[97-1 USTC ¶50,463] Virginia Rush, Plaintiff v. Department of Treasury, Internal Revenue Service, Defendant

U.S. District Court, So. Dist. Ala. , So. Div., Civ. 96-0079-CB-M, 3/4/97

[Code Secs. 6511 and 7422 ]

Refund claims: Jurisdiction: Timely filing.--The district court lacked subject matter jurisdiction over a refund suit because the individual's claims for refund were not timely filed. The individual's liability as transferee of her late husband for his tax debt pertained to two tax years, and her refund claims were filed more than three years after the IRS 's seizure of funds from her bank accounts in satisfaction of those taxes.

[Code Secs. 6512 and 7422 ]

Refund suits: After Tax Court decision: Res judicata.--An individual could not sue in a federal district court to recover a tax refund where her liability had been finally adjudicated by the Tax Court. She had never appealed the Tax Court's decision that she was liable as transferee of her late husband for his tax debt. Moreover, the doctrine of res judicata barred litigation of her liability as a transferee.

[Code Sec. 6325 ]

Liens and levies: Release of lien: Effect on tax liability.--The IRS 's release of its lien on an individual's property following satisfaction of her liability as transferee of her late husband for his tax debt did not constitute an admission that she was not liable for the taxes. The lien was released because her tax liability was satisfied through other collection procedures--the seizure of money from her bank accounts..

MEMORANDUM OPINION AND ORDER

BUTLER , JR., Chief District Judge:

This matter is before the Court on a motion for summary judgment (Doc. 15) filed by the defendant, the Department of Treasury, Internal Revenue Service, and on plaintiff's response thereto (Doc. 17). After careful consideration of the facts presented in the light most favorable to the nonmoving party, the Court finds that the motion for summary judgment is due to be granted. ¹

Findings of Fact

In 1985 the United States Tax Court found plaintiff Virginia Dell Rush liable for the tax liability of her late husband, Quentin W. Rush, for the tax years 1967 and 1968. See Virginia Dell Rush v. Commissioner [ CCH Dec. 41,882(M)], 1985 WL 14701 (U.S.T.C.). Although plaintiff was not married to Quentin Rush until 1971, she was held liable for his 1967 and 1968 tax liabilities because Mr. Rush had fraudulently transferred his assets to her to avoid the payment of those taxes Id.

Shortly after the Tax Court decision was entered, the Secretary of the Treasury made transferee assessments against the plaintiff in the amount of $37,561.88 for tax year 1967 and $557,050 for tax year 1968. On January 30, 1996, a notice of federal tax lien was filed against the plaintiff as transferee, with the Judge of Probate, Mobile County , Alabama . On February 4, 1986, the Internal Revenue Service levied plaintiff's funds at two banks, collecting the total sum of $98,068.91. The sum of $33,014.49 was seized from an account at First Southern Federal Savings, and the sum of $65,054.42 from Alabama Federal. The collected funds satisfied plaintiff's transferee liabilities with interest. On March 24, 1986, the plaintiff's transferee liability having been satisfied, the Internal Revenue Service filed a Certificate of Release of Federal Tax Lien with the Judge of Probate, Mobile County , Alabama .

On December 12, 1991, a "claim" was filed with the IRS , presumably for a refund of funds paid pursuant to the levy. On November 19, 1990, plaintiff filed an amended federal income tax return for the year 1986, claiming a refund due by virtue of the $98,068.91 seized in 1986. Plaintiff never filed a claim for refund with respect to her 1967 and 1968 tax liabilities. On January 26, 1996, plaintiff filed the instant action for a refund of the $98,063.91 in tax, plus interest from mid-February 1986. From plaintiff's pleadings, it appears that she believes that the release of the lien by the IRS has relieved her of all transferee liability arising from the transfer of assets by Mr. Rush. ²

Conclusions of Law

Summary judgment is due to be granted for several reasons. First, this action is barred under section 6512(a) of the Internal Revenue Code, 26 U.S.C. §6512(a). That section provides that a taxpayer whose liability has been finally adjudicated in the Tax Court cannot then bring suit for a refund except under circumstances not applicable here. The Tax Court has found plaintiff liable as the transferee of her late husband. That decision was issued in 1985 and was never appealed. Also, the doctrine of re judicata bars relitigation of plaintiff's transferee liability. Gibbs v. Commissioner [87-2 USTC ¶9509], 673 F. Supp. 1088, 1092 (ND. Ala. 1987) aff'd 846 F.2d 754 (11th Cir. 1988).

Furthermore, this Court lacks jurisdiction over plaintiff's claim. Because this action is a suit against the sovereign, all conditions precedent to suit are considered jurisdictional in nature. See Vintilla v. United States [91-1 USTC ¶50,272], 931 F.2d 1444, 1446 (11th Cir. 1991). If a plaintiff fails to comply with such a condition, the action must be dismissed for lack of subject matter jurisdiction. One of the conditions precedent to filing a suit in district court for a refund of overpayment of taxes is that plaintiff must first file a valid claim for refund with the IRS . 26 U.S.C. §7422. Plaintiff never filed a valid claim for refund because, inter alia, any and all claims she has filed have been untimely. A claim for refund must be filed within three years from the date the tax return was filed or two years from the date the tax was paid, whichever is later. 26 U.S.C. §651(a). In this case, the latter of those events was the payment of taxes which occurred in February 1986 when funds from plaintiffs's bank accounts were seized to satisfy the assessments against her. Thus, the claims filed by plaintiff in 1990 and 1991, even if valid, were not timely. ³

Finally, even if this action were not barred for the reasons set forth above, plaintiff's suit is without merit. As the Court interprets the pleadings, plaintiff contends that by releasing the lien filed against her property with the Judge of Probate, the IRS has admitted that she is not liable for the taxes paid on account of her transferee liability. This contention is clearly wrong. As the evidence reveals, the IRS released its lien against plaintiff's property because the tax liability was satisfied through other collection procedures, namely the levy against plaintiff's bank accounts. Hence the law required that the lien be released. See 26 U.S.C. §6325.

In conclusion, the government's arguments in support of its motion are well-taken. Plaintiff's attempt to relitigate her transferee liability in this action is barred under 26 U.S.C. §6512, by the doctrine of res judicata and by sovereign immunity. Accordingly, it is ORDERED that the motion for summary judgment be and hereby is GRANTED.

DONE.

¹ Defendant's motion to dismiss (Doc. 4) is MOOT. Many of the arguments raised therein are subsumed in the motion for summary judgment.

² In her response to the defendant's motion for summary judgment, plaintiff states that she is also asserting a claim against the IRS for $1 million for "reckless collection" of taxes. Plaintiff has cited no legal basis for this claim. Moreover, plaintiff's claim for "reckless collection" has no factual basis since the IRS was entitled to levy against her assets to collect the assessment made pursuant to the Tax Court's ruling.

³ These claims do not appear even to be claims for refunds of the taxes paid on account of transferee liability. Rather, they appear to be claims for refund of plaintiff's overpayment of income taxes.

[92-2 USTC ¶50,507] Albert J. Miller, Plaintiff v. United States of America , Defendant

U.S. District Court, No. Dist. Calif., C-90-3132 MHP , 9/15/92 , 813 FSupp 715

[Code Secs. 6352, 7432 and 7433 ]

Damages: Failure to release lien: Collection activity.--Damages claimed by a tax shelter promoter against the government for the failure to release a federal tax lien that was filed pursuant to assessments made prior to the mailing of a notice of deficiency were not recoverable. The liens were released the same day that the IRS attorney discovered that the statutory notice of deficiency had not been mailed, and the assessments were subsequently abated. There was no other contact between the taxpayer and the IRS that would trigger liability under Code Sec. 7432 for the failure to release the tax liens. Further, the taxpayer was not entitled to damages under Code Sec. 7433 because no officer or employee of the IRS recklessly or intentionally disregarded any provision of the Code or regulations with respect to collection of the taxes assessed against the taxpayer. The revenue officer assigned to the collection of taxes at issue acted within his authority when he attempted to interview the taxpayer and caused the filing of a notice of tax lien. The officer was not put on notice that the assessments were improper. The taxpayer's motion to reopen for additional testimony relating to a notice of deficiency issued posttrial was denied.

FINDINGS OF FACT , CONCLUSIONS OF LAW, AND ORDER

Patel, DISTRICT JUDGE"

EC: This matter arises out of an international withholding tax audit conducted by the Internal Revenue Service (" IRS ") under 26 U.S.C. §1441 against Albert Miller as withholding agent for A-Alphatronics, Inc. The IRS recommended withholding tax liability in excess of $10,000,000 and additional penalties in excess of $6,000,000.

BACKGROUND

This case presents issues involving sections 7432 and 7433 of the Internal Revenue Code, which were enacted as part of the so-called "Taxpayer Bill of Rights" in the Technical and Miscellaneous Revenue Act of 1988, Pub. L. No. 100-647, Secs. 6240 -6241. Sections 7432 and 7433 allow taxpayers to bring civil actions in the United States district courts to recover damages from the government when an IRS officer or employee knowingly or negligently fails to release a lien (section 7432 ) or recklessly or intentionally disregards any provision of the Internal Revenue Code or any regulation promulgated thereunder (section 7433 ).

Section 7432 , entitled "Civil Damages for Failure to Release Lien," provides in pertinent part:

(a) In General.--If any officer or employee of the Internal Revenue Service knowingly, or by reason of negligence, fails to release a lien under section 6325 on property of the taxpayer, such taxpayer may bring a civil action for damages against the United States in a district court of the United States .

(b) Damages.--In any action brought under subsection (a), upon a finding of liability on the part of the defendant, the defendant shall be liable to the plaintiff in an amount equal to the sum of--

(1) actual, direct economic damages sustained by the plaintiff which, but for the actions of the defendant, would not have been sustained, plus

(2) the costs of the action.

Section 7433 , entitled "Civil Damages for Certain Unauthorized Collection Actions," provides in pertinent part:

(a) In General.--If, in connection with any collection of Federal tax with respect to a taxpayer, any officer or employee of the Internal Revenue Service recklessly or intentionally disregards any provision of this title, or any regulation promulgated under this title, such taxpayer may bring a civil action for damages against the United States in a district court of the United States. Except as provided in section 7432 , such civil action shall be the exclusive remedy for recovering damages resulting from such actions.

(b) Damages.--In any action brought under subsection (a), upon a finding of liability on the part of the defendant, the defendant shall be liable to the plaintiff in an amount equal to the lesser of $100,000 or the sum of--

(1) actual, direct economic damages sustained by the plaintiff as a proximate result of the reckless or intentional actions of the officer or employee, and

(2) the costs of the action.

The government concedes that the assessment made on September 4, 1989 against plaintiff was erroneous. It should not have been made on that date because a notice of deficiency (90-day letter) had not been sent to the plaintiff before the assessment was made. The notices of tax lien that had been filed on May 1 and 17, 1990 were released on July 27, 1990 and the assessments were abated on August 30, 1990 .

Plaintiff contends that the government is liable for damages under sections 7432 and 7433 . The government claims it is not liable for damages because no officer or employee of the IRS knowingly, or by reason of negligence, failed to release a lien under 26 U.S.C. §6325 or recklessly or intentionally disregarded any provision of the Internal Revenue Code in connection with the collection of the taxes assessed against plaintiff.

This matter was tried before the court on March 23-25, 1992. The trial related solely to the issue of whether the United States is liable to the plaintiff for damages under the provisions of 26 U.S.C. §§7432 and 7433 . The court hereby enters its findings of fact and conclusions of law as to plaintiff's claims. To the extent that any findings of fact are included under conclusions of law they shall be deemed findings of fact, and to the extent that any conclusions of law are included under findings of fact they shall be deemed conclusions of law.

FINDINGS OF FACT

1. The plaintiff is a tax shelter promoter who used Hong Kong entities to claim certain alleged research and development deductions on numerous partnership returns. Ex. B-16. The IRS began to audit the plaintiff's tax shelter partnerships in 1982. In 1982 Jon Tamaki, an IRS international examiner, was assigned to examine the international tax aspects of the audit that the IRS was conducting of the partnerships controlled by the plaintiff. Tamaki did not formally begin his audit until 1984, after the conclusion of the domestic phase of the audit. The focus of his audit was whether the $33,928,000 sent to Hong Kong by fifty seven partnerships formed by plaintiff was subject to withholding taxes under 26 U.S.C. §1442 because it was United States source income sent to a foreign recipient. If the plaintiff was liable for such taxes, then he was required to file a U.S. Annual Return of Income Tax To Be Paid at Source (Form 1042). Ex. B-20.

2. Tamaki is a specialist employed by the IRS to investigate transactions involving foreign entities. Cases are referred to international examiners by domestic revenue agents if issues involve foreign entities. As soon as an international examiner completes his investigation, the case is referred back to the domestic revenue agent group which had referred the case to the international examination group. The international examiner or his group has not responsibility or authority to close out or process a case once he completes his audit. Only a domestic revenue agent has that responsibility.

3. Tamaki's audit was initiated in 1982. Both Edward Mevi and Lawrence Brookes filed Power of Attorney concerning this matter. In a letter dated November 6, 1986 , Brookes contacted Tamaki inquiring whether Tamaki needed any additional materials to complete the audit. Ex. A-10. In a telephone conversation in early December, 1986, Brookes requested a closing conference if a tax were to be assessed against plaintiff. Tamaki never contacted Brookes thereafter.

4. Tamaki completed his report on June 30, 1987 and recommended that withholding taxes under section 1442 be assessed against plaintiff at 30% of the research and development contract amounts for each of the years 1976 through 1980. Ex. B-16. Tamaki based this recommendation, among other reasons, on the fact that "the taxpayer has not and will not provide the proper books and records or information to support his position." Ex. B-16 at 56. the report concluded that "the entire series of transactions with all the entities created by A.J. Miller are considered sham. . . . None . . . are considered arm's length." Ex. B-16 at 56. Tamaki then prepared various IRS internal processing forms for purposes of closing the case out of his international examination group for transfer back to the domestic revenue agent group.

5. Tamaki was aware that plaintiff's tax counsel, Lawrence Brookes, did not agree with the imposition of the withholding taxes under section 1442 against his client and that Brookes intended to appeal the matter to the IRS appeals division. Tamaki included that fact in the transmittal form he prepared when he transferred his report to his group manager. Ex. A-30; Form 4665. It was Tamaki's understanding that the domestic revenue agent group which had referred the case to him would issue a 30-day letter and that the taxpayer would file a protest and the matter would be transferred to the appeals division for further review and an attempt to settle the case.

6. Tamaki's report was reviewed by a reviewer on July 9, 1987 for purposes of technical accuracy. The reviewer proposed certain adjustments and Tamaki made those adjustments to his report on August 27, 1987 . The reviewer also stated in his report that he expected the appeals division to review the case. Ex. A-30; Form 3990.

7. No copies of this report were sent to either Miller or his attorneys. No one from the IRS made any effort to contact Miller or his attorneys to set up a closing conference.

8. The IRS took no further action on this report from August 27, 1987 until June or July of 1989, when someone from the IRS discovered the report in San Francisco . Defendants cannot explain what happened to the report during those two years, although interest and penalties accrued against Miller during this period.

9. Tamaki had no further involvement in the matter from August 27, 1987 until June or July of 1989, when the group manager of the international examination group in the San Jose District, Donald Kihara, showed Tamaki a box containing Tamaki's original report and workpapers which had been sent to Kihara by the group manager of the international examination group in San Francisco. Tamaki told Kihara to send it to a domestic revenue agent group for processing. The original domestic revenue agent group that had originally referred the case to Tamaki in 1982 no longer existed, so the case had to be assigned to a new group for it to be processed.

10. Tamaki did not keep track of the case after he completed his report because he had a large caseload that included multinational corporations, of which many involved potential assessments of tax much larger than the Miller audit, although the Miller audit was the largest potential assessment of personal tax that he had handled. Tamaki had no knowledge of what happened to his report between August 27, 1987 and June or July of 1989 when Kihara spoke to him. After completing a report, there is nothing for Tamaki has nothing to do with a case unless he is asked by an appeals officer or government attorney to respond to something the taxpayer filed or did.

11. Kihara is the group manager of the international examination group in the San Jose IRS District. Prior to June, 1989 there was no international examination group in San Jose, so all referrals regarding international tax issues were sent to the San Francisco District.

12. In June of 1989 Kihara received a phone call from the international examination group manager in the San Francisco District, Dough Kuntz. He told Kihara that he had located the Miller file in San Francisco and that it needed to be closed. They decided the case should be closed in the San Jose District because Miller resided and worked within that district.

13. Since the international group is only a specialty group within the Examination Division, they have no control over tax returns. The processing of cases can only be initiated by a domestic revenue agent group who would cause 30 and 90-day letters to be sent out. The international examination group manager or agent who wrote the report does not review either the 30 or 90-day letters either before or after they are sent out by the processing or support units responsible for sending out such letters.

14. Kihara then asked Jean Janich, a group manager of a revenue agent group, if she would process the Miller case. She agreed. Kihara made no suggestion as to how Janich should process the case. Kihara had no involvement in the case again until May, 1990 when Brookes called him seeking a copy of the notice of deficiency on the assessment that had been made on September 4, 1989 . When he spoke with Brookes in May, 1990, Kihara had no reason to believe that 30 and 90-day letters had not been sent to Miller before the assessment was made. Although he had not seen the 90-day letter, he assumed it had been sent out and told Brookes he would attempt to locate a copy of the notice.

15. Janich is a group manager of a domestic revenue agent group in the San Jose IRS District. She had twelve revenue agents under her supervision in 1989. Each domestic revenue agent group has a support function which prepares all 30 and 90-day letters. Janich had no authority to prepare or send out such letters. Only the processing unit can perform those functions.

16. In June or July of 1989, Janich took control of the Miller case for purposes of closing it out. She intended that it be sent to the appropriate examination support and processing group to send out the 30 and 90-day letters. She assigned the matter to a revenue agent in her group, Ann Reuter, in order to research the procedures that needed to be performed to close the case since it involved the filing of 1042 tax returns. Neither Janich, Reuter, nor any other domestic revenue agent in the San Jose District had ever before processed a case involving a 1042 tax return.

17. Both Janich and Reuter discussed the matter with the manager of the processing group in the San Jose District who told both of them that all 1042 tax returns must be sent to the Philadelphia Service Center for processing. Janich also personally looked at the IRS Manual which directed that all 1042 tax returns be sent to the Philadelphia Service Center for processing. Ex. A-29. The administrative file was sent by Janich to the Philadelphia Service Center on July 26, 1989 and received by the service center on August 16, 1989 . Ex. A-12.

18. Janich believed that the Philadelphia Service Center would process the 1042 tax returns in the proper manner which included sending 30 and 90-day letters to the taxpayer before any assessment was made. Janich made the decision to send the 1042 tax returns to the Philadelphia Service Center for processing based upon her review of the Internal Revenue Manual, the research conducted by Reuter, and conversations she and Reuter had with the manager of the processing function.

19. Reuter then filed all the appropriate internal processing forms and gave them to the secretary along with the administrative file to be sent to the Philadelphia Service Center . Reuter assumed that the Philadelphia Service Center would properly process the case by first issuing both 30 and 90-days letters. She did not prepare the internal processing forms that went along with the administrative file to the Philadelphia Service Center any differently than if the case was being closed out by the San Jose processing group. Moreover, the internal processing forms are filled out the same way whether they involve 1040 or 1042 tax returns.

20. The Philadelphia Service Center received the administrative file on August 16, 1989 . It did not issue either a 30 or 90-day letter. Nor did anyone return the administrative file to the San Jose District for purposes of mailing such letters. Instead, on September 4, 1989 , it assessed tax liabilities against the plaintiff as were originally proposed by Tamaki's report.

21. The IRS made no person-to-person contact with the plaintiff with respect to the collection of the taxes assessed on September 4, 1989 until April 26, 1990 . Between those two dates the only attempt at collection was made by the Philadelphia Service Center , which mailed four sets of notices to the plaintiff. The first set was dated September 4, 1989 , and the second set was dated October 16, 1989 . Exs. B-1, B-2. Both notices were mailed to plaintiff's mail drop.

22. Plaintiff picked up both notices sometime during October, 1989. He asked his attorney, Mevi, to make inquiries about the notices.

23. Mevi called the Philadelphia Service Center on October 31, 1989 and spoke to a telephone service representative named Robert Rentka. Rentka informed Mevi that Rentka could find no computer record of the assessment made against Miller. In fact, the name Albert Miller did not even appear in the computer records that Rentka reviewed as he spoke to Mevi. Mevi reported back to Miller that the Philadelphia Service Center could find no computer record of Miller or the assessment. Mevi did not request that Rentka abate the assessment or release any liens. Mevi also told plaintiff's attorney Brookes and plaintiff's accountant Pierre Koramos that the Philadelphia Service Center had no computer record of Miller or any assessment having been made against him. Mevi ceased representing Miller within a few days after the October 31, 1989 phone call to Rentka.

24. Rentka did not tell Mevi during their phone conversation that the notices Miller had received were in error or wrong; that Miller could ignore the notices; or that Rentka would abate the assessments. Mevi left his name and number and asked Rentka to call him if he found anything more. He made no other request to Rentka.

25. Mevi did not tell Miller that the notices had been issued in error and that he could ignore them or that anyone in the IRS had told Mevi that they were issued in error and could be ignored. Mevi had no idea what further action the IRS would take after his phone call to Rentka on October 31, 1989 .

26. The deposition of Robert Rentka was taken on December 16, 1991 and is part of the record in this case. Rentka is a taxpayer service representative in the Pittsburgh IRS District, takes 50-100 calls a day, and has no recollection of receiving a call from Mevi. Rentka Depo. at 11, 24-28. He testified that there are circumstances when a particular assessment would not be on the computer records. The specific assessment made in this case against Miller was a non-master file assessment and therefore would not have been in the computer records on October 31, 1989 . Moreover, it would not even appear on microfilm at the Philadelphia Service Center . Rentka Depo. at 32-38.

27. The deposition of the group manager for taxpayer services in the Pittsburgh district office, Mary Vojtash, is also part of the record. One testified that it is common that certain records of assessments are not found on the computer. Vojtash Depo. at 15. Since the assessment made against the plaintiff was a non-master file, there would be no computer record of it when Mevi called on October 31, 1989 . Vojtash Depo. at 15-16, 21-22. A record of such assessments does not appear in the computer until the final computer notice is sent to the taxpayer and the matter is referred to the collection division. Vojtash Depo. at 16. Because it is never a part of the computer record, whether or not a notice of deficiency is sent before an assessment is made cannot be determined by a taxpayer service representative on the computer. Vojtash Depo. at 26-30.

28. A telephone service representative cannot speak to an attorney about a taxpayer's account unless the computer shows that there is a power of attorney on file. Vojtash Depo. at 10-11. However, if a telephone service representative cannot find any information on the computer, the representative should then ask the taxpayer "would you like me to send this for further research?" Vojtash Depo. at 32. The request is then referred to the written accounts department to do the research, and whatever information they find is communicated, usually in writing, to the taxpayer. Rentka Depo. at 24. In this case since there was no computer record of either Miller or the assessment, there was no way for the telephone service representative to verify to whom he was talking. Therefore, the telephone representative could not call Mevi back with any information about Miller since it would be a violation of the disclosure provisions of the Internal Revenue Code §6103 to do so and would subject Rentka to criminal and civil fines. However, if the request had been referred to the written accounts department, they would have discovered Mevi's power of attorney on file and the lack of statutory notice sent to plaintiff in this case, and could have contacted Miller with this information about the assessments.

29. The call to Rentka by Mevi occurred on October 31, 1989 . On November 27, 1989 the Philadelphia Service Center sent the plaintiff a third notice requesting payment of the tax liabilities. Ex. B-33. Neither the plaintiff, Mevi, Koramos, nor Brookes made any calls or attempted to communicate with the IRS as a result of this third notice.

30. On January 8, 1990 the Philadelphia Service Center sent a fourth notice to Miller. Exs. A-17, B-25. This letter informed the plaintiff that this would be the final notice before enforcement action would be taken and that a Notice of Federal Tax Lien could be filed which constitutes a public notice to his creditors that a tax lien existed against his property.

31. The collection of these tax liabilities by the Philadelphia Service Center was transferred to the Collection Division in the San Jose District on April 9, 1990 and assigned to Revenue Officer Kenneth Whitmore. This was the first any IRS office was assigned the collection of these taxes. Whitmore received only a Taxpayer Delinquency Account ("TDA") card for each period with respect to Miller. Ex. A-3.

32. The TDA card shows information about the liability the revenue officer is assigned to collect, including the following: name of taxpayer, social security number, type of tax, date assessed and amount, and whether or not the liability had been manually assessed, meaning it was a non-master file account. There is nothing on the TDA card which shows any events that occurred before the assessment was made; why the assessment was made; or whether a statutory notice of deficiency was mailed to the taxpayer.

33. On April 15, 1990 , Mevi ordered a transcript of Miller's tax records from the Fresno Service Center . The transcript failed to show any information about Miller's tax liability in this case even though the assessment was entered into the IRS computer system on March 5, 1990 . Exs. A-23, A-17.

34. On April 25, 1990 Whitmore requested the automatic lien system to file a notice of tax lien. This is a normal and routine practice in all collection cases. Ex. B-8.

35. On April 26, 1990 Whitmore along with Revenue Officer Jules Tupaj attempted to interview the plaintiff at his residence. Tupaj was assigned the collection of certain unrelated income tax liabilities. Whitmore told the plaintiff that he was there to collect the 1042 income taxes assessed against him. The plaintiff told Whitmore he would not discuss those tax liabilities. The plaintiff did not tell Whitmore that the Philadelphia Service Center could find no record of the assessments or that plaintiff had not received a statutory notice of deficiency.

36. Whitmore was never contacted after April 26, 1990 by either Miller, Mevi, Brookes, or any other representative of Miller. No one ever told or suggested to Whitmore that there was anything wrong or incorrect about the assessment. Whitmore was not told by either Miller or his representatives that a 90-day letter had not been received.

37. Despite having requested the automatic lien system to file a notice of tax lien, Whitmore discovered on May 1, 1990 that no such lien had been filed. Accordingly, a notice of tax lien was manually filed on May 1 and the automatic lien system filed a duplicate lien on May 17, 1990 . Exs. B-5, B-6.

38. Whitmore took no other collection action in this case. He was on annual leave from July 24 to August 6, 1990 . Upon his return, he learned that the notices of tax lien had been released and assessments were going to be abated. He had no further involvement with the case after that time.

39. Whitmore was the only collection officer ever assigned to collect these taxes. During the time he was responsible for collecting the taxes, he neither saw, read, nor heard anything which indicated to him that there was something wrong about the assessment. He never talked to Mevi, Brookes or any other representative of Miller about the 1042 tax liabilities.

40. Unless shown otherwise, revenue officers assume that the examination division has followed all proper procedures before an assessment is made. Revenue officers do not search for notices of deficiency after they receive a case and before they commence collection activity.

41. Miller came into the offices of the Collection Division during the first week of May to deliver to Revenue Officer Tupaj a power of attorney relating to both the income and 1042 tax liabilities. Ex. B-36. Miller said nothing to Tupaj about the 1042 liabilities. Tupaj called Brookes on May 10, 1990 to discuss the income tax liabilities. Brookes told Tupaj he would not discuss the 1042 tax liabilities with him, he would discuss them only with Whitmore. Brookes did not tell Tupaj that anything was wrong with the 1042 return assessments. Brookes never called Whitmore.

42. No action was taken by the plaintiff or his representatives to contact the IRS between October 31, 1989 and June 5, 1990 . On June 5, 1990 , Brookes wrote a letter to the IRS requesting that a copy of the notice of deficiency sent to his client be sent to him. If no notice of deficiency had been sent, he requested that the assessment be abated. Ex. B-9.

43. This letter was routed to Perry Foster, Deputy Regional Counsel in charge of general litigation matters. Foster did not know nor had he ever met Brookes. Foster assigned his staff attorney, Helen Winnick, to investigate the matter. As a result of her investigation, as well as phone calls Foster personally made to the District Counsel in Philadelphia , Pennsylvania for assistance, Foster determined on July 27, 1990 that a notice of deficiency had not been mailed to the plaintiff before the assessment was made. He also determined that a notice of deficiency was required to be mailed before an assessment in this case could properly be made. As a result of his investigation, Foster determined that the tax liabilities were legally unenforceable. He immediately directed the IRS to release the notices of tax lien and abate the assessments. The notices of tax lien were released the same day that Foster determined the liens were legally unenforceable, July 27, 1990 . Ex. B-13. The assessment was eventually abated by the Philadelphia Service Center on August 30, 1990 . Ex. B-14.

44. Foster made this decision without the prior approval or discussions with Ben Sanchez, the Regional Counsel for the Western Region. Foster called Brookes on July 27 to inform him that the liens were being released and assessments abated.

45. After the liens had been released, Brookes charged in letters sent to Foster that agents of the IRS should be investigated for possible criminal violations as it relates to the assessment made against Miller. Foster investigated the matter and determined that no employee of the IRS intentionally subverted the procedures of the IRS with respect to what happened in this case.

46. In a letter addressed to Brookes, Foster indicated that Miller had satisfied all administrative prerequisites to Internal Revenue Code §7433 . Ex. A-40.

CONCLUSIONS OF LAW

1. This court has jurisdiction over this action by reason of the explicit grant of jurisdiction under 26 U.S.C. §§7432 and 7433 .

2. The United States , as a sovereign, is immune from suit without its consent and that the terms of its consent define the court's jurisdiction. United States v. Sherwood, 312 U.S. 586, 586 (1940). Any waiver of the United States ' immunity must be explicit and is to be strictly construed. See e.g., Lehman v. Nakshian, 453 U.S. 156, 160-161 (1981).

3. Sections 7432 and 7433 are clear waivers of sovereign immunity.

4. Plaintiff's first claim is brought under section 7432 which provides in pertinent part:

(a) In General.--If any officer or employee of the Internal Revenue Service knowingly, or by reason of negligence, fails to release a lien under section 6325 on property of the taxpayer, such taxpayer may bring a civil action for damages against the United States in a district court of the United States .

(b) Damages.--In any action brought under subsection (a), upon a finding of liability on the part of the defendant, the defendant shall be liable to the plaintiff in an amount equal to the sum of--

(1) actual, direct economic damages sustained by the plaintiff which, but for the actions of the defendant, would not have been sustained, plus

(2) the costs of the action.

* * *

(e) Notice of Failure to Release Lien.--The Secretary shall by regulation prescribe reasonable procedures for a taxpayer to notify the Secretary of the failure to release a lien under section 6325 on property of the taxpayer.

5. Section 6325 provides:

(a) Release of Lien.--Subject to such regulations as the Secretary may prescribe, the Secretary shall issue a certificate of release of any lien imposed with respect to any internal revenue tax not later than 30 days after the day on which--

(1) Liability satisfied or unenforceable.--The Secretary finds that the liability for the amount assessed, together with all interest in respect thereof, has been fully satisfied or has become legally unenforceable.

6. In addition, Section 7432(d)(1) contains an exhaustion requirement:

A judgment for damages shall not be awarded under subsection (b) unless the court determines that the plaintiff has exhausted the administrative remedies available to such plaintiff within the Internal Revenue Service.

26 U.S.C. §7432(d)(1) .

7. In its May 6, 1991 opinion, this court noted that the Secretary of the Treasury had failed to adopt a procedure for a taxpayer to notify the Secretary of the IRS ' failure to release a lien under section 6352. ¹ Opinion at 7. Because no regulations had been promulgated, plaintiff could not possibly have been on notice of what he was required to do in order to exhaust his administrative remedies. In the absence of regulations, any action by plaintiff which reasonably could be said to have put the IRS on notice of the unenforceability of the liens on plaintiff's property may have been sufficient to satisfy the exhaustion requirement of section 7432(d)(1) . Plaintiff's June 5, 1990 written request for a certificate of release of lien satisfied the requirement that he exhaust his administrative remedies and entitles plaintiff to bring suit for damages under section 7432 .

8. Section 7432 contemplates that if an IRS employee knowingly or negligently acts to obstruct the Secretary from making a finding under section 6325 , the aggrieved taxpayer is entitled to bring an action. Therefore, the only question remaining is whether the IRS knew that the lien on Miller's property was legally unenforceable before it was so informed on June 5, 1990 . Once the IRS learned that the lien on Miller's property was legally unenforceable, it had thirty days to release the lien.

9. The government concedes it made a mistake. A notice of deficiency was not sent to the plaintiff before an assessment was made. The IRS administrative file was mistakenly sent to the Philadelphia Service Center for the issuance of a 30-day letter and notice of deficiency. It turns out that the Philadelphia Service Center only assesses 1042 tax return liabilities, it does not issue notices of deficiency with respect to those liabilities. As soon as the Office of IRS Regional Counsel determined on July 27, 1990 that no notice of deficiency had been issued by either the Philadelphia Service Center or the San Jose or San Francisco IRS Districts and therefore the tax liabilities were legally unenforceable, the liens were released that day and assessments subsequently abated.

10. There were only five occasions between September 4, 1989 , when the assessment was made, and June 5, 1990 , when the plaintiff or his representatives were in contact with officers or employees of the IRS . They were the following:

(1) October 31, 1989 call from Ed Mevi to Robert Rentka.

(2) April 26, 1990 conversation between the plaintiff and revenue officers Kenneth Whitmore and Jules Tupaj.

(3) May 2, 1990 meeting between plaintiff and Jules Tupaj.

(4) May 10, 1990 telephone call between Jules Tupaj and Lawrence Brookes.

(5) May 1990 telephone call between Lawrence Brookes and Donald Kihara.

11. The court concludes that none of these events triggered the statutory obligation under section 6325 to release the tax liens or liability under section 7432 for the failure to release the tax liens after the expiration of the 30-day period required in section 6325 .

12. In the call by Mevi to Rentka, Rentka accurately informed Mevi that there was no record of plaintiff or the assessments in the computer records. Mevi made no request to Rentka to either release any liens or abate any assessments. This call did not put the IRS on notice that a statutory notice of deficiency had not been sent since the computer records do not show whether a notice of deficiency was mailed or not.

13. The conversation between the plaintiff and Revenue Officer Whitmore on April 26, 1990 did not trigger any obligation or liability under sections 6325 or 7432 because the plaintiff refused to talk about the 1042 tax return liabilities.

14. Similarly, the plaintiff's meeting on May 2, 1990 with Revenue Officer Tupaj or the revenue officer's call to Brookes did not trigger liability under section 7432 because nothing was said about the 1042 income tax liabilities.

15. Finally, the telephone call between Brookes and Kihara did not trigger liability because it was only a call seeking information. There was no request made by Lawrence Brookes for liens to be released or assessments abated.

16. The event that triggers liability under sections 6325 and 7432 occurred in this case on July 27, 1990 , the same day the notices of tax lien were released and the instructions to abate the assessments given. Consequently, the IRS complied with section 6325 and therefore no liability arises under section 7432 .

17. The third cause of action is brought by plaintiff under 26 U.S.C. §7433 , which provides in pertinent part:

IRC §7433 . CIVIL DAMAGES FOR CERTAIN UNAUTHORIZED COLLECTION ACTIONS.

(a) In General.--If, in connection with any collection of Federal tax with respect to a taxpayer, any officer or employee of the Internal Revenue Service recklessly or intentionally disregards any provision of this title, or any regulation promulgated under this title, such taxpayer may bring a civil action for damages against the United States in a district court of the United States. Except as provided in section 7432 , such civil action shall be the exclusive remedy for recovering damages resulting from such action.

18. Section 7433 was also enacted into law in the Technical and Miscellaneous Revenue Act of 1988. The House Conference Committee clearly delineated when section 7433 would apply as well as when it would not: (See 6 U.S. C.C.A.N. 5289 (1988))

The conference agreement follows the Senate amendment, with several modifications. First, the right to sue authorized by the provision is limited to allegations of reckless or intentional disregard by an IRS employee. An action may not be brought under this provision alleging mere negligence or carelessness on the part of an IRS employee. Second, the provision is limited to reckless or intentional disregard in connection with the collection of tax. An action under this provision may not be based on alleged reckless or intentional disregard in connection with the determination of tax. Third, the provision is limited to reckless or intentional disregard of the Internal Revenue Code and the regulations thereunder.

19. The making of an assessment is not a "collection activity" within the meaning of Section 7433 . An "assessment" is the formal recording of a taxpayer's tax liability, and establishes a taxpayer's liability in acting as "a judgment for the taxes found due." Secs. 6303(a) , 6321 , 6331 ; Bull v. United States [35-1 USTC ¶9346 ], 295 U.S. 247, 259 (1938). An assessment is a determination of tax liability which must precede any collection action by the IRS (i.e., notice and demand for payment, the filing of a notice of tax lien and notice of levy, and actual levy by seizure and distraint). The legislative history to Section 7433 makes clear, however, that damages may not be based on alleged or intentional disregard in connection with the determination of tax.

20. With respect to plaintiff's claim for damages under section 7433 , the Court finds that no officer or employee of the IRS recklessly or intentionally disregarded any provision of the Internal Revenue Code or regulations with respect to collection of the taxes assessed against the plaintiff.

21. Only one revenue officer, Kenneth Whitmore, was assigned the collection of the taxes at issue here. He attempted to interview the plaintiff on April 26, 1990 and caused a notice of tax lien to be filed on May 1, 1990 . He took no other collection activity. There was nothing unusual about attempting to interview a taxpayer or filing a notice of tax lien in a collection matter. In fact, it is the custom and practice of all revenue officers to take such actions. No provision of the Internal Revenue Code or regulation was disregarded by Whitmore in his attempt to collect the taxes assessed against plaintiff.

22. The revenue officer was not put on notice by anything in the TDA or computer printouts he received or conversation he had with the plaintiff on April 26, 1990 that anything was wrong with the assessments he was assigned to collect.

23. The plaintiff attempted to establish at trial that various IRS employees incorrectly filled out internal processing forms as they related to the plaintiff. There was no evidence that any forms were incorrectly filled out. Janich and Reuter were correctly advised that the Philadelphia Service Center processed all 1042 tax returns. Ex. A-29. Janich and Reuter mistakenly believed that since the Philadelphia Service Center processed 1042 tax returns, the Service Center would therefore also mail the appropriate 30 and 90-day letters before any assessment was made. It turns out that they were wrong in making that assumption. In any event, the provisions of the internal revenue manual do not create protection for the rights of taxpayers and their representatives. Rather, they are designed to enhance administrative efficiency and expedite investigations. They cannot serve as a basis for a damage action. United States v. DERR [92-2 USTC ¶50,369 ], No. 91-16908, 1992 U.S. App. LEXIS 15003, 5-6 (9th Cir. July 2, 1992 ).

24. The plaintiff also claimed at trial that employees of the IRS intentionally subverted the procedures of the IRS to cause an assessment to be made against plaintiff without mailing him a 90-day letter. There is no evidence that such a conspiracy ever existed or to that any IRS employee or officer intentionally subverted any procedure of the IRS . No one suggested to Janich or Reuter how to process the case or to which service center it should be sent. That was a decision solely made by Janich based upon a good faith belief at the time that since all 1042 tax returns must be sent to the Philadelphia Service Center for processing, the Service Center would send out the appropriate 30 and 90-day letters. She was not mistaken in believing that the Philadelphia Service Center processes all 1042 tax returns. The only mistake was assuming that they also mailed out the 30 and 90-day letters. There is no evidence that Janich made her decision to send the tax returns to the Philadelphia Service Center with the intent to deny to the plaintiff the right to receive a 90-day letter before an assessment was made or that she did it for any improper purpose.

25. The court finds that plaintiff has failed to meet its burden of establishing liability under either section 7432 or 7433 of Table 26.

PLAINTIFF'S POST-TRIAL MOTION TO REOPEN

After the close of trial, plaintiff moved to reopen for additional testimony relating to a Notice of Deficiency issued post-trial. Plaintiff offers to show that the new Notice of Deficiency if for an amount substantially less than proposed by agent Tamaki and that it demonstrates the agent's intent and lack of credibility. Plaintiff claims that this new Notice is also erroneous and that the actions leading up to its issuance will show bad motive on the part of IRS .

A motion to reopen is addressed to the sound discretion of the trial court. Zenith Radio Corp. v. Hazeltine Research, Inc., 401 U.S. 321, 331 (1971). The court should take into consideration the nature of the proposed testimony and the effect of granting the motion, including prejudice to the opposing party. S.E.C. v. Rogers , 790 F.2d 1450, 1460 (9th Cir. 1986).

Even if plaintiff is able to elicit the testimony he proposes, in light of the above findings it is difficult to see how it would change the result. The evidence does not go to the issue of the failure to release the lien in question. Nor does it go to the issue of whether there was any wrongful conduct in the "collection" of taxes in connection with any claim now before the court. Whether it forms the basis for any new claim this court would not opine; that is not before this court. Accordingly, since even if the testimony were admitted it would not be likely to change the result reflected in this Order, the court exercises its discretion to deny the motion.

CONCLUSIONS

For the reasons set forth above, plaintiff's claims under 29 U.S.C. §§7432 and 7433 are DISMISSED, motion to reopen is DENIED, and judgment will be entered accordingly.

IT IS SO ORDERED.

¹ Since that time the Secretary of the Treasury has issued proposed regulations regarding §7432 ; those regulations are not yet in effect. 56 Fed. Reg. 28,840 (1991) (to be codified at 26 C.F.R. Part 301) (proposed June 25, 1991). However, the court's holding would be the same under the proposed regulations. The exhaustion requirement in the proposed regulations, §301.7432-1(e) , provides that no civil action shall be brought in federal district court under §7432 unless the aggrieved taxpayer has sent a written request for damages to the district director. Plaintiff's June 5, 1990 letter requesting a certificate of release of lien satisfies that requirement.

Robert Foulds and Nancy Foulds v. Commissioner

Docket No. 28873-86., TC Memo. 1989-29, 56 TCM 1112, Filed January 17, 1989

[Appealable, barring stipulation to the contrary, to CA-6.-- CCH .]

[Code Secs. 6325 , 6651 , 6673 and 7122 ]

Taxes: Lien: Effect of discharge of tax lien: Compromises: Additions to tax: Civil penalties: Failure to file returns: Damages: Proceedings for delay.--A couple's payment for release of a tax lien that resulted from unpaid 1983 taxes did not constitute a settlement of their entire 1983 tax liability and did not preclude the IRS from subsequently determining a deficiency for unpaid self-employment taxes for the same year. Although the IRS had issued a certificate of lien release, the evidence was insufficient to establish that the IRS , either orally or in writing, agreed to compromise the taxpayers' entire tax liability in exchange for payment to release the lien. The taxpayers were also liable for a 25 percent addition to tax because their 1983 return was not timely filed and did not reflect their liability for self-employment taxes. However, the Tax Court declined to award damages for delay of court proceedings.-- CCH .

Robert J. Foulds, pro se. Robert Kern, for the respondent.

Memorandum Findings of Fact and Opinion

WOLFE, Special Trial Judge:

This case was assigned pursuant to the provisions of section 7443A(b)(3) of the Internal Revenue Code. ¹ By a statutory notice dated April 11, 1986 , respondent determined a deficiency in petitioners' 1983 Federal income tax in the amount of $2,912.55 and an addition to tax of $728.13 pursuant to section 6651(a)(1) . At trial, respondent presented an oral motion for an award of damages under section 6673 . The issues for decision are (1) whether the payment or release of a Federal tax lien resulting from petitioners' failure to pay Federal taxes for the year in issue, together with alleged statements by revenue officials concerning petitioners' taxes for such year, precludes respondent from determining a deficiency in petitioners' taxes for such year; (2) whether petitioners are liable for additions to tax under section 6651(a)(1) because they failed to file a Schedule SE reporting self-employment income and tax and because they filed their Federal income tax return for 1983 late; and (3) whether the imposition of damages under section 6673 is appropriate.

Petitioners Robert and Nancy Foulds are married and resided at Lyndhurst , Ohio , when they filed their petition in this case. During 1983 Robert Foulds, hereinafter sometimes referred to as petitioner, was a practicing attorney. Nancy Foulds was employed as a nurse during part of the year in question. Petitioners filed a joint return on which they reported gross income of $38,229.77 for the 1983 tax year. Of this amount, $31,150.25 was income earned by Robert Foulds in his law practice.

Petitioners filed their 1983 Federal income tax return on Form 1040, but they did not report self-employment taxes on a Schedule SE. The return was dated September 12, 1984, but was not received by respondent until October 5, 1984. It is undisputed that petitioners are subject to the self-employment tax. Petitioners offered no evidence of reasonable cause which would excuse the late filing of their Form 1040. Petitioners admit that they did not indicate a liability for self-employment taxes on the face of their return.

Prior to April 24, 1985, petitioner contacted respondent about tax liens that respondent had filed against petitioners' property. These tax liens were the result of unpaid taxes for the 1981, 1982 and 1983 tax years. Petitioners made arrangements with respondent for payment of the amounts required for release of these liens. On April 24, 1985, petitioners paid respondent the sum of $4,147.42, which was the amount of tax giving rise to the liens plus interest. Of this sum, $231.03 was for 1983 taxes. Respondent provided petitioner with a receipt for the amounts paid and issued two certificates of lien release discharging the liens. ² These releases were filed in the appropriate county recorder's offices. At the time of payment, petitioner inquired as to a release for the 1981, 1982 and 1983 tax years. He testified that he was told that he could not get a release but that the receipt would be his "release". Petitioner testified that the revenue officials advised that the "receipt" "along with a certificate of a release of the Federal Tax Liens, would be everything that I would need in order to satisfy the service in the future. That my tax liabilities for those three years had been satisfied." Petitioners neither asked for, nor received a closing agreement from respondent for the 1981, 1982 or 1983 tax years.

Petitioners contend that they paid all taxes due in April, 1985, and received a full release from respondent relating to the self-employment tax for 1983. Petitioners suggest that their payment of the amounts required for release of the liens and the issuance of lien releases effectively compromised or settled their entire tax liability. Petitioners urge that this alleged settlement, together with the statements of the revenue officials, precludes respondent from later determining a deficiency for self-employment taxes.

Section 7122 sets forth the exclusive procedure by which a taxpayer may enter into a compromise agreement with respondent. Botany Worsted Mills v. United States [1 USTC ¶348 ], 278 U.S. 282 (1929). Compromise agreements are required to be in writing and accepted by the Secretary or his delegate. Sec. 301.7122-1(d) , Proced. & Admin. Regs.; secs. 601.203(a) and 601.203(b) Statement of Procedural Rules.

An agreement to discharge a lien does not operate as a compromise with respect to a taxpayer's total tax liability for the year in question. Parks v. Commissioner [Dec. 23,848 ], 33 T.C. 298, 301 (1959). In that case we held that even if subordinate revenue officials at a conference informally had agreed to accept the taxpayer's payment of a lien in full satisfaction of the tax liability, that agreement would not bind respondent. Parks v. Commissioner, 33 T.C. at 302.

Petitioners bear the burden of proving that respondent's determinations are incorrect. Welch v. Helvering [3 USTC ¶1164 ], 290 U.S. 111 (1933); Rule 142(a). We are not satisfied by the evidence that respondent, either orally or in writing agreed to compromise petitioners' tax liability in exchange for payment of the liens. There was no exchange of writings which might be interpreted as a compromise agreement. The scope of the negotiations between the parties never extended beyond the issue of the liens. Petitioner's own testimony was that he asked for a release for the three tax years and was refused. There is no evidence that the parties ever intended to enter into a settlement or compromise of petitioners' total tax liability. Petitioners have failed to satisfy their burden of proving error in respondent's determination.

Further, the doctrine of equitable estoppel is inapplicable in this case. Section 6325 and the lien release itself clearly show that the effect of the statute and release is to extinguish the tax lien and not the tax liability. Baker v. Commissioner [Dec. 21,234 ], 24 T.C. 1021 (1955); Miller v. Commissioner [Dec. 20,792 ], 23 T.C. 565 (1954), affd. [56-1 USTC ¶9398 ] 231 F.2d 8 (5th Cir. 1956). In Baker, we held that a discharge of a tax lien could not result in an estoppel against respondent. Respondent cannot be estopped because of a mistake by petitioners as to the effect of section 6325 or a lien release. Miller v. Commissioner, supra.

Respondent is sustained with respect to the imposition of self-employment tax for 1983, for reasons indicated above.

Respondent determined a 25 percent addition to tax under section 6651(a)(1) because petitioners' return was not timely filed and did not reflect a liability for self-employment taxes. Section 1401(a) imposes the tax upon self-employment income. Section 6017 requires a taxpayer to make a return with respect to the self-employment tax. Even if petitioners properly had reported their self-employment income with their Form 1040 return, that return was not timely. Accordingly, the addition to tax under section 6651(a)(1) applies. Respondent is sustained on this issue.

Respondent seeks to have damages awarded to the United States under section 6673 . To award damages under this section, we must find that petitioners instituted or maintained this proceeding primarily for delay, that petitioners' position in this proceeding is frivolous or groundless, or that petitioners unreasonably failed to pursue administrative remedies. On this record, we decline to award damages under section 6673 .

Decision will be entered under Rule 155.

¹ All section references are to the Internal Revenue Code, as amended and in effect in the year in question, unless otherwise indicated. All Rule references are to the Tax Court Rules of Practice and Procedure.

² The format of each certificate states:

I certify that as to the following named taxpayer, the requirements of section 6325(a) of the Internal Revenue Code have been satisfied for the taxes listed below and for all statutory additions. Therefore, the lien provided by Code section 6321 for these taxes and additions have been released. The proper officer in the office where the notice of internal revenue tax lien was filed on -- 19--, is authorized to note the books to show the release of this lien for these taxes and additions.

George H. Baker v. Commissioner

Docket No. 46416, 24 TC --, No. 115, 24 TC 1021, Filed September 21, 19 55

[1939 Code Secs. 3675 and 3761--substantially unchanged in 1954 Code Secs. 6325(c) and 7122 , respectively]

[Deficiencies: Assessment and collection: Not precluded by compromise: Fraud.]--Held: Upon the facts, the assessment and collection of the deficiencies and additions to tax because of fraud herein determined are not precluded by reason of a compromise within the purview of section 3761, Internal Revenue Code of 1939.

Symington P. Landreth, Esq., Girard Trust Building, Philadelphia, Pa., and Bertram P. Rambo, Esq., for the petitioner. William G. Handfield, Esq., for the respondent.

Respondent determined deficiencies in income tax and additions to tax because of fraud in the following amounts:

                                     50% Addition

Year              Deficiency               to Tax

1944 ....           $ 682.03            $1,330.83

1945 ....             638.13             4,030.36

1946 ....           1,015.26             9,882.60

The additions to tax exceed the deficiencies because substantial amounts of the deficiencies were paid prior to the issuance of the notice of deficiency.

Petitioner concedes the correctness of the deficiencies in tax determined by respondent. He also concedes that each of the original returns filed for the taxable years involved was fraudulent. The only issue presented is whether the respondent is precluded from assessing and collecting the deficiencies and additions to tax by reason of a compromise.

Findings of Fact

Petitioner is an individual residing in the State of Pennsylvania . During the years 1944, 1945, and 1946 petitioner was doing business under the name of Howard Cleaners in and around Philadelphia , Pennsylvania . Petitioner filed fraudulent income tax returns for each of those years with the collector of internal revenue for the first district of Pennsylvania.

On October 15, 19 47, upon advice of counsel, petitioner filed amended income tax returns for the taxable years 1944, 1945, and 1946 disclosing deficiencies in income tax, to which the petitioner added 5% as self-imposed penalties for negligence. The amounts of such deficiencies and penalties, together with interest to October 15, 19 47, for each of those years were as follows:

1944 ....         $ 2,385.44

1945 ....           8,498.86

1946 ....          20,343.70

On the same date petitioner paid the tax, penalties and interest shown on the amended returns as due for the years 1944 and 1945 and made a partial payment of $5,343.70 on the amount due for 1946.

On February 11, 19 49 the United States Government filed a tax lien against petitioner for the amount of $14,988.55 in the Office of the Prothonotary of the Courts of Common Pleas, Philadelphia , Pennsylvania , and in the Office of the Clerk of the United States District Court for the Eastern District of Pennsylvania.

Both before and after the filing of these liens Thomas J. Clary, now Judge of the United States District Court for the Eastern District of Pennsylvania and then one of petitioner's counsel, had several conversations with Edward A. Dooley (now deceased), Chief Field Agent of the Bureau of Internal Revenue in Charge of Collections, concerning settlement of the balance owing for the year 1946. Clary told Dooley that if petitioner's assets were sold on levy, the Government would not get more than 35 or 40 per cent of the tax due. He further explained that petitioner could borrow enough money from the Broad Street Trust Co. of Philadelphia to pay the balance due together with accrued interest if the bank could be assured no fraud penalty would be asserted. Dooley was specifically asked to check with his superiors in Washington so that Clary would have the assurance from him that no fraud penalty would be imposed.

Sometime in late April or early May 1949 Clary and Symington Landreth, also an attorney for petitioner, conferred with Dooley and an internal revenue agent named Donnelly. At that conference Dooley orally assured Clary that no fraud penalty would be imposed on petitioner. Petitioner's counsel left the conference confident that Dooley had full authority from his superiors to give that assurance. Bertram P. Rambo, another of petitioner's attorneys, negotiated the loan with the bank solely on the strength of the assurance given to Clary. Rambo had no memorandum or statement from any Treasury official to the effect that such assurance had been given.

A check in the amount of $15,341.12 drawn on the account of the firm of Rambo, Knox and Landreth, dated May 19, 19 49 was mailed to Chief Field Deputy, E. A. Dooley. The payment was accepted, the check cashed, and the liens discharged by the Government in June 1949.

Subsequently petitioner was indicted in the United States District Court for the Eastern District of Pennsylvania for attempted evasion of income taxes for the years 1944, 1945, and 1946. On February 6, 19 51 upon his plea of nolo contendere petitioner was given a suspended sentence, three years probation and was fined $10,000.

A statutory notice of deficiency was mailed to petitioner on October 16, 19 52, determining deficiencies in income tax for the years 1944, 1945 and 1946 in the aggregate amount of $2,335.42 and additions to tax under section 293(b), Internal Revenue Code of 1939, in the net aggregate amount of $13,836.18 ($15,243.79 less $1,407.61).

Opinion

BRUCE, Judge:

Petitioner filed fraudulent income tax returns containing substantial understatements of income for each of the years 1944, 1945, and 1946. Thereafter, upon advice of counsel and after an investigation had been begun by internal revenue agents, petitioner filed amended returns disclosing additional income and deficiencies in tax, to which he added 5% as penalties for negligence and interest to October 15, 19 47, the date of filing. On the same date he paid all the tax, penalty and interest shown thereon for the years 1944 and 1945 and a portion of the tax for the year 1946. In May 1949, after counsel for petitioner had been assured by one of the internal revenue agents that, if petitioner paid the balance of the tax, penalty and interest shown on the amended return, no fraud penalties would be imposed on him. Petitioner paid the balance.

Petitioner contends that such assurance and payment constituted a compromise and settlement of all his tax liabilities for the years 1944, 1945, and 1946, by reason of which respondent is now estopped from assessing and collecting any further taxes and penalties for those years.

Assuming the assurance given petitioner's counsel by the revenue agent amounted to an agreement, it is clear such agreement is not binding upon the respondent herein. The agent was only a subordinate official in the Bureau of Internal Revenue and there is no evidence such agreement was called to the attention of the Commissioner or approved by him. Petitioner's counsel merely assumed it had been. Nor is there any evidence any agreement compromising petitioner's tax liabilities was approved by the Secretary of the Treasury, the Under Secretary, or an Assistant Secretary, as required by section 3761 of the Internal Revenue Code of 1939. ¹

The leading case on this point is Botany Worsted Mills v. United States, 278 U. S. 282 [1 USTC ¶348 ], wherein the Supreme Court, referring to section 3229 of the Revised Statutes, from which source section 3761, supra, was derived, stated:

"We think that Congress intended by the statute to prescribe the exclusive method by which tax cases could be compromised, requiring therefor the concurrence of the Commissioner and the Secretary, and prescribing the formality with which, as a matter of public concern, it should be attested in the files of the Commissioner's office; and did not intend to intrust the final settlement of such matters to the informal action of subordinate officials in the Bureau. When a statute limits a thing to be done in a particular mode, it includes the negative of any other mode. * * *

"It is plain that no compromise is authorized by this statute, which is not assented to by the Secretary of the Treasury. Leach v. Nichols (C. C. A.), 23 Fed. (2d) 275, 277 [1 USTC ¶269 ]. * * *"

See also L. Loewy & Son, Inc. v. Commissioner (C. A. 2), 31 Fed. (2d) 652 [1929 CCH D-9160]; Bank of New York , Exec. v. United States (C. A. 3), 170 Fed. (2d) 20 [48-2 USTC ¶10,636 ]; Victoria R. Johnston, 19 B. T. A. 630 [Dec. 5980 ].

Willingham v. United States , 208 Fed. 137; Rau v. United States , 260 Fed. 131; and Oliver v. United States , 267 Fed. 544, relied upon by petitioner, were all decided prior to the decision of the Supreme Court in the Botany Worsted Mills case and, to the extent they are contrary thereto, are no longer authority. Victoria B. Johnston, supra. Backus v. United States , 59 Fed. (2d) 242 [1932 CCH ¶9326], certiorari denied 288 U. S. 610; Reynolds v. Gnichtel, 1 Fed. Supp. 606 [1932 CCH ¶9530]; and Loeb v. United States, 17 Fed. Supp. 966 [36-2 USTC ¶9488 ], also cited by petitioner, are distinguishable. In the Backus case there was a consent judgment entered into pursuant to a stipulation between the taxpayer and authorized officers of the United States in an action pending before the Board of Tax Appeals. In Reynolds v. Gnichtel, supra, and order of dismissal was entered in an action pending before the Court of Claims, pursuant to a settlement as to which the statutory requirements were met. The Loeb case held that the compromise of cases should be encouraged and in the absence of compelling reasons would not be set aside.

Nor does discharge of the lien filed by the Government in the Office of the Prothonotary of the Courts of Common Pleas and in the Office of the Clerk of the United States District Court, after payment of the balance of the tax disclosed by the amended returns, preclude respondent from determining additional taxes and penalties. See Joseph T. Miller, 23 T. C. 565 [Dec. 20,792 ] (on appeal C. A. 5), wherein we held that the effect of section 3675 of the Internal Revenue Code of 1939 ² is to extinguish the tax lien and not the tax liability, and that reliance upon the extinguishment of a lien could not result in an estoppel against the Government.

For the reasons discussed above we hold that respondent is not estopped from assessing and collecting the deficiencies and additions to tax determined by him.

Decision will be entered for the Respondent.

¹ SEC . 3761. COMPROMISES.

(a) Authorization.--The Commissioner, with the approval of the Secretary, or the Under Secretary of the Treasury, or of an Assistant Secretary of the Treasury, may compromise any civil or criminal case arising under the internal revenue laws prior to reference to the Department of Justice for prosecution or defense; and the Attorney General may compromise any such case after reference to the Department of Justice for prosecution or defense.

(b) Record.--Whenever a compromise is made by the Commissioner in any case there shall be placed on file in the office of the Commissioner the opinion of the General Counsel for the Department of the Treasury, or of the officer acting as such, with his reasons therefor, with a statement of--

(1) The amount of tax assessed,

(2) The amount of additional tax or penalty imposed by law in consequence of the neglect or delinquency of the person against whom the tax is assessed, and

(3) The amount actually paid in accordance with the terms of the compromise.

* * *

² SEC . 3675. EFFECT OF CERTIFICATES OF RELEASE OR PARTIAL DISCHARGE.

A certificate of release or of partial discharge issued under this subchapter shall be held conclusive that the lien upon the property covered by the certificate is extinguished.

[56-1 USTC ¶9398]Joseph T. Miller and Crystal V. Miller, Petitioners v. Commissioner of Internal Revenue, Respondent

(CA-5), In the United States Court of Appeals for the Fifth Circuit, No. 15767, 231 F2d 8, March 27, 19 56

Petition for review of decisions of the Tax Court of the United States (District of Florida).

[1939 Code Sec. 271--similar to 1954 Code Sec. 6211]

Deficiency: Definition: Net operating loss: Abatement for prior years: Determination.--By reason of a net operating loss deduction from a loss incurred in 1948, taxpayers received tentative abatements of their income taxes assessed for the taxable year 1946, before the renegotiation tax credit under 1939 Code Sec. 3806 applicable to 1946 was applied. Because the abatements were in excess of the amounts properly allowable, the Commissioner determined deficiencies which taxpayers alleged were contrary to the definition contained in 1939 Code Sec. 271, on the ground that the abatements were final. The appellate court affirmed the Tax Court's holding that the Commissioner used the proper method in determining the deficiencies. BACK REFERENCES: 56 FED ¶5316.183.

[1939 Code Sec. 3675--similar to 1954 Code Sec. 6325(c)]

Release of lien: Estoppel.--The Commissioner filed tax liens for unpaid income taxes assessed for 1946. On the abatement of such taxes, certificates of discharge of tax liens were issued. Taxpayers alleged that by reason of the issuance of such certificates the Commissioner was estopped from thereafter determining a deficiency. The appellate court held that the Tax Court properly determined that the effect of 1939 Code Sec. 3675 was to extinguish the lien and not the tax liability and that no estoppel resulted against the Government. BACK REFERENCES: 56 FED ¶5366.125. Affirming the decision of the Tax Court, 23 TC 565, CCH Dec. 20,792, reported at 555 CCH ¶7292.

Ralph O. Cullen, Miami , Fla. , for petitioners. H. Brian Holland, Assistant Attorney General, Ellis N. Slack, Lee A. Jackson, Frank E. A. Sander, Harry Marselli, Department of Justice, John Potts Barnes, Chief Counsel, Rollin H. Transue, Special Attorney, Internal Revenue Service, Washington, D. C., for respondent.

Before HUTCHESON, Chief Judge, and RIVES and BROWN, Circuit Judges.

[Issue]

HUTCHESON, Chief Judge:

This proceeding ¹ for redetermination of a deficiency of $24,772.05 in the 1946 income tax of each of the petitioners presented below two questions for decision: (1) Did the respondent properly compute the deficiencies? (2) Is he estopped from asserting them?

The Tax Court, in an opinion ² fully and correctly setting out the facts, answered the first question in the affirmative on the authority of Kurtzon v. Commissioner, 17 T. C. 1542 [ CCH Dec. 18,854], a case which involved a similar issue under comparable facts. It answered the second question in the negative, basing its answer on the conclusion that the facts furnish no basis for a finding of estoppel.

Appealing from the decision, petitioners are here seeking its reversal. Admitting that the "facts in the Kurtzon case are very similar to the facts in this case", they insist that that case was not correctly decided and should not be followed. Not at all challenging the correctness of the Tax Court's findings of fact, petitioners assail its conclusion that no basis for estoppel is shown. Urging "the treatment which petitioners have received at the hands of the commissioner has not been completely frank and fair", and citing cases supporting their view, that estoppel may be asserted against the government in a proper case, petitioners insist that this is such a case.

The commissioner, pointing out, as the Tax Court did, that the application on form 1045 for the tentative carry-back adjustments was filed to get prompt action upon the release of liens, and quoting from his letter to the taxpayer, "This allowance is a tentative adjustment which ordinarily carries no interest. Final adjustment of the tax liability and of any interest which may be allowable will be made at a later date.", insists that there was and is no basis for the estoppel claim.

Finally, citing Knapp v. Commissioner, 139 Fed. (2d) 863 [44-1 USTC ¶9151] in support of his position that it is essential to an estoppel that the claimant show that in reliance on another's word or action he acted to his injury and, pointing out that petitioners have failed to show the existence of either justified reliance or action to their injury or any sufficient reason for departing from the formula used in, or the teachings of the Kurtzon case, the commissioner insists that the petition should be denied and the judgment affirmed.

[Decision]

We find ourselves in full agreement with these views and with the grounds stated by the Tax Court in its opinion. Without, therefore, further discussion of, or elaboration upon, them, we deny the petition for review and affirm the judgment.

Affirmed.

¹ It arose in this way:

(1) By reason of a net operating loss deduction from a loss incurred in 1948, the respective petitioners received tentative abatements of their income taxes assessed for the taxable year 1946, before the renegotiation tax credit under section 3806 applicable to 1946 was applied. Because the abatements were in excess of the amounts properly allowable, the respondent determined deficiencies which petitioners allege are contrary to the definition of a deficiency contained in section 271, I. R. C. (1939).

(2) The respondent filed tax liens for the unpaid income taxes assessed for 1946. On the abatement of such taxes certificates of discharge of tax liens were issued. Petitioners allege that by reason of the issuance of such certificates the respondent is estopped from thereafter determining a deficiency.

² 23 T. C. 565 [ CCH Dec. 20,792].