Friday, December 31, 2010

Notice 2011-6, 2011-3 IRB, 12/30/2010, IRC Sec(s). Headnote: Reference(s): Full Text: Purpose This notice provides guidance regarding the implementation of new Treasury regulations governing tax return preparers. Section 1 of this notice provides guidance regarding the requirement to obtain a preparer tax identification number (PTIN) under section 1.6109-2 and identifies the forms that qualify as tax returns or claims for refund for purposes of those regulations. Section 2 of this notice provides interim rules applicable to certain PTIN holders during the implementation phase of the new regulations governing tax return preparers. Background The IRS made findings and recommendations in Publication 4832, “ Return Preparer Review,” which was published on January 4, 2010, concerning the results of an in-depth review of the tax return preparer industry. The IRS recommended increased oversight of tax return preparers through the issuance of regulations governing tax return preparers. The IRS published: (1) final regulations (75 FR 60309) addressing tax return preparer PTIN requirements on September 30, 2010; (2) final regulations (75 FR 60316) regarding the user fee to apply for or renew a PTIN on September 30, 2010; and (3) proposed regulations (REG-138637-07) addressing competency testing requirements, continuing education requirements, and extension of the ethics rules under 31 CFR Part 10 (reprinted in Treasury Department Circular 230 (Circular 230)) for tax return preparers on August 23, 2010. 1. Guidance under section 1.6109-2 .01 PTINs Obtained After September 28, 2010 Section 1.6109-2 provides that beginning after December 31, 2010, all tax return preparers must have a PTIN that was applied for and received at the time and in the manner as prescribed by the IRS. This notice confirms that tax return preparers who obtain a PTIN or a provisional PTIN and pay any applicable user fee after September 28, 2010, have applied for and received a PTIN in the manner prescribed by the IRS for purposes of the section 6109 regulations. .02 Individuals Who May Obtain a Ptin Section 1.6109-2(d) provides that for returns or claims for refund filed after December 31, 2010, the identifying number of a tax return preparer is the individual's PTIN or other number prescribed by the IRS. Additionally, after December 31, 2010, all individuals who are compensated for preparing, or assisting in the preparation of, all or substantially all of a tax return or claim for refund of tax must have a PTIN. Section 1.6109-2(d) also provides that, except as provided in paragraph (h), beginning after December 31, 2010, a tax return preparer must be an attorney, certified public accountant, enrolled agent, or registered tax return preparer to obtain a PTIN. Section 1.6109-2(h) provides that the IRS may prescribe exceptions to the PTIN rules in appropriate guidance, including the requirement that an individual be an attorney, certified public accountant, enrolled agent, or registered tax return preparer before receiving a PTIN. The IRS has decided to allow certain individuals who are not attorneys, certified public accountants, enrolled agents, or registered tax return preparers to obtain a PTIN and prepare, or assist in the preparation of, all or substantially all of a tax return in certain discrete circumstances. a. Tax Return Preparers Supervised by Attorneys, Certified Public Accountants, Enrolled Agents, Enrolled Retirement Plan Agents, and Enrolled Actuaries Until further guidance is issued, the IRS, in accordance with the authority to provide exceptions to the PTIN rules under section 1.6109-2(h), will permit any individual eighteen years or older to pay the applicable user fee and obtain a PTIN permitting the individual to prepare, or assist in the preparation of, all or substantially all of a tax return or claim for refund for compensation if: (i) the individual is supervised by an attorney, certified public accountant, enrolled agent, enrolled retirement plan agent, or enrolled actuary authorized to practice before the IRS under Circular 230 § 10.3(a) through (e); (ii) the supervising attorney, certified public accountant, enrolled agent, enrolled retirement plan agent, or enrolled actuary signs the tax returns or claims for refund prepared by the individual; (iii) the individual is employed at the law firm, certified public accounting firm, or other recognized firm of the tax return preparer who signs the tax return or claim for refund; and (iv) the individual passes the requisite tax compliance check and suitability check (when available). For purposes of this provision, a law firm is a law partnership, professional corporation, sole proprietorship, or any other association authorized to practice law in any state, territory, or possession of the United States, including a Commonwealth, or the District of Columbia. A certified public accounting firm is a partnership, professional corporation, sole proprietorship, or any other association that is registered, permitted, or licensed to practice as a certified public accounting firm in any state, territory, or possession of the United States, including a Commonwealth, or the District of Columbia. A recognized firm is a partnership, professional corporation, sole proprietorship, or any other association, other than a law firm or certified public accounting firm, that has one or more employees lawfully engaged in practice before the IRS and that is 80 percent or a greater percent owned by one or more attorneys, certified public accountants, enrolled agents, enrolled actuaries, or enrolled retirement plan agents authorized to practice before the IRS under sections 10.3(a) through (e) of Circular 230, respectively. Individuals applying for a PTIN under this provision will be required to certify on the PTIN application that they are supervised by an attorney, certified public accountant, enrolled agent, enrolled retirement plan agent, or enrolled actuary who signs the tax return or claim for refund prepared by the individual and provide a supervising individual's PTIN or other number if prescribed by the IRS. If at any point the individual is no longer supervised by the signing attorney, certified public accountant, enrolled agent, enrolled retirement plan agent, or enrolled actuary, the individual must notify the IRS as prescribed in forms, instructions, or other appropriate guidance and will not be permitted to prepare, or assist in preparing, all or substantially all of a tax return or claim for refund for compensation under this provision. Individuals who obtain a PTIN under this provision and prepare, or assist in preparing, all or substantially all of a tax return or claim for refund for compensation will not be subject to a competency examination or continuing education requirements. These individuals, however, may not sign any tax return they prepare or assist in preparing for compensation, represent taxpayers before the IRS in any capacity, or represent to the IRS, their clients, or the general public that they are a registered tax return preparer or a Circular 230 practitioner. Although individuals who obtain a PTIN under this provision are not practitioners under Circular 230, they are, by preparing, or assisting in the preparation of, a tax return for compensation, acknowledging that they are subject to the duties and restrictions relating to practice in subpart B of Circular 230. The IRS may, by written notification, revoke a PTIN obtained under this provision if the tax return preparer willfully violates applicable duties and restrictions prescribed in Circular 230 or engages in disreputable conduct. The tax return preparer may, within 30 days after receipt of the notice of revocation of the PTIN, file a written protest of the notice of revocation as prescribed in the revocation notice. A protest is not a proceeding under subpart D of Circular 230. b. Individuals Who Prepare Tax Returns Not Covered by the Registered Tax Return Preparer Competency Examination(s) The Treasury Department and the IRS have proposed rules that will require an individual to pass a registered tax return preparer minimum competency examination (competency examination). The IRS anticipates, however, that the tax returns and claims for refund covered by the competency examination(s) initially offered will be limited to individual income tax returns (Form 1040 series tax returns and accompanying schedules). Although the IRS anticipates the types of returns and claims for refunds covered by the competency examination(s) may expand in the future, the IRS recognizes that certain compensated tax return preparers do not prepare Form 1040 series tax returns or related claims for refunds and that the tax returns and claims for refunds prepared by some of these individuals may not be covered by the competency examinations for a significant period of time. The IRS has determined that individuals should not be required, as a condition to obtaining a PTIN, to pass a competency examination covering tax returns and claims for refunds not prepared by the individual. Therefore, until further guidance, this notice, in accordance with the authority under section 1.6109-2(h), provides that any individual eighteen years or older may pay the applicable user fee and obtain a PTIN if: (i) the individual certifies that the individual does not prepare, or assist in the preparation of, all or substantially all of any tax return or claim for refund covered by the competency examination(s) for registered tax return preparers administered under IRS oversight (1040 series until further notice); and (ii) the individual passes the requisite tax compliance check and suitability check (when available). Individuals who obtain a PTIN under this provision and prepare, or assist in preparing, all or substantially all of a tax return or claim for refund for compensation will not yet be subject to a competency examination. These individuals are not currently required to satisfy the same continuing education requirements that a registered tax return preparer must complete to renew their PTIN. In the future, the IRS may require through forms, instructions, or other appropriate guidance that these individuals complete continuing education to renew their PTIN. Individuals who obtain or renew a PTIN under this provision may sign the tax returns or claims for refunds that they prepare for compensation as the paid preparer. These individuals may also represent taxpayers before revenue agents, customer service representatives, or similar officers and employees of the IRS (including the Taxpayer Advocate Service) during an examination if the individual signed the tax return or claim for refund for the taxable year under examination. They may not, however, represent to the IRS, their clients, or the general public that they are a registered tax return preparer or a Circular 230 practitioner. Enrolled retirement plan agents and enrolled actuaries who obtain a PTIN under this provision may continue to practice and represent as provided in Circular 230. Although individuals who obtain a PTIN under this provision are not practitioners under Circular 230, they are, by preparing, or assisting in the preparation of, a tax return for compensation, acknowledging that they are subject to the duties and restrictions relating to practice in subpart B of Circular 230. The IRS may, by written notification, revoke a PTIN obtained under this provision if the tax return preparer willfully violates applicable duties and restrictions prescribed in Circular 230 or engages in disreputable conduct. The tax return preparer may, within 30 days after receipt of the notice of revocation of the PTIN, file a written protest of the notice of revocation as prescribed in the revocation notice. A protest is not a proceeding under subpart D of Circular 230. .03 Forms Requiring a Ptin Section 1.6109-2(h) provides that the IRS may specify in appropriate guidance the returns, schedules, and other forms that qualify as tax returns or claims for refund for purposes of the PTIN regulations. Consistent with that authority, the IRS hereby specifies that all tax returns, claims for refund, or other tax forms submitted to the IRS are considered tax returns or claims for refund for purposes of section 1.6109-2 unless otherwise provided by the IRS. For purposes of this provision, the term tax forms is interpreted broadly. An individual must obtain a PTIN to prepare for compensation all or substantially all of any form except those specifically identified by the IRS as not subject to the requirements of § 1.6109-2. At this time, the IRS identifies the following forms as not subject to the requirements of § 1.6109-2: Form SS-4, Application for Employer Identification Number; Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding; Form SS-16, Certificate of Election of Coverage under FICA; Form W-2 series of returns; Form W-7, Application for IRS Individual Taxpayer Identification Number; Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding; Form 870, Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of Overassessment; Form 872, Consent to Extend the Time to Assess Tax; Form 906, Closing Agreement On Final Determination Covering Specific Matters; Form 1098 series; Form 1099 series; Form 2848, Power of Attorney and Declaration of Representative; Form 3115, Application for Change in Accounting Method; Form 4029, Application for Exemption From Social Security and Medicare Taxes and Waiver of Benefits; Form 4361, Application for Exemption From Self-Employment Tax for Use by Ministers, Members of Religious Orders and Christian Science Practitioners; Form 4419, Application for Filing Information Returns Electronically; Form 5300, Application for Determination for Employee Benefit Plan; Form 5307, Application for Determination for Adopters of Master or Prototype or Volume Submitter Plans; Form 5310, Application for Determination for Terminating Plan; Form 5500 series; Form 8027, Employer's Annual Information Return of Tip Income and Allocated Tips; Form 8288-A, Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests; Form 8288-B, Application for Withholding Certificate for Dispositions by Foreign Persons of U.S. Real Property Interests; Form 8508, Request for Waiver From Filing Information Returns Electronically; Form 8717 User Fee for Employee Plan Determination, Opinion, and Advisory Letter Request; Form 8809, Application for Extension of Time to File Information Return; Form 8821, Tax Information Authorization; Form 8942, Application for Certification of Qualified Investments Eligible for Credits and Grants Under the Qualifying Therapeutic Discovery Project Program The IRS may in future guidance modify the list of documents that do not qualify as tax returns or claims for refund for purposes of section 1.6109-2(h). 2. Interim Rules .01 Provisional PTINs As discussed in section 1 of this notice, an individual may be designated as a registered tax return preparer if the individual successfully completes a competency examination or otherwise meets requisite standards prescribed by the IRS. The IRS, however, does not expect to offer the competency examination before mid 2011. Therefore, to allow tax return preparers to obtain a PTIN and continue to prepare tax returns or claims for refund until the competency examination is available, the IRS, as an interim rule, will allow individuals who are not attorneys, certified public accountants, or enrolled agents to obtain a provisional PTIN before the date that the competency examination is first offered (“ initial test offering date” ). Individuals may obtain a provisional PTIN through the IRS' new online PTIN application system or by submitting to the IRS a paper Form W-12, IRS Paid Preparer Tax Identification Number (PTIN) Application. The individual must annually renew the provisional PTIN and pay the applicable user fee. The IRS generally will not issue provisional PTINs in accordance with this provision after the initial test offering date. After the initial test offering date, only attorneys, certified public accountants, enrolled agents, and registered tax return preparers, or individuals defined in section 1.02(a) or (b) of this notice will be eligible to obtain a PTIN in accordance with section 1.6109-2, subject to any future IRS guidance identifying additional individuals who may obtain a PTIN. Until December 31, 2013, a provisional PTIN may be renewed upon proper application and payment of the applicable user fee, even if the individual holding the provisional PTIN is not an attorney, certified public accountant, enrolled agent, or registered tax return preparer. After December 31, 2013, provisional PTINs generally will not be renewed, and the holder of a provisional PTIN obtained in accordance with this provision may keep the PTIN only if the holder of the provisional PTIN is eligible to obtain a PTIN in accordance with section 1.6109-2, section 1.02(a) or (b) of this notice, or future guidance. .02 Return Preparation by Provisional Ptin Holders Tax return preparers who properly obtain a provisional PTIN before the initial test offering date will be permitted, subject to the requisite federal tax compliance check and suitability check (when available), to prepare for compensation all or substantially all of any tax return or claim for refund until December 31, 2013. During the transition period from the initial test offering date through December 31, 2013, tax return preparers who hold a provisional PTIN may, subject to the payment of the applicable user fee, take the competency examination as often as the examination is offered. These interim rules apply to those tax return preparers who obtain a provisional PTIN prior to the initial test offering date. An individual who is subject to the competency testing requirement for becoming a registered tax return preparer who does not obtain a PTIN before the initial test offering date must pass the competency examination and be designated as a registered tax return preparer to be permitted to prepare for compensation all or substantially all of a tax return or claim for refund. The holder of a provisional PTIN may represent that the holder is authorized to practice before the IRS by preparing and filing tax returns or claims for refund, but the holder of a provisional PTIN may not represent that the holder is a registered tax return preparer or has passed the competency examination necessary to become a registered tax return preparer. .03 Practice Based on Return Preparation The proposed Circular 230 regulations include registered tax return preparers in the definition of individuals described as practitioners and authorize these individuals to practice before the IRS. Practice as a registered tax return preparer generally is limited to preparing tax returns, claims for refund, or other documents for submission to the IRS and to limited representation as described below. A registered tax return preparer may prepare all or substantially all of a tax return or claim for refund. The IRS will prescribe by forms, instructions, or other appropriate guidance the tax returns and claims for refund that a registered tax return preparer may prepare and sign. Registered tax return preparers may represent taxpayers before revenue agents, customer service representatives, or similar officers and employees of the IRS during an examination if the registered tax return preparer prepared and signed (or prepared and was not required to sign) the tax return or claim for refund for the taxable period under examination. Prior to January 1, 2011, any individual generally may prepare a tax return or claim for refund for compensation. An individual who prepares and signs a taxpayer's return or claim for refund as the preparer generally may represent that taxpayer during an examination of the taxable period covered by that return or claim for refund. The proposed Circular 230 regulations generally do not extend this right of representation to individuals who are not practitioners after December 31, 2010. To ensure that tax return preparers have sufficient time to become registered tax return preparers, these interim rules provide that an individual may represent a taxpayer during an examination provided the individual prepared and signed the taxpayer's return or claim for refund as the preparer for the taxable period under examination and the individual was permitted under the regulations or other published guidance to prepare the taxpayer's return or claim for refund for compensation. This right to represent the taxpayer does not, however, permit an individual who is not an attorney, certified public accountant, enrolled agent, enrolled retirement plan agent, or enrolled actuary to represent the taxpayer before appeals officers, revenue officers, Counsel, or similar officers or employees of the IRS or the Department of Treasury. .04 Continuing Education The proposed Circular 230 regulations require registered tax return preparers to complete fifteen hours of continuing education each registration year. As an interim rule, there is no continuing education requirement for registered tax return preparers or tax return preparers who obtain a provisional PTIN during the first year of registration, which commenced on September 30, 2010. .05 Ethics and Conduct The proposed Circular 230 regulations include registered tax return preparers in the definition of individuals described as practitioners and authorize these individuals to practice before the IRS. Practice as a registered tax return preparer, therefore, will be subject to applicable duties and restrictions relating to practice before the IRS under Circular 230. Accordingly, as an interim rule, practice before the IRS by a tax return preparer who obtains a provisional PTIN or any individual who for compensation prepares, or assists in the preparation of, all or a substantial portion of a document pertaining to any taxpayer's tax liability for submission to the IRS also is subject to applicable duties and restrictions relating to practice before the IRS under Circular 230. Tax return preparers holding a provisional PTIN and other individuals who for compensation prepare, or assist in the preparation of, all or a substantial portion of a document pertaining to any taxpayer's tax liability for submission to the IRS must not engage in disreputable conduct under section 10.51 of Circular 230. The IRS may, by written notification, revoke a provisional PTIN if the tax return preparer willfully violates applicable duties and restrictions prescribed in Circular 230 or engages in disreputable conduct under section 10.51 of Circular 230. The tax return preparer may, within 30 days after receipt of the notice of revocation of the provisional PTIN, file a written protest of the notice of revocation as prescribed in the revocation notice. A protest is not a proceeding under subpart D of Circular 230. The interim rules described in this notice and any final regulations apply to all tax return preparers who prepare all or substantially all of a tax return or claim for refund for compensation. As discussed in section 1 of this notice, all tax returns, claims for refund, or other documents submitted to the IRS unless otherwise provided for in section 1 of this notice or other guidance are tax returns for purposes of the PTIN regulations. Contact Information The principal author of this notice is Matthew D. Lucey of the Office of Associate Chief Counsel (Procedure and Administration). For further information regarding this notice contact Matthew D. Lucey on (202) 622-4940 (not a toll-free call). www.irstaxattorney.com 888-712-7690

Thursday, December 30, 2010

PHILADELPHIA HOUSING AUTHORITY v. STA PAINTING COMPANY, INC., ET AL., Cite as 106 AFTR 2d 2010-XXXX, 12/17/2010 ________________________________________ PHILADELPHIA HOUSING AUTHORITY, Plaintiff, v. STA PAINTING COMPANY, INC., et al., Defendants. Case Information: Code Sec(s): Court Name: IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA, Docket No.: CIVIL ACTION No. 10-1511, Date Decided: 12/17/2010. Disposition: MEMORANDUM ON SUMMARY JUDGMENT Judge: Baylson, J. STA Painting Company, Inc. (“STA”) filed suit against Philadelphia Housing Authority (“PHA”) in Pennsylvania state court seeking $140,000 in unpaid fees for services rendered. After an internal investigation, PHA admitted it owed $132,000, but also discovered that STA owes back taxes to the Internal Revenue Service (“IRS”). PHA subsequently filed a state interpleader action identifying the United States as a party in interest. The United States then removed the matter to this Court pursuant to 28 U.S.C. § 1442 and § 1444. Presently before the Court are the United States's Motion for Summary Judgment (ECF No. 10), PHA's Motion to Pay Funds Into Court and for Dismissal of All Claims (ECF No. 11), and STA's Cross-Motion for Summary Judgment (ECF No. 18). After a review of the parties' briefing and the record, and for the following reasons, the United States's Motion will be granted, PHA's Motion will be granted in part and denied in part as moot, and STA's Cross-Motion will be denied. I. Factual and Procedural Background The following facts are derived primarily from STA's complaint filed in the Philadelphia Court of Common Pleas, STA's answer to PHA's interpleader, and the exhibits attached thereto. In November 2009, STA filed a breach of contract action against PHA in the Philadelphia Court of Common Pleas. STA claimed it entered into a services contract with PHA. PHA was supposed to make payment “monthly and upon receipt and approval of an itemized invoice.” (ECF No. 15, Ex. A ¶ 2.) STA submitted the invoices required for payment. (E.g., ECF No. 15, Exs. C–G.) PHA failed to pay, so STA filed suit. (ECF No. 1, Ex. A.) PHA, not disputing the debt but asserting that the United States had an interest in the funds, filed an interpleader action pursuant to Pennsylvania Rules of Civil Procedure 2301 et seq., in the Court of Common Pleas and served the United States. The IRS had assessed against STA federal employment taxes for several quarters between 2000 and 2003. (ECF No. 10-3, Decl. of Perry Shumsky ¶ 4.) By operation of law, this assessment established a lien against assets belonging to STA. Because STA failed to pay these assessments, and in light of the services contract, the IRS served on PHA a notice of levy on October 21, 2008. (ECF No. 10, Ex. 103.) STA subsequently disclosed tax deficiencies through 2009. (ECF No. 18.) On February 4, 2009, the IRS issued a final demand for payment to PHA, to which PHA responded that it had not received the levy notice. (ECF No. 1, Ex. B ¶¶ 4–5.) But PHA had previously acknowledged receipt of the notice in an October 31, 2008 letter to STA. (ECF No. 15, Ex. K.) Despite this acknowledgment, PHA did not — and still has not — forwarded the funds to the IRS, notwithstanding the IRS lien and levy. The Court of Common Pleas granted interpleader, and the United States removed the matter to this Court asserting federal subject matter jurisdiction based on 28 U.S.C. § 2410. (ECF No. 1.) The United States then answered PHA's petition for interpleader, asserting a counter-claim against PHA to enforce the levy (ECF No. 4), and a cross-claim against STA to foreclose the lien (ECF No. 7). In February 2010, counsel for STA informed the IRS that he was “involved with PHA in settling [STA's] lawsuit against [PHA and his] intention is to resolve and have all monies paid to [the IRS].” (ECF No. 26, Ex. A.) The United States moved for summary judgment on its counter- and cross-claims. (ECF No. 10.) PHA then filed its Motion, seeking permission to pay the disputed funds into this Court and dismissal. (ECF No. 11.) In April 2010, counsel for PHA informed STA that although it had reviewed STA's claims and acknowledged PHA owed $132,000 for services rendered, it would not forward payment in light of the IRS's levy. (ECF No. 15, Ex. N.) STA answered PHA's interpleader (ECF No. 15) and filed a Cross-Motion for Summary Judgment seeking the right to use the funds to offset of its most recent tax deficiencies (ECF No. 18). II. Jurisdiction and Standard of Review 1. Jurisdiction The United States removed PHA's state interpleader action pursuant to 28 U.S.C. § 1442 and § 1444, asserting the Court has jurisdiction under 28 U.S.C. § 2410. In removal cases, subject matter jurisdiction is determined from the face of the complaint and on the basis of the state court record at the time the removal notice is filed. Westmoreland Hosp. Ass'n v. Blue Cross of W. Pa., 605 F.2d 119, 124 (3d Cir. 1979). An action is removable only if the district court would have original jurisdiction over the claims in the suit. Jefferson County v. Acker, 527 U.S. 423, 430 (1999); see 28 U.S.C. § 1441(a) (“[A]ny civil action brought in a State court of which the district courts of the United States have original jurisdiction[] may be removed by the defendant or defendants ....”). There are two means of bringing an interpleader action in federal court — under 28 U.S.C. § 1335 or pursuant to Federal Rule of Civil Procedure 22. Metro. Life Ins. Co. v. Price, 501 F.3d 271, 275 (3d Cir. 2007). In this case, the United States does not assert jurisdiction pursuant to § 1335. Because the United States has no citizenship for purposes of § 1335, this statute does not apply. See Kent v. N. Cal. Reg'l Office of Am. Friends Serv. Comm., 49 F.2d 1325, 1328 (9th Cir. 1974). The other means for filing interpleader, Rule 22(a), which permits a party to institute an interpleader action when exposed to double or multiple liability, does not confer federal jurisdiction. Price, 501 F.3d at 275. Rule 22 is “no more than a procedural device; the plaintiff must plead and prove an independent basis for subject matter jurisdiction.” Id. The Court requested supplemental briefing from the parties regarding its jurisdiction over the removed interpleader action. This Court concludes it has subject matter jurisdiction in this case because the interpleader action implicates a substantial question of federal law, creating jurisdiction under 28 U.S.C. § 1331. 1 See id. at 275–76. Therefore, the Court need not address the other bases of jurisdiction the parties identified. “Federal question jurisdiction exists when the plaintiff's well-pleaded complaint establishes that “federal law creates the cause of action.”” Id. at 276 (quoting Franchise Tax Bd. v. Constr. Laborers Vacation Trust, 463 U.S. 1, 27–28 (1983)). In the interpleader context, some courts have construed this to mean that federal courts may exercise jurisdiction over interpleader actions that do not state a federal question on the face of the complaint, provided a stakeholder's right to relief necessarily depends on resolution of a substantial question of federal law. Commercial Nat'l Bank of Chi. v. Demos, 18 F.3d 485, 488 [73 AFTR 2d 94-1542] (7th Cir. 1994) (identifying other circuits adopting same position). Although the Third Circuit has not yet adopted this position, see Metro, 501 F.3d at 277 n.4, at least one district court in this Circuit has followed the reasoning, Allstate Settlement Corp. v. United States, No. 07-5123, 2008 WL 2221897 [101 AFTR 2d 2008-2429], at 4 (E.D. Pa. May 28, 2008) (Buckwalter, S.J.). In Demos, the Seventh Circuit declined to exercise jurisdiction because the stakeholders did not actually dispute the validity or amount of the United States's lien and, therefore, there was no federal question for the court to resolve. 18 F.3d at 489. In this case, although STA does not dispute its overall liability to the United States, it does dispute the validity of the United States's levy and, by implication, the amount of the lien. Thus, the validity of the United States's levy necessarily raises a substantial question of federal law over which this Court exercises jurisdiction. Venue is proper pursuant to § 1441(a). 2. Standard of Review Summary judgment is appropriate “if the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(c). An issue is “genuine” if the evidence is such that a reasonable jury could return a verdict for the non-moving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). A factual dispute is “material” if it might affect the outcome of the case under governing law. Id. Under Rule 56, the Court must view the evidence presented on the motion in the light most favorable to the non-moving party. Id. at 255. The non-movant's evidence is to be believed, and all justifiable inferences are to be drawn in the non-movant's favor. III. Parties' Contentions The parties do not dispute that the United States is entitled to the $132,000 which PHA owes STA. (See ECF No. 18 (“STA ... agrees that the $132,000.00 ... should be paid directly to the United States.”).) The United States asserts that STA owes back taxes, which are the subject of a federal tax lien, and the United States asserts that it issued a levy for a portion of those back taxes. A federal tax lien arises when a taxpayer neglects or refuses to pay a tax liability. The United States can enforce the lien by filing a lien foreclosure suit or issuing a levy. If the Government issues a levy, it only attaches to property possessed or obligations existing at the time the levy is served. In contrast, a lien covers all property existing before and acquired after the date the lien arises. In this case, there is no dispute that STA had performed $104,000 worth of services under its contract with PHA by the date the United States served the levy on PHA. The United States contends that this $104,000 is therefore subject to the levy. The United States argues the remaining $28,000 is subject to a tax lien. (ECF No. 10-1 at 5–7.) STA argues that the levy attached to nothing because its right to payment was not fixed and determinable as of the date the United States served the levy. Therefore, STA contends that the United States could not levy against $104,000 and the entire $132,000 is subject only to a federal tax lien. (ECF No. 18 at 2–3.) This distinction is important for STA because it preserves its argument that it has a right to direct allocation of the funds to its most recent tax deficiencies. The United States argues allocation is within its sole discretion. (ECF No. 21 at 4–6.) The United States also argues that this Court lacks jurisdiction to declare STA's legal rights with respect to federal taxes. (U.S. Letter Br. at 3–4 (Oct. 20, 2010).) The United States argues that its levy is valid because at the time it was issued, PHA had a fixed and determinable obligation to pay STA $104,000 pursuant to the services contract. (ECF No. 21 at 3–4.) STA counters that PHA's obligation was not fixed as of October 21, 2008 because PHA had not yet approved STA's invoices, which was the final condition prior to payment. (ECF No. 18 at 2.) PHA takes no position on these issues. Instead, PHA asks this Court to excuse its failure to comply with the United States's levy, allow PHA to deposit the funds with the Court, and dismiss it from the case. (ECF Nos. 11, 14.) IV. Issues Presented (1.) Is the United States entitled to levy on PHA to satisfy its lien as to STA's assets? (2.) If so, can STA determine how to allocate the payment to the IRS against STA's back taxes, or does the United States have complete discretion regarding how to allocate the funds? V. Discussion A. There is No Dispute Regarding the Validity of the Lien A federal tax lien arises when, after notice and demand, the taxpayer neglects or refuses to pay its tax liability. 26 U.S.C. § 6321. A federal tax lien arises at the time the assessment is made, 26 U.S.C. § 6322, and attaches to all property and rights to property belonging to the taxpayer at any time during the period of the lien, including any property or property rights acquired by the taxpayer after the lien arises, 26 C.F.R. § 301.6321-1. Section 6321's language, “all property and rights to property,” is broad and reveals on its face that Congress meant to reach every interest in property that a taxpayer may have. United States v. Nat'l Bank of Commerce, 472 U.S. 713, 719–20 [56 AFTR 2d 85-5210] (1985). Neither STA nor PHA disputes the validity of the United States's lien or the United States's interest in or right to the funds due and owing from PHA. The United States issued assessments against STA for back taxes dating from 2000, and STA's failure to pay gave rise to the lien. The lien applies to STA' property rights, including the $132,000 due and owing from PHA. Therefore, the United States's Motion (ECF No. 10) to foreclose its lien will be granted. The dispute in this case relates to the effect of the levy by the IRS served on PHA, which implicates how much of the funds is subject to levy and how much is subject to the lien. B. Did the Levy Attach to the Lien? A lien against a taxpayer is not self-executing; rather, the United States must select between two enforcement alternatives: (1) a 26 U.S.C. § 7403 lien foreclosure suit, or (2) a § 6331 administrative levy. V.I. Bureau of Internal Revenue v. Chase Manhattan Bank, 312 F.3d 131, 136 [91 AFTR 2d 2003-2713] (3d Cir. 2002). A lien foreclosure suit is a plenary action in which the court adjudicates all matters involved and finally determines the merits of all claims to and liens on the property. Nat'l Bank of Commerce, 472 U.S. at 720. The § 6331 administrative levy is a provisional remedy which does not determine priority interests until after the levy is made. Chase Manhattan, 312 F.3d at 136; see also Lanier v. Wachovia Bank, No. 09-4566, 2010 WL 1141267 [105 AFTR 2d 2010-1669], at 3 n.4 (E.D. Pa. Mar. 24, 2010) (Yohn, J.) (“The constitutionality of the administrative levy “has long been settled.”” (quoting Phillips v. Comm'r, 283 U.S. 589, 595 [9 AFTR 1467] (1931))). Section 6331's language is extremely broad, covering “all property and rights to property” owned by the taxpayer. Chase Manhattan, 312 F.3d at 137. Therefore, courts must liberally identify property rights, which are created by state law. Id. Although state law determines the nature of the legal interest the taxpayer has in property, federal law assigns consequences to state law rights. 2 Id. The United States's right to levy property extends only to the taxpayer's property — the United States steps into the taxpayer's shoes and acquires whatever rights the taxpayer possesses. Id. Consequently, a levy only attaches to property possessed and obligations existing at the time the United States serves notice of the levy. 3 Resolution Trust Corp. v. Gill, 960 F.2d 336, 341 [69 AFTR 2d 92-1120] (3d Cir. 1992); 26 C.F.R. § 301.6331-1(a). Obligations “exist” when the liability of the obligor is “fixed and determinable” although the taxpayer's right to receive payment thereof is deferred until a later date. 26 C.F.R. § 301.6331-1(a); see also Lanier, 2010 WL 1141267 [105 AFTR 2d 2010-1669], at 4 n.5 (noting that although treasury regulations are not the law, “if reasonable, [they] are accepted or deferred to by the courts because they are made by the agency Congress has entrusted with carrying out its purpose”) (quotation marks and alterations omitted). A levy is made on the date on which notice is served. 26 U.S.C. § 6502(b). In United States v. Hemmen, the Ninth Circuit analogized “fixed and determinable” to the obligation of a party to an ordinary contract with an executory duty to pay for completed performance. 51 F.3d 883, 890 [75 AFTR 2d 95-1646] (9th Cir. 1995). To avoid the label of “fixed and determinable,” the Ninth Circuit concluded that the property rights at issue must be materially distinguishable from such an obligation. Id. The primary focus is on whether the third party's obligation to pay was fixed after the underlying performance — if the beneficial act giving rise to the benefits is completed before the levy is issued, the benefits are subject to the levy. Id. Notably, it is the liability which must be fixed, not the amount; so long as the events which gave rise to the obligation have occurred, and the amount of the obligation is capable of being determined in the future, the obligation is fixed and determinable. United States v. Antonio, No. 86-1053, 1991 WL 253021 [71A AFTR 2d 93-4578], at 6 n.2 (D. Haw. Sept. 24, 1991). C. Was PHA's Debt to STA Fixed and Determinable, and Why Relevant? Pursuant to the agreement between STA and PHA, “payment will be made monthly and upon receipt and approval of an itemized invoice.” (ECF No. 15, Ex. A.) STA does not dispute that it completed the work, that it delivered the invoices, or that the value of the work as of October 21, 2008 was $104,000. (See ECF No. 26 at 2 (stating $132,000 is comprised, in part, of $104,000 for work completed before October 21, 2008).) Rather, STA argues that the obligation was not “fixed and determinable” because PHA had not yet approved the invoices. The only action remaining under the contract was approval and payment, both of which constituted conduct only PHA could perform. STA had completed its services, the beneficial act had been rendered, and all that remained was payment. This case falls squarely within the Ninth Circuit's hypothetical. See Hemmen, 51 F.3d at 890 (likening “fixed and determinable” to obligation of a party to an ordinary contract with an executory duty to pay for completed performance). Therefore, the levy by the IRS served on PHA attached to the $104,000 PHA owed to STA as of October 21, 2008, and the United States is entitled to judgment as a matter of law. The United States's Motion (ECF No. 10) to enforce its levy will be granted. As discussed below, this conclusion impacts STA's argument that it can direct allocation of the funds to its most recent tax deficiencies. D. Is STA's Payment Voluntary (i.e. Prompt), and Why Relevant? STA wants the right to direct allocation of the $132,000 to improve its chances of securing an installment plan with the United States for payment of the remainder of its back taxes. STA also complains about the IRS's denial of its proposed installment agreements to pay its remaining deficiencies. 4 The Court has already concluded that the levy is valid. All that is left for the Court to determine is whether STA has the right to direct allocation of the funds to offset its most recent tax deficiencies. The United States contends that the Court lacks jurisdiction to declare STA's rights in this manner. STA first asked the Court to direct specific allocation of the payments. (ECF No. 18.) After the United States raised the jurisdictional issue, STA revised its request and asked the Court to find it has the right to direct allocation. (STA Letter Br. at 5 (Oct. 28, 2010).) This request still asks the Court to declare STA's rights, which constitutes declaratory relief, and the Court likely lacks jurisdiction to issue declaratory relief with respect to federal taxes. See 28 U.S.C. § 2201(a) (empowering court to “declare the rights and other legal relations of any interested party seeking such declaration,” but not “with respect to Federal taxes”). In the interest of judicial economy, and assuming the Court has jurisdiction, there is nevertheless no merit to STA's position. Taxpayers may designate application of tax payments that are voluntarily made, but may not designate application of involuntary payments. United States v. Pepperman, 976 F.2d 123, 127 [70 AFTR 2d 92-5657] (3d Cir. 1993). Involuntary payments have been traditionally defined as “any payment received by agents of the United States as a result of distraint or levy or from a legal proceeding in which the government is seeking to collect its delinquent taxes or file a claim therefor.” Id.; see Theodore A. Pride & Assocs. v. United States, No. 97-0762, 2001 WL 177064 [87 AFTR 2d 2001-881], at 5 (E.D. Pa. Jan. 18, 2001) (Weiner, J.) (noting that payments received as result of a levy are considered involuntarily made). Voluntariness is to be contrasted with situations in which actions by creditors leave debtors with no realistic choice but to make a payment. Stevens v. United States, 49 F.3d 331, 334 [75 AFTR 2d 95-1387] (7th Cir. 1995). The issue of voluntariness is determined along a continuum, it is an issue of more or less promptness in payment of taxes before the full coercive machinery of collection is brought to bear. Id. But the fact that a taxpayer's action in paying a portion of taxes owed confers a benefit on the IRS is not by itself sufficient to prove the taxpayer was acting voluntarily, especially when the “voluntary” act comes only days before an involuntary act, the threat of which compelled the taxpayer to turn “volunteer” to minimize its tax liability. Id. at 335; see Freck v. IRS, 37 F.3d 986, 991 [74 AFTR 2d 94-6544], 994 (3d Cir. 1994) (finding payment voluntary despite year-old outstanding lien, but no indication legal proceedings commenced); Interfirst Bank of Dallas, NA v. United States, 769 F.2d 299, 306 [56 AFTR 2d 85-5891] (5th Cir. 1985) (finding threat to levy, with no levy, does not render payment involuntary); Pullman Constr. Indus. v. United States (In re Pullman Constr. Indus.), 186 B.R. 88, 96 [76 AFTR 2d 95-6935] (Bankr. E.D. Ill. 1995) (stating payments are not involuntary when IRS takes slightest bit of action, such as filing a claim or phoning and writing to inform taxpayer of liability). STA would not have the right to direct allocation as a matter of law because the payments are not voluntary. STA relies on correspondence its counsel sent to the IRS in February 2010 relating counsel's efforts to obtain money from PHA and his intent to forward payment to the IRS. (ECF No. 26, Ex. A.) STA argues this letter indicates its payment is voluntary because the United States did not initiate legal proceedings to collect until June 2010, when it first filed the § 7403 lien foreclosure suit. The $104,000 subject to the levy is not voluntary. See Theodore A. Price & Assocs., 2001 WL 177064 [87 AFTR 2d 2001-881], at 5 (noting that payments received as result of a levy are considered involuntarily made). Nor can the remaining $28,000 be considered voluntary. Stevens advocates considering voluntariness on a spectrum of more or less prompt and, in this case, the payment of $28,000 is clearly less prompt. 49 F.3d at 334. Although voluntariness is generally a factual issue, see Stevens, 49 F.3d at 335, there is no genuine dispute of material fact in this case. STA has not paid its tax deficiencies, regardless of its assertion of intent to pay before the United States filed its lien-foreclosure action. There is also no dispute that STA has tax delinquencies in nearly every quarter from 2000 through 2009, (see ECF No. 26, Ex. G (listing tax deficiencies through December 31, 2009)), and the IRS is attempting to collect taxes from 2000 through 2003, (see ECF No. 10-1 ¶ 1). Thus, STA's “payment” of $28,000 is, at minimum, almost seven years late and at most, almost ten years late. Such tardiness cannot be considered anywhere near the “more prompt” end of the spectrum. Moreover, the United States had to levy a portion of the funds in October 2008 before STA finally “volunteered” to pay nearly sixteen months later. For these reasons, STA's Cross-Motion for Summary Judgment (ECF No. 18) will be denied. E. Is PHA Entitled to Dismissal? PHA seeks permission to deposit the funds with the Court and for dismissal of all claims against it. Because the United States is entitled to the full $132,000, the Court will instruct PHA to pay these funds to the United States forthwith, rendering this portion of PHA's Motion moot. With no further interest in this matter, PHA's request for dismissal (ECF No. 11) will be granted. 5 VI. Conclusion For the foregoing reasons, the Court concludes that the United States is entitled to all $132,000, which it may allocate to STA's tax deficiencies in a manner the United States deems appropriate. The United States's levy attached to $104,000 of the funds, and the remaining $28,000 is subject to the foreclosed lien. This payment is not voluntary and, therefore, STA has no right to direct allocation of the funds. Accordingly, the United States's Motion (ECF No. 10) will be granted, PHA's Motion (ECF No. 11) will be granted in part and denied in part, and STA's Cross-Motion (ECF No. 18) will be denied. An appropriate Order will follow. ________________________________________ 1 The Court concludes that the United States's asserted basis for jurisdiction, 28 U.S.C. § 2410, only waives sovereign immunity and authorizes suit, but does not establish federal jurisdiction. See Hudson County Bd. of Chosen Freeholders v. Morales, 581 F.2d 379, 383–84 [42 AFTR 2d 78-5597] (3d Cir. 1978). ________________________________________ 2 In Pennsylvania, the right to payment under a contract depends on performance. Boise Cascade Corp. v. East Stroudsburg Sav. Ass'n, 446 A.2d 614, 616 (Pa. Super. Ct. 1982); Biofeedback Group v. State Farm Mut. Auto. Ins. Co., 31 Phila. 106, 109 (Phila. Ct. Com. Pl. 1996) (“A right to payment only accrues upon performance.”). ________________________________________ 3 The United States satisfies its duty to provide notice by sending notice to the last known address, regardless of whether it is actually received. Lopez v. United States, No. 92-2089, 1993 WL 151877 [71 AFTR 2d 93-1200], at 3 (W.D. Pa. Mar. 22, 1993); 26 U.S.C. § 6331(d)(2). Moreover, an unsupported assertion by a third party that it did not receive statutorily-required notice is insufficient to affirmatively establish notice was not sent. See Lopez, 1993 WL 151877 [71 AFTR 2d 93-1200], at 3. ________________________________________ 4 The Court lacks jurisdiction to address the denial of the proposed installment agreements. See Asemani v. IRS, 163 F. App'x 102, 104–05 [97 AFTR 2d 2006-423] (3d Cir. 2006) (per curiam). Where an offer-in-compromise is made prior to commencement of a collection due process (“CDP”) hearing, the Internal Revenue Code expressly provides “for an independent administrative review of any rejection of a proposed offer in compromise or installment agreement made by a taxpayer.” 26 U.S.C. § 7122(d). There is no provision for judicial review in a district court. Asemani, 163 F. App'x at 105. Instead, judicial review is only available where an offer-incompromise has been tendered in the context of CDP proceedings, and even then, § 6330(d) provides for an appeal to the tax court, and then to the district court, in most instances. Id. In this case, there is no indication from the record that a CDP hearing occurred and there is no indication STA requested a hearing, as was its statutory right. Accordingly, STA failed to exhaust the administrative process and the Court lacks jurisdiction to review the denial. See id. ________________________________________ 5 In its Motion, the United States only requested the Court to enforce the levy (ECF No. 10-1 at 5); the United States did not seek the imposition of costs or interest pursuant to 26 U.S.C. § 6332(d)(1) for PHA's failure to pay. www.irstaxattorney.com 888-712-7690

Wednesday, December 29, 2010

IRS updates disclosure rules to lessen understatement and preparer penalties Rev Proc 2011-13, 2011-3 IRB A revised revenue procedure identifies when disclosure on a taxpayer's return for an item or a position is adequate to reduce a Code Sec. 6662(d)understatement of income tax under the accuracy-related penalty, and to avoid the Code Sec. 6694(a) preparer penalty for understatements due to unreasonable positions. It applies to any income tax return filed on 2010 tax forms for tax years beginning in 2010, and to any income tax return filed on 2010 tax forms in 2011 for short tax years beginning in 2011. Background. Under Code Sec. 6662 , a 20% penalty applies to the portion of a tax underpayment that is attributable to a substantial understatement of income tax. The penalty rate is 40% in the case of gross valuation misstatements under Code Sec. 6662(h) , nondisclosed noneconomic substance transactions under Code Sec. 6662(i) , or undisclosed foreign financial asset understatements under section Code Sec. 6662(j) . An understatement is “substantial” if it exceeds the greater of 10% of the amount of tax required to be shown on the return for the tax year or $5,000. However, a corporation (other than an S corporation or personal holding company) has a substantial tax understatement if the understatement exceeds the lesser of (1) 10% of the tax required to be shown on the return for a tax year (or, if greater, $10,000), or (2) $10 million. ( Code Sec. 6662(d) ) For a non-tax shelter item, the understatement is reduced to the extent the relevant facts affecting the item's tax treatment are adequately disclosed in the return or in a statement attached to the return, and there is a reasonable basis for the taxpayer's tax treatment. ( Code Sec. 6662(d)(2)(B)(ii) ) Under Code Sec. 6694(a) , a penalty is imposed on a tax return preparer who prepares a return or refund claim reflecting an understatement of liability due to an “unreasonable position” if he knew (or reasonably should have known) of the position. A position (other than for a tax shelter or a reportable transaction) is generally treated as unreasonable unless (1) there is or was substantial authority for the position; or (2) the position was properly disclosed under Code Sec. 6662(d)(2)(B)(ii)(I) and had a reasonable basis. If the position is with respect to a tax shelter or a reportable transaction, the position is treated as unreasonable unless it is reasonable to believe that the position would more likely than not be sustained on the merits. ( Notice 2009-5, 2009-1 CB 309 ) Revised procedure. In Rev Proc 2011-13 , IRS sets out the circumstances under which disclosure of information on a return is considered to be adequate to avoid the substantial understatement penalty under Code Sec. 6662(d) and the preparer penalty under Code Sec. 6694(a) for understatements due to unreasonable positions. A corporation making a complete and accurate disclosure of a tax position on the appropriate year's Schedule UTP (Uncertain Tax Position Statement), will be treated as if it had filed a Form 8275 (Disclosure Statement) or Form 8275-R (Regulation Disclosure Statement) regarding the tax position. However, the filing of a Form 8275 or Form 8275-R, will not be treated as if the corporation filed a Schedule UTP. Additional disclosure of relevant facts or positions taken with respect to issues involving any of the items listed in Rev Proc 2011-13 is unnecessary for purposes of reducing any understatement of income tax under Code Sec. 6662(d) (except as otherwise provided in Rev Proc 2011-13, Sec. 4.02(3) , concerning Schedules M-1 and M-3), if forms and attachments are completed in a clear manner and in accordance with instructions. Although a taxpayer may literally meet Rev Proc 2011-13 's disclosure requirements, the disclosure won't have an effect for purposes of the Code Sec. 6662 accuracy-related penalty if the item or position on the return: (1) doesn't have a reasonable basis as defined in Reg. § 1.6662-3(b)(3) ; (2) is attributable to a tax shelter item as defined in Code Sec. 6662(d)(2) ; or (3) isn't properly substantiated or the taxpayer failed to keep adequate books and records with respect to the item or position. Disclosure will have no effect for purposes of the Code Sec. 6694(a) penalty as applicable to tax return preparers if the position is with respect to a tax shelter (as defined in Code Sec. 6662(d)(2)(C)(ii) ) or a reportable transaction to which Code Sec. 6662Aapplies. Rev Proc 2011-13, Sec. 4.01(2) provides that money amounts entered on forms must be verifiable, and the information on the return must be disclosed in the manner described in Rev Proc 2011-13, Sec. 4.02(3) . A number is verifiable if, on audit, the taxpayer can prove the origin of the amount (even if that number is not ultimately accepted by IRS) and can show good faith in entering that number on the applicable form. Further, the disclosure of an amount as provided in Rev Proc 2011-13, Sec. 4.02 , isn't adequate when the understatement arises from a transaction between related parties. If an entry may present a legal issue or controversy because of a related-party transaction, then that transaction and the relationship must be disclosed on Form 8275 or Form 8275-R. When the amount of an item is shown on a line that doesn't have a preprinted description identifying that item, the taxpayer must clearly identify the item by including the description on that line. For example, to disclose a sole proprietorship's bad debt, the words “bad debt” must be written or typed on the line of Schedule C that shows the amount of the bad debt. Also, for Schedule M-3 (Form 1120), Part II, line 25, Other income (loss) items with differences, or Part III, line 35, Other expense/deduction items with differences, the entry must provide descriptive language (e.g., “Cost of non-compete agreement deductible not capitalizable”). If space limitations on a form do not allow for an adequate description, the description must be continued on an attachment. . Rev. Proc. 2011-13, 2011-3 IRB, 12/28/2010, IRC Sec(s). ________________________________________ Headnote: Reference(s): Full Text: 1. Purpose This revenue procedure updates Rev. Proc. 2010-15, 2010-7 I.R.B. 404, and identifies circumstances under which the disclosure on a taxpayer's income tax return with respect to an item or a position is adequate for the purpose of reducing the understatement of income tax under section 6662(d) of the Internal Revenue Code (relating to the substantial understatement aspect of the accuracy-related penalty), and for the purpose of avoiding the tax return preparer penalty under section 6694(a) (relating to understatements due to unreasonable positions) with respect to income tax returns. This revenue procedure does not apply with respect to any other penalty provisions (including the disregard provisions of the section 6662(b)(1) accuracy-related penalty, the section 6662(i) increased accuracy-related penalty in the case of nondisclosed noneconomic substance transactions, and the section 6662(j) increased accuracy-related penalty in the case of undisclosed foreign financial asset understatements). This revenue procedure applies to any income tax return filed on 2010 tax forms for a taxable year beginning in 2010, and to any income tax return filed on 2010 tax forms in 2011 for short taxable years beginning in 2011. 2. Changes From Rev. Proc. 2010-15 .01. This revenue procedure has been updated to include reference to: (i) the section 6662(i) increased accuracy-related penalty in the case of nondisclosed noneconomic substance transactions; (ii) the section 6662(j) increased accuracy-related penalty in the case of undisclosed foreign financial asset understatements; and (iii) the Schedule UTP, Uncertain Tax Position Statement, a new schedule required of certain corporations. 3. Background .01. If section 6662 applies to any portion of an underpayment of tax required to be shown on a return, an amount equal to 20 percent of the portion of the underpayment to which the section applies is added to the tax (the penalty rate is 40 percent in the case of gross valuation misstatements under section 6662(h), nondisclosed noneconomic substance transactions under section 6662(i), or undisclosed foreign financial asset understatements under section 6662(j)). Section 6662(b)(2) applies to the portion of an underpayment of tax that is attributable to a substantial understatement of income tax. .02. Section 6662(d)(1) provides that there is a substantial understatement of income tax if the amount of the understatement exceeds the greater of 10 percent of the amount of tax required to be shown on the return for the taxable year or $5,000. Section 6662(d)(1)(B) provides special rules for corporations. A corporation (other than an S corporation or personal holding company) has a substantial understatement of income tax if the amount of the understatement exceeds the lesser of 10 percent of the tax required to be shown on the return for a taxable year (or, if greater, $10,000) or $10,000,000. Section 6662(d)(2) defines an understatement as the excess of the amount of tax required to be shown on the return for the taxable year over the amount of the tax that is shown on the return reduced by any rebate (within the meaning of section 6211(b)(2)). .03. In the case of an item not attributable to a tax shelter, section 6662(d)(2)(B)(ii) provides that the amount of the understatement is reduced by the portion of the understatement attributable to the item if the relevant facts affecting the item's tax treatment are adequately disclosed in the return or in a statement attached to the return, and there is a reasonable basis for the tax treatment of the item by the taxpayer.. .04. Section 6694(a) imposes a penalty on a tax return preparer who prepares a return or claim for refund reflecting an understatement of liability due to an “ unreasonable position” if the tax return preparer knew (or reasonably should have known) of the position. A position (other than a position with respect to a tax shelter or a reportable transaction to which section 6662A applies) is generally treated as unreasonable unless (i) there is or was substantial authority for the position, or (ii) the position was properly disclosed in accordance with section 6662(d)(2)(B)(ii)(I) and had a reasonable basis. If the position is with respect to a tax shelter (as defined in section 6662(d)(2)(C)(ii)) or a reportable transaction to which section 6662A applies, the position is treated as unreasonable unless it is reasonable to believe that the position would more likely than not be sustained on the merits. See Notice 2009-5, 2009-3 I.R.B. 309 (January 21, 2009) for interim penalty compliance rules for tax shelter transactions. .05. In general, this revenue procedure provides guidance for determining when disclosure by return is adequate for purposes of section 6662(d)(2)(B)(ii) and section 6694(a)(2)(B). For purposes of this revenue procedure, the taxpayer must furnish all required information in accordance with the applicable forms and instructions, and the money amounts entered on these forms must be verifiable. .06. Fiscal and short tax year returns. (a) In general. This revenue procedure may apply to a return for a fiscal tax year that begins in 2010 and ends in 2011. This revenue procedure may also apply to a short year return for a period beginning in 2011 if the return is to be filed before the 2011 forms are available. (Note that individuals are generally not put in this position as a decedent's final return for a fractional part of a year is due the fifteenth day of the fourth month following the close of the 12-month period which began with the first day of such fractional part of the year. See Treas. Reg. § 1.6072-1(b).) In the case of fiscal year and short year returns, the taxpayer must take into account any tax law changes that are effective for tax years beginning after December 31, 2010, even though these changes are not reflected on the form. (b) Tax law changes effective after December 31, 2010. This document does not take into account the effect of tax law changes effective for tax years beginning after December 31, 2010. If a line referenced in this revenue procedure is affected by such a change and requires additional reporting, a taxpayer may have to file Form 8275, Disclosure Statement, or Form 8275-R, Regulation Disclosure Statement, until the Service prescribes criteria for complying with the requirement. .07. A complete and accurate disclosure of a tax position on the appropriate year's Schedule UTP, Uncertain Tax Position Statement, will be treated as if the corporation filed a Form 8275 or Form 8275-R regarding the tax position. The filing of a Form 8275 or Form 8275-R, however, will not be treated as if the corporation filed a Schedule UTP. 4. Procedure .01. General (1) Additional disclosure of facts relevant to, or positions taken with respect to, issues involving any of the items set forth below is unnecessary for purposes of reducing any understatement of income tax under section 6662(d) (except as otherwise provided in section 4.02(3) concerning Schedules M-1 and M-3), provided that the forms and attachments are completed in a clear manner and in accordance with their instructions. (2) The money amounts entered on the forms must be verifiable, and the information on the return must be disclosed in the manner described below. For purposes of this revenue procedure, a number is verifiable if, on audit, the taxpayer can prove the origin of the amount (even if that number is not ultimately accepted by the Internal Revenue Service) and the taxpayer can show good faith in entering that number on the applicable form. (3) The disclosure of an amount as provided in section 4.02 below is not adequate when the understatement arises from a transaction between related parties. If an entry may present a legal issue or controversy because of a related-party transaction, then that transaction and the relationship must be disclosed on a Form 8275 or Form 8275-R. (4) When the amount of an item is shown on a line that does not have a preprinted description identifying that item (such as on an unnamed line under an “ Other Expense” category) the taxpayer must clearly identify the item by including the description on that line. For example, to disclose a bad debt for a sole proprietorship, the words “ bad debt” must be written or typed on the line of Schedule C that shows the amount of the bad debt. Also, for Schedule M-3 (Form 1120), Part II, line 25, Other income (loss) items with differences, or Part III, line 35, Other expense/deduction items with differences, the entry must provide descriptive language; for example, “Cost of non-compete agreement deductible not capitalizable.” If space limitations on a form do not allow for an adequate description, the description must be continued on an attachment. (5) Although a taxpayer may literally meet the disclosure requirements of this revenue procedure, the disclosure will have no effect for purposes of the section 6662 accuracy-related penalty if the item or position on the return: (1) Does not have a reasonable basis as defined in Treas. Reg. § 1.6662-3(b)(3); (2) Is attributable to a tax shelter item as defined in section 6662(d)(2); or (3) Is not properly substantiated or the taxpayer failed to keep adequate books and records with respect to the item or position. (6) Disclosure also will have no effect for purposes of the section 6694(a) penalty as applicable to tax return preparers if the position is with respect to a tax shelter (as defined in section 6662(d)(2)(C)(ii)) or a reportable transaction to which section 6662A applies. .02. Items (1) Form 1040, Schedule A, Itemized Deductions: (a) Medical and Dental Expenses: Complete lines 1 through 4, supplying all required information. (b) Taxes: Complete lines 5 through 9, supplying all required information. Line 8 must list each type of tax and the amount paid. (c) Interest Expenses: Complete lines 10 through 15, supplying all required information. This section 4.02(1)(c) does not apply to (i) amounts disallowed under section 163(d) unless Form 4952, Investment Interest Expense Deduction , is completed, or (ii) amounts disallowed under section 265. (d) Contributions: Complete lines 16 through 19, supplying all required information. Enter the amount of the contribution reduced by the value of any substantial benefit (goods or services) provided by the donee organization in consideration, in whole or in part. Entering the value of the contribution unreduced by the value of the benefit received will not constitute adequate disclosure. If a contribution of $250 or more is made, this section will not apply unless a contemporaneous written acknowledgment, as required by section 170(f)(8), is obtained from the donee organization. If a contribution of cash of less than $250 is made, this section will not apply unless a bank record or written communication from the donee, as required by section 170(f)(17), is obtained from the donee organization. If a contribution of property other than cash is made and the amount claimed as a deduction exceeds $500, attach a properly completed Form 8283, Noncash Charitable Contributions, to the return. In addition to the Form 8283, if a contribution of a qualified motor vehicle, boat, or airplane has a value of more than $500, this section will not apply unless a contemporaneous written acknowledgment, as required by section 170(f)(12), is obtained from the donee organization and attached to the return. An acknowledgment under section 170(f)(8) is not required if an acknowledgment under section 170(f)(12) is required. (e) Casualty and Theft Losses: Complete Form 4684, Casualties and Thefts, and attach to the return. Each item or article for which a casualty or theft loss is claimed must be listed on Form 4684. (2) Certain Trade or Business Expenses (including, for purposes of this section, the following six expenses as they relate to the rental of property): (a) Casualty and Theft Losses: The procedure outlined in section 4.02(1)(e) must be followed. (b) Legal Expenses: The amount claimed must be stated. This section does not apply, however, to amounts properly characterized as capital expenditures, personal expenses, or non-deductible lobbying or political expenditures, including amounts that are required to be (or that are) amortized over a period of years. (c) Specific Bad Debt Charge-off: The amount written off must be stated. (d) Reasonableness of Officers' Compensation: Form 1120, Schedule E, Compensation of Officers , must be completed when required by its instructions. The time devoted to business must be expressed as a percentage as opposed to “part” or “as needed.” This section does not apply to “golden parachute” payments, as defined under section 280G. This section will not apply to the extent that remuneration paid or incurred exceeds the employee-remuneration deduction limitations under section 162(m), if applicable. (e) Repair Expenses: The amount claimed must be stated. This section does not apply, however, to any repair expenses properly characterized as capital expenditures or personal expenses. (f) Taxes (other than foreign taxes): The amount claimed must be stated. (3) Differences in book and income tax reporting. For Schedule M-1 and all Schedules M-3, including those listed in (a)-(f) below, the information provided must reasonably apprise the Service of the potential controversy concerning the tax treatment of the item. If the information provided does not so apprise the Service, a Form 8275 or Form 8275-R must be used to adequately disclose the item (see Part II of the instructions for those forms). Note: An item reported on a line with a pre-printed description, shown on an attached schedule or “ itemized” on Schedule M-1, may represent the aggregate amount of several transactions producing that item (i.e., a group of similar items, such as amounts paid or incurred for supplies by a taxpayer engaged in business). In some instances, a potentially controversial item may involve a portion of the aggregate amount disclosed on the schedule. The Service will not be reasonably apprised of a potential controversy by the aggregate amount disclosed. In these instances, the taxpayer must use Form 8275 or Form 8275-R regarding that portion of the item. Combining unlike items, whether on Schedule M-1 or Schedule M-3 (or on an attachment when directed by the instructions), will not constitute an adequate disclosure. Additionally, for taxpayers that file the Schedule M-3 (Form 1120), the new Schedule B, Additional Information for Schedule M-3 Filers, must also be completed. For taxpayers that file the Schedule M-3 (Form 1065), the new Schedule C, Additional Information for Schedule M-3 Filers, must also be completed. When required, these new Schedules are necessary to constitute adequate disclosure. (a) Form 1065. Schedule M-3 (Form 1065), Net Income (Loss) Reconciliation for Certain Partnerships: Column (a), Income (Loss) per Income Statement, of Part II (reconciliation of income (loss) items) and Column (a), Expense per Income Statement, of Part III (reconciliation of expense/deduction items); Column (b), Temporary Difference, and Column (c), Permanent Difference, of Part II (reconciliation of income (loss) items) and Part III (reconciliation of expense/deduction items); and Column (d), Income (Loss) per Tax Return, of Part II (reconciliation of income (loss) items) and Column (d), Deduction per Tax Return , of Part III (reconciliation of expense/deduction items). (b) Form 1120. (i) Schedule M-1, Reconciliation of Income (Loss) per Books With Income per Return. (ii) Schedule M-3 (Form 1120), Net Income (Loss) Reconciliation for Corporations with Total Assets of $10 Million or More: Column (a), Income (Loss) per Income Statement , of Part II (reconciliation of income (loss) items) and Column (a), Expense per Income Statement, of Part III (reconciliation of expense/deduction items); Column (b), Temporary Difference, and Column (c), Permanent Difference, of Part II (reconciliation of income (loss) items) and Part III (reconciliation of expense/deduction items) and Column (d), Income (Loss) per Tax Return , of Part II (reconciliation of income (loss) items); and Column (d), Deduction per Tax Return, of Part III (reconciliation of expense/deduction items). (c) Form 1120-L. Schedule M-3 (Form 1120-L), Net Income (Loss) Reconciliation for U.S. Life Insurance Companies With Total Assets of $10 Million or More: Column (a), Income (Loss) per Income Statement, of Part II (reconciliation of income (loss) items) and Column (a), Expense per Income Statement, of Part III (reconciliation of expense/deduction items); Column (b), Temporary Difference, and Column (c), Permanent Difference, of Part II (reconciliation of income (loss) items) and Part III (reconciliation of expense/deduction items); and Column (d), Income (Loss) per Tax Return, of Part II (reconciliation of income (loss) items) and Column (d), Deduction per Tax Return, of Part III (reconciliation of expense/deduction items). (d) Form 1120-PC. Schedule M-3 (Form 1120-PC), Net Income (Loss) Reconciliation for U.S. Property and Casualty Insurance Companies With Total Assets of $10 Million or More: Column (a), Income (Loss) per Income Statement, of Part II (reconciliation of income (loss) items) and Column (a), Expense per Income Statement, of Part III (reconciliation of expense/deduction items); Column (b), Temporary Difference, and Column (c), Permanent Difference, of Part II (reconciliation of income (loss) items) and Part III (reconciliation of expense/deduction items); and Column (d), Income (Loss) per Tax Return, of Part II (reconciliation of income (loss) items) and Column (d), Deduction per Tax Return , of Part III (reconciliation of expense/deduction items). (e) Form 1120S. Schedule M-3 (Form 1120S), Net Income (Loss) Reconciliation for S Corporations With Total Assets of $10 Million or More: Column (a), Income (Loss) per Income Statement, of Part II (reconciliation of income (loss) items) and Column (a), Expense per Income Statement , of Part III (reconciliation of expense/deduction items); Column (b), Temporary Difference, and Column (c), Permanent Difference, of Part II (reconciliation of income (loss) items) and Part III (reconciliation of expense/deduction items); and Column (d), Income (Loss) per Tax Return, of Part II (reconciliation of income (loss) items) and Column (d), Deduction per Tax Return, of Part III (reconciliation of expense/deduction items). (f) Form 1120-F. Schedule M-3 (Form 1120-F), Net Income (Loss) Reconciliation for Foreign Corporations With Total Assets of $10 Million or More: Column (b), Temporary Difference, Column (c), Permanent Difference , and Column (d), Other Permanent Differences for Allocations to Non-ECI and ECI, of Part II (reconciliation of income (loss) items) and Part III (reconciliation of expense/deduction items). (4) Foreign Tax Items: (a) International Boycott Transactions: Transactions disclosed on Form 5713, International Boycott Report; Schedule A, International Boycott Factor ( Section 999(c)(1)) ; Schedule B, Specifically Attributable Taxes and Income ( Section 999(c)(2)); and Schedule C, Tax Effect of the International Boycott Provisions , must be completed when required by their instructions. (b) Treaty-Based Return Position: Transactions and amounts under section 6114 or section 7701(b) as disclosed on Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b), must be completed when required by its instructions. (5) Other: (a) Moving Expenses: Complete Form 3903, Moving Expenses, and attach to the return. (b) Employee Business Expenses: Complete Form 2106, Employee Business Expenses, or Form 2106-EZ, Unreimbursed Employee Business Expenses, and attach to the return. This section does not apply to club dues, or to travel expenses for any non-employee accompanying the taxpayer on the trip. (c) Fuels Credit: Complete Form 4136, Credit for Federal Tax Paid on Fuels, and attach to the return. (d) Investment Credit: Complete Form 3468, Investment Credit, and attach to the return. 5. Effective Date This revenue procedure applies to any income tax return filed on a 2010 tax form for a taxable year beginning in 2010, and to any income tax return filed on a 2010 tax form in 2011 for a short taxable year beginning in 2011. 6. Drafting Information The principal author of this revenue procedure is Francis M. McCormick of the Office of Associate Chief Counsel (Procedure & Administration). For further information regarding this revenue procedure, contact Branch 2 of Procedure and Administration at (202) 622-4940 (not a toll free call). www.irstaxattorney.com 888-712-7690

Tuesday, December 28, 2010

Verduzco v. Commissioner, TC Memo 2010-278 , Code Sec(s) 6651; 6654. ________________________________________ Code Sec(s): 6651; 6654 Docket: Docket No. 21807-08. Date Issued: 12/20/2010 Judge: Opinion by THORNTON various other years. 2 OPINION I. Burden of Proof Respondent determined that with respect to each year at issue petitioner is liable for additions to tax pursuant to ($26,122 for 2001 and $3,795 for 2003) and indicated that petitioner had zero wage withholdings for 2002. sections 6651(a)(1) and (2) and 6654. Respondent has the burden of production with respect to these additions to tax. Sec. 7491(c). To meet this burden, respondent must produce evidence showing that the additions to tax are appropriate. See Higbee v. Commissioner, 116 T.C. 438, 446 (2001). Once respondent satisfies this burden, petitioner has the burden of proof with respect to exculpatory factors such as reasonable cause. See id. ; Ruggeri v. Commissioner, T.C. Memo. 2008-300 [TC Memo 2008-300]. II. Section 6651(a)(1) Addition to Tax Section 6651(a)(1) imposes an addition to tax for failure to file a return by its due date unless the taxpayer can establish that the failure is due to reasonable cause and not due to willful neglect. 3 The addition equals 5 percent of the net amount due for each month that the return is late, not to exceed 25 percent. , Sec. 6651(a)(1), (b)(1). The parties stipulated that petitioner did not timely file his returns. In computing the section 6651(a)(1) addition to tax as determined in the notice of deficiency, respondent took into account petitioner's wage withholdings for 2001 and 2003. In this proceeding respondent has conceded that petitioner's deficiency for each year at issue is smaller than determined in the notice of deficiency. If, as seems likely, the computations show that petitioner's tax liabilities as determined in this proceeding exceed his prepayment credits, respondent will have satisfied his burden of production and the section 6651(a)(1) addition will apply unless petitioner can show reasonable cause See Higbee v. Commissioner, supra and a lack of willful neglect. at 446; Crocker v. Commissioner, 92 T.C. 899, 913 (1989). Petitioner ascribes his failure to file to a variety of circumstances. He asserts that he had difficulty obtaining bookkeeping and accounting services after his accountant stopped working for him in May 2001. The record does not show conclusively when petitioner obtained the services of his new accountant. But the more fundamental consideration is that a taxpayer has a personal and nondelegable duty to file a timely return. United States v. Boyle, 469 U.S. 241, 249 [55 AFTR 2d 85-1535] (1985). Difficulty in finding a bookkeeper or accountant does not provide reasonable cause for petitioner's untimely filing. See Sparkman v. Commissioner, T.C. Memo. 2005-136 [TC Memo 2005-136], affd. 509 F.3d 1149 [100 AFTR 2d 2007-6961] (9th Cir. 2007). Petitioner also asserts that his failure to file was due to his caring for his ill father and to his own anxiety issues which he contends impaired his ability to manage his affairs. Reasonable cause for failure to file may exist if the taxpayer's or a family member's illness or incapacity prevents the taxpayer from filing his or her tax return but not if the taxpayer is able to continue his or her business affairs despite the illness or incapacity. See Ruggeri v. Commissioner, supra (and cases cited therein). We are not persuaded that his father's illness or petitioner's own anxiety issues prevented petitioner from filing his 2001, 2002, and 2003 Federal income tax returns. His father became seriously ill in June 2003, after the due dates had passed for petitioner to file his 2001 and 2002 tax returns. The evidence shows that throughout the relevant periods petitioner was able to manage his business affairs, working 14 to 16 hours a day, not only holding down a full-time job with significant management responsibilities but also operating his sole proprietorship. On cross-examination petitioner acknowledged that he had failed to timely file Federal income tax returns for 1998 through 2005. This pattern of chronic noncompliance further weighs against finding reasonable cause. See, e.g., Judge v. Commissioner, 88 T.C. 1175, 1189-1191 (1987). We conclude and hold that petitioner lacked reasonable cause for failing to file his returns for 2001, 2002, and 2003. Accordingly, petitioner is liable for the section 6651(a)(1) additions to tax, insofar as the computations show that for any month petitioner had net amounts due with respect to the years at issue. III. Section 6651(a)(2) Addition to Tax Section 6651(a)(2) imposes an addition to tax for failure to pay the amount shown as tax on a return on or before the due date unless the taxpayer can establish that the failure is due to reasonable cause and not due to willful neglect. The addition is calculated as 0.5 percent of the amount shown as tax on the tax return but not paid, with an additional 0.5 percent for each month or fraction thereof during which the failure to pay continues, up to a maximum of 25 percent. 4 If the amount required to be shown as tax on the return is less than the amount actually shown on the return, the addition to tax is calculated by reference to the lesser amount. Sec. 6651(c)(2). For purposes of computing the section 6651(a)(2) addition for any month, the amount of tax shown on the return is reduced by the amount of any part of the tax paid before the beginning of the month and by the amount of any credit against the tax which may be claimed on the return. Sec. 6651(b)(2). The section 6651(a)(2) addition applies only if an amount of Wheeler v. Commissioner, 127 T.C. 200, tax is shown on a return. 208 (2006), affd. 521 F.3d 1289 [101 AFTR 2d 2008-1696] (10th Cir. 2008). The parties have stipulated copies of SFRs that respondent filed for each year at issue. These SFRs meet the requirements of section 6020(b). See id. at 209. In computing the section 6651(a)(2) additions to tax as determined in the notice of deficiency, respondent reduced the amounts of tax shown on the SFRs by petitioner's wage withholdings for 2001 and 2003. It is undisputed that petitioner failed to pay any other part of the tax shown on the SFRs. Respondent concedes that petitioner's deficiency for each year at issue is smaller than he originally determined on the basis of the SFRs. If, as seems likely, the computations show that after taking into account petitioner's decreased liabilities resulting from these decreased deficiencies there are unpaid amounts of tax required to be shown on petitioner's returns, respondent will have met his burden of production with respect to the section 6651(a)(2) additions to tax. The addition to tax for failure to pay does not apply if the taxpayer shows that the failure was due to reasonable cause and not due to willful neglect. Sec. 6651(a)(2); see Higbee v. Commissioner, 116 T.C. at 447. To prove reasonable cause for a failure to pay the amount shown as tax on a return, the taxpayer must show that he exercised ordinary business care and prudence in providing for payment of his tax liability and nevertheless was either unable to pay the tax or would suffer undue hardship if he paid the tax on the due date. Sec. 301.6651-1(c)(1), Proced. & Admin. Regs. Petitioner was gainfully employed during the years at issue. He has not shown, or even expressly alleged, that his financial situation during 2001, 2002, or 2003 prevented him from paying his Federal income tax despite the use of ordinary business care and prudence. We conclude and hold that petitioner did not have reasonable cause for his failure to pay timely. Accordingly, petitioner is liable for the section 6651(a)(2) additions to tax for failure to pay the amounts shown on his Federal income tax returns for 2001, 2002, and 2003, insofar as the computations show unpaid amounts of tax required to be shown on petitioner's returns. IV. Section 6654 Addition to Tax Section 6654(a) imposes an addition to tax for failure to make timely and sufficient payments for estimated taxes. Respondent has conceded the section 6654 addition for 2001. To satisfy his burden of production for the section 6654 addition for 2002 and 2003, he must produce evidence sufficient to show that petitioner had an obligation to make estimated tax payments for those years. See Wheeler v. Commissioner, supra at 211. The section 6654 addition is calculated by reference to four required installment payments of the taxpayer's estimated income tax. Sec. 6654(c)(1); Wheeler v. Commissioner, supra at 210. Each required installment of estimated income tax is equal to 25 percent of the “required annual payment.” Sec. 6654(d)(1)(A). The required annual payment is generally equal to the lesser of: (1) 90 percent of the tax shown on the taxpayer's return for the year (or, if no return is filed, 90 percent of the taxpayer's tax for the year); or (2) if the taxpayer filed a return for the immediately preceding taxable year, 100 percent of the tax shown on the return. Sec. 6654(d)(1)(B); Wheeler v. Commissioner, supra at 210-211. For purposes of applying section 6654, credits allowed under section 31 for tax withheld on wages are deemed payments of estimated taxes. Sec. 6654(g). Petitioner filed no return for 2001, 2002, or 2003. Therefore, petitioner's required annual payments for 2002 and 2003 are determined by reference to 90 percent of his tax for each of those years, as determined in this proceeding. Respondent has satisfied his burden of production for the section 6654 addition with respect to 2002 and has also satisfied it with respect to 2003 insofar, as seems likely, petitioner's section 31 credits for 2003 do not completely satisfy his required annual payments for that year. Except in very limited circumstances not applicable in this case, see sec. 6654(e)(3)(B), section 6654 provides no exception for reasonable cause. Mendes v. Commissioner, 121 T.C. 308, 323 (2003). Instead, the section 6654 addition to tax is mandatory unless the taxpayer establishes that one of the exceptions in section 6654(e) applies. Recklitis v. Commissioner, 91 T.C. 874, 913 (1988). Petitioner has not shown that any of the statutory exceptions under section 6654(e) applies. We hold that petitioner is liable for the section 6654(a) additions to tax for 2002 and 2003. To reflect the foregoing and respondent's concessions, Decision will be entered under Rule 155. ________________________________________ 1 In computing the additions to tax for 2001 and 2003, respondent took into account petitioner's wage withholdings ________________________________________ 2 On these delinquent returns petitioner claimed wage withholdings that do not differ materially from those respondent used in computing the additions to tax. ________________________________________ 3 The substitutes for return that respondent made are disregarded for this purpose. See sec. 6651(g). ________________________________________ 4 The amount of the addition to tax under sec. 6651(a)(2) reduces the amount of the addition to tax under sec. 6651(a)(1) for any month to which an addition to tax applies under both paragraphs. Sec. 6651(c)(1). www.irstaxattorney.com 888-712-7690

Monday, December 27, 2010

Bengt Edvard Oman v. Commssioner, TC Memo 2010-276 , Code Sec(s) 6012; 6211; 6330; 6651; 6654; 7491. ________________________________________ BENGT EDVARD OMAN, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent . Case Information: Code Sec(s): 6012; 6211; 6330; 6651; 6654; 7491 Docket: Docket Nos. 18413-08, 18421-08L. Date Issued: 12/15/2010 Judge: Opinion by MARVEL HEADNOTE XX. Reference(s): Code Sec. 6012 ; Code Sec. 6211 ; Code Sec. 6330 ; Code Sec. 6651 ; Code Sec. 6654 ; Code Sec. 7491 Syllabus Official Tax Court Syllabus . Discussion I. Deficiency Proceeding With Respect to 2005 A. Burden of Proof and Unreported Income Issues Generally, the Commissioner's determination of a taxpayer's liability for an income tax deficiency is presumed correct, and the taxpayer bears the burden of proving it incorrect. See Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 [12 AFTR 1456] (1933). The U.S. Court of Appeals for the Ninth Circuit, to which an appeal would lie absent a stipulation to the contrary, see sec. 7482(b)(1)(A), has held that for the presumption of correctness to attach to the notice of deficiency in unreported income cases, the Commissioner must establish “some evidentiary foundation” connecting the taxpayer with the income-producing activity, see Weimerskirch v. Commissioner, 596 F.2d 358, 361-362 [44 AFTR 2d 79-5072] (9th Cir. 1979), revg. 67 T.C. 672 (1977), or demonstrating that the taxpayer actually received unreported income, Edwards v. Commissioner, 680 F.2d 1268, 1270-1271 [50 AFTR 2d 82-5390] (9th Cir. 1982). If the Commissioner introduces some evidence that the taxpayer received unreported income, the burden of production shifts to the taxpayer, who must establish by a preponderance of the evidence that the deficiency was arbitrary or erroneous. See Hardy v. Commissioner, 181 F.3d 1002, 1004 [84 AFTR 2d 99-5015] (9th Cir. 1999), affg. T.C. Memo. 1997-97 [1997 RIA TC Memo ¶97,097]. Respondent introduced into evidence a Form W-2, Wage and Tax Statement, for 2005 showing that petitioner received wages from Myers Industries, Inc. Respondent also introduced into evidence a certified print of the Information Returns Processing Transcript for 2005 showing, on the basis of third-party information returns, that petitioner received wages from Myers Industries, Inc., and Paramount; unemployment compensation; and a distribution from a section 401(k) plan. Petitioner testified that in 2005 he worked for a company that was part of Myers Industries, Inc., and acknowledged that he possibly worked for Paramount. He also testified that it was possible that he received unemployment compensation from the State of Nevada and a distribution from an employee stock ownership plan. Because respondent connected petitioner with income-producing activities, the burden of production shifted to petitioner and the presumption of correctness attached to respondent's income See Weimerskirch v. Commissioner, supra at 361-362. adjustments. Petitioner does not argue that section 7491(a), which shifts the burden of proof to the Commissioner in certain circumstances, applies, nor does the record permit us to conclude that the requirements of section 7491(a)(2) are met. Consequently, petitioner bears the burden of proof with respect to all adjustments. See Rule 142(a). Petitioner denies that he received wages from Paramount and Myers Industries, Inc. Petitioner contends that he attached the Forms 4852 to his 2005 return because the payors, Paramount and Dillen Products, Inc., erroneously withheld the Social Security and Medicare taxes. Petitioner presented no credible evidence to show that Paramount and Dillen Products, Inc., incorrectly reported wages they paid petitioner on the third-party information returns. To the contrary, petitioner testified that in 2005 he worked for Dillen Products, Inc., and it was “very possible” that he worked for Paramount. At trial petitioner recalled receiving the Forms W-2 but testified that he did not report the amounts because in his opinion they did not meet the definition of wages and instead he engaged in an exchange of property for property. This meritless argument is reminiscent of the equal exchange theory, which we have previously rejected as See Beard v. Commissioner, 82 T.C. 766, 767, 773 frivolous. (1984), affd. 793 F.2d 139 [58 AFTR 2d 86-5290] (6th Cir. 1986). Accordingly, we sustain respondent's determination with respect to petitioner's income. B. The Validity of the 2005 Form 1040 We now turn to the issue whether petitioner's 2005 Form 1040 was a valid return. We must first decide whether petitioner had an obligation to file a 2005 return, and then we must decide whether he did so. 1. Obligation To File a Return Under section 6012(a)(1)(A)(iv), an individual who is entitled to make a joint return and whose gross income, when combined with the gross income of his spouse, exceeds the sum of twice the exemption amount and the basic standard deduction applicable to a joint return, must file a Federal income tax return. As discussed above, we sustain respondent's determination regarding petitioner's income for 2005 as modified by respondent's concession. Petitioner's income for 2005 exceeded the described threshold, and consequently, petitioner had an obligation to file a return for 2005. Petitioner contends that he had no obligation to file a return because respondent's records show no such obligation. Petitioner relies on respondent's letter dated July 2, 2008. Respondent's July 2, 2008, letter is a response to petitioner's request for release of records under the Freedom of Information Act. Petitioner contends that the records produced in response to his request show code "01” as petitioner's filing requirement code, which petitioner asserts means “Return not required to be mailed or filed”. We reject petitioner's argument. It is the Internal Revenue Code that establishes a taxpayer's filing requirement. See sec. 6012. Moreover, petitioner has failed to show that the Individual Master File records on which he relies are related to his 2005 taxable year. 10 Accordingly, we conclude petitioner has failed to prove that he was not required to file a return for 2005. 2. Validity of a Return in General Generally, pursuant to section 6011(a) taxpayers must file returns that conform to the forms and regulations prescribed by the Secretary. See sec. 1.6011-1(a), Income Tax Regs. The Form 1040 is the form prescribed by the Secretary for use by individual taxpayers in filing returns. Williams v. Commissioner, 114 T.C. 136, 139 (2000). Section 6065 requires a return to be verified by a written declaration that it is made under the penalties of perjury. See id. The preprinted jurat on the Form 1040 satisfies the verification requirement of section 6065. See id. The Code does not define the word “return”. See Mendes v. Commissioner, 121 T.C. 308, 329 (2003) (Vasquez, J., concurring); Swanson v. Commissioner, 121 T.C. 111, 122-123 (2003). On the basis of the Supreme Court's opinions in Zellerbach Paper Co. v. Helvering, 293 U.S. 172, 180 [14 AFTR 688] (1934), and Florsheim Bros. Drygoods Co. v. United States, 280 U.S. 453, 464 [8 AFTR 10281] (1930), in Beard v. Commissioner, supra at 777, we applied a four-part test (Beard test) for determining whether a taxpayer's document constitutes a valid return. To be a valid return, we said the document must meet the following requirements: First, there must be sufficient data to calculate [the] tax liability; second, the document must purport to be a return; third, there must be an honest and reasonable attempt to satisfy the requirements of the tax law; and fourth, the taxpayer must execute the return under penalties of perjury. [Id.] We have applied the Beard test in various contexts, including for purposes of sections 6651(a)(1), 6662(a), and 6011, among others. Mendes v. Commissioner, supra at 329-330 (Vasquez, J., concurring). Applying the Beard test, this Court has generally held that a Form 1040 with zeros on every income line is devoid of financial data and is not a valid return. See, e.g., Turner v. Commissioner, T.C. Memo. 2004-251 [TC Memo 2004-251]; Halcott v. Commissioner, T.C. We also applied the Beard test when the taxpayer Memo. 2004-214. reported income on one line of the Form 1040 but wrote zeros on all other lines of income under circumstances that indicated no intent to file a valid return. See, e.g., Watson v. Commissioner, T.C. Memo. 2007-146 [TC Memo 2007-146] (concluding that a return that reported income on one line and zeros on other lines and that was accompanied by an attachment negating the jurat was invalid as it did not constitute a reasonable attempt to comply with the requirements of the tax law), affd. 277 Fed. Appx. 450 [101 AFTR 2d 2008-2109] (5th Cir. 2008). The Beard test has been adopted and used by several U.S. Courts of Appeals, often in the context of a bankruptcy case appeal, to decide whether a particular document is a return filed by a taxpayer. See, e.g., Colsen v. United States, 446 F.3d 836 [97 AFTR 2d 2006-2333] (8th Cir. 2006) (whether purported returns filed by a debtor- taxpayer after the IRS had prepared substitutes for returns and assessed tax liabilities were returns within the meaning of 11 U.S.C. sec. 523(a)(1)(B)(i)); Moroney v. United States, 352 F.3d 902 [92 AFTR 2d 2003-7381] (4th Cir. 2003); United States v. Hindenlang, 164 F.3d 1029 [83 AFTR 2d 99-509] (6th Cir. 1999) (whether a substitute for return was a return for purposes of 11 U.S.C. sec. 523(a)(1)(B)(i)); Bergstrom v. United States, 949 F.2d 341 [68 AFTR 2d 91-5886] (10th Cir. 1991) (same). Under Golsen v. Commissioner, 54 T.C. 742, 757 (1970), affd. 445 F.2d 985 [27 AFTR 2d 71-1583] (10th Cir. 1971), we follow any decisions of the Court of Appeals to which appeal lies that are squarely on point. In United States v. Long, 618 F.2d 74, 75-76 [46 AFTR 2d 80-5004] (9th Cir. 1980), 11the Court of Appeals for the Ninth Circuit held that in the context of a criminal prosecution under section 7203, 12 a Form 1040 that contained only zeros in every space for entering exemptions, income, tax, and tax withheld was a valid return. In Long, the Court of Appeals reversed the taxpayer's conviction for willful failure to file a return on a record that showed the following: (1) The Government had no record of the taxpayer's having filed any returns for the years at issue; (2) during the years at issue the IRS did not keep copies of documents that it considered to be invalid returns, including forms showing only zeros, nor did the IRS keep records of receiving such documents; (3) the taxpayer, defending against the prosecution's position of no return, introduced facsimile copies of the documents he purportedly filed as returns; (4) the trial court, sitting as the trier of fact in a nonjury trial, accepted as a fact that the taxpayer had filed the documents; and (5) the taxpayer “had inserted zeros in the spaces reserved for entering exemptions, income, tax, and tax withheld” on the Forms 1040 he had filed and had attached to the Forms 1040 copies of “a tax protest tract”. See id. at 75. The Court of Appeals started with the trial court's factual finding that the taxpayer “filed tax forms resembling the facsimiles introduced at trial”, which the court concluded was not clearly erroneous, and then turned to the issue of whether, by filing the Forms 1040, the taxpayer “made a return” for purposes of section 7203. See id. It decided the issue by applying the principle articulated in United States v. Porth, 426 F.2d 519, 523 [25 AFTR 2d 70-961] (10th Cir. 1970), and adopted by the Court of Appeals for the Ninth Circuit in United States v. Klee, 494 F.2d 394, 397 [33 AFTR 2d 74-1070] (9th Cir. 1974)—a tax form that does not contain any information relating to the taxpayer's income from which the tax may be computed is not a valid return under section See United States v. Long, supra at 75. The Court of 7203. Appeals held that the prosecution did not prove that the taxpayer was guilty of willfully failing to file a return within the meaning of section 7203, and it explained its reasoning 13 as follows: The zeros entered on Long's tax forms constitute “information relating to the taxpayer's income from which the tax can be computed.” The I.R.S. could calculate assessments from Long's strings of zeros, just as it could if Long had entered other numbers. The resulting assessments might not reflect Long's actual tax liability, but some computation was possible. In this respect, the circumstances here differ from those in Porth and similar cases in which defendants failed to complete tax forms or left them blank. Nothing can be calculated from a blank, but a zero, like other figures, has significance. A return containing false or misleading figures is still a return. False figures convey false information, but they convey information. [Id. at 75-76; fn. refs. omitted.] In Conforte v. Commissioner, 692 F.2d 587 [50 AFTR 2d 82-6051] (9th Cir. 1982), affg. in part, revg. in part and remanding 74 T.C. 1160 (1980), the Court of Appeals for the Ninth Circuit again addressed what constitutes a “return”, but this time the issue arose under section 6211, which defines a deficiency, former section 6653(b), which imposed a 50-percent fraud penalty on any part of an underpayment due to fraud, and former section 6653(c), which defined “underpayment” to mean “deficiency” as defined in section 6211. One of the taxpayers argued that she was entitled to a reduction in the fraud penalties determined by the Commissioner for amounts that she and her husband had reported on filed Forms See id. at 590. The Forms 1040 reflected only the 1040. taxpayers' names, addresses, Social Security numbers, filing status, exemptions, amounts designated as taxable income, and computations of income and self-employment tax. Id. at 588. The taxpayers did not include specific amounts or descriptions for gross income or deductions on the Forms 1040. Id. at 588-589. Instead they attached to each form a statement that they were under investigation by the Government and that they were asserting their Fifth Amendment privilege against self- incrimination with respect to the details of their income and expenses. See id. at 589. Before this Court, the taxpayer in Conforte had argued that the tax shown on the Forms 1040 qualified as an “amount shown as the tax by the taxpayer upon his return” within the meaning of Id. at 590 (quoting section section 6211(a)(1)(A). 6211(a)(1)(A)). Alternatively she had argued that the amount of tax shown on her Forms 1040 represented an amount previously assessed or collected without assessment within the meaning of section 6211(a)(1)(B). Conforte v. Commissioner, supra at 590- 591. Relying on Sanders v. Commissioner, 21 T.C. 1012, 1018 (1954), affd. 225 F.2d 629 [47 AFTR 1914] (10th Cir. 1955), this Court rejected both arguments, concluding that none of the Forms 1040 qualified as returns because the documents did not state specifically the amounts of gross income or the deductions and credits taken into account in computing taxable income. See Conforte v. Commissioner, supra at 591. The Commissioner, relying on United States v. Long, 618 F.2d 74 [46 AFTR 2d 80-5004] (9th Cir. 1980), argued that for a Form 1040 to be recognized as a return for tax purposes, it must set forth sufficient information relating to the taxpayer's income from which the tax can be computed. See Conforte v. Commissioner, supra at 591. The Court of Appeals in Conforte distinguished Long because Long decided whether the taxpayer had made a return for purposes of section 7203. See id. It rejected the idea that the term “return” has the same meaning under all sections of the Code, acknowledging instead “the possibility that the same word could have a different meaning in different parts of the code.” Id. It concluded that “where, as here, a word could well have a different meaning in different statutory contexts, a purpose- oriented approach should be used when interpreting the meaning of the word as it is used in different sections of the Code.” Id. Applying the described approach, the Court of Appeals held that the Forms 1040 were returns for purposes of the calculations required by section 6211 and former section 6653(b) and (c). See id. at 592. The approach of the Court of Appeals for the Ninth Circuit regarding what constitutes a “return”, as reflected in United States v. Long, supra, and clarified in Conforte v. Commissioner, supra, requires us to examine the purpose behind the relevant Code section under which the issue arises. In this case, the issue arises under section 6651(a)(1), which authorizes an addition to tax when a taxpayer fails to file a timely return. We can discern from a simple reading of section 6651(a)(1) that Congress clearly intended to impose the addition to tax whenever a taxpayer fails to satisfy the taxpayer's obligation to file a proper return by its due date. We can also discern that a provision like section 6651(a)(1) was designed to facilitate the orderly administration of Federal tax law by the Commissioner. A Form 1040 on which a taxpayer fails to make an honest and reasonable attempt to comply with the tax law, such as the claiming of withholding without any reported wages or taxable distributions, is not a document that is worthy of being processed as a return, and the IRS routinely takes the position that such a Form 1040 is not a return for purposes of section 6651(a)(1). It is this scenario that respondent contends is In a case like this one, we apply the Beard test presented here. in deciding whether a document qualifies as a return for purposes of section 6651(a)(1). See, e.g., Cabirac v. Commissioner, 120 T.C. 163, 168-170 (2003); Janpol v. Commissioner, 102 T.C. 499, 503, 505 (1994). We note that the Court of Appeals has applied the Beard test under different circumstances to decide whether a document qualified as a return and has described the Beard test as providing “a sound approach under both the Bankruptcy Code and the [Code].” United States v. Hatton, 220 F.3d 1057, 1060-1061 [86 AFTR 2d 2000-5572] (9th Cir. 2000). Consequently, we conclude that the Beard test is not inconsistent with the purpose-oriented approach of Conforte, and we shall apply it here. 14 3. The Application of the Beard Test Respondent contends that the Form 1040 fails the first and third parts of the Beard test because it does not contain sufficient information to calculate tax liability and it is not an honest and reasonable attempt to satisfy the requirements of the tax law. We agree and explain our reasoning below. Part one of the Beard test considers whether the purported return contains sufficient data to calculate the tax liability. See Beard v. Commissioner, 82 T.C. at 777. Although an incorrect return is not necessarily an invalid return, see Zellerbach Paper Co. v. Helvering, 293 U.S. at 180 (”Perfect accuracy or completeness is not necessary to rescue a return from nullity, if it purports to be a return, is sworn to as such *** , and evinces an honest and genuine endeavor to satisfy the law.”), we have held that returns containing zero entries on every line regarding income are devoid of financial data and therefore are invalid, see, e.g., Turner v. Commissioner, T.C. Memo. 2004-251 [TC Memo 2004-251]; Halcott v. Commissioner, T.C. Memo. 2004-214 [TC Memo 2004-214]. At first glance, it appears that petitioner's purported return is not a zero income return because petitioner reported a $1,419 IRA distribution. In addition, petitioner and Mrs. Oman claimed joint return filing status, dependency exemption deductions, and the standard deduction, and they inserted their Social Security numbers. Nevertheless, petitioner's return on its face lacks information sufficient to apprise respondent of his and Mrs. Oman's Federal income tax liability because it shows $6,055 tax withheld but contains no information as to income from which such tax was purportedly withheld. Specifically, the return shows zeros for wages, pension distributions, or dividends from which the $6,055 tax could have been withheld and reports no Federal income tax liability despite the one income entry. Accordingly, we conclude petitioner's 2005 Form 1040, on its face, does not contain sufficient data to calculate petitioner's tax liability and fails part one of the Beard test. Part three of the Beard test considers whether the taxpayer made an honest and reasonable attempt to satisfy the requirements of the tax law. See Beard v. Commissioner, supra at 777. Respondent contends that the Form 1040 fails part three of the Beard test because of the “assertion of the Fifth Amendment as protecting him from having the government use the forms he submitted as evidence against him”. For reasons set forth below, we do not limit our analysis to petitioner's asserted Fifth Amendment position. This Court and the Court of Appeals for the Ninth Circuit have examined the taxpayer's intent and the facts and circumstances surrounding the filing of the document purporting to be the taxpayer's return in deciding whether a taxpayer has satisfied part three of the Beard test. See United States v. Hatton, supra at 1060-1061 (considering as part of the third part of the Beard test the fact that the taxpayer filed the return only after the Commissioner contacted him); Dunham v. Commissioner, T.C. Memo. 1998-52 [1998 RIA TC Memo ¶98,052] (considering the taxpayer's background and intent under the third part of the Beard test). In applying part three of the Beard test, we consider that petitioner received wages during 2005, he failed to report those wages, and he claimed he had no obligation to report his earned income on a return. 15 As discussed above, we have previously rejected similar arguments as frivolous. See Beard v. Commissioner, supra at 767, 773; see also Rowlee v. Commissioner, 80 T.C. 1111, 1120-1121 (1983). Our conclusion regarding petitioner's intent with respect to his purported 2005 return is also supported by petitioner's behavior after he filed the purported return. On July 31, 2006, less than 4 months after filing the 2005 return, petitioner mailed to respondent a letter requesting an explanation of respondent's authority to issue notices and to make assessments and legal determinations against petitioner and giving respondent 30 days to reply. 16 Petitioner also asked respondent what Code section requires him to enclose documentation to support the entries on the return and what Code section defines income. Petitioner then instructed respondent to mail the answer to his address in “Nevada Republic [no ZIP Code]". The letter concluded: “If [the response] is addressed any other way than exactly as above I will know that the letter is intended for a fiction and you are trying to trick Me into abandoning my common law jurisdiction to enter your commercial, admirality [sic], color of law jurisdiction.” The rhetoric of petitioner's July 31, 2006, letter, which was nearly contemporaneous with the time of filing the 2005 return, raises serious doubts that the notice, while not a blanket Fifth Amendment claim, was drafted and attached to the 2005 return in good faith. The July 31, 2006, letter is one of 11 similar letters in the record that petitioner mailed to respondent from July 31, 2006, through October 12, 2008. We find that the notice and the purported return to which it was attached 16 Petitioner continues this line of argument on brief. were part of a pattern of communications of meritless content that petitioner mailed to respondent evincing an intent on petitioner's part not to comply with his tax obligations. We further find that petitioner's purported 2005 return was not an honest and reasonable attempt to satisfy the requirements of the tax law, and we conclude that it fails part three of the Beard test. Because petitioner's purported 2005 return fails the first and third parts of the Beard test, we conclude it was not a valid return, and we sustain respondent's determination to disregard it. C. Additions to Tax 1. Burden of Production Section 7491(c) provides that the Commissioner bears the burden of production in any court proceeding with respect to the liability of any individual for any penalty, addition to tax, or additional amount. The Commissioner's burden of production under section 7491(c) is to produce evidence that imposing the relevant penalty or addition to tax is appropriate. Swain v. Commissioner, 118 T.C. 358, 363 (2002). The taxpayer bears the burden of introducing evidence regarding reasonable cause or a similar defense. Higbee v. Commissioner, 116 T.C. 438, 446 (2001). 2. Section 6651(a)(1) Section 6651(a)(1) imposes an addition to tax for failure to file a return timely in the amount of 5 percent of the tax required to be shown on the return for each month during which such failure continues, not to exceed 25 percent in the aggregate, unless it is shown that such failure is due to reasonable cause and not due to willful neglect. Respondent satisfied his burden of production under section 7491(c) by introducing an excerpt from petitioner's transcript that contained third-party information returns data relating to petitioner's income and a copy of the 2005 return that respondent determined was unprocessable. Accordingly, petitioner was required to introduce evidence to prove that his failure to file a valid return was due to reasonable cause and not due to willful neglect. See sec. 6651(a)(1); Rule 142(a). Petitioner did not argue that his failure to file a valid return was due to reasonable cause, and he presented no credible evidence on the issue. Accordingly, we hold that petitioner is liable for the addition to tax under section 6651(a)(1). 3. Section 6651(a)(2) Section 6651(a)(2) imposes an addition to tax for failure to pay timely the amount of tax shown on a return. The section 6651(a)(2) addition to tax applies only when an amount of tax is shown on a return. Cabirac v. Commissioner, 120 T.C. at 170. Petitioner did not file a valid 2005 return. However, respondent prepared a substitute for return under section 6020(b) for 2005. A return made by the Secretary under section 6020(b) is treated as the return filed by the taxpayer for purposes of determining whether the section 6651(a)(2) addition to tax applies. Sec. 6651(g)(2); Wheeler v. Commissioner, 127 T.C. 200, 208-209 (2006), affd. 521 F.3d 1289 [101 AFTR 2d 2008-1696] (10th Cir. 2008). Where the taxpayer did not file a valid return, to satisfy his burden of production for the section 6651(a)(2) addition to tax the Commissioner must introduce evidence that he prepared a substitute for return satisfying the requirements under section 6020(b). Wheeler v. Commissioner, supra at 209. Respondent satisfied this burden by introducing into evidence an IRC Section 6020(b) Certification. Consequently, petitioner had the burden of introducing evidence to show that his failure to pay was due to reasonable cause. He did not do so. Petitioner did not advance any argument regarding the section 6651(a)(2) addition to tax and introduced no credible evidence to show reasonable cause for his failure to pay tax shown on the return. Accordingly, we sustain respondent's determination with respect to the addition to tax under section 6651(a)(2). 4. Section 6654 Section 6654 imposes an addition to tax for underpayment of a required installment of estimated tax. Each required installment of estimated tax is equal to 25 percent of the “required annual payment”, which in turn is equal to the lesser of (1) 90 percent of the tax shown on the taxpayer's return for that year (or, if no return is filed, 90 percent of his or her tax for such year), or (2) if the taxpayer filed a return for the immediately preceding taxable year, 100 percent of the tax shown on that return. Sec. 6654(d)(1)(A) and (B). Respondent introduced evidence that petitioner was required to file a Federal income tax return for 2005 and that the return he filed was invalid. Despite petitioner's claim on the 2005 return that tax of $6,055 was withheld, respondent's records show no such withholding. Petitioner made no other payments for 2005. Respondent also introduced into evidence petitioner's return for 2004 showing a $4,764 tax liability. This satisfies respondent's burden of production under section 7491(c) by showing that petitioner had a required annual payment of estimated tax for 2005. We also find that petitioner does not qualify for any of the exceptions of section 6654(e). Petitioner presented no argument with respect to section 6654. Therefore, we sustain respondent's determination that petitioner is liable for the addition to tax under section 6654(a). II. Collection Proceeding Regarding Petitioner's 2004 Tax Liability Section 6330(a) provides that no levy may be made on any property or right to property of any person unless the Secretary has notified such person in writing of the right to a hearing before the levy is made. If the person requests a hearing, a hearing shall be held before an impartial officer or employee of the IRS Appeals Office. Sec. 6330(b)(1), (3). At the hearing a taxpayer may raise any relevant issue, including appropriate spousal defenses, challenges to the appropriateness of the collection action, and collection alternatives. Sec. 6330(c)(2)(A). A taxpayer may contest the existence or amount of the underlying tax liability at the hearing if the taxpayer did not receive a notice of deficiency for the tax liability or did not otherwise have an earlier opportunity to dispute the tax liability. Sec. 6330(c)(2)(B); see also Sego v. Commissioner, 114 T.C. 604, 609 (2000). Following a hearing, the Appeals Office must determine whether the proposed levy may proceed. The Appeals Office is required to take into consideration: (1) Verification presented by the Secretary that the requirements of applicable law and administrative procedure have been met, (2) relevant issues raised by the taxpayer, and (3) whether the proposed levy action appropriately balances the need for efficient collection of taxes with a taxpayer's concerns regarding the intrusiveness of the proposed levy action. Sec. 6330(c)(3). Section 6330(d)(1) grants this Court jurisdiction to review the determination made by the Appeals Office in connection with the section 6330 hearing. Where the validity of the underlying liability is properly at issue, the Court reviews the matter on a de novo basis. Sego v. Commissioner, supra at 610; Goza v. Commissioner, 114 T.C. 176, 181-182 (2000). Where the underlying tax liability is not in dispute, the Court reviews the Appeals Office's determination for abuse of discretion. Sego v. Commissioner, supra at 610; Goza v. Commissioner, supra at 182. An abuse of discretion occurs if the Appeals Office exercises its discretion “arbitrarily, capriciously, or without sound basis in fact or law.” Woodral v. Commissioner, 112 T.C. 19, 23 (1999). Petitioner contends that respondent misled him by instructing him not to take further action when he contacted respondent after receiving the notice of deficiency for 2005. However, petitioner stipulated the notice of deficiency and does not deny that he received it. The notice of deficiency states: “The time in which you must file a petition with the court (90 days or 150 days as the case may be) is fixed by law and the Court cannot consider your case if the petition is filed late.” Petitioner testified that he read the notice of deficiency upon receipt and remembered the language regarding the time for filing a petition. Petitioner may not now hide behind respondent's form letters because the notice of deficiency contained clear instructions on what petitioner had to do to contest the 2004 liability. Because petitioner failed to dispute the underlying liability by filing a timely petition, section 6330(c)(2)(B) precludes him from contesting the validity of the underlying tax liability during the section 6330 hearing and in this proceeding. Accordingly, we review respondent's determination for abuse of discretion. In his petition petitioner does not raise any meritorious arguments. During trial petitioner contended that although he requested a face-to-face hearing, he did not receive any hearing. Petitioner contends that respondent improperly interpreted the phrase “Please contact me in writing” on the Form 12153 as petitioner's request for a hearing by correspondence. Petitioner's claimed misunderstanding of the Form 12153 is understandable. Line 3 of the Form 12153 asks for a taxpayer's phone number and the best time to call. It does not indicate that it is intended to be the means by which a taxpayer selects a hearing format, nor does it indicate that by providing a phone number the taxpayer is requesting a telephone hearing or that, in petitioner's case, by requesting a contact in writing, he selects a hearing by correspondence. The Form 12153 in fact has no box to check or area to write in to indicate the preferred format of a requested hearing. Nevertheless, even if petitioner unknowingly requested a hearing by correspondence and later clarified he wanted a face-to-face hearing, we conclude that respondent did not abuse his discretion in denying petitioner a face-to-face hearing and that petitioner received a proper section 6330 hearing. Generally, because a hearing under section 6330 is an informal proceeding, a face-to-face hearing is not mandatory. See Katz v. Commissioner, 115 T.C. 329, 337 (2000); Davis v. Commissioner, 115 T.C. 35, 41 (2000); Clough v. Commissioner, T.C. Memo. 2007-106 [TC Memo 2007-106]. While a section 6330 hearing may be held face-to-face, a proper hearing may be conducted by telephone or correspondence in certain circumstances. Katz v. Commissioner, supra at 337-338; see also Clough v. Commissioner, supra. A hearing by correspondence consists of one or more written or oral communications between an Appeals officer or employee and the taxpayer. Sec. 301.6330-1(d)(2), Q&A-D6, Proced. & Admin. Regs. All communications between the taxpayer and the Appeals officer from the time of the hearing request up to the time of the issuance of the notice of determination constitute part of the section 6330 hearing. See Turner v. Commissioner, T.C. Memo. 2010-44 [TC Memo 2010-44]; Middleton v. Commissioner, T.C. Memo. 2007-120 [TC Memo 2007-120]. The record establishes that petitioner submitted his Form 12153 on November 19, 2007. Petitioner did not request a face- to-face hearing on his Form 12153 but did so by letter dated April 4, 2008. In the April 4, 2008, letter petitioner stated that respondent had repeatedly refused to answer his questions regarding Code sections that define income and property received as income and establish respondent's “Delegated Constitutional and Legislated Lawful authority”. The letter contained meaningless language, for example: “I do hereby give you notice that you, and all you are, are Fired from any and all representation of my private affairs without recourse”. Other than stating that his inability to discuss the underlying liability at the hearing is unfair, petitioner did not describe in his request for a face-to-face hearing what he intended to discuss at the hearing, nor did he offer collection alternatives. Ms. Chavez informed petitioner by letter dated April 11, 2008, that his request for a face-to-face hearing was denied. On April 30, 2008, petitioner sent another letter to Ms. Chavez that was similar to the April 4, 2008, letter. Petitioner pointed out that the Form 12153 was confusing because it did not state that by selecting the method of contact, he was actually selecting the format of the section 6330 hearing. Petitioner included the 2005 and 2006 Forms 1040. As discussed above, the 2005 Form 1040 was an invalid return and the 2006 Form 1040 was a zero income return. Again, petitioner did not identify any issues he would discuss at the hearing, nor did he propose collection alternatives or submit a completed Form 433-A, as Ms. Chavez had requested. We conclude that respondent did not err in refusing to grant petitioner a face-to-face hearing and that the correspondence between petitioner and Ms. Chavez constituted a proper section 6330 hearing. In his petition and at trial petitioner did not pursue any meritorious argument, nor did he introduce any credible evidence that would allow us to conclude that the determination to sustain the levy was arbitrary, capricious, without foundation in fact or law, or otherwise an abuse of discretion. See, e.g., Giamelli v. Commissioner, 129 T.C. 107, 112, 115-116 (2007). The Appeals Office verified that all requirements of applicable law or administrative procedure were met. It balanced the need for efficient collection of taxes with petitioner's concerns that the collection action be no more intrusive than necessary. Accordingly, we conclude that respondent did not abuse his discretion in sustaining the collection action. We have considered all of the arguments raised by either party, and to the extent not discussed above, we find them to be irrelevant or without merit. 17To reflect the foregoing, Decision will be entered under Rule 155 in docket No. 18413-08. Decision will be entered for respondent in docket No. 18421-08L. ________________________________________ 1 Unless otherwise indicated, all section references are to the Internal Revenue Code (Code), as amended, and all Rule references are to the Tax Court Rules of Practice and Procedure. Monetary amounts are rounded to the nearest dollar. ________________________________________ 2 Respondent concedes that petitioner's distribution from pensions was $1,480 rather than $14,800 as he had determined in the notice of deficiency. ________________________________________ 3 Petitioner and Mrs. Oman attached a similar notice to their 2005 return. The notice accompanying their 2005 return is reproduced infra p. 10. ________________________________________ 4 The parties subsequently exchanged similar correspondence. On Mar. 3, 2007, petitioner and Mrs. Oman sent respondent another letter similar to the Oct. 19, 2006, letter. On May 16, 2007, respondent wrote that he would contact petitioner and Mrs. Oman within 60 days. ________________________________________ 5 Respondent sent a separate final notice for 2004 to Mrs. Oman. ________________________________________ 6 Ms. Chavez stated: “It is not necessary to provide a copy of your 2002 tax return.” ________________________________________ 7 It appears that petitioner did not include in his Apr. 30, 2008, letter to Ms. Chavez the notice that accompanied the originally filed 2005 return. ________________________________________ 8 The jurat portion of the Form 1040 reads: “Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my knowledge and belief, they are true, correct, and complete.” ________________________________________ 9 On the Form 1040 petitioner and Mrs. Oman claimed a filing status of “Married filing jointly”. In preparing the substitute for return, respondent used a filing status of “single”. The parties have not indicated whether they agree that petitioner may use the filing status “Married filing jointly” in Rule 155 computations. ________________________________________ 10 Petitioner contends the "01” code means that the taxpayer has no filing obligation. However, one printout in Exhibit 37-P appears to refer to Mrs. Oman's 2005 year, and the other printout appears to relate to petitioner's 2003 taxable year. ________________________________________ 11 The position of the Court of Appeals for the Ninth Circuit that a return containing all zeros constitutes a valid return for purposes of a sec. 7203 prosecution is contrary to the positions of several other Courts of Appeals that have considered the issue. See United States v. Mosel, 738 F.2d 157 [54 AFTR 2d 84-5481] (6th Cir. 1984) (zero income return); United States v. Rickman, 638 F.2d 182 [47 AFTR 2d 81-379] (10th Cir. 1980) (zero income return); United States v. Smith, 618 F.2d 280 [46 AFTR 2d 80-5071] (5th Cir. 1980) (zero on every line of the return). ________________________________________ 12 Sec. 7203 establishes criminal liability for willful failure to file returns. ________________________________________ 13 In a footnote, the court distinguished cases in which a court has held that a purported return stating only a name, address, occupation, and signature and asserting that the tax law is unconstitutional, e.g., United States v. Daly, 481 F.2d 28 [32 AFTR 2d 73-5534] (8th Cir. 1973), or stating a name, address, an entry claiming a refund, and a constitutional objection, e.g., United States v. Irwin, 561 F.2d 198, 201 [40 AFTR 2d 77-5686] (10th Cir. 1977), was not a tax return under the Code. See United States v. Long, 618 F.2d 74, 76 [46 AFTR 2d 80-5004] n.3 (9th Cir. 1980). In another footnote, the Court acknowledged that applying the principle from United States v. Porth, 426 F.2d 519, 523 [25 AFTR 2d 70-961] (10th Cir. 1970), may “leave open the possibility that certain papers, although conveying information, might nevertheless not constitute tax returns.” United States v. Long, supra at 76 n.4. ________________________________________ 14 In Coulton v. Commissioner, T.C. Memo. 2005-199 [TC Memo 2005-199], a deficiency case in which the taxpayer filed a return containing zeros on each line regarding income and tax, we distinguished United States v. Long, 618 F.2d 74 [46 AFTR 2d 80-5004] (9th Cir. 1980), on the ground that it involved a criminal statute, sec. 7203. We concluded that Long was not squarely on point, and we applied the Beard test to decide whether the taxpayer's purported return was a valid return. See Coulton v. Commissioner, supra; see also Golsen v. Commissioner, 54 T.C. 742, 757 (1970), affd. 445 F.2d 985 [27 AFTR 2d 71-1583] (10th Cir. 1971). As in Coulton, we are not faced with a prosecution under sec. 7203. Instead we are considering the validity of a purported return in the context of a civil tax deficiency proceeding in which one of the issues is whether petitioner is liable for the sec. 6651(a)(1) addition to tax for failing to file a timely return. ________________________________________ 15 At trial petitioner argued the amounts he received in exchange for services did not meet the definition of “wages” because he received property in exchange for property. ________________________________________ 16 ________________________________________ 16 ________________________________________ 17 Sec. 6673(a)(1) provides that this Court may require the taxpayer to pay a penalty not in excess of $25,000 whenever it appears to this Court that: (a) The proceedings were instituted or maintained by the taxpayer primarily for delay, (b) the taxpayer's position is frivolous or groundless, or (c) the taxpayer unreasonably failed to pursue available administrative remedies. Respondent did not request that we impose a penalty pursuant to sec. 6673, and in the exercise of our discretion we will not impose a sec. 6673 penalty on petitioner. However, we warn petitioner that if in the future he maintains groundless positions in this Court, he runs the risk that he will be sanctioned in accordance with sec. 6673(a)(1). www.irstaxattorney.com 888-712-7690