Dennis J. DANNER and Pamela O. Danner, Plaintiffs, v. UNITED STATES of America, Defendant., United States District Court, E.D. Washington., 208 F.Supp.2d 1166, No. CS-01-0143-JLQ., April 26, 2002
Dennis J. DANNER and Pamela O. Danner, Plaintiffs, v. UNITED STATES of America, Defendant.
United States District Court, E.D. Washington.
208 F.Supp.2d 1166
April 26, 2002.
Dennis J. Danner, Spokane, WA, Pro se.
Pamela O. Danner, Spokane, WA, Pro se.
Frederick S. Wermuth, U.S. Depart╜ment of Justice, Tax Division, Washington, DC, for United States of America.
ORDER GRANTING SUMMARY JUDG╜MENT FOR DEFENDANT UNIT╜ED STATES OF AMERICA
QUACKENBUSH, Senior District Judge.
Before the court is the United States' Motion to Dismiss or, in the Alternative, for Summary .Judgment (C.R.30), which was heard without oral argument on April 23, 2002. Plaintiffs Dennis J. Danner and Pamela O. Danner are proceeding pro se. Defendant United States of America is represented by Frederick S. Wermuth, United States Department. of Justice, Tax Division.
For the following reasons, the Defen╜dant's Motion is GRANTED.
Background and Procedural History
This case involves a $500 tax penalty which the Internal Revenue Service (IRS) imposed on Plaintiffs pursuant to 26 U.S.C. ╖ 6702 because Plaintiffs allegedly tiled a frivolous income-tax return. The United States seeks to levy upon the Plain╜tiffs' property to collect the tax penalty pursuant to 26 U.S.C. ╖ 6331. The Plain╜tiffs have petitioned this court to declare the basis for the levy action invalid. The procedural history of this matter may be summarized as follows.
On June 23, 1998, Dennis and Pamela Danner filed their 1997 Form 1040 joint federal income tax return with zeros en╜tered on nearly every line of the return, including Line 38, which indicated zero taxable income. The only exceptions were Lines 54 and 60-62, which showed that $1,058 in federal income tax had been withheld and that the Danners were claim╜ing a refund of $1,058. (United States' Statement of Material Facts (C.R.33), Ex╜hibit A (Declaration of Frederick S. Wer╜muth) at Exhibit 1). In contrast, the gov╜ernment's computerized records of the Danners' Forms W-2 and 1099 revealed that the Danners' 1997 income was at least $24,259. (C.R. 33 at 2).
Accompanying the Danners' 1040 Form, and submitted as part their return, was a two-page statement averring, inter alia, that "no section of the Internal Revenue Code: 1) [e]stablishes an income tax 'lia╜bility' as, for example, Code Sections 4401, 5005, and 5703 do with respect to wager╜ing, alcohol, and tobacco taxes; [or] 2) [p]rovides that income taxes have to be paid on the basis of a return-as, for ex╜ample, Code Sections 4374, 4401(c), 5061(a), and 5703(b) do with respect to other taxes." (Declaration of Frederick S. Wermuth at Exhibit 1). The remainder of the statement set forth a dozen additional arguments as to why the Danners believed that they were not liable for any income tax.
On August 6, 1998, the IRS sent the Danners a letter notifying them that their 1997 1040 Form was a frivolous return and offering them 30 days to correct the return to avoid a penalty. ( Id., Exhibit 3 at 1). The Danners did not correct their return.
Consequently, on November 12, 1999, the IRS issued the Danners a Statutory Notice of Deficiency recalculating their 1997 tax liability as $1,414. The calcula╜tion was based on unreported wages of $22,321, interest income of $58, and unem╜ployment compensation of $1,880. (United States' Statement of Material Facts (C.R.33), Exhibit C (Declaration of Debra Brush), Exhibit 1 at 3). The government asserts that "it is certain that [the ban╜ners] received the Statutory Notice be╜cause on January 5, 2000 they wrote a letter to the Internal Revenue Service, attention Deborah Decker, Customer Ser╜vice Center, Ogden, Utah, titled 'In Re: Your Deficiency Notice Dated November 12, 1999.' " Id . The Danners did not file a petition with the United States Tax Court for a redetermination of the deficiency under 26 U.S.C. ╖ 6213.
On February 21, 2000, the IRS sent notice to the Plaintiffs that they were be╜ing charged a $500 penalty under 26 U.S.C. ╖ 6702 for filing a frivolous 1997 income-tax return. (United States' State╜ment of Material Facts (C.R.33), Exhibit B (Certificate of Official Record) at 8). The record also indicates that the government assessed the Danners' recalculated 1997 income tax on May 8, 2000. (C.R. 33, Exhibit C (Declaration of Debra Brush), Exhibit 1 at 3).
Subsequently, the IRS sent the Danners a letter captioned "Final Notice-Notice Of Intent To Levy And Notice of Your Right To A Hearing" on August 30, 2000. (Declaration of Frederick S. Wermuth, Ex╜hibit 4). The letter recited that the government was giving notice of its intent to levy upon Plaintiffs' property under 26 U.S.C. ╖ 6331 in order to collect the frivo╜lous return penalty. The letter also in╜formed the Danners of their right to re╜quest a Collections Due Process (CDP) hearing pursuant to 26 U.S.C. ╖ 6330. The Notice Of Intent To Levy And Notice of Right To A Hearing form contained a footer with the words "Letter 1058(DO) (Rev.l-1999)." Id.
The Danners admit that they received the notice, but deny that "IRS Form 1058" is the correct Statutory Notice and Demand required to be provided under ╖ 6331 of the Internal Revenue Code. (C.R. 21 at 5). Instead, the Danners claim that "IRS Form 17" is the proper Statutory Notice and Demand requited to be provided under 26 U.S.C. ╖ 6331. Id . In support of this claim, the Danners cite a Treasury Department document dated June 12, 1914, T.D. (Treasury Decision) 1995. (Memorandum in Opposition to the United States' Motion to Dismiss or, in the Alternative, for Summary Judgment (C.R.36), Plaintiff Exhibit 2 at 1). The Danners assert that T.D.1995 established Form 17 as the required Statutory Notice and Demand to be provided under 26 U.S.C. ╖ 6331, and that T.D.1995 has nev╜er been revoked. (C.R. 36 at 11). The Danners have submitted Affidavits stating that they have not received "a statutory Form 17A, Notice and Demand for Pay╜ment." (C.R. 36, Plaintiff Exhibit 2 at 3A-3B). Nevertheless, on September 9, 2000, the Danners timely requested a CDP hearing pursuant to 26 U.S.C. ╖ 6330, along with a request for produc╜tion of a number of documents. (C.R. 21 at 2).
The IRS acknowledged the request for hearing in a letter dated September 20, 2000, and attempted to schedule a tele╜phonic conference for October 11, 2000. ═ (Declaration of Debra Brush, Exhibit 1 at 4). The Danners rejected the proposed hearing in a letter dated October 4, 2000, in which they expressed outrage at the suggestion that a mere "telephone confer╜ence" would suffice; instead, the Plaintiffs demanded a face-to-face appeals confer╜ence. They also demanded a minimum of 60 days notice and ruled out holding the hearing during the period from December 1, 2000 to January 15, 2001. The IRS then offered to schedule the hearing in its Spokane Office on March 21, 2001 or April 5, 2001. Neither date was acceptable to the Danners. Id. at 4-5. Concluding that the Plaintiffs' primary purpose was to delay, on April 20, 2001, the IRS issued a deter╜mination letter, without having held a prior CDP hearing, Id . at 5.
The Plaintiffs then commenced the ac╜tion herein on May 8, 2001. (C.R.1). In their complaint, the Danners petitioned this court to declare the determination of April 20, 2001 invalid and to order the IRS to conduct a Collections Due Process hear╜ing pursuant to 26 U.S.C. ╖ 6330. Id. at 4. The Danners also alleged that the govern╜ment had improperly attempted to limit the scope of the CDP hearing so as to exclude argument regarding the Danners' underlying tax liability. Id . at 2. In addi╜tion, the Danners asked this court to order the IRS to produce documents establishing a chain of delegated authority from the Secretary of the Treasury to the IRS Ap╜peals Officer assigned to their case. Id. at 4. However, before this court ruled on the merits herein, the parties entered into a stipulated agreement vacating the April 20, 2001 determination and remanding the case to the IRS Appeals Office for a CDP hearing on the collection issue. (Declara╜tion of Debra Brush, Exhibit 1 at 5).
Appeals Officer Debra Brush conducted the Collections Due Process hearing in Spokane on October 24, 2001. In addition to the Plaintiffs, also present at the hearing were Charles Danner and Richard Bristol. At the outset, Plaintiffs asserted that Richard Bristol, to whom Plaintiffs had given their Power of Attorney, was Mr. Danner's brother. (C.R. 36, Written Transcript of Collection Due Process Hearing Conducted October 24, 2001 (Plaintiff Exhibit 3) at 7). Plaintiffs thereby asserted that it was their right under 5 U.S.C. ╖ 500(d) to have Mr. Bris╜tol represent them before the IRS as their attorney-in-fact. Id. at 3-4. The record indicates that Mr. Bristol was essentially permitted to represent the Plaintiffs throughout the proceedings. Id.
At the CDP hearing, the Plaintiffs of╜fered a number of arguments as to why the frivolous return penalty should not be collected. Some of the Plaintiffs' argu╜ments attacked the government's alleged failure to follow the procedural require╜ments of 26 U.S.C. ╖ 6330, such as the statutory notice requirement. Others at╜tacked the authority of the IRS to assess a frivolous return penalty under 26 U.S.C. ╖ 6702. Still other arguments sought to attack the validity of Plaintiffs' underlying 1997 income-tax liability. Id.
It is apparent from the transcript of the hearing that the Appeals Officer found these arguments irrelevant and frivolous. At one point in the hearing, Mr. Bristol asked the Appeals Officer if a recommen╜dation that the IRS proceed with the col╜lection was a possible outcome. Id. at 14. The Appeals Officer replied, "It's a definite outcome ... unless I hear some argu╜ments on why the frivolous return penalty [inaudible]." However, the Danners con╜tinued to press their attacks on the validity of their underlying income-tax liability. Id.
At the end of the hearing, Plaintiffs purported to offer the government a col╜lection alternative-immediate payment of the frivolous return penalty-if the Appeals Officer pointed to language in the United States Code which subjected them, in their view, to federal income-tax liabili╜ty. Id . at 32-33. In response, the Ap╜peals Officer stated that the only underly╜ing tax liability at issue in the hearing was for the frivolous return penalty, the au╜thority for which was set forth in 26 U.S.C. ╖ 6702. Id . at 32-33. That response was unacceptable to Plaintiffs, and the CDP hearing was subsequently concluded. The IRS issued a letter of determination rec╜ommending appropriate enforced collection action on Dec. 17, 2001. (Declaration of Debra Brush, Exhibit 1 at 4).
Plaintiffs moved to reopen this action and amend their complaint on January 22, 2002. The United States did not oppose the motion. Accordingly, Plaintiffs' Amended Complaint alleged, inter alia, that Plaintiffs did not receive a fair Collec╜tions Due Process hearing; that notice of the CDP hearing was defective; that the IRS Appeals Officer was biased; that the procedure used to impose the frivolous return penalty was defective; that Defen╜dant failed to comply with their requests for the production of documents; that the Appeals Officer ignored their offer of a viable collection alternative; and that the $500 frivolous return penalty was errone╜ously predicated on the government's re╜calculation of their underlying 1997 in╜come-tax liability. (C.R. 29 at 2-8).
The court now turns to consideration of the merits of the United States' Motion.
This court has jurisdiction of the Plain╜tiffs' Amended Complaint under the IRS Restructuring and Reform Act of 1998, which allows an appeal to federal district court from an adverse IRS ruling arising from a Collections Due Process hearing, if the United States Tax Court does not have jurisdiction of the underlying tax liability. 26 U.S.C. ╖ 6330(d)(1)(B). Under the Internal Revenue Code, a tax penalty is itself considered to be a tax. 26 U.S.C. ╖ 6671. Consequently, two distinct "underlying tax liabilities" are implicated herein: (1) the Danners' 1997 income-tax liability; and (2) the Danners' alleged liability for filing a frivolous 1997 tax return.
In general, the United States Tax Court has exclusive jurisdiction to deter╜mine the correctness of deficiency assess╜ments made by the Commissioner of Inter╜nal Revenue, and may raise or lower an assessment or determine that there was no deficiency. Peerless Woolen Mills v. Rose, 28 F.2d 661, 662 (5th Cir.1928) (referring to powers of the Tax Court's predecessor body, the Board of Tax Appeals); Bramp╜ton Woolen Co. v. Field, 56 F.2d 23, 26-27 (1st Cir.1932) (holding that the jurisdiction of the Board of Tax Appeals is exclusive, and that District Courts are without juris╜diction of suit after appeal to the Board from a determination of additional deficiency tax).
In the case sub judice, the IRS issued a Statutory Notice of Deficiency recalculating the Danners' 1997 income-tax liability as $1,414. Consequently, the United States Tax Court, rather than this court, had exclusive jurisdiction of any ap╜peal of underlying tax liability of type (1), the Danners' 1997 income-tax liability. The Danners were advised of their right under 26 U.S.C. ╖ 6213 to petition the Tax Court for a redetermination of the income-tax deficiency, but they failed to do so. Thus, this court lacks subject matter juris╜diction as to matters related to the ban╜ners' underlying income-tax liability.
Although the jurisdiction of the Tax Court extends to civil penalties that can be assessed and paid after the govern╜ment gives notice of a deficiency to the taxpayer, its jurisdiction does not apply to those penalties which the government can assess without notice of a deficiency. Runtch v. Commissioner , 30 TCM 856, 1971 WL 2281 (1971). Deficiency proce╜dures do not apply to the assessment or collection of frivolous tax return penalties. 26 U.S.C. ╖ 6703. Where the Tax Court lacks jurisdiction, the federal district court is empowered to review a determination arising from a Collections Due Process hearing. 26 U.S.C. ╖ 6330(d)(1)(B). Ac╜cordingly, this court has jurisdiction to review matters related to underlying tax liability of type (2), the Danners' alleged liability for filing a frivolous tax return.
Section 6330(d) does not pre╜scribe the standard of review the court should apply in reviewing administrative CDP determinations, but the standard of review is set forth in the legislative history of the provision. Sego v. Commissioner , 114 T.C. 604, 609, 2000 WL 889754 (2000). Where the validity of the underlying tax liability was properly at issue in the hear╜ing, the standard of review is de novo. However, where the validity of the under╜lying tax liability was not properly at issue, the court will review the administrative determination for abuse of discretion. Sego, 114 T.C. at 610 (citing House Confer╜ence Report on the IRS Restructuring and Reform Bill of 1998).
The gray amen of the Plaintiffs' com╜plaint is that they did not receive the fair hearing to which they were entitled under 26 U.S.C. ╖ 6330(b). The Danners' chal╜lenge rests in part on the claim that the Appeals Officer improperly attempted to limit the scope of the hearing to a discus╜sion of "collection alternatives." The tran╜script of the hearing indicates that the Danners basically attempted to reargue their obligation to pay income taxes. The Danners contend that under ╖ 6330(c)(2)(B), they were entitled to be heard as to the validity of their underlying income-tax liability.
The Plaintiffs' argument is un╜sound. A taxpayer may raise a challenge to the existence of the underlying tax lia╜bility "if the person did not receive any statutory notice of deficiency for the tax liability or did not otherwise have an op╜portunity to dispute such tax liability." 26 U.S.C. ╖ 6330(c)(2)(B). However, the Danners did receive a notice of deficiency regarding their underlying income-tax lia╜bility. They also had an opportunity to dispute the income-tax deficiency before the Tax Court, but they did not do so. Thus, this court concludes as a matter of law that the Appeals Officer properly re╜fused to hear arguments regarding the validity of Plaintiffs' underlying income-tax liability.
The Danners' related claim that the Ap╜peals Officer was only willing to discuss collection alternatives for the frivolous re╜turn penalty is inaccurate. Early in the hearing, the Appeals Officer asked, "[W]hat would your position be on why your return shouldn't be considered a frivolous return and subject to that penalty?" (C.R. 36, Exhibit 3, at 7). Later, the Appeals Officer again asked, "What is your position regarding the $500 frivolous re╜turn penalty?" Still later, the Appeals Officer asked, "And so my question would be, . . . why do you not feel that . . . Mr. and Mrs. Danners' 1997 income tax return would be considered a frivolous return by the Internal Revenue Service?" Id . at 15. The transcript is simply devoid of any pertinent argument addressing the Plain╜tiffs' underlying liability for the frivolous return penalty.
An income tax return is frivolous if it contains information that on its face indicates that the self-assessment is sub╜stantially incorrect and is due to a position which is frivolous. 26 U.S.C. ╖ 6702(a). The Danners filed their 1997 Form 1040 joint federal income tax return with zeros on nearly every line of the return, includ╜ing Line 38, which indicated zero taxable income. Lines 54 and 60-62 showed that $1,058 in federal income tax had been withheld and that the Danners were claim╜ing a refund of $1,058. This information indicates that the Plaintiffs' self-assess╜ment was substantially incorrect. In addi╜tion, the Danners' position has been based on frivolous arguments. Consequently, this court concludes as a matter of law that the Plaintiffs are liable for the $500 tax penalty pursuant to 26 U.S.C. ╖ 6702.
The Appeals Officer also inquired at the outset of the hearing whether the Danners wanted to discuss any collection alterna╜tives, such as an installment agreement. (C.R. 36, Exhibit 3, at 8). The only re╜sponse was an illusory offer in which Plain╜tiffs purported to offer immediate payment of the frivolous return penalty-if the Ap╜peals Officer identified language in the United States Code which subjected them, in their view, to federal income-tax liabili╜ty. Id. at 32-33. The Appeals Officer properly declined. This court therefore concludes that declining the Plaintiffs' illu╜sory offer of a "collection alternative" was not an abuse of discretion.
The Plaintiffs claim that they did not receive a fair hearing because the Appeals Officer allegedly was biased. In support of this claim, the Plaintiffs allege that when asked if a recommendation that the IRS proceed with collection was a possible outcome, the Appeals Officer replied, "It's a definite outcome." Id . at 14. This quota╜tion takes the Appeals Officer's words en╜tirely out of context, because the Plaintiffs fail to supply the remainder of the state╜ment "unless I hear some arguments on why the frivolous return penalty [inaudi╜ble]." Id. The record contains no evidence of bias on the part of the Appeals Officer.
The Plaintiffs claim that they did not receive a fair hearing because the United States failed to comply with their requests for the production of documents. Under the Administrative Procedure Act, however, "[p]rocess, requirement of a re╜port, inspection, or other investigative act or demand may not be issued, made, or enforced except as authorized by law." 5 U.S.C. ╖ 555(c). Section 6330 does not provide authorization for production of documents or other investigative demands in connection with a Collections Due Pro╜cess hearing. Hence, the Danners were not entitled to the production of documents from the IRS.
The Plaintiffs also claim that the Ap╜peals Officer tried to disallow the partic╜ipation of Richard Bristol in the CDP hearing. The transcript shows otherwise. The Appeals Officer allowed Mr. Bristol a great deal of latitude during the hearing to provide assistance to the Plaintiffs.
Finally, the Plaintiffs contend that the procedures used to impose the frivolous return penalty, such as the Statutory No╜tice and Demand issued to Plaintiffs, were defective. The Plaintiffs' contention is without merit.
In sum, the Plaintiffs have failed to raise a genuine issue of material fact and the United States is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c). The United States' Motion for Summary Judg╜ment (C.R.30) is GRANTED.
Accordingly, IT IS HEREBY OR╜DERED that Plaintiffs' Amended Com╜plaint is DISMISSED with prejudice.
IT IS SO ORDERED. The Clerk is hereby directed to enter this Order and furnish copies to Dennis J. Danner, Pame╜la O. Danner, and counsel for the Defen╜dant. The Clerk shall thereafter enter judgment for the Defendant and close this file.