced by an admission extracted from the defendant by one of plaintiff's interrogatories, the total outstanding assessments against the plaintiff on September 16, 1963, were only $463,118.55. Despite this, the defendant, through threat of levies, forced the plaintiff to pay $1,192,405.43 in settlement of such assessments. This is not the full story, though; and the facts will not support the plaintiff's contentions in this regard. On September 16, 1963, the defendant issued against the plaintiff additional notices of deficiencies in the aggregate of $1,412,522.58, plus interest. Before the plaintiff filed its injunction suits, these notices had matured into assessments. As a consequence, the assessments outstanding against the plaintiff at the filing of its injunctive suits were $1,508,033.10, by the allegations of plaintiff's own complaint in the second injunction suit. What was involved in the subsequent settlement was thus not assessments in the amount of $463,118.55 but assessments aggregating $1,795,466.63, 13 against the plaintiff. Plaintiff would apparently disregard these additional assessments because, in its view, the notices of deficiencies were defective. However, this objection of the plaintiff had been raised and decided adversely to it in both of the injunction suits. Moreover, the plaintiff would completely disregard the fact that the compromise settlement covered not only its one tax liability but also those of fourteen other parties and that the aggregate tax liabilities involved totaled well over $15,000,000.00.
The motion of the defendant for summary judgment herein is accordingly granted.
AND IT IS SO ORDERED.
1 235 F. Supp. (D. C. S. C. 1964) 276, 278.
2 Cooper Agency, Inc. v. McLeod (D. C. S. C. 1964) [64-2 USTC ¶9776] 235 F. Supp. 276, 283, [65-2 USTC ¶9603] affirmed, 348 F. 2d 919.
3 Cooper Agency v. McLeod (D. C. S. C. 1965) [65-2 USTC ¶9745] 245 F. Supp. 57.
4 Apparently, since time for appealing had not expired in the injunction suit, the Department of Justice retained control over the proceedings and the approval of the Attorney General was required for any compromise settlement.
5 United States v. Lane (C. C. A. Fla. 1962) [62-1 USTC ¶9467] 303 F. 2d 1, 4; Lowe v. United States (D. C. Mont. 1963) [63-2 USTC ¶9778] 223 F. Supp. 948, 949; United States v. McCue (D. C. Conn. 1959) [60-1 USTC ¶9147] 178 F. Supp. 426, 432.
6 Compliance is presumed in the absence of a contrary showing. Anderson v. P. W. Madsen Inv. Co. (C. C. A. Utah 1934) [4 USTC ¶1334] 72 F. 2d 768, 771. Or, as phrased in Stearns Co. v. United States (1934) [4 USTC ¶1210] 291 U. S. 54, 64, 54 S. Ct. 325, 78 L. Ed. 647, there is always a "presumption of official regularity".
See, also, Hamilton v. United States (Ct. Cl. 1963) [63-2 USTC ¶9829] 324 F. 2d 960, 964:
"Plaintiffs (taxpayers) have not shown us that the requirements of section 7122 have not been met. Before their claim for refund can be considered, in face of the unequivocal terms of the compromise agreement and the express prohibition against the filing or prosecution of a claim for refund, they must show that this section has not been complied with. This they have not done. On the contrary, on the face of the documents that have been exhibited, it would seem that the section has been complied with."
7 See 11 A. L. R. 2d 913:
"There are several thousand cases each year in which there are proposed deficiencies and which are suitable material for a formal agreement such as will preclude the reopening of the question of tax liability under §3760 of the Internal Revenue Code, and there are numerous cases in which a final compromise agreement under §3761 would be the ideal way of closing the matter. But the administrative burden placed on the Secretary and Undersecretary of the Treasury by these statutes makes it impossible for them to handle more than a small proportion of the cases and the remainder must be closed by agents not authorized by law to enter into binding agreements. The Commissioner has attempted to devise an informal type of agreement which will be binding on both parties and end controversies, but without success. See Dean Griswold's article in 57 Harv. L. Rev. 912."
8 Daugette v. Patterson (C. A. Ala. 1957) [58-1 USTC ¶9156] 250 F. 2d 753, 757, cert. den. 356 U. S. 902, 78 S. Ct. 561, 2 L. Ed. 580; Cain v. United States (C. A. Ark. 1958) [58-1 USTC ¶9476] 255 F. 2d 193, 198-9; Guggenheim v. United States (Ct. Cl. 1948) [48-1 USTC ¶9232] 77 F. Supp. 186, cert. den. 335 U. S. 908, 69 S. Ct. 411, 93 L. Ed. 441, reh. den. 336 U. S. 911, 69 S. Ct. 513, 93 L. Ed. 1075; Girard v. Gill (D. C. N. C. 1956) [56-2 USTC ¶9849] 142 F. Supp. 770, 772, aff. [57-1 USTC ¶9584] 243 F. 2d 166; Schneider v. Kelm (D. C. Minn. 1956) [56-1 USTC ¶9280] 137 F. Supp. 871, 875-6, aff. [56-2 USTC ¶9995] 237 F. 2d 721; Lowe v. United States (D. C. Mont. 1963) [63-2 USTC ¶9778] 223 F. Supp. 948, 949.
9 Joyce v. Gentsch (C. A. Ohio, 1944) [44-1 USTC ¶9277] 141 F. 2d 891, 896-7; Bank of New York v. United States (C. A. N. J. 1948) [48-2 USTC ¶10,636] 170 F. 2d 20, 24; Bennett v. United States (C. A. Ill. 1956) [56-1 USTC ¶11,600] 231 F. 2d 465, 467; Cooney v. United States (D. C. N. J. 1963) [63-2 USTC ¶12,149] 218 F. Supp. 896, 898; Hamil v. Fahs (D. C. Fla. 1955) [55-1 USTC ¶11,546] 129 F. Supp. 837, 841-2; Steiden Stores v. Glenn (D. C. Ky. 1950) [50-2 USTC ¶9423] 94 F. Supp. 712, 721.
In a note, Morris White Fashions, Inc. v. United States (D. C. N. Y. 1959) 176 F. Supp. 760, 766, lists Girard v. Gill (C. C. A. N. C. 1958) [59-1 USTC ¶9144] 261 F. 2d 695, 698-700, as indicative of a leaning in this direction by this Circuit.
See, also, Finality of Administrative Settlement in Tax Cases, 57 Harv. L. Rev. 912 (1944).
10 In Morris White Fashions, Inc. v. United States (D. C. N. Y. 1959) [60-1 USTC ¶9146] 176 F. Supp. 760, 765, the Court, after an exhaustive review of the conflicting authorities, thus stated the reasoning behind the strict rule:
"The key factor ignored in the Guggenheim and Cain v. United States decisions, supra, is that the defense of equitable recoupment may be pleaded by the Government as a set-off to plaintiff's claim for refund, even though the statute of limitations has run against the Government. Such a defense is never barred by the statute of limitations, so long as the main action is timely."
See, also, Joyce v. Gentsch (C. C. A. Ohio 1944) [44-1 USTC ¶9277] 141 F. 2d 891, 895-6.
11 That the right of recoupment is strictly limited to the actual parties to the action, see Smith v. United States (C. C. A. Md. 1966) [67-1 USTC ¶9161] 373 F. 2d 419, 421.
12 Walker v. Alamo Foods Co. (C. A. Texas, 1927) [1 USTC ¶207] 16 F. 2d 694, cert. den. 274 U. S. 741, 47 S. Ct. 587, 71 L. Ed. 1320.
13 The difference between this item (i.e., $1,799,466.63) and that stated in the second injunction suit (i.e., $1,508,033.10) was apparently represented by additional interest and penalties accruing subsequent to the date referred to in the injunction suit.
14 The District Court held that Treas. Reg. §301.7701-2(h) is invalid in its entirety. We hold it to be invalid only to the extent stated in this opinion.
The taxpayer failed to fulfill his obligations under an agreement collateral to an executed offer in compromise --where the agreement called for additional consideration to be based on graduated percentages of annual income --by transferring income-producing property held at the time of the agreement without consideration. Contract rules under Tennessee law permit the implication of terms in a contract. Were the promise not to transfer income-producing property held at the time of the agreement not to be implied, the taxpayer could have effectively destroyed the value of the collateral agreement. However, the implied promise did not apply to income-producing property acquired after execution of the collateral agreement. 69-1 USTC ¶9407]R. C. Hoskins v. United States of America U. S. District Court, East. Dist. Tenn., No. Div., Civil Action No. 6464, 299 FSupp 1229, 4/16/69
[Code Sec. 7122]
Compromises: Collateral agreements: Breach: Contracts: State law: Implied promises.--The taxpayer failed to fulfill his obligations under an agreement collateral to an executed offer in compromise--where the agreement called for additional consideration to be based on graduated percentages of annual income--by transferring income-producing property held at the time of the agreement without consideration. Contract rules under Tennessee law permit the implication of terms in a contract. Were the promise not to transfer income-producing property held at the time of the agreement not to be implied, the taxpayer could have effectively destroyed the value of the collateral agreement. However, the implied promise did not apply to income-producing property acquired after execution of the collateral agreement.
Memorandum
TAYLOR, District Judge:
Plaintiff seeks refund of sums paid the Internal Revenue Service under assessments which the Government claims were due under an agreement to compromise a tax liability. Jurisdiction is derived from Title 28 U. S. C. 1346(a)(1).
In 1945 and 1946 plaintiff, R. C. Hoskins, failed to pay the proper amount of taxes. In 1955 he entered an agreement with the Internal Revenue Service whereby he admitted he was liable for taxes and penalties in excess of $200,000.00. The agreement provided that his businesses would be operated under the supervision of a Government agent. The contract listed his business assets, then provided at page two that before plaintiff could sell and transfer any business assets he would have to get permission of the Nashville Director of Internal Revenue and pay at least part of the proceeds of sale toward satisfaction of his tax debt.
During the period of Government supervision the businesses lost money. As a consequence on November 2, 1966 Hoskins and the Government agreed to compromise plaintiff's remaining tax liability of some $183,000.00. The first section of the two part agreement was entitled "offer in compromise" and provided that plaintiff should pay $75,000.00 in six annual installments. Attached to the offer in compromise was a statement of plaintiff's net worth and a list of all his business and personal property. This statement showed that the fair market value of his equity in all property held at that time was $81,973.42 (see affidavit and brief filed by plaintiff's counsel on February 24, 1969).
The second section of the contract, called the collateral agreement, provided in part as follows:
"The purpose of this collateral agreement . . . is to provide additional consideration for acceptance of the above-described offer in compromise. It is understood and agreed:
"That in addition to the payment of the aforesaid sum of $75,000 the taxpayer will pay out of annual income for the years 12-31-57 to 12-31-64, inclusive:
"(a) Nothing with respect to the first $5,000 of annual income.
"(b) 20% of annual income in excess of $5,000 and not in excess of $7,000.
"(c) 30% of annual income in excess of $7,000 and not in excess of $10,000.
"(d) 50% of annual income in excess of $10,000.
"That the term 'annual income' as used herein means adjusted gross income as defined in section 62 of the Internal Revenue Code of 1954, (except that in computing such 'annual income,' deductions for depreciation, depletion, and losses from sales or exchange of property shall not be allowed) plus all nontaxable earnings, profits, bequests, devises, or inheritances) minus (a) the Federal income tax due for the year in question and paid, and (b) the payments made on the offer in compromise during the year in question."
There is no expressed limitation on plaintiff's rights to dispose of his property in the contract. Although plaintiff was married to Katherine Hoskins before any negotiations for compromise began, she did not sign the contract because the marriage date in 1949 was after Mr. Hoskins had incurred the tax liability.
In full performance of his obligation under the offer in compromise Hoskins paid a total of $87,000.00 including interest over a period of seven years. The question in this controversy is whether he fulfilled his obligations under the collateral agreement.
In conjunction with his wife and two other persons, Hoskins in 1958 incorporated and capitalized the Acme Drug Company. Plaintiff contributed $2,600.00 for 26% of the shares and Mrs. Hoskins purchased 24%. Plaintiff testified that he purchased his share of the enterprise from that portion of his income which was left to his use under the collateral agreement. Three years later, on December 31, 1961, Hoskins made a gift to his wife of the 26% interest which he held in Acme and paid the gift tax thereon.
In 1962 Hoskins incorporated Hoskins Drug Store No. 1, in which he owned a 75% interest, and Norris Drug Store, in which he owned 100% of the shares. In December of that year he transferred without any consideration all his interests in the two businesses to Mrs. Hoskins and paid the appropriate gift tax.
Hoskins testified that he turned the stores over to his wife as he did not have time to oversee their operations, because of his state of health, and upon the advice of his accountant as a recommended estate planning device. Katherine Hoskins exercised control over the stores after the transfer and exerted substantial efforts in their operation. During the time remaining under the collateral agreement all three stores made substantial earnings.
After the transfers plaintiff reported the income from the three businesses as income of Katherine Hoskins but did not include for the years 1962-64 any earnings from them in his statements of gross income on which were figured the amounts due under the collateral agreement. The Government contended that the part of the earnings from those stores which is proportional to plaintiff's former ownership interest should be charged to his gross income for purposes of the contract. It accordingly assessed against him the following amounts:
1962 .... $ 4,886.34
1963 .... 7,781.89
1964 .... 16,976.23
Plaintiff paid those sums and proceeded under the refund procedure to contest his liability.
All of the facts in this case have been stipulated or testified to without contradiction. After introduction of all the testimony and after both parties had moved for a directed verdict, it appeared that there was no question of fact for the jury. The liabilities of the respective parties depend upon the construction of the contract in light of all the circumstances, which is a question for the Court rather than for a jury. Petty v. Sloan, 197 Tenn. 630; Hibernia Bank & Trust Co. v. Boyd, 164 Tenn. 376.
The Government insists that the collateral agreement impliedly prohibited Hoskins from transferring his income-producing property without consideration because otherwise the purpose of the agreement could readily be thwarted.
Plaintiff argues that the contract is a public contract in which nothing may pass by implication and in support of his argument relies on Volunteer Electric Cooperative v. TVA, 139 F. Supp. 22 (E. D. Tenn., S. D., 1954). Further, plaintiff insists that Hoskins' uncontradicted testimony establishes that he did not intend such an implication when he signed the agreement twelve years ago, and that an implied promise may only be found when consistent with the intent of the parties. See, E. O. Bailey & Co. v. Union Planters Title Guaranty Co., 33 Tenn. App. 439. Plaintiff relies on the rule that the inclusion of some matters of a class in a contract means the exclusion of all other matters in the same class. Aetna Life Ins. Co. v. Bidwell, 192 Tenn. 627.
The parties agree that the collateral agreement is to be construed as an ordinary Tennessee contract without reference to the Internal Revenue Code. See United States v. Lane [62-1 USTC ¶9467], 303 F. 2d 1 (C. A. 5, 1962). Because this case presents a new question, an extensive discussion of the authorities is necessary.
A contract in compromise of a tax liability is not such a contract for public services as was involved in Volunteer Electric Cooperative v. TVA, supra, which held that nothing can pass by implication. Rather, it has been held that a compromise agreement with relation to interest due on a disputed tax liability was subject to the implied condition that if the ultimate liability for the principal was not subsequently found, the Government must return the interest agreed upon in the compromise. Phelps v. United States [39-2 USTC 9583], 105 F. 2d 904 (C. A. 2, 1939); Big Diamond Mills Co. v. United States [2 USTC ¶791], 51 F. 2d 721 (C. A. 8, 1931).
The contract rules followed in Tennessee permit the implication of terms in a contract. Dunlap Lumber Co. v. Nashville, C. & St. L. Ry. Co., 129 Tenn. 163. The rule was stated in Weatherly v. American Agricultural Chemical Co., 16 Tenn. App. 613, that a covenant may be implied when necessary to give effect to the purpose of the contract as a whole. Our Sixth Circuit has applied this rule in a case arising in Tennessee that, "when the whole contract is 'instinct with an obligation', an agreement by a party to perform may be implied." Big Cola Corporation v. World Bottling Co., 134 F. 2d 718, 721.
The most recent word of the Sixth Circuit on the subject is contained in the case of United States ex rel. TVA v. Hughes, April 9, 1969, as follows:
". . . Obviously, the provision requiring removal of existing structures by necessary implication prohibits the erection later of identical or similar structures." Slip Opinion, p. 4.
No case has been cited or discovered by the Court which determines whether an obligation not to give away income-producing property must be implied when, as part of consideration for the compromise of a tax liability, the taxpayer agrees to pay portions of his income for subsequent years. However, closely analogous are those cases in which is implied a covenant to produce income when the consideration for a grant of property lies wholly in the payment of sums of money based on the earnings of the property transferred. Mechanical Ice Tray Corp. v. General Motors Corp., 144 F. 2d 720 (C. A. 2, 1944), and cases cited therein; Parev Products Co. v. I. Rokeach & Sons, 124 F. 2d 147 (C. A. 2, 1941); Crossland v. Kentucky Blue Grass Seed Growers' Coop. Ass'n, 103 F. 2d 665 (C. A. 6, 1939) (contract for employment of a sales agent); Kentucky Rock Asphalt Co. v. Milliner, 234 Ky. 217, 27 S. W. 2d 937 (lease of mineral rights).
Considering all the circumstances and the language of the collateral agreement and offer in compromise, the Court must construe the contract to require plaintiff not to dispose of his business property without consideration. Otherwise, plaintiff could destroy the value of the agreement by giving away all his sources of income. To the offer in compromise was attached a list of plaintiff's business and personal assets which included both the Hoskins Drug Store No. 1 and the Norris store. That it was intended and expected that the property left in Hoskins' hands would produce either income or liquidation proceeds for the Government is the only logical construction of the collateral agreement under the circumstances and when read with the offer in compromise. The Government could have taken all plaintiff's property in satisfaction of the tax liability, but the Government chose to allow plaintiff to retain it if he would pay $75,000.00 and portions of his income during the next seven years. The reason for accepting the offer (including the collateral agreement) was stated in the offer in compromise to be that selling the assets would not yield the amount tendered in settlement.
Hoskins Drug Store No. 1 and Norris Drug were owned by plaintiff at the time he entered the compromise and were listed in the schedule attached to the offer. Those properties were clearly contemplated to be the source of further consideration for the Government. However, the Acme store stands on a different footing. The Internal Revenue office left portions of plaintiff's income for his own use. At the time he paid his part of Acme's original capital in 1958, he was paying all amounts due under the agreements. Hoskins testified that he purchased the $2,600.00 interest from those sums left to him. Under the contract plaintiff could dispose in any way of that income not due the Government and that right carries with it the right to give away the property acquired from savings that were exempt under the compromise agreement.
In summary, the Government in computing Hoskins income under the collateral agreement may treat as belonging to plaintiff the income proportionate to his former interest in Hoskins Drug Store No. 1 and Norris Drug, but may not include any earnings of Acme after plaintiff gave the stock to Katherine Hoskins. The parties will compute the amount of the refund to plaintiff in conformity with the principles declared herein.
Brief mention should be made of plaintiff's contention that Hoskins Drug Store No. 1 and Norris Drug Store should be charged with reasonable salaries for the work done by Mrs. Hoskins during the years involved in the tax dispute. This is a matter that addresses itself to the Commissioner of Internal Revenue rather than the Court. For purposes of this suit, the Court is bound by what was done rather than what could have been done.
An IRS Appeals officer did not abuse her discretion by sustaining the default of a married taxpayer's offer in compromise (OIC) and determining to proceed with collection. The taxpayer failed to comply with the terms of the OIC, which required him to timely pay all required taxes for five years following its acceptance. Further, the taxpayer failed to timely respond to an IRS letter notifying him that failure to pay the balances due within 30 days would result in a default of the OIC. Finally, the taxpayer did not propose any collection alternatives during his Collection Due Process (CDP) hearing. Michael Poindexter v. Commissioner.
Dkt. No. 14979-05L , TC Memo. 2008-99, 95 TCM 1378, April 15, 2008.
An IRS Appeals officer did not abuse her discretion by sustaining the default of a married taxpayer's offer in compromise (OIC) and determining to proceed with collection. The terms of the OIC required the taxpayer to timely pay all required taxes for five years following its acceptance. However, the taxpayer incurred delinquent tax liabilities for two years during the compliance period and failed to timely respond to an IRS letter notifying him that failure to pay the balances due within 30 days would result in a default of the OIC. Further, the taxpayer did not propose any collection alternatives during his Collection Due Process (CDP) hearing. Finally, the Appeals officer was not required to adhere to certain instructions contained in the Internal Revenue Manual because the instructions were promulgated several years after the OIC default.
MEMORANDUM FINDINGS OF FACT AND OPINION
FOLEY, Judge: The issue for decision is whether respondent abused his discretion in sustaining the default of petitioner's offer-in-compromise and determining to proceed with collection.
FINDINGS OF FACT
On November 21, 1997, respondent accepted petitioner and his wife Nancy Poindexter's joint offer-in-compromise (OIC) relating to tax years 1990, 1991, 1992, 1993, 1994, and 1995 (original tax liability). The OIC required petitioner to file timely all Federal income tax returns and pay timely all Federal income taxes due for the 5 years following acceptance of the OIC or until the OIC was paid in full, whichever was longer. Petitioner failed to timely pay his 2000 and 2001 Federal income taxes. On October 22, 2003, respondent sent petitioner a letter advising him of the outstanding balances relating to 2000 and 2001 and notifying him that failure to pay the balances within 30 days would result in a default on the OIC and reinstatement of the original tax liability. Petitioner, in a letter dated November 22, 2003, requested an additional 6 months to pay the outstanding balances relating to 2000 and 2001.
On December 19, 2003, respondent entered petitioner's default on the OIC in the system. On September 9, 2004, respondent mailed petitioner a Notice of Intent to Levy and Your Right to a Hearing relating to 1993, 1994, and 1995. On September 23, 2004, petitioner timely filed a Form 12153, Request for a Collection Due Process Hearing. On December 21, 2004, more than a year after the OIC default, petitioner paid the outstanding balances relating to 2000 and 2001.
On or about April 26, 2005, a collection due process hearing (CDP hearing) was held, during which petitioner contended that collection was improper because the OIC should not have been defaulted. On July 14, 2005, respondent issued petitioner a Notice of Determination Concerning Collection Action(s) Under Section 6320 and/or 6330 finding that default of the OIC was procedurally and legally correct, and that it was proper to proceed with the levy.
Petitioner filed his petition with the Court on August 12, 2005, while residing in Colorado.
OPINION
Pursuant to Robinette v. Commissioner [Dec. 55,698] 123 T.C. 85, 93-94 (2004), revd. on other grounds [2006-1 USTC ¶50,213] 439 F.3d 455 (8th Cir. 2006), the underlying tax liabilities are not at issue and we review respondent's determination for an abuse of discretion. To prevail on an abuse of discretion claim, the taxpayer must show that the Commissioner's actions were arbitrary, capricious, or without sound basis in law or fact. See Giamelli v. Commissioner [Dec. 57,155] 129 T.C. 107, 111 (2007); Woodral v. Commissioner [Dec. 53,206] 112 T.C. 19, 23 (1999). Section 6330(c)(3) 1 provides that in making a determination, the Appeals officer must verify that the requirements of applicable law and administrative procedure have been met, consider the issues raised by the taxpayer, and consider whether the proposed collection action balances the need for the efficient collection of taxes with the taxpayer's legitimate concern that any collection be no more intrusive than necessary. Petitioner contends that the Appeals officer abused her discretion by sustaining the default of the OIC. We disagree.
The OIC, which was accepted on November 21, 1997, required petitioner to pay timely all Federal income taxes due for the 5 years following acceptance. Petitioner failed to pay his 2000 and 2001 taxes in a timely manner and did not respond in a timely manner to respondent's letter advising him of the impending OIC default. In addition, petitioner did not propose collection alternatives. Under these circumstances, the Appeals officer's actions were appropriate. We also note that petitioner asserts that the Appeals officer abused her discretion by failing to adhere to certain instructions that petitioner contends were contained in the Internal Revenue Manual. The instructions upon which petitioner relies, however, were promulgated several years after the OIC default. Thus, we reject petitioner's contentions and sustain respondent's determination.
Contentions we have not addressed are irrelevant, moot, or meritless.
Decision will be entered for respondent.
1 Unless otherwise indicated, all section references are to the Internal Revenue Code of 1986, as amended.
The IRS Appeals office did not abuse its discretion by sustaining a levy against a married couple whose repeated violations of the terms of their offer-in-compromise (OIC) resulted in the offer's termination. The couple's failure to keep their tax obligations current during the compliance period was a significant and material breach of the OIC. Moreover, the IRS's failure to send copies of correspondence to the couple's representative did not provide a basis to reject the collection action because the notices were sent to the couple's last know address.
John E. and Sandra L. West v. Commissioner.
Dkt. No. 5376-06L , TC Memo. 2008-30, 95 TCM 1116, February 13, 2008.
[Code Secs. 6330 and 7122]
The IRS Appeals office did not abuse its discretion by sustaining a levy against a married couple whose repeated violations of the terms of their offer-in-compromise (OIC) resulted in the offer's termination. The couple's argument that their failure to timely file tax returns and to pay taxes during the OIC's compliance period was not a material breach of the OIC and, therefore, did not justify the termination of the OIC was rejected. The couple's failure to keep their tax obligations current during the compliance period was a significant and material breach of the OIC. Moreover, the IRS sent the couple a number of notices alerting them to the possibility of a default and giving them an opportunity to correct the problem. However, the couple had moved to a new address and failed to notify the IRS. Further, the IRS's failure to send copies of correspondence to the couple's representative did not provide a basis to reject the collection action. Notices are generally valid as long as they are properly mailed to the taxpayer and the notices were sent to the couple's last know address.
MEMORANDUM OPINION
SWIFT, Judge: Under section 6330, petitioners challenge respondent's notice of determination sustaining respondent's levy notice.
Unless otherwise indicated, all section references are to the Internal Revenue Code, and all Rule references are to the Tax Court Rules of Practice and Procedure.
The primary issue for decision is whether respondent's Appeals Office abused its discretion in sustaining a notice of intent to levy relating to petitioners' outstanding 1993 Federal income taxes.
Background
The facts of this case have been submitted fully stipulated under Rule 122 and are so found.
At the time the petition was filed, petitioners resided in Orange County, California.
Petitioners have a history of failing to timely pay estimated Federal income taxes due and failing to timely file their Federal income tax returns.
On April 24, 1998, petitioners and respondent agreed on an offer-in-compromise (OIC) on the grounds of doubt as to collectibility relating to approximately $148,350 in petitioners' unpaid 1993 Federal income taxes.1 Among other things, respondent's acceptance of petitioners' OIC was contingent on petitioners': (1) Paying, within 60 days of respondent's acceptance of the OIC, to respondent $10,000 (OIC amount); (2) timely filing Federal income tax returns that became due during the 5-year period subsequent to their entering into the OIC or until the OIC amount was paid in full, whichever was longer (5-year compliance period); and (3) timely paying the taxes reported due on their Federal income tax returns filed during the 5-year compliance period. Specifically, paragraph (d) on petitioners' Form 656, Offer in Compromise, stated: "I/We will comply with all provisions of the Internal Revenue Code relating to filing my/our returns and paying my/our required taxes for 5 years from the date the IRS accepts the offer".
Under the express terms of the OIC, if petitioners failed to meet any of the express conditions of the OIC, respondent had the right to revoke the OIC and to attempt to collect from petitioners the full amount of petitioners' unpaid 1993 Federal income taxes.
On May 7, 1998, petitioners paid to respondent the $10,000 OIC amount. Petitioners' 5-year compliance period thus began when respondent accepted the OIC on April 24, 1998.
During the 5-year compliance period, petitioners, among other things, failed to pay estimated taxes, failed to timely file their tax returns, and/or failed to timely pay taxes reported due on their filed Federal income tax returns, as follows:
Year Petitioners Failed To
______________ ______________________________________________________
1998 Timely file their return
Timely pay the tax liability stated on the return
1999 Timely pay estimated taxes
Timely pay the tax liability stated on the return
2000 Timely pay the tax liability stated on the return
2001 Timely file their return
Timely pay the tax liability stated on the return
2002 Timely pay estimated taxes
Timely pay the tax liability stated on the return
In April 2000, petitioners moved to a new address, but petitioners did not notify respondent of their change of address. Before this move, petitioners filed with respondent IRS Form 2848, Power of Attorney and Declaration of Representative, in which petitioners directed respondent to send to petitioners' representative copies of any correspondence sent to petitioners.
Petitioners' 2000, 2001, and 2002 Federal income tax returns filed with respondent continued to show petitioners' old address and did not show the new address to which petitioners moved in April 2000. Petitioners did not otherwise notify respondent of their new address until sometime after March 2004.
From November 2002 through January 2004, respondent sent to petitioners (at the old address shown on petitioners' 2000, 2001, and 2002 Federal income tax returns; namely, 23382 Via Chirpia, Mission Viejo, CA) at least seven notices relating to various late filing and late payment additions to tax and penalties that respondent had assessed against petitioners relating to petitioners' 2000, 2001, and 2002 Federal income tax returns and warning petitioners of the potential for default on the OIC that had been entered into if petitioners did not pay the various additions to tax and penalties that had been assessed against them.
Specifically, in November 2003, respondent mailed to petitioners at their Via Chirpia, Mission Viejo, address a notice alerting petitioners that the OIC was subject to likely termination if petitioners' outstanding additions to tax and penalties for 2001 and 2002 were not paid.
In January 2004, respondent mailed to petitioners (at the Via Chirpia, Mission Viejo, address) a notice of default on the OIC, informing petitioners that the OIC was terminated.
On June 18, 2005, respondent mailed to petitioners a notice of intent to levy and a notice of petitioners' right to a hearing relating to the approximate $148,350 balance of petitioners' unpaid 1993 Federal income taxes.
On July 21, 2005, petitioners filed a Form 12153, Request for a Collection Due Process Hearing, with regard to respondent's notice of intent to levy, in which petitioners requested that respondent reinstate the OIC.
On January 6, 2006, an Appeals Office hearing was held by telephone conference among respondent's Appeals Office, petitioners, and petitioners' attorney.
On February 8, 2006, respondent's Appeals Office issued to petitioners a notice of determination sustaining respondent's levy notice.
In the notice of determination, respondent's Appeals Office indicated that because petitioners had defaulted on the OIC and because petitioners had not provided any financial or other information applicable to other collection alternatives, respondent's levy notice was sustained.
Discussion
Because the underlying tax liability is not in dispute, we review the actions of respondent's Appeals Office for abuse of discretion. See Goza v. Commissioner [Dec. 53,803] 114 T.C. 176, 182 (2000). Abuse of discretion occurs where the actions of the Commissioner's Appeals Office are arbitrary or capricious, lack sound basis in law, or are not justifiable in light of the facts and circumstances. Woodral v. Commissioner [Dec. 53,206] 112 T.C. 19, 23 (1999).
Pursuant to section 6330(c)(3), respondent's Appeals Office must verify that the requirements of applicable law and administrative procedure have been met, consider issues raised by petitioners, and consider whether the proposed collection action balances the need for the efficient collection of taxes with petitioners' legitimate concern that respondent's collection be no more intrusive than necessary.
In reviewing whether respondent's Appeals Office abused its discretion in sustaining respondent's notice of intent to levy, our analysis is governed by "general principles of contract law." See Dutton v. Commissioner [Dec. 55,542] 122 T.C. 133, 138 (2004).
Under the "material breach of contract" analysis applied in Robinette v. Commissioner [Dec. 55,698] 123 T.C. 85, 108 (2004), revd. [2006-1 USTC ¶50,213] 439 F.3d 455 (8th Cir. 2006), "If * * * [petitioners'] breach is material and sufficiently serious, * * * [respondent's] obligation to perform may be discharged. * * * Not so, however, if * * * [petitioners'] breach is comparatively minor."
On appeal, the Court of Appeals for the Eighth Circuit noted that the failure to comply with an express condition of an OIC is itself grounds for the Commissioner to revoke the OIC, regardless of materiality. Robinette v. Commissioner, 439 F.3d at 462.
Generally, for purposes of section 6330, a notice mailed to the taxpayer's "last known address" is proper and sufficient. Tadros v. Commissioner [85-2 USTC ¶9448] 763 F.2d 89, 91 (2d Cir. 1985); Buffano v. Commissioner [Dec. 56,833(M)] T.C. Memo. 2007-32. In determining petitioners' last known address, unless otherwise notified respondent may rely upon petitioners' most recently filed return. See Abeles v. Commissioner [Dec. 45,203] 91 T.C. 1019, 1025 (1988); Brown v. Commissioner [Dec. 38,765] 78 T.C. 215, 219 (1982).
Petitioners argue that petitioners' failure timely to file tax returns, to pay estimated taxes, and to pay the various additions to tax and penalties assessed against them during the 5-year compliance period did not constitute a material breach of the OIC and did not justify respondent's revocation of the OIC and therefore that respondent's Appeals Office abused its discretion in sustaining respondent's notice of intent to levy.
We disagree. The numerous instances of petitioners' failure to keep their tax obligations current during the 5-year compliance period constitute, under any standard, a significant and material breach of the requirements of the OIC.
We need not address different standards that, in other cases, might be considered and that might be applicable. See Ng v. Commissioner [Dec. 56,809(M)] T.C. Memo. 2007-8.
Respondent mailed to petitioners a number of notices alerting petitioners to the potential for default on the OIC and giving petitioners opportunity to bring current their tax and other payments due.
Although petitioners moved to a new address, petitioners failed to apprise respondent of their new address, and respondent cannot now be faulted for mailing the notices to the address shown on petitioners' tax returns. Petitioners, not respondent, must bear the consequences of petitioners' failure to properly file their tax returns with, or otherwise apprise respondent of, petitioners' new address.
Petitioners argue that respondent should have, but did not, mail to petitioners' representative a copy of the various dunning letters. Failure of respondent to mail to petitioners' representative a copy of a notice that was mailed to petitioners provides no basis to reject respondent's collection action in this case. See Amsler v. Commissioner [Dec. 48,930(M)] T.C. Memo. 1993-114 (notice generally will be valid even when a copy is not mailed to a taxpayer's representative so long as properly mailed to the taxpayer); Foster v. Commissioner [Dec. 38,841(M)] T.C. Memo. 1982-115 (citing Houghton v. Commissioner [Dec. 28,566] 48 T.C. 656, 661 (1967)).
Because of petitioners' repeated violations of the conditions of the OIC, respondent's Appeals Office did not abuse its discretion in sustaining the notice of intent to levy. Other arguments petitioners make herein have been considered and rejected.
To reflect the foregoing,
Decision will be entered for respondent.
1 Because of a credit offset, petitioners' outstanding Federal income tax liability for 1995 (including interest, penalties, additions to tax, and interest) has been paid in full, and any issue herein relating to 1995 is now moot.
The IRS did not abuse its discretion in determining that an individual had defaulted on an offer in compromise (OIC) and proceeding with collection of his unpaid tax liability. The taxpayer materially breached the terms of the OIC by incurring a delinquent tax liability for a subsequent tax year. The taxpayer failed to comply with the express terms of the agreement by failing to pay his tax liability for well over a year after it was due, thereby depriving the government of a material financial benefit. The record did not indicate that requiring the taxpayer to strictly comply with the terms of the agreement would result in a disproportionate forfeiture or penalty. Therefore, because the condition that the taxpayer timely pay his taxes was a material part of the OIC agreement, it could not be excused.
Will K. Ng v. CommissionerDkt. No. 3883-05L , TC Memo. 2007-8, January 16, 2007.
[Code Secs. 6330 and 7122]
The IRS did not abuse its discretion in determining that an individual had defaulted on an offer in compromise (OIC) and proceeding with collection of his unpaid tax liability. The taxpayer failed to comply with the express terms of the agreement by failing to pay his tax liability for well over a year after it was due, thereby depriving the government of a material financial benefit. In addition, requiring the taxpayer to strictly comply with the terms of the agreement would not result in a disproportionate forfeiture or penalty. Therefore, because the condition that the taxpayer timely pay his taxes was a material part of the OIC agreement, it could not be excused. --CCH.
MEMORANDUM FINDINGS OF FACT AND OPINION
VASQUEZ, Judge: Pursuant to section 6330(d),1 petitioner seeks review of respondent's determination regarding collection of his 1993, 1994, and 1995 income tax liabilities. The issue for decision is whether respondent's determination to proceed with collection was an abuse of discretion.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.2 The stipulation of facts and the attached exhibits are incorporated herein by this reference. At the time he filed his petition, petitioner lived in San Francisco, California. As of February 29, 2000, petitioner owed income taxes and additions to tax for 1993, 1994, and 1995 of $113,417.14, $24,228.67, and $18,789.03, respectively. On January 18, 2000, petitioner filed a Form 656, Offer in Compromise (OIC), with respondent. On his OIC, petitioner proposed to settle his 1993, 1994, and 1995 tax liabilities with a cash payment of $83,779. Petitioner submitted his OIC on the grounds of doubt as to collectibility. The OIC stated (in relevant part):
Item 8 - By submitting this offer, I/we understand and agree to the following conditions:
* * * * * * *
(d) I/we will comply with all provisions of the Internal Revenue Code relating to filing my/our returns and paying my/our required taxes for 5 years or until the offered amount is paid in full, whichever is longer.
* * * * * * *
(j) I/we understand that I/we remain responsible for the full amount of the tax liability, unless and until the IRS accepts the offer in writing and I/we have met all the terms and conditions of the offer. The IRS will not remove the original amount of the tax liability from its records until I/we have met all the terms of the offer.
* * * * * * *
(o) If I/we fail to meet any of the terms and conditions of the offer and the offer defaults, then the IRS may:
--immediately file suit to collect the entire unpaid balance of the offer
--immediately file suit to collect an amount equal to the original amount of the tax liability as liquidating damages, minus any payment already received under the terms of this offer
--disregard the amount of the offer and apply all amounts already paid under the offer against the original amount of the tax liability
--file suit or levy to collect the original amount of the tax liability, without further notice of any kind.
Respondent accepted petitioner's OIC by a letter dated February 25, 2000. That letter stated, in relevant part:
"Please note that the conditions of the offer require you to file and pay all required taxes for five tax years or the period of time payments are being made on the offer, whichever is longer." The letter also reiterated the language above from Item 8, paragraph (o) of the OIC.
Petitioner timely paid the offer amount of $83,779. Petitioner also timely filed returns and paid the tax owed for 2001, 2003, and 2004. The dispute in this case focuses on petitioner's failure to timely pay his 2002 tax.
After respondent granted petitioner's timely requests for extensions, petitioner timely filed his 2002 Form 1040, U.S. Individual Income Tax Return, on October 15, 2003. That return showed a tax liability of $86,496, payments of $9,849, and a remaining liability of $77,540.3 With his 2002 return, petitioner submitted a $15,000 payment and a Form 9465, Installment Agreement Request. On the Installment Agreement Request, petitioner proposed to make payments of $20,000 on the 28th of each month.
Respondent neither accepted nor rejected petitioner's Installment Agreement Request. At trial, respondent did not contest petitioner's assertion that respondent never acted on the Installment Agreement Request. Moreover, it is not clear from the record whether any employee of respondent ever considered petitioner's Installment Agreement Request.
On November 14, 2003, respondent sent petitioner a letter stating that, as part of his OIC, petitioner agreed to timely file returns and pay his income taxes for 5 years following the date respondent accepted the offer. The letter warned petitioner that he needed to pay his remaining 2002 tax liability of $71,984.36 within 30 days "to prevent termination of * * * [his] Offer In Compromise." The letter stated that if petitioner did not comply, respondent would terminate the OIC and would reinstate the original amount of the compromised liability, reduced for the payment petitioner had already made.
That letter apparently never reached petitioner and was returned to respondent by the Postal Service. Respondent sent a nearly identical letter containing the same warnings to petitioner at his new address on December 10, 2003. By that time, because of the accrual of interest and penalties, petitioner's 2002 liability had increased to $72,683.54. Petitioner does not contend that he did not receive the December 10 letter. Petitioner did not pay his 2002 tax liability within 30 days of the December 10 letter or otherwise reply to the letter.
Petitioner received a letter from respondent dated February 11, 2004. In that letter, respondent declared petitioner in default of the OIC and stated that "arrangements to compromise the liability are terminated."
Respondent applied petitioner's payment on the OIC to his previously compromised liabilities. This left balances owing for 1993, 1994, and 1995 of $29,347.57, $33,763.22 and $30,195.96, respectively.
On March 24, 2004, petitioner made payments totaling $20,000 toward his 2002 tax liability.
In a letter dated July 7, 2004, respondent sent petitioner a Final Notice --Notice of Intent to Levy and Notice of Your Right to a Hearing (notice of intent to levy) for the outstanding 1994, 1995, and 2002 liabilities. The notice of intent to levy showed a total of $121,218.36 in unpaid taxes, interest, and penalties.
On July 14, 2004, petitioner paid respondent a total of $56,731.05, satisfying his 2002 tax liability.
On July 15, 2004, respondent sent petitioner a Notice of Federal Tax Lien Filing and Your Right to a Hearing Under IRC 6320 (NFTL). On August 11, 2004, petitioner filed a Form 12153, Request for a Collection Due Process Hearing, with regard to the NFTL.
Appeals Officer Lawrence Dorr was assigned to petitioner's case. Petitioner's hearing consisted of an in-person meeting with Officer Dorr on January 19, 2005, and subsequent correspondence. During the hearing, petitioner raised the argument that although he had violated the literal terms of the OIC by failing to timely pay his 2002 income tax liability, his breach was not "material" and that respondent therefore should not have declared him in default on the OIC. Officer Dorr did not have petitioner's Installment Agreement Request from October 15, 2003, and Officer Dorr did not consider the Installment Agreement Request in reaching his determination regarding petitioner's outstanding tax liabilities. On February 23, 2005, respondent issued to petitioner two Notices of Determination Concerning Collection Action(s) Under Section 6320 and/or 6330 (notices of determination) regarding petitioner's outstanding 1993, 1994, 1995, and 2002 tax liabilities.4 In the notices of determination, respondent sustained the filing of the lien. In the Attachment to Determination Letter mailed with the notices of determination, respondent noted petitioner's argument that he had been improperly declared in default on the OIC and concluded that petitioner had been properly declared in default.
On February 28, 2005, petitioner timely petitioned this Court for review of respondent's determinations under section 6320 and/or 6330.
OPINION
I. Standard of Review
In the context of a section 6320 or 6330 hearing, a challenge to the Commissioner's determination that a taxpayer was properly deemed in default on an OIC is not a dispute of the underlying tax liability. See Robinette v. Commissioner [Dec. 55,698], 123 T.C. 85, 93-94 (2004), revd. on other grounds [2006-1 USTC ¶50,213] 439 F.3d 455 (8th Cir. 2006). Petitioner has not raised any other issue that amounts to a challenge of the underlying tax liability.
Where the validity of the underlying tax liability is not properly in dispute, we review the Commissioner's determination for an abuse of discretion. Sego v. Commissioner [Dec. 53,938], 114 T.C. 604, 610 (2000); Goza v. Commissioner [Dec. 53,803], 114 T.C. 176, 181 (2000). Accordingly, we review respondent's determination to proceed with collection of petitioner's 1993, 1994, and 1995 tax liabilities for an abuse of discretion. An abuse of discretion has occurred if the "Commissioner exercised * * * [his] discretion arbitrarily, capriciously, or without sound basis in fact or law." Woodral v. Commissioner [Dec. 53,206], 112 T.C. 19, 23 (1999).
II. Analysis Applied to Offers-in-Compromise
"An accepted offer in compromise is properly analyzed as a contract between the parties." Dutton v. Commissioner [Dec. 55,542], 122 T.C. 133, 138 (2004). When reviewing whether the Commissioner abused his discretion in declaring a taxpayer in default on an OIC, our analysis is governed by "general principles of contract law." Id.
III. Parties' Arguments
The parties have focused their disputes in this case on two contentious --and familiar --issues. Petitioner urges that, when analyzing whether respondent abused his discretion by finding that petitioner defaulted on his OIC, we apply the "material breach" analysis as applied in the majority opinion of this Court's decision in Robinette v. Commissioner, supra at 109-112. Applying that analysis, petitioner argues that late payment of his 2002 taxes was not material, and that respondent therefore abused his discretion by finding that petitioner defaulted on his OIC. Petitioner also urges that the Court consider his Installment Agreement Request and his testimony at trial, neither of which is part of the administrative record that respondent considered at the section 6330 hearing. Petitioner argues that, under this Court's decision in Robinette, the evidence is within the scope of this Court's review of a determination under section 6320 and/or 6330 for an abuse of discretion. On the basis of his testimony, respondent's internal procedures, and the Installment Agreement Request, petitioner urges that we should treat his Installment Agreement Request as having been granted. Had the Installment Agreement Request been granted, petitioner argues, late payment of his 2002 taxes would not have been a material breach of the OIC.
As to the contractual issue, respondent argues that we should apply the "doctrine of express conditions" analysis applied by the U.S. Court of Appeals for the Eighth Circuit in reversing this Court's decision. Robinette v. Commissioner [2006-1 USTC ¶50,213], 439 F.3d at 462-463. Respondent also argues that, even under a "material breach" analysis, respondent did not abuse his discretion by declaring petitioner in default on his OIC because petitioner's late payment of his 2002 taxes was a material breach. Finally, relying on the Court of Appeals' opinion in Robinette, respondent argues that we may not consider evidence beyond the administrative record when reviewing a determination under section 6320 and/or 6330 for an abuse of discretion.
IV. Analysis
A. Applicable Contract Law
1. Material Breach Analysis
Under the "material breach" analysis applied by the Tax Court in Robinette, "'If the plaintiff's breach is material and sufficiently serious, the defendant's obligation to perform may be discharged. * * * Not so, however, if the plaintiff's breach is comparatively minor.'" Robinette v. Commissioner [Dec. 55,698], 123 T.C. at 108 (quoting TXO Prod. Corp. v. Page Farms, Inc., 598 S.W.2d 791, 793 (Ark.1985)).
The Court went on to point out:
"In determining whether a failure to render or to offer performance is material, the following circumstances are significant:
(a) the extent to which the injured party will be deprived of the benefit which he reasonably expected;
(b) the extent to which the injured party can be adequately compensated for the part of that benefit of which he will be deprived;
(c) the extent to which the party failing to perform or to offer to perform will suffer forfeiture;
(d) the likelihood that the party failing to perform or to offer to perform will cure his failure, taking account of all the circumstances including any reasonable assurances; [and]
(e) the extent to which the behavior of the party failing to perform or to offer to perform comports with standards of good faith and fair dealing." [ Id. at 109, quoting 2 Restatement, Contracts 2d, sec. 241 (1981).]
Although the above circumstances may by themselves indicate the materiality or nonmateriality of a breach, the standard of materiality is necessarily somewhat imprecise and flexible, and should be applied in light of the facts of each case in such a way as to further the purpose of securing for each party his expectation of an exchange of performances. 2 Restatement, supra sec. 241 cmt. a.
2. Doctrine of Express Conditions
Under the "doctrine of express conditions" analysis endorsed by the Court of Appeals in Robinette, an express condition of a contract is subject to a requirement of strict performance. Robinette v. Commissioner [2006-1 USTC ¶50,213], 439 F.3d at 462 (citing 13 Williston on Contracts, sec. 38:6 (4th ed. 2000)). When an express condition fails to occur, the performance subject to that condition does not become due unless the nonoccurrence of the condition is excused. 2 Restatement, supra sec. 225(1). Under that doctrine, a failure to meet express conditions may be excused if they are immaterial to the exchange and if their enforcement would result in a disproportionate forfeiture. Robinette v. Commissioner [2006-1 USTC ¶50,213], 439 F.3d at 463 (citing 2 Restatement, supra sec. 229).
Under this analysis, the performance conditioned upon strict compliance with the terms of the OIC is the Commissioner's discharge of the full amount of the tax liability compromised.
3. Application
Considering all the relevant facts and circumstances, petitioner's significantly late payment of a substantial tax liability amounts to both a failure of an express condition of the OIC and a material breach of the OIC. Therefore, we need not decide which doctrine applies.
By the plain terms of the OIC, respondent was not obligated to discharge petitioner's unpaid 1993, 1994, and 1995 tax liabilities until petitioner "[complied] with all provisions of the Internal Revenue Code relating to filing [his] returns and paying [his] required taxes for 5 years or until the offered amount is paid in full, whichever is longer." The Internal Revenue Code required that petitioner pay his outstanding 2002 income tax liability of $77,540 by April 15, 2003. See secs. 6151(a), 6072(a). He failed to do so. Petitioner failed to pay the bulk of his 2002 tax liability for well over a year after it was due, eventually satisfying his tax debt with his final payment of $56,731.05 on July 14, 2004. Moreover, despite petitioner's failure to pay his 2002 taxes, respondent's letters of November 14 and December 10, 2003, warned petitioner of the potential for default and gave him an additional opportunity to pay his taxes without defaulting on the OIC. Petitioner again failed to pay his 2002 tax liability.
Under the circumstances, petitioner's failure to satisfy his 2002 tax liability amounted to a "material breach" of the OIC. By withholding a sizable sum of money from respondent for a substantial period, petitioner deprived respondent of a material financial benefit under the OIC. Also, at the time respondent declared petitioner in default on February 11, 2004, it appeared unlikely that petitioner would cure his failure. By that time, petitioner had failed to comply with the terms not only of the OIC but also of respondent's letter of December 10, 2003 (again requesting payment of petitioner's 2002 taxes), thereby declining an opportunity to "cure" his failure.
By failing to satisfy his 2002 tax liability for over a year, petitioner committed a material breach of the terms of the OIC. Nor is there any applicable "excuse of a condition". As explained supra, an express condition of a contract may be excused if a contracting party can show that (1) compliance with the condition would result in a disproportionate forfeiture or penalty, and (2) the condition was not a material part of the bargain. See 2 Restatement, supra sec. 229. The record before us does not indicate that strict compliance would have resulted in a disproportionate forfeiture or penalty to petitioner. Moreover, for the reasons discussed supra, we find that the condition that petitioner timely pay his 2002 taxes was a material part of the OIC.
B. Scope of Review
Consideration of petitioner's testimony or the Installment Agreement Request would not alter any of the conclusions above. At the time petitioner filed his Installment Agreement Request, the Commissioner's internal procedures provided that the Commissioner could grant installment agreement requests from a taxpayer in petitioner's situation without declaring the taxpayer in default. Internal Revenue Manual sec. 5.19.7.3.17.3 (effective October 1, 2001). While it may have been within respondent's discretion to overlook petitioner's noncompliance with the OIC and grant petitioner's Installment Agreement Request, we have long held that the Commissioner's internal procedures do not have the effect of law and that noncompliance with those procedures does not render an action of the Commissioner invalid. Vallone v. Commissioner [Dec. 43,824], 88 T.C. 794, 807-808 (1987).
Petitioner also argues that because he was never notified that his Installment Agreement Request was denied, we should treat the request as having been granted. We disagree. We note that petitioner failed to comply with the terms of his proposed Installment Agreement by not making the monthly payments he had offered. Such noncompliance hardly inspires the Court to find that petitioner's late payment of his 2002 taxes did not form adequate grounds upon which to find him in default of his OIC.
Indeed, consideration of petitioner's testimony would only bolster the conclusions that his breach was material and that there was no "excuse of conditions" because reinstatement of his original tax liability would not work a disproportionate forfeiture upon him. At trial, petitioner admitted that the terms of the OIC were explained to him by his tax advisers when he entered into the compromise. Petitioner also admitted that he realized a capital gain of $416,895 upon the sale of his home in December 2002. Even after purchasing a new home and remodeling it, petitioner admitted he had slightly over $100,000 in cash with which to satisfy his 2002 tax liability. Under such circumstances, petitioner's late payment of his 2002 taxes seems to be exactly the sort of "evasion of the spirit of the bargain, lack of diligence and slacking off, [and/or] willful rendering of imperfect performance" that typifies a failure of good faith performance and therefore indicates a material breach. See 2 Restatement, supra sec. 205 cmt. d. Accordingly, we need not decide herein whether we may consider evidence beyond the administrative record.
We conclude that respondent did not abuse his discretion in proceeding with collection of petitioner's unpaid 1993, 1994, and 1995 taxes.
To reflect the foregoing,
Decision will be entered for respondent.1 Unless otherwise indicated, all section references are to the Internal Revenue Code, and all Rule references are to the Tax Court Rules of Practice and Procedure.
2 The parties initially stipulated that petitioner's 1993 tax liability was satisfied by the payment petitioner submitted with his offer-in-compromise. In their briefs, the parties agree that this is incorrect. Pursuant to Rule 91(e), we do not treat that portion of the stipulation as a conclusive admission by either party.
3 The figure of $77,540 includes an estimated tax penalty of $893.
4 Petitioner's 2002 tax year is not at issue in this case.
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