United States of America v. Gonzales

Filing 48

Order by Judge Saundra Brown Armstrong granting in part and denying in part 35 Motion for Summary Judgment. Order to Show Cause deadline: 6/27/2018(dtmS, COURT STAFF) (Filed on 6/20/2018)

1
2
3
4
5
6

UNITED STATES DISTRICT COURT

7

FOR THE NORTHERN DISTRICT OF CALIFORNIA

8

OAKLAND DIVISION

9

UNITED STATES OF AMERICA,

Case No: C 17-01523 SBA

10

Plaintiff,
11

vs.
12

ORDER GRANTING IN PART AND
DENYING IN PART THE UNITED
STATES’ MOTION FOR SUMMARY
JUDGMENT

TOM GONZALES, as Personal
13 Representative for the Estate of Thomas J.

Dkt. 35

Gonzales, II, and as Successor Trustee of
14 THE THOMAS J. GONZALES II 2001
TRUST under agreement dated November
15 26, 2001 as amended and restated on
November 28, 2001,
16

Defendant.
17
18

The United States brings the instant action against Defendant Tom Gonzales

19

(“Defendant”), as personal representative for the Estate of Thomas J. Gonzales, II (the

20

“Estate”), and as successor trustee of THE THOMAS J. GONZALES II 2001 TRUST,

21

under agreement dated November 26, 2001, as amended and restated on November 28,

22

2001 (the “Trust”), to collect unpaid interest assessed against Thomas J. Gonzales, II,

23

deceased (“Taxpayer”). Presently before the Court is the United States’ motion for

24

summary judgment. Dkt. 35. Having read and considered the papers filed in connection

25

with this matter and being fully informed, the Court hereby GRANTS IN PART and

26

DENIES IN PART the United States’ motion, for the reasons stated below. The Court, in

27

its discretion, finds this matter suitable for resolution without oral argument. See Fed. R.

28

Civ. P. 78(b); N.D. Cal. Civ. L.R. 7-1(b).

1

I.

BACKGROUND1

2

A.

3

Taxpayer sold shares of stock resulting in a capital gain of $132,521,496 in the 2000

THE PRIOR ACTION

4

tax year. Dkt. 174 at 2, Tom Gonzales v. United States, Case No. 08-03189 SBA (N.D.

5

Cal. Mar. 4, 2011) (“Refund Action” or “R.A.”). To avoid the income tax attendant to such

6

a gain, Taxpayer participated in a tax shelter. Id. at 14. In April 2001, he filed a tax return

7

for the 2000 tax year, wherein he reported capital losses from the tax shelter. Id. at 5.

8
9

Taxpayer died in December 2001. Compl. ¶ 2. Upon his death, Defendant became
the personal representative of the Estate and successor trustee of the Trust. Id. ¶¶ 3-4.

10

Thereafter, Defendant signed a series of consent forms (i.e., the Consents) that purported to

11

extend, through December 31, 2006, the deadline for the Internal Revenue Service (“IRS”)

12

to assess taxes against Taxpayer for the 2000 tax year. Gonzales Decl. ¶ 2.

13

On December 6, 2006, the IRS issued a notice of deficiency to Defendant, in his

14

capacity as the representative of the Estate, for underpayment of income taxes in the

15

amount of $26,231,835 and an accuracy-related penalty in the amount of $5,246,367.

16

SNOD at US000064. On April 12, 2007, the IRS assessed the aforementioned sums, as

17

well as $13,361,360.50 in interest. Compl. ¶ 16; Form 4340 at US000003. On or about

18

April 13, 2007, the IRS gave notice of the assessment and made demand for payment.

19

Compl. ¶ 17; Form 4340 at US000004.

20

The Estate paid the tax and penalty under protest on August 17, 2007. Compl. ¶ 11.

21

Defendant, as the personal representative of the Estate, then filed an administrative claim

22

for refund. Id. The IRS abated the penalty in full because the Estate had complied with the

23
1

In support of the summary judgment motion, the United States provides the
Declaration of David B. Palmer, IRS Revenue Officer (“Palmer Decl.”), Dkt 35-1; Form
4340, Certificate of Assessments, Payments, and Other Specified Matters (“Form 4340”),
25 id., Ex. A, Dkt. 35-2; and Form INTSTD, id., Ex. B, Dkt. 35-3.
24

In opposition to the motion, Defendant provides, inter alia, the Declaration of Tom
Gonzales (“Gonzales Decl.”), Dkt. 38 at 18; the Declaration of Mark Wray (“Wray Decl.”),
27 Dkt. 38 at 19-20; Statutory Notice of Deficiency (“SNOD”), id., Ex. 1, Dkt. 38-1; Forms
872-I, Consent to Extend the Time to Assess Tax (“Consents”), id., Exs. 2-4, Dkt. 38-2, 3828 3 & 38-4; and a notice of partial claim disallowance (“Disallowance”), id., Ex. 6, Dkt. 38-6.
26

-2-

1

IRS’s disclosure initiative regarding abusive tax shelters, but otherwise disallowed the

2

claim. Id. ¶ 12. The IRS did not refund the penalty, however, but retained the funds as a

3

setoff against a portion of the interest owed on the additional tax liability for 2000. Id.

4

On July 2, 2008, Defendant, as personal representative of the Estate, filed suit in this

5

Court for a refund. Dkt. 1, R.A. Among other issues raised by the parties and decided by

6

the Court was whether the IRS had properly credited the refund of the accuracy-related

7

penalty against Taxpayer’s unpaid statutory interest. Dkt. 174 at 19-20, R.A. The action

8

was resolved in the United States’ favor on summary judgment (“SJ Order”), id., and the

9

Court entered judgment for the United States, Dkt. 175, R.A. The Ninth Circuit affirmed

10

the judgment (“USCA Memo”), Dkt. 186, R.A., and the Supreme Court denied a petition

11

for writ of certiorari (“USSC Order”), Dkt. 190, R.A. See Compl. ¶ 13.

12

B.

13

Although Defendant satisfied the underpayment of income tax and penalty prior to

THE INSTANT ACTION

14

filing the Refund Action, he failed to pay the interest assessed against Taxpayer for tax year

15

2000. Compl. ¶¶ 14, 18. As of August 29, 2016, Taxpayer remained indebted to the

16

United States “in the amount of $8,749,116.09, plus such additional amounts, including

17

interest and penalties, which accrued and continue to accrue as provided by law.” Id. ¶ 19.

18

On March 21, 2017, the United States filed the instant action against Defendant—in

19

his capacity as the personal representative of the Estate and as successor trustee of the

20

Trust—to collect unpaid interest assessed against Taxpayer. The United States brings a

21

single cause of action for reduction of interest to judgment.

22

On January 9, 2018, the United States filed the instant Motion for Summary

23

Judgment, seeking judgment against Defendant, as personal representative of the Estate and

24

successor trustee of the Trust, “in the amount of $9,234,440.14, for unpaid interest

25

associated with the tax liability of [Taxpayer] for tax year 2000, less any additional credits

26

according to proof, plus interest and other statutory additions as provided by 28 U.S.C.

27

§ 1961(c) and 26 U.S.C. §§ 6601, 6621 from January 4, 2018.” Mot. at 6, Dkt. 35.

28
-3-

1

Defendant opposes the motion, arguing: (1) the IRS fails to establish the liability of

2

either the Trust or the Estate; (2) the IRS’s claim is barred by the statute of limitations;

3

(3) the IRS did not give the requisite notice of the assessment of interest (4) the IRS’s claim

4

is barred by estoppel; and (5) the IRS cannot rely on the Form 4340 to carry its burden of

5

proving the amount owed. Opp’n, Dkt. 38.

6

The United States filed a reply. Dkt. 41. After the close of briefing, the Court

7

issued an order directing the parties to file supplemental briefs on two issues: (1) the

8

liability of the Trust; and (2) the effect, if any, of the Refund Action on Defendant’s statute

9

of limitations claim. Dkt. 44. The parties submitted their respective briefs, and the motion

10

is ripe for adjudication. U.S.’s Supp. Br., Dkt. 45; Def.’s Supp. Br., Dkt. 46.

11

II.

LEGAL STANDARDS

12

A.

13

A party may move for summary judgment on some or all of the claims or defenses

SUMMARY JUDGMENT

14

presented in an action. Fed. R. Civ. P. 56(a). “Summary judgment is appropriate only

15

where ‘there is no genuine dispute as to any material fact and the movant is entitled to

16

judgment as a matter of law.’” Salazar-Limon v. City of Houston, Tex., 137 S. Ct. 1277,

17

1280 (2017) (quoting Fed. R. Civ. P. 56(a)). The moving party bears the initial burden of

18

identifying those portions of the pleadings, discovery, and affidavits that establish the

19

absence of a genuine dispute of material fact. Cline v. Indus. Maint. Eng’g & Contracting

20

Co., 200 F.3d 1223, 1229 (9th Cir. 2000) (citing Celotex Corp. v. Catrett, 477 U.S. 317,

21

323-25 (1986)). If the moving party meets its burden, the burden then shifts to the non-

22

moving party to go beyond the pleadings and identify specific facts demonstrating the

23

existence of a triable issue. Id. (citing Celotex, 477 U.S. at 323-24; Anderson v. Liberty

24

Lobby, Inc., 477 U.S. 242, 248 (1986)).

25

In evaluating a motion for summary judgment, “the court must ‘view the facts and

26

draw reasonable inferences in the light most favorable to the [non-moving party].’”

27

Salazar-Limon, 137 S. Ct. at 1281 (quoting Scott v. Harris, 550 U.S. 372, 378 (2007)

28

(quotation omitted)). Facts must be viewed in this manner, however, only if there is a
-4-

1

genuine dispute as to a material fact. Scott, 550 U.S. at 380. A factual dispute is material

2

if it “might affect the outcome of the suit under governing law.” Anderson, 447 U.S. at

3

248. “Factual disputes that are irrelevant or unnecessary will not be counted.” Id. A

4

factual dispute is genuine if it properly can be resolved in favor of either party. Id. at 250.

5

“If the evidence is merely colorable, or is not significantly probative, summary judgment

6

may be granted.” Id. at 249-50 (internal citations omitted).

7

B.

8

“In an action to collect taxes, the government bears the initial burden of proof.”

9

TAX LIABILITY

Palmer v. United States, 116 F.3d 1309, 1312 (9th Cir. 1997) (citing United States v.

10

Stonehill, 702 F.2d 1288, 1293 (9th Cir. 1983)). The government may satisfy this burden

11

by introducing into evidence its deficiency determinations and assessments of taxes due,

12

which are generally entitled to a presumption of correctness. Oliver v. United States, 921

13

F.2d 916, 919 (9th Cir. 1990) (citing Stonehill, 702 F.2d at 1293). As to the form of this

14

evidence, a Certificate of Assessments and Payments, i.e., a Form 4340, “is probative

15

evidence in and of itself and, ‘in the absence of contrary evidence, [is] sufficient to

16

establish that notices and assessments were properly made.’” Hansen v. United States, 7

17

F.3d 137, 138 (9th Cir. 1993) (quoting Hughes v. United States, 953 F.2d 531, 540 (9th Cir.

18

1992) (a certified Form 4340 is admissible as a self-authenticating public record)).

19

Introduction of the assessment shifts the burden to the taxpayer to rebut the presumption by

20

countervailing proof. Stonehill, 702 F.2d at 1294. If rebutted, the presumption disappears,

21

and the burden of proving the deficiency reverts to the government. Id.

22

III.

23

DISCUSSION
The United States moves to reduce outstanding interest to judgment. Interest

24

accrues by operation of law upon the underpayment of any tax. 26 U.S.C. § 6601(a) (“If

25

any amount of tax imposed by this title . . . is not paid on or before the last day prescribed

26

for payment, interest on such amount at the underpayment rate established under section

27

6621 shall be paid for the period from such last date to the date paid.”). The United States

28

asserts that the Refund Action conclusively determined Defendant’s tax liability for the
-5-

1

2000 tax year, and thus, the accrual of interest on that tax is automatic. The United States

2

further argues that the Form 4340 establishes that the assessment of interest was proper.

3

As discussed above, Defendant argues that the United States is not entitled to

4

summary judgment for the following reasons: (1) it fails to establish the liability of either

5

the Trust or the Estate; (2) its claim is barred by the statute of limitations; (3) it did not give

6

the requisite notice of the assessment of interest; (4) its claim is barred by estoppel; and

7

(5) it cannot rely on the Form 4340 to carry its burden of proving the amount owed. The

8

Court addresses these arguments seriatim.

9
10

A.

LIABILITY OF THE ESTATE AND/OR TRUST

Defendant argues that the Estate and the Trust are distinct, and that the United States

11

has failed to establish that the Trust (or any portion of it) is liable for the Taxpayer’s

12

outstanding indebtedness. The Court agrees.

13

Little information regarding the Trust is before the Court. Defendant asserts, and the

14

United States does not dispute, that the Trust became irrevocable upon Taxpayer’s death,

15

and thus, is taxable as an entity separate from its grantor. After the United States failed to

16

respond adequately to Defendant’s argument in its reply brief, the Court directed the United

17

States to file a supplemental brief addressing the issue. The supplemental brief fares no

18

better. In conclusory fashion, the United States asserts:

19
20
21
22
23
24
25

For purposes of reducing the outstanding unpaid interest assessment to
judgment, the tax liability of Thomas Joel Gonzales for tax year 2000 extends to
Defendant Tom Gonzales as both the Personal Representative of [the Estate] and
the Trustee of [the Trust]. See Sequoia Property and Equipment Ltd. Partnership
v. United States, No. CV-F-97-5044, 2002 WL 32388132, *2 (E.D. Cal. June 3,
2002) (stating that an executor, administrator, or distributee of a distributed
estate are proper parties for substitution of a deceased party). The Trust, as a
beneficiary of the pour-over-will of Thomas Joel Gonzales, is a distributee of the
Estate and therefore Defendant as Trustee is a property [sic] party.
U.S.’s Supp. Br. at 1-2.

26

The Court finds that Sequoia, which concerns identification of a proper party to be

27

substituted for a deceased litigant, is not directly on point. 2002 WL 32388132, at *2. A

28

proper party—the personal representative of the Estate—is already present in this action.
-6-

1

The Court need not delve into such matters of law, however. Even if Sequoia is germane,

2

the United States fails to adduce facts demonstrating that the Trust is a “distributee of a

3

distributed estate.” Id. Neither the Trust instrument nor the will are before the Court.

4

Thus, even accepting that the Trust is a beneficiary under the will, the Court cannot

5

ascertain whether the Estate has been distributed or whether the Trust received a

6

distribution. Defendant asserts that the Estate has, in fact, made no distributions to the

7

Trust. Def.’s Supp. Br. at 3. Whether it has or not, such evidence is not before the Court.

8
9
10

Because the United States fails to demonstrate that the Trust is a proper party to this
action, summary judgment as to the Trust is DENIED. In light of that determination, the
Court focuses its remaining analysis solely on the Estate.2

11

B.

12

Defendant next argues that the Government’s claim is barred by the three-year

STATUTE OF LIMITATIONS

13

statute of limitations. Opp’n at 8 (citing 26 U.S.C. § 6501(a) (“Except as otherwise

14

provided in this section, the amount of any tax imposed by this title shall be assessed within

15

3 years after the return was filed . . . and no proceeding in court without assessment for the

16

collection of such tax shall be begun after the expiration of such period.”)). His argument

17

is twofold: (1) the Consents may be invalid against the Estate, and thus, failed to extend the

18

statute of limitations; and (2) even if the Consents are valid, the time to assess any tax or

19

interest was extended only through December 31, 2006.

20
21

1.

Validity of the Consents

Defendant notes that the statute of limitations was initially set to expire in 2004.

22

Although the Consents purported to extend the statute of limitations to December 31, 2006,

23

Defendant claims that the forms are “ambiguous.” Opp’n at 8. Noting that the Consents

24
2

In conclusory fashion, Defendant also disputes the liability of the Estate. Opp’n at
7 (“the moving papers fail to establish any basis for liability as the taxpayer of either the
Trust or the Estate”). There is no doubt that Defendant, in his capacity as personal
26 representative of the Estate, is a proper party, however. As a personal obligation of a
decedent existing at the time of his or her death, unpaid income taxes are properly
27 recovered as claims against the estate. See 26 U.S.C. § 2053; 26 C.F.R. §§ 20.2053-1,
20.2053-4, 20.2053-6(f). Moreover, the liability of the Estate was conclusively determined
28 in the Refund Action, which Defendant brought on the Estate’s behalf.
25

-7-

1

are signed, “Tom Gonzales TTEE [i.e., trustee],” Defendant argues that he signed the

2

consents in his capacity as the trustee of the Trust, not in his capacity as the personal

3

representative of the Estate. Id. Thus, Defendant posits, there is a genuine dispute as to

4

“the validity of the consents” against the Estate. Id. at 9.

5

The Court finds this argument foreclosed by the Refund Action. Under the doctrine

6

of res judicata, “a final judgment on the merits of an action precludes the parties from

7

relitigating issues that were or could have been raised in that action.” In re Baker, 74 F.3d

8

906, 910 (9th Cir. 1996). “In the [income] tax context, once a taxpayer’s liability for a

9

particular year is litigated, ‘a judgment on the merits is res judicata as to any subsequent

10

proceeding involving the same claim and the same tax year.’” Id. (quoting Commissioner

11

v. Sunnen, 333 U.S. 591, 598 (1948) (“Income taxes are levied on an annual basis. Each

12

year is the origin of a new liability and of a separate cause of action.”)).

13

In the Refund Action, the parties litigated the issue of the Taxpayer’s liability for the

14

2000 and 2001 tax years. It is evident that Defendant could have raised the issue of the

15

statute of limitations in that action. In fact, in the refund claim submitted to the IRS prior to

16

the filing of the Refund Action, Defendant argued that “the statute of limitations for

17

additional assessment had expired as of the date [the SNOD] was issued on December 6,

18

2006.” Dkt. 28-1 at 32, R.A. For any of a number of reasons (e.g., because he deemed the

19

argument meritless or because he explicitly relied on the validity of the consents in arguing

20

that his refund claim for 2001 was timely, see Dkt. 91 at 21-22, R.A.), Defendant later

21

omitted the statute of limitations argument from his complaint. Nevertheless, res judicata

22

bars the Court from revisiting the legality of the underlying tax deficiency and assessment

23

for which Defendant was found liable in the Refund Action.3

24
3

Defendant posits: “In reality, if claim preclusion applies in this case to anyone, it
should apply to the United States. In the [Refund] Action, the IRS could have, but did not,
pursue the claim for additional interest.” Def.’s Supp. Br. at 9. This issue was not raised in
26 the opposition, and is beyond the scope of the supplemental briefing order. Moreover, an
action to reduce unpaid tax assessments to judgment is not a compulsory counterclaim in a
27 refund action. Caleshu v. United States, 570 F.2d 711, 713-14 (8th Cir. 1978) (“[T]he
nature and purpose of the statutes authorizing government tax collection suits demonstrate
28 Congress’ intent that such suits were not to be compulsory counterclaims.”).
25

-8-

1
2

2.

The Limitations Period

Even if the Consents are valid, Defendant asserts that “the time period for assessing

3

the tax and interest was extended only through December 31, 2006.” Opp’n at 9. Noting

4

that interest was not assessed until April 12, 2007, Defendant argues that the assessment

5

was time-barred. Defendant makes two material errors.

6

First, by operation of sections 6503(a)(1) and 6213(a), the statute of limitations was

7

suspended for 150 days after the SNOD was issued on December 6, 2006.4 Shannahan v.

8

United States, 47 F. Supp. 2d 1128, 1135-36 (S.D. Cal. 1999). Consequently, the limitation

9

period to assess a tax deficiency did not expire on December 31, 2006, but rather, on May

10

30, 2007. Id. (explaining that any days remaining in the limitation period continue to run

11

after the suspension period). Defendant acknowledged as much in the Refund Action. See

12

Dkt. 91 at 21-22, R.A. The assessment on April 12, 2007 therefore was timely.

13

Second, although a tax deficiency must be assessed within three years after a return

14

is filed, interest “may be assessed and collected at any time during the period within which

15

the tax to which such interest relates may be collected.” 26 U.S.C. § 6601(g); see also

16

Field v. United States, 381 F.3d 109, 113 (2d Cir. 2004) (“section 6601(g) supplies the

17

relevant limitations period” for the assessment of interest). The collection period for the

18

underlying tax at issue here extends “10 years after the assessment of the tax.” 26 U.S.C.

19

§ 6502(a). Thus, given that the assessment of interest “coincided with the commencement

20

of the collection period, the assessment was no doubt timely.” Field, 381 F.3d at 113.

21

C.

22

The Complaint alleges that notice of the assessment of interest and demand for

NOTICE

23

payment thereof was given in April 2007. Compl. ¶ 17. Defendant asserts that the IRS

24

failed to provide the alleged notice. As evidence of this purported failure, Defendant notes

25

that he requested in discovery all notices and assessments sent to Taxpayer. Subject to and

26
4

The IRS is prohibited from making an assessment for 90 days after a notice of
deficiency is issued. 26 U.S.C. § 6213(a). The running of the period of limitations to make
28 an assessment is suspended for that period and for 60 days thereafter. Id. § 6503(a)(1).
27

-9-

1

without waiving its general objections, the IRS responded that it had already produced

2

responsive documents, identified as: (a) the SNOD; (b) the Form 4340; (c) the SJ Order;

3

(d) the USCA Memo; and (e) the USSC Order. Defendant asserts that, “[o]bviously, none

4

of these documents include any notice allegedly sent . . . on or about April 13, 2007, for the

5

interest assessment.” Opp’n at 12. He argues that the allegation regarding notice is

6

therefore “unsubstantiated,” and it is “safe to conclude that no such notices exist.” Id.

7

The Government’s response is somewhat unsatisfactory. It responds: “Defendant

8

seems to believe that he was entitled to receive a notice, separate from the [SNOD], about

9

the assessment of interest. This is simply not the case. Because the application of interest

10

is automatic under [section 6601] in the case of an underpayment, his notice was the

11

[SNOD]. Defendant certainly cannot claim that he did not receive proper notice of the tax

12

liability for which he has already received a complete adjudication.” Reply at 2-3.

13

The SNOD issued in December 2006 did not include interest. To be sure, a notice of

14

deficiency need not—and, according to IRS rules, should not—include interest. See 26

15

U.S.C. § 6601(e)(1) (exempting interest from deficiency proceedings); Field, 381 F.3d at

16

113 (section 6601(e)(1) expressly excludes interest from the definition of a “tax” for

17

purposes of deficiency proceedings); see also I.R.M. 4.8.9.8.3 (07-09-2013), 2007 WL

18

7994343, at *1 (“The notice of deficiency letter should specify the amount of tax and

19

penalty for each tax period, but should not include the interest amount.”). Given that a

20

notice of deficiency need not include interest, however, the Government’s assertion that

21

notice separate and apart from the SNOD is not required is tantamount to an argument that

22

no notice is required at all. The Government provides no authority to support this assertion,

23

which is contradicted by statute. See 26 U.S.C. § 6601(e)(1) (“Interest prescribed under

24

this section on any tax shall be paid upon notice and demand . . . .”) (emphasis added).

25

Generally, the notice and demand requirement is satisfied when the IRS informs a taxpayer

26

of the amount owed and requests payment thereof. 26 U.S.C. § 6303(a). The Court finds

27

that Defendant was thus entitled to notice of the assessment of interest.

28
- 10 -

1

The Government’s perfunctory and unsupported argument aside, the Court

2

nevertheless finds that notice was proper. As stated above, “Form 4340 is probative

3

evidence in and of itself and, ‘in the absence of contrary evidence, [is] sufficient to

4

establish that notices and assessments were properly made.’” Hansen, 7 F.3d at 138

5

(quoting Hughes, 953 F.3d at 540). Here, the Form 4340 indicates that a “Statutory Notice

6

of Balance Due” was first sent on April 12, 2007. Form 4340 at US000004.5 Several

7

additional notices were sent thereafter. Id. at US000004-5. Defendant offers no evidence

8

to rebut the information contained in the Form 4340. Indeed, he does not even declare that

9

no notice was received; rather, he asserts that the IRS failed to produce a copy of the notice

10

during discovery. At most, this evidences a potential discovery violation, not a defect in

11

the assessment and collection process. See Hughes, 953 F.2d at 539 n.4.

12

Moreover, the Court notes that Defendant did, in fact, receive notice of the

13

assessment of interest. In the Refund Action, the Estate itself alleged that, “on or about

14

July 28, 2008, Defendant’s [sic] Internal Revenue Service credited the $5,246,367

15

[accuracy-related penalty] against asserted interest allegedly due of $13,361,360.50.”

16

Dkt. 28 ¶ 12 n.*, R.A. The propriety of crediting the accuracy-related penalty against the

17

outstanding interest was litigated in the Refund Action. See Dkt. 174 at 19-20, R.A. It is

18

therefore apparent that notice of the assessment of interest was given—and received—

19

sometime before July 28, 2008.6 Taken together with the presumption of regular notice

20

established by the Form 4340, and in the absence of any evidence to negate that

21

presumption, the Court finds that notice of the assessment of interest was proper.

22
23
24
5

A statutory notice of balance due constitutes a notice and demand for payment.
See United States v. Scott, 290 F. Supp. 2d 1201, 1209 (S.D. Cal. 2003); see also Elias v.
Connett, 908 F.2d 521, 525 (9th Cir. 1990) (“The form on which a notice of assessment and
26 demand for payment is made is irrelevant as long as it provides the taxpayer with all the
information required under 26 U.S.C. § 6303(a).”).
25

27

6

28

In the Refund Action, the Government also produced a Form 4340, dated August
19, 2009, showing assessed interest in the amount of $13,361,360.50. Dkt. 170-2 at 4, R.A.
- 11 -

1

D.

2

Defendant further argues that the Government should be estopped from asserting its

ESTOPPEL

3

claim of interest because the IRS twice represented that “no interest was due.” Opp’n at 16.

4

Specifically, on December 6, 2006 and again on June 11, 2008—attached to the SNOD and

5

Disallowance, respectively,—the IRS provided a Form 4549-A, “Income Tax Discrepancy

6

Adjustments,” that reflected “Interest (IRC § 6601)” in the amount of $0.00. SNOD at

7

US000069; Disallowance at US000198. Although acknowledging that estoppel is applied

8

sparingly against the government, Defendant argues that the IRS’s misstatements are the

9

“sort of ‘official misconduct’ that can be considered sufficient to estop the government.”

10

Id. (quoting Brandt v. Hickel, 427 F.2d 53, 56-57 (9th Cir. 1970)). This is based largely on

11

Defendant’s claim that the IRS failed to assess or provide notice of the assessment of

12

interest prior to brining this suit, thereby allowing interest to accrue for 10 years.

13

“The traditional elements of an equitable estoppel claim include (1) the party to be

14

estopped must know the facts; (2) he must intend that his conduct shall be acted on or must

15

so act that the party asserting the estoppel has a right to believe it is so intended; (3) the

16

latter must be ignorant of the true facts; and (4) he must rely on the former’s conduct to his

17

injury. Additionally, a party asserting equitable estoppel against the government must also

18

establish that (1) the government engaged in affirmative misconduct going beyond mere

19

negligence; (2) the government’s wrongful acts will cause a serious injustice; and (3) the

20

public’s interest will not suffer undue damage by imposition of estoppel.” Baccei v. United

21

States, 632 F.3d 1140, 1147 (9th Cir. 2011) (quotations and citations omitted).

22

Defendant fails to establish the elements of estoppel. The fact that no outstanding

23

interest was shown on two forms is not necessarily an affirmative representation that no

24

interest would be due. Rather, it may simply have been the case that the notices to which

25

those forms were attached, i.e., the SNOD and Disallowance, did not address the matter of

26

statutory interest. Moreover, even if the forms are construed as such a representation,

27

Defendant has not shown that the IRS engaged in affirmative misconduct. Although the

28

IRS may have been negligent in failing to accurately report the amount of interest owed,
- 12 -

1

“negligence alone will not support a claim of equitable estoppel against the government.”

2

Baccei, 632 F.3d at 1147.7 Finally, no injury or injustice resulted. As discussed above, the

3

evidence before the Court demonstrates that the IRS timely assessed the interest and issued

4

a notice and demand for payment thereof. Defendant was made aware of the assessment by

5

no later than July 28, 2008, and the issue of crediting the abated penalty as a setoff against

6

the interest was litigated in the Refund Action. Thus, Defendant cannot plausibly claim

7

that he failed to pay the interest for lack of notice.

8

E.

9

Finally, Defendant contends that the Government is not entitled to rely on the Form

THE FORM 4340

10

4340’s presumption of correctness to “prove” the amount of interest owed. Opp’n at 12.

11

As a threshold matter, Defendant errs in asserting that the United States must “prove” the

12

amount of interest. “Although establishing the amount of tax liability is a matter of

13

evidence, the amount of interest accrued on such tax liability is a matter of law.” United

14

States v. Sarubin, 507 F.3d 811, 816 (4th Cir. 2007) (emphasis in original) (citing United

15

States v. Schroeder, 900 F.2d 1144, 1150 n.5 (7th Cir. 1990) (noting that the amount of

16

interest “is not something the government must prove at trial”)). The government need

17

only provide sufficient evidence to prove the amount of the underlying tax debt, “which

18

accrues interest by operation of statute.” Id.8

19

In any event, Defendant’s arguments challenging the Form 4340 are without merit.

20

First, Defendant relies on Stallard v. United States, 806 F. Supp. 152, 159 (W.D. Tex.

21

1992) for the proposition that a Form 4340 “‘prepared and executed after the expiration of

22

the statute of limitations is no evidence that a valid assessment occurred.’” Opp’n at 14.

23
7

Brandt, cited by Defendant, is inapt and does not control. The Court in Brandt held
that due process was violated where an agency provided misinformation (i.e., that no
adverse action would be suffered) such that notice of an adverse proceeding was effectively
25 deprived. 427 F.2d at 56-57. The Court held that “some forms of erroneous advice are so
closely connected to the basic fairness of the administrative decision making process that
26 the government may be estopped from disavowing the misstatement.” Id. Due process
concerns like those at issue in Brant are not implicated here.
24

27
8

28

Nevertheless, the government may (and should) provide documentation to assist
the Court in establishing the amount of interest owed. See Schroeder, 900 F.2d at 1150 n.5.
- 13 -

1

This argument is easily dispensed with. Although Stallard was affirmed on other grounds,

2

the Court of Appeals expressly rejected the proposition on which Defendant relies. Stallard

3

v. United States, 12 F.3d 489, 493-94 (9th Cir. 1994) (“the district court erred” in requiring

4

a Form 4340 to be prepared within the prescriptive period). The Court of Appeals

5

explained that the assessment itself must be timely, but that the supporting record need not

6

be prepared within the statute of limitations. Id. Defendant’s reliance on Stallard is

7

therefore clearly misplaced.

8

Second, Defendant argues that the presumption of validity is rebutted here because

9

“evidence shows the information in the forms to be erroneous.” Opp’n at 14. Specifically,

10

he asserts that, “in 2007, the Form 4340 would have said . . . that the [$5.2 million penalty]

11

was owed,” even though the IRS subsequently abated the penalty on the ground that it was

12

“wrongfully charged.” Id. The logic behind this argument is flawed. The form filed in this

13

action reflects that the accuracy-related penalty was abated. Form 4340 at US000004.

14

Thus, no error appears. Moreover, insofar as an “error” existed in 2007, it was not in the

15

form, but in the penalty assessment itself. “Where an assessment is based on more than one

16

item,” however, “the presumption of correctness attaches to each item.” Stonehill, 702

17

F.2d at 1294. “Proof that an item is in error destroys the presumption for that single item;

18

the remaining items retain their presumption of correctness.” Id. Thus, even if the IRS

19

erred in imposing the accuracy-related penalty, that error does not infect other items, such

20

as assessed interest.

21

In view of the forgoing, the Court finds that the Government may rely on the Form

22

4340 to establish the amount of interest owed. The Form 4340, together with the Form

23

INTSTD, shows a balance due of $9,234,440.14 as of January 4, 2018. See Palmer Decl.

24

¶ 7. Defendant offers no evidence to dispute this sum. Consequently, the Court finds that

25

the Estate remains indebted to the United States in the sum of $9,234,440.14, plus interest

26

as provided by 26 U.S.C. §§ 6601 and 6621 from January 4, 2018, to the date paid.

27
28
- 14 -

1

IV.

CONCLUSION

2

In view of the forgoing,

3

IT IS HEREBY ORDERED THAT:

4

1.

The Government’s motion for summary judgment (Dkt. 35) is GRANTED IN

5

PART and DENIED IN PART. The motion is DENIED as to the Trust, and GRANTED as

6

to the Estate. Judgment shall be entered in favor of the United States and against Tom

7

Gonzales, as Personal Representative for the Estate of Thomas J. Gonzales, II, in the

8

amount of $9,234,440.14, plus interest as provided by 26 U.S.C. §§ 6601 and 6621 from

9

January 4, 2018, to the date paid.

10

2.

Given that the Government has failed to establish the liability of the Trust,

11

and that the Court has already provided the Government an opportunity to file a

12

supplemental brief on the issue, the Government shall SHOW CAUSE why the action

13

against the Trust should not be dismissed. The Government shall file a written response,

14

not to exceed 5 pages, within 7 days of the date this Order is entered. Failure to comply

15

with this Order will result in the dismissal of the action against the Trust without further

16

notice.

17
18

IT IS SO ORDERED.
Dated: June 20, 2018

______________________________
SAUNDRA BROWN ARMSTRONG
Senior United States District Judge

19
20
21
22
23
24
25
26
27
28
- 15 -