United States v. Ward

[2] 3 IN THE UNITED STATES DISTRICT COURT [4] FOR THE DISTRICT OF ALASKA [6] UNITED STATES OF AMERICA, 7 Case No. 3-21-cv-00056-JWS Plaintiff, [8] 9 vs. ORDER ON MOTION FOR SUMMARY JUDGMENT AND 10 WALTER WARD and VIRGINIA CROSS MOTION FOR SUMMARY 11 WARD, JUDGMENT [Dockets 14, 17] 12 Defendants. [15] I. MOTIONS PRESENTED [16] 17 At docket 14 Defendants Walter and Virginia Ward (“Defendants”) filed a 18 motion for summary judgment in this action brought by Plaintiff United States of [19] America (the “Government”) to reduce Defendants’ tax assessments issued by the [20] 21 Internal Revenue Service (“IRS”) to a civil judgment. They argue that the suit is barred 22 by the statute of limitations and, alternatively, that the interest assessed should be [23] abated due to IRS delays. The Government filed an opposition and cross motion for [24] summary judgment at docket 17, asserting that the statute of limitations tolled long [25] 26 enough to make its suit timely and that the court does not have jurisdiction to abate [27] interest. Defendants filed their joint response/reply at docket 18. The Government [28] 1 filed its reply brief at docket 19. Oral argument was requested but would not be of [2] assistance to the court. [3] II. BACKGROUND [4] 5 In 2000, the IRS concluded that Defendants had underreported their income by [6] $197,521 for 1996 and by $209,127 for 1997 and notified them of these deficiencies. [7] Defendants challenged the IRS’s findings in the U.S. Tax Court. The Tax Court [8] 9 sustained the tax liabilities calculated by the IRS, which included a statutory penalty 10 of $81,329 for substantial underreporting.1 Additionally, the Tax Court imposed a [11] $25,000 penalty against Defendants after finding that they had “maintained these [12] proceedings primarily for delay” and that they demonstrated “an unwillingness to [13] 14 respect the tax laws of the United States.”2 [15] The IRS then recorded assessments for Defendants’ tax liabilities. Assessments [16] authorize the IRS to collect payment through a levy or court proceeding and trigger a [17] 18 ten-year statute of limitations on any collection action subject to certain tolling events.3 [19] Defendants’ 1996 tax deficiency and penalty, plus the Tax Court’s additional penalty, [20] were assessed on November 25, 2002. Their 1997 deficiency and penalty were [21] 22 assessed on December 9, 2002. While the statute of limitations would have run out in 23 late 2012, the Government asserts that Defendant-initiated events tolled the IRS’s [27] 1 Ward v. Comm’r, 83 T.C.M. (CCH) 1820 , 2002 WL 1285562 , at *1 (June 11, 2002). 28 2 Id. at *6. [3] 26 U.S.C. § 6502 . 1 collection deadline out to July 2021, a few months after the Government filed suit. The [2] tolling events are as follows: [3] (1) Offer-in-Compromise dated 12/27/2002; [4] 5 (2) Due Process Hearing request dated 7/15/2003; [6] (3) Offer-in-Compromise dated 3/5/2004; [7] (4) Offer-in-Compromise dated 12/4/2008; [8] 9 (5) Due Process Hearing request dated 12/16/2011; 10 (6) Offer-in-Compromise dated 3/6/2014; and [11] (7) Offer-in-Compromise dated 9/23/2015.4 [12] A taxpayer files an offer-in-compromise through IRS Form 656, wherein he sets forth [13] 14 an offer to settle a tax debt for less than the assessed amount.5 An IRS official then [15] decides whether the form is administratively processable and, if so, signs the form.6 [16] At that time, the statute of limitations tolls while the IRS considers the offer on its [17] 18 merits.7 The statute of limitations begins to run again 30 days after the IRS makes a 19 final decision about the offer.8 [20] Defendants’ first offer-in-compromise argued that the assessments were [21] 22 erroneous. The offer was rejected, and the IRS notified Defendants that it was going 23 to record a lien against their property. In response, Defendants requested a Due Process [25] 26 4 Docket 17 at 15; Docket 17-19 at 5–10; Docket 17-20 at 4–8. [5] 26 C.F.R. § 301.7122-1 (a); Docket 17-1 at ¶ 4. [6] 26 C.F.R. § 301.7122-1 (d)(2); Docket 17-1 at ¶ 4. 28 7 26 U.S.C. § 6331 (i)(5), (k); 26 C.F.R. §301.7122-1 (d), (g), (i). [8] 26 U.S.C. § 6331 (i)(5), (k); 26 C.F.R. §301.7122-1 (g). 1 Hearing with the IRS Office of Appeals as provided for under 26 U.S.C. § 6330 . The [2] reviewing appeals officer explained to Defendants’ representative that they could not [3] use the § 6330 hearing process to contest a liability already affirmed by the Tax Court. [4] 5 After months of discussions with Defendants’ representative, the appeals officer [6] sustained the liens and closed the appeal. However, by that time, Defendants had filed [7] a second offer-in-compromise. For this offer, Defendants requested a reduced payment [8] 9 for reasons based on “effective tax administration,” which means when the debtor does 10 not contest liability but argues that collection would cause economic hardship or would [11] be unjust.9 Defendants submitted “a large file of documentation” with their offer, but [12] it ultimately was rejected for lack of any special circumstances that would justify a [13] 14 finding of hardship or unfairness.10 Defendants filed an appeal. The reviewing appeals [15] officer sustained the examiner’s decision, and the offer was formally rejected in April [16] 2005. [17] 18 Defendants filed another offer-in-compromise in late 2008, again based on [19] hardship and fairness. As with the previous offer, an IRS examiner rejected it, [20] Defendants appealed, and the reviewing appeals officer affirmed the rejection. [21] 22 Afterwards, in 2011, the IRS sought to levy against Defendants’ property but again 23 Defendants requested a Due Process Hearing to challenge the levy. The appeals officer [24] saw that the assessments originated from a Tax Court judgment and sustained the levy. [25] Defendants appealed the decision to the Tax Court. [27] 28 9 26 C.F.R. § 301.7122-1 (b)(3). 10 Docket 17-3 at 7. 1 At this time, the IRS assigned the case to a lawyer who failed to realize what [2] the reviewing appeals officer did—that the assessments originated from a Tax Court [3] judgment in 2002—and therefore agreed to allow Defendants to submit another [4] 5 proposed offer-in-compromise in exchange for dismissal of the case. Six months later, [6] Defendants filed their fourth offer, asserting that they were not liable for the 1996 and [7] 1997 tax deficiencies and offering to settle with the IRS for $1. They submitted four [8] 9 boxes of documents they claimed supported their position. The form was accepted for 10 processing. It was rejected on the merits five days later. Defendants appealed, but the [11] rejection was upheld and the offer was formally rejected in April 2015. [12] Defendants filed a fifth offer-in-compromise in September 2015, asking the IRS [13] 14 to settle the assessments for $2,808 based in part on their inability to pay. After a [15] rejection of the offer and a failed appeal, the IRS formally rejected the offer in February [16] 2017. After not receiving full payment, the IRS filed this lawsuit to reduce the long17 18 standing assessments to a civil judgment. [19] III. STANDARD OF REVIEW [20] Summary judgment is appropriate where “there is no genuine dispute as to any [22] material fact and the movant is entitled to judgment as a matter of law.”11 The 23 materiality requirement ensures that “[o]nly disputes over facts that might affect the [24] outcome of the suit under the governing law will properly preclude the entry of [25] summary judgment.”12 Ultimately, “summary judgment will not lie if the . . . evidence [27] 28 11 Fed. R. Civ. P. 56(a). 12 Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). 1 is such that a reasonable jury could return a verdict for the nonmoving party.”13 [2] However, summary judgment is mandated “against a party who fails to make a [3] showing sufficient to establish the existence of an element essential to that party’s case, [4] 5 and on which that party will bear the burden of proof at trial.”14 [6] The moving party has the burden of showing that there is no genuine dispute as [7] to any material fact.15 Where the nonmoving party will bear the burden of proof at [8] 9 trial on a dispositive issue, the moving party need not present evidence to show that 10 summary judgment is warranted; it need only point out the lack of any genuine dispute [11] as to material fact.16 Once the moving party has met this burden, the nonmoving party [12] must set forth evidence of specific facts showing the existence of a genuine issue for [13] 14 trial.17 All evidence presented by the nonmovant must be believed for purposes of [15] summary judgment and all justifiable inferences must be drawn in favor of the [16] nonmovant.18 However, the nonmoving party may not rest upon mere allegations or [17] 18 denials but must show that there is sufficient evidence supporting the claimed factual 19 dispute to require a fact-finder to resolve the parties differing versions of the truth at [20] trial.19 [24] 25 13 Id. 14 Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). 26 15 Id. at 323 . [16] Id. at 323–25. 17 Anderson, 477 U.S. at 248–49. 28 18 Id. at 255. 19 Id. at 248–49. 1 IV. DISCUSSION [2] A. Unpaid Assessments [3] In a case to reduce unpaid tax assessments to a civil judgment, the Government [4] 5 has the burden to prove that the IRS made an assessment, that the assessment is [6] “supported by a minimal evidentiary foundation,” and that the defendants have not [7] fully paid.20 Here, the dates and amounts of the 1996 and 1997 tax assessments are [9] not in dispute:21 10 Amount of Assessment Tax Year Date of Assessment (deficiency, penalty, and interest) [11] 1996 11/25/2002 $372,835.83 [12] 1997 12/09/2002 $356,615.96 [14] These assessments are adequately supported. The IRS imposed the assessments after [15] receiving a final Tax Court judgment that affirmed Defendants’ tax liabilities. [16] 17 Taxpayers are collaterally estopped from challenging an assessment that originates 18 from a Tax Court judgment.22 It is undisputed that Defendants have not fully paid the [19] assessments. As of March 17, 2022, with the interest that has accumulated, the unpaid [20] balance for the 1996 tax liability is $104,326.78 and the unpaid balance for the 1997 [21] 22 tax liability is $906,368.02.23 Defendants do not contest these calculations. [27] 20 United States v. Stonehill, 702 F.2d 1288, 1293 (9th Cir. 1983). 21 Docket 17-19 at 3–4; Docket 17-20 at 3–4. 28 22 United States v. Carter, 906 F.2d 1375, 1378 (9th Cir. 1990). 23 Docket 17-1 at ¶¶ 23–24; Docket 17-16; Docket 17-17. 1 Consequently, the IRS is entitled to summary judgment as to the amounts owed [2] by Defendants if it can demonstrate that the ten-year deadline for filing a collection [3] action against Defendants extended through March 8, 2021, the date it filed suit. [4] 5 B. Tolling of the Collection Deadline [6] The statute of limitations to reduce tax assessments to civil judgment is ten years [7] after the date of assessment. The 1996 tax liability was assessed on November 25, [8] 9 2002, and the 1997 tax liability was assessed on December 9, 2002, giving the IRS an 10 original deadline of late 2012 to file a collection action. Given that the IRS filed its [11] action against Defendants in 2021, it must prove that the collection deadline was [12] appropriately tolled. Certain actions taken by a taxpayer can toll the collection [13] 14 deadline, including the filing of an offer-in-compromise through Form 656 or a request [15] for a § 6330 Due Process Hearing.24 The IRS claims that seven tolling events initiated [16] by Defendants pushed its collection deadline out to July 2021 and therefore the March [17] 18 2021 complaint is timely. The seven events are as follows:25 [19] Tolling Event Start Date End Date Days Tolled [20] Offer in Compromise 12/27/2002 1/23/2004 [860] 22 Due Process Hearing 7/15/2003 3/12/2004 (Not double-counting 23 Offer in Compromise 3/05/2004 4/05/2005 days that overlap) [24] Offer in Compromise 12/04/2008 10/15/2010 710 [25] 26 Due Process Hearing 12/16/2011 8/21/2013 614 [27] 28 24 26 U.S.C. § 6331 (i)(5), (k); 26 U.S.C. § 6330 (e); 26 C.F.R. § 301.7122-1 (g), (i). 25 Docket 17 at 15; Docket 19 at 2, n.1. 1 Tolling Event Start Date End Date Days Tolled [2] Offer in Compromise 3/06/2014 4/02/2015 422 [3] Offer in Compromise 9/23/2015 2/22/2017 548 [4] 5 TOTAL 3,154 [6] 7 Defendants argue that the statute of limitations should not toll for these events [8] because the IRS allowed the process to linger unreasonably. There is no [9] reasonableness exception to tolling under the statute. It is tolled while an offer-in10 11 compromise or due process hearing remains pending. The tolling period remains 12 pending until the matter is terminated, withdrawn, or formally rejected by the [13] government.26 Indeed, the IRS rejected each offer within the 24-month time limit [14] 15 created by Congress in 2005 and applicable to any offer-in-compromise submitted on 16 and after July 16, 2006.27 Moreover, as noted by the Government, Defendants caused [17] much of the delay themselves through numerous filings and appeals. This is not a case [18] where Defendants submitted offers and then waited years for answers. The record [19] 20 shows continuous correspondence with the IRS, and Defendants repeatedly appealed [21] the IRS’s initial determinations, regardless of merits. Defendants “made these offers [22] and chose to see them through. There is no legal or equitable basis to hold that against [23] 24 the IRS.”28 [27] 26 United States v. McGee, 993 F.2d 184 , 186–87 (9th Cir. 1993). [27] 26 U.S.C. § 7122 (f); Tax Increase and Prevention and Reconciliation Act of 2005, [28] Pub. L. No. 109-222. 28 Docket 17 at 20. 1 In their reply, Defendants clarify their argument. They argue that the IRS was [2] unreasonable not because of delays in processing their offers, but because it processed [3] their meritless offers. That is, Defendants concede that the 2002 Tax Court judgment [4] 5 precluded them from contesting the underlying tax liability, and now assert that their [6] first and fourth offers-in-compromise, which improperly attempted to contest liability, [7] were invalid on their face and thus could not have tolled the statute of limitations. That [8] 9 is, they argue that the IRS knowingly accepted at least two offers-in-compromise for 10 processing that it had no basis to consider and that it did so to stall the IRS’s collection [11] deadline. This argument is nonsensical and baseless. “[W]ithout denying that they [12] voluntarily made these offers, [Defendants] attempt to weaponize [their own] supposed [13] 14 impropriety to their benefit.”29 There is no factual basis to support Defendants’ [15] argument that the IRS tried to delay collection or would want to do so. [16] No single IRS official reviewed all five of [Defendants’] offers. It was [17] many employees, from examiners to appeal officers, across 15 years. 18 [The] surviving work product shows a good-faith effort to resolve each offer appropriately. To allege the opposite, and claim without evidence 19 that the IRS played out a 15-year scheme to toll the statute, is absurd.30 [20] It was Defendants who primarily benefitted from these delays: “While the offers [21] 22 remained pending, the IRS could not collect payment on the underlying assessments. 23 . . . [B]y filing so many offers, [Defendants] successfully blocked collection for [24] years.”31 [27] 29 Docket 19 at 2. 28 30 Id. at 4. 31 Id. 1 Moreover, there is no legal support for the argument that an offer-in2 compromise contesting liability after a Tax Court judgment will not toll the statute. [3] Indeed, any such rule “would have the perverse effect of allowing tax debtors to freeze [4] 5 collection against them by filing frivolous offers, without the return cost of tolling the 6 statute.”32 The Seventh Circuit recognized as much in United States v. McGaughey,33 [7] acknowledging that even an offer preordained to fail is nonetheless a quid pro quo [8] 9 where the offeror agrees to suspend the collection deadline in exchange for the IRS to 10 consider his offer.34 [11] Defendants alternatively argue that their March 2014 offer-in-compromise [12] should not toll the deadline because the 656 form was incomplete, lacking their [13] 14 signatures and an accompanying deposit. These arguments are without merit. [15] Defendants’ agent signed on their behalf, and the Government used its discretion to [16] forego the required 20 percent deposit, which would have amounted to 20 cents given [17] 18 Defendants’ $1 offer.35 [19] Defendants reframe their argument in their responsive briefing. They assert that [20] there is at least a factual dispute as to whether their first three offers-in-compromise [21] 22 were properly signed by all parties, and therefore a dispute about whether the tolling 23 period was triggered. They rely on the fact that the IRS no longer has copies of the [24] 656 forms submitted by them for their first three offers-in-compromise. Despite the [32] Id. [33] 977 F.2d 1067 (7th Cir. 1992). 28 34 Id. at 1073 . 35 See Docket 17 at 20–21. 1 absence of the 656 forms—which are presumed destroyed pursuant to a 2014 IRS [2] policy to purge files of a rejected offer-in- compromise six years after closure—the [3] Government has evidence of the dates and pendency of Defendants’ first three offers. [4] 5 It filed the Certificate of Assessments and Payments (IRS Form 4340) for the 1996 and 6 1997 tax assessments.36 These 4340 forms, which are self-authenticating official IRS [7] certificates, can constitute sufficient proof of assessments and related facts absent any [9] evidence from the taxpayer that the certificate is incorrect or lacking credibility.37 10 As noted above, to make an offer-in-compromise a taxpayer or his agent sends [11] the IRS a signed Form 656 and then the receiving IRS examiner signs the form to [12] accept it for processing, thereby triggering the tolling period. The 4340 forms [13] 14 document the dates Defendants’ offers-in-compromise became pending, which [15] necessarily means, given the IRS procedure, that the forms were signed by the [16] examiner. Defendants present no contrary evidence or evidence suggesting some [17] 18 irregularity here. Moreover, the IRS did locate and submit Defendants’ final two [19] offers-in-compromise forms. Those 656 forms were signed with dates matching those [20] on the 4340 forms, further supporting the accuracy of the 4340 forms.38 [21] 22 Defendants argue that the 4340 forms are inadmissible as secondary evidence 23 to prove the contents of their 656 forms because the IRS has not adequately [24] demonstrated that the originals have been destroyed. This argument is unavailing. As [27] 36 Docket 17-1 at ¶ 5; Docket 17-19; Docket 17-20. 37 Hughes v. United States, 953 F.2d 531, 535 (9th Cir. 1992); Hansen v. United 28 States, 7 F.3d 137, 138 (9th Cir. 1993). 38 Docket 17-9 at 16; Docket 17-13 at 7. 1 noted by the Government, under the federal rules of evidence, inadvertent loss is [2] enough to introduce secondary evidence in place of the original.39 Moreover, the [3] evidence does in fact show that the 656 forms for Defendants’ first three offers were [4] 5 destroyed in accordance with the IRS’s six-year retention policy.40 [6] Defendants’ reliance on McGaughey to assert that something more specific [7] about destruction is needed before secondary evidence can be admitted is [8] 9 unpersuasive. In that case, as here, the taxpayer disputed that his offer-in-compromise 10 tolled the statute of limitations. He argued that because his 656 form was missing, the [11] IRS could not demonstrate he agreed to waive the deadline. He also submitted an [12] affidavit claiming that an IRS agent induced him to make an offer-in-compromise and [13] 14 that he did not recall filling out a Form 656.41 Despite this contrary evidence, the court [15] upheld summary judgment in favor of the IRS, relying on secondary evidence that [16] sufficiently proved the taxpayer had submitted a Form 656 and thereby agreed to the [17] 18 tolling of the collection deadline.42 The affidavit relied upon in that case as to the [19] IRS’s destruction of the Form 656 does not appear to be distinguishable from the one [20] submitted here. Both assert that the IRS requires destruction of 656 forms and files [21] 22 after a specified period of time and that a search to procure a copy of the taxpayer’s [25] 26 39 Fed. R. Evid. 1004; Med. Lab. Mgmt. Consultants v. Am. Broad. Cos., Inc., 306 27 F.3d 806, 825 (9th Cir. 2002). 40 Docket 17-1 at ¶ 5. 28 41 977 F.2d at 1070 . [42] Id. at 1071–72. 1 form was fruitless. Indeed, the Seventh Circuit stressed in McGaughey that proof of a [2] thorough search for the original is not required.43 [3] Relying on McGaughey, Defendants also argue that IRS failed to show that [4] 5 “sufficient procedural safeguards were in place to [e]nsure the IRS properly accepted 6 the defendant taxpayer’s missing offer in compromise.”44 In McGaughey, the record [7] included an affidavit from an IRS official detailing document retention safeguards and [8] 9 routine procedures for processing an offer-in-compromise and which the court relied 10 upon in part to find that the taxpayer must have submitted a Form 656 waiving the [11] statute of limitations.45 Such an affidavit is not, however, a requirement to prove that [12] the IRS properly processed a Form 656; it simply was secondary evidence adding [13] 14 weight to the Government’s argument that the taxpayer necessarily submitted the form. [15] Similarly here, there is secondary evidence to demonstrate the IRS processed and [16] signed the 656 forms. The declaration of an IRS official outlines the standard [17] 18 procedure related to a Form 656, which includes an examiner signing the form, 19 triggering the pendency of the offer in the system.46 The 4340 forms in the record [20] indicate the date that Defendants’ offers became pending, which shows that the 656 [22] forms were necessarily signed by the IRS examiner.47 Indeed, courts presume that IRS [43] Id. at 1071 . 26 44 Docket 18 at 9. [27] 45 977 F.2d at 1071–72. 46 Docket 17-1 at ¶ 4. 28 47 Docket 17-19; Docket 17-20. See Randle v. United States, 2000 WL 1739314 , at *11 (C.D. Cal. Aug. 4, 2000). 1 officials follow all procedural requirements in carrying out their duties.48 This would [2] necessarily include signing routine forms and checking for signatures. Defendants [3] provide no rebuttal evidence. [4] 5 C. Interest [6] Defendants also seek summary judgment on the issue of interest, asking the [7] court to abate the interest accrued on their tax liabilities as a matter of law because of [8] 9 IRS error. As noted and argued by the Government in its responsive briefing, the court 10 lacks jurisdiction to abate interest on unpaid assessments. Any request for abatement [11] must be submitted to the IRS and the IRS’s denial is only reviewable by the Tax [12] Court.49 [13] 14 V. CONCLUSION [15] Based on the preceding discussion, Defendants’ motion for summary judgment [16] at docket 14 is DENIED and the Government’s motion for summary judgment at [17] 18 docket 17 is GRANTED. [19] IT IS SO ORDERED this 6th day of July, 2022, at Anchorage, Alaska. [20] 21 /s/ John W. Sedwick 22 JOHN W. SEDWICK Senior United States District Judge [27] 48 Palmer v. IRS, 116 F.3d 1309 , 1311 (9th Cir. 1997). 28 49 See 26 U.S.C. § 6404 ; Hinck v. United States, 550 U.S. 501, 503 (2007); Purcell v. United States, 1 F.3d 932, 943 (9th Cir. 1993).