Shafmaster et al v. USA

Filing 31

///ORDER granting in part and denying in part 19 Motion for Summary Judgment. So Ordered by Judge Paul J. Barbadoro.(jna) Modified on 9/30/2011 to add: ///(vln).

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW HAMPSHIRE
Jonathan Shafmaster
and Carol Shafmaster
v.

Case No. 09-cv-238-PB
Opinion No. 2011 DNH 149

United States of America

MEMORANDUM AND ORDER
Jonathan and Carol Shafmaster seek a refund of interest
payments and a failure-to-pay penalty they incurred following an
audit of their tax returns for the 1993 and 1994 tax years.
They argue that they are entitled to recover interest payments
because the payments were the result of unreasonable delay by
the Internal Revenue Service (“IRS”) in completing the audit.
They claim that the failure-to-pay penalty was improper both
because the IRS failed to issue a proper notice and demand for
payment of the underlying taxes and because the IRS agreed that
it would not seek to recover a failure-to-pay penalty from them.
The United States has filed a motion seeking either
dismissal for lack of subject matter jurisdiction or summary
judgment.

I.

BACKGROUND

The Shafmasters allege that the IRS commenced an audit of
their personal income tax returns for the 1993 and 1994 tax
years on November 19, 1996, Compl. ¶ 6 (Doc. No. 1), and issued
notices of deficiency and proposed assessments on April 17,
1998.

(Doc. No. 24-5).

Although approximately seventeen months

passed between the start of the audit and its completion, the
Shafmasters allege that the audit should have taken no more than
six months.

Compl. ¶ 28 (Doc. No. 1); (Doc. No. 24-3).

The Shafmasters petitioned the tax court for a
redetermination of the proposed assessments, and the matter was
referred to Appeals Officer Robert Hamilton of the Portsmouth,
New Hampshire Appeals Office.

Compl. ¶ 8 (Doc. No. 1).

From

1999 until early 2001, Hamilton worked with the Shafmasters to
resolve their objections to the proposed assessments.

Id. ¶ 9.

The parties ultimately entered into three written Stipulations
of Settlement, all dated March 19, 2001, and the IRS prepared a
Form 5278 reflecting the agreement.
17, 24-18).

(Doc Nos. 24-15, 24-16, 24-

On April 25, 2001, the tax court issued two brief

orders implementing the settlement agreements.

(Doc. Nos. 25-5,

25-6).
Two of the three settlement agreements address the subject
of penalties by stating that “[t]he respondent concedes that no
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[accuracy-related penalty] is due under I.R.C. § 6662(a).”
(Doc. Nos. 24-16 ¶ 17, 24-18 ¶ 28).

The third agreement states

that “[t]he petitioners concede the delinquency penalty under
I.R.C. § 6651(a)(1) and respondent concedes the accuracy-related
penalty under I.R.C. § 6662(a).”

(Doc. No. 24-17 ¶ 35).

The

only penalty amount that is included in the Form 5278 is the
failure-to-file penalty described in the third settlement
agreement.

(Doc. No. 24-15).

Neither the settlement agreements

nor the tax court decisions include any reference to failure-topay penalties.
Although the Shafmasters did not raise the subject of
failure-to-pay penalties directly with Hamilton during the
discussions that led to the settlement agreements, they claim
that “Hamilton agreed that the Taxpayers would not have to pay
any other penalties for 1993, 1994, and 1995, on the basis that
the Taxpayers had reasonable cause to believe that no additional
taxes were due.”
omitted).

(Doc. No. 24-9 ¶ 16) (internal quotations

They also assert that they would not have agreed to

settle the tax court cases if the IRS had insisted on additional
penalties.

(Doc. No. 24-8

¶¶ 4-6).

Shortly after the tax court issued its decisions, Hamilton
informed the Shafmasters’ attorney during a meeting that “the
[IRS’s] system would automatically impose a penalty under
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Internal Revenue Code section 6651 for ‘failure to pay’ the tax
liability previously.”

(Doc. No. 24-9 ¶ 21).

He then stated

“that he could and would waive the penalty for ‘reasonable
cause.’”

Id.

In a later meeting, Hamilton informed counsel

that he had entered a code into the IRS computer system that
would suppress any late payment penalty that otherwise would
have been assessed.

Id. at ¶ 22.

The parties disagree as to whether notice and demand was
properly sent with respect to the taxes that the Shafmasters
agreed to pay for the 1993 and 1994 tax years.

The IRS, relying

on Form 4340 certifications for both tax years, contends that
notice and demand was sent on September 10, 2001. (See Doc. No.
13-2 at 5, 11; Doc No. 13-3 at 5, 14).

The Shafmasters deny

that they received notice and demand for either tax year at that
time.

(Doc. No. 24-8 ¶ 6).

On January 6, 2004, the Shafmasters submitted an “Offer to
Waive Restoration on Assessments and Collection of Tax
Deficiency and to Accept Overassessment” (“Form 870-AD”) in
which they sought specific reductions in the amounts they owed
for the 1992, 1993, and 1994 tax years based on net operating
carryback losses that they had incurred in later tax years.
(Doc. No. 24-20).

Preprinted language on the second page of

Form 870-AD provides that, except in specified circumstances
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that are not present here, “the case will not be reopened by the
[IRS] Commissioner” if he accepts the taxpayer’s offer.

Id.

IRS Appeals Team Manager, Kathleen Brown, signed the
Shafmasters’ offer and thereby accepted it for the Commissioner
on January 13, 2004.

(Doc. No. 25).

On August 4, 2004, the Shafmasters and the IRS entered into
an installment agreement establishing a payment schedule for the
Shafmasters’ outstanding tax liabilities.

(Doc. No. 25-1).

The

agreement identifies the Shafmasters’ tax liability, sets a
payment schedule, and states that the Shafmasters agree to “pay
the federal taxes shown above, PLUS PENALTIES AND INTEREST
PROVIDED BY LAW.”

Id. (emphasis in original).

On April 17, 2006, the IRS imposed a failure-to-pay penalty
of $261,189.50 for the 1994 tax year.

(Doc. No. 25-7).

It

based the penalty on the Shafmasters’ failure to timely pay the
taxes identified in the September 10, 2001 notice and demand.
The Shafmasters filed a refund claim on September 18, 2008.
Compl. ¶ 22 (Doc. No. 1).
2008.

Id. ¶ 23.

The claim was denied on November 28,

The Shafmasters filed a protest of the denial

on January 22, 2009, which was also denied on April 20, 2009.
Id. ¶ 27.

Thereafter, they commenced this suit, wherein they

seek a refund of the allegedly erroneous late payment penalty
and its associated interest, as well as a refund of the excess
5

interest that accrued because of what they claim was
unreasonable delay in completing the audit.

II.

STANDARD OF REVIEW

The standard that a district court must use in evaluating a
challenge to its subject matter jurisdiction will vary depending
upon the nature of the challenge.

Here, the motion to dismiss

does not depend upon disputed facts.

Thus, dismissal for lack

of subject matter jurisdiction will be warranted only if “the
facts alleged in the complaint, taken as true, do not justify
the exercise of subject matter jurisdiction.”

Muniz-Rivera v.

United States, 326 F.3d 8, 11 (1st Cir. 2003).
A summary judgment motion should be granted when the record
reveals “that there is no genuine dispute as to any material
fact and the movant is entitled to judgment as a matter of law."
Fed. R. Civ. P. 56(a).

A material fact “is one ‘that might

affect the outcome of the suit under the governing law.’”
United States v. One Parcel of Real Prop. with Bldgs., 960 F.2d
200, 204 (1st Cir. 1992) (quoting Anderson v. Liberty Lobby,
Inc., 477 U.S. 242, 248 (1986)).

In assessing whether a genuine

dispute exists, the evidence submitted in support of the motion
must be considered in the light most favorable to the nonmoving
party, with all reasonable inferences drawn in that party’s
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favor.

See Navarro v. Pfizer Corp., 261 F.3d 90, 94 (1st Cir.

2001).

III.

ANALYSIS

The Shafmasters argue that they are entitled to a refund of
both a portion of the interest they paid on their 1993 and 1994
tax liabilities and the penalty that the IRS required them to
pay for failing to timely pay their taxes for the 1994 tax year.
I address the government’s challenge to each claim in turn.
A.

Interest
The Shafmasters base their claim for a refund of interest

on 26 U.S.C. § 6404(e)(1), which authorizes the Secretary of the
Treasury to abate interest on any deficiency that is
attributable to unreasonable delay by the IRS.
In Hinck v. United States, 550 U.S. 501, 503 (2007), the
Supreme Court held that a federal district court lacks
jurisdiction to consider a claim for abatement under § 6404(e)
because Congress has given the tax court exclusive jurisdiction
over such claims.

See 26 U.S.C. 6404(h).

Although the

Shafmasters attempt to distinguish Hinck by noting that they are
seeking a refund rather than an abatement, the Supreme Court
anticipated their argument and rejected it in dictum.
550 U.S. at 507-08.

Hinck,

The Shafmasters have failed to explain why
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I should disregard the Supreme Court’s recent guidance on the
subject and I am aware of no reason why I should do so in this
case.

Accordingly, I dismiss the Shafmasters’ claim for a

refund of interest for lack of subject matter jurisdiction.
B.

Failure-to-Pay Penalty
A taxpayer who fails to pay taxes due after notice and

demand for payment is subject to a failure-to-pay penalty under
26 U.S.C. § 6651(a)(3).

The penalty for tax assessments over

$100,000 that are not paid within ten business days after notice
and demand accrues at a monthly rate of 0.5% of the taxes owed.
26 U.S.C. § 6651(a)(3).

The penalty is capped at 25%.

Id.

The Shafmasters present two principal arguments to support
their claim that they are entitled to a refund of the failureto-pay penalty.

First, they claim that the IRS failed to issue

a proper notice and demand for payment.

Second, they invoke the

doctrine of equitable estoppel in arguing that the IRS
improperly collected the payment in any event because it
promised the Shafmasters that they would not be subject to a
failure-to-pay penalty.
1.

Notice and Demand

As I have explained, a failure-to-pay penalty may be
asserted if tax liabilities are not paid within a specified time
after notice and demand.

26 U.S.C. 6303(a) provides that this
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requirement can be satisfied by leaving the notice and demand at
the taxpayer’s dwelling or his usual place of business.
Alternatively, the IRS can mail the notice and demand to the
taxpayer at his last known address, in which case the notice and
demand is effective even if it is never actually received by the
taxpayer.

26 U.S.C. 6303(a); United States v. Zolla, 724 F.2d

808, 810 (9th Cir. 1984).
The IRS has relied on a Form 4340 certification in this
case to establish that it satisfied the notice and demand
requirement.

“Certificates of assessments and payments are

generally regarded as being sufficient proof, in the absence of
evidence to the contrary, of the adequacy and propriety of
notices and assessments that have been made.”

Gentry v. United

States, 962 F.2d 555, 557 (6th Cir. 1992); Geiselman v. United
States, 961 F.2d 1, 6 (1st Cir. 1992); United States v.
Aivalikles, 278 F.Supp.2d 141, 143 (D.N.H. 2003).
Because the Form 4340 at issue here states that notice and
demand was made, the Shafmasters must present evidence
sufficient to rebut the presumption of correctness that attaches
to the certification.

To overcome the presumption, the

Shafmasters have both the burden of production and the burden of
persuasion.

Long v. United States, 972 F.2d 1174, 1181 & n.9

(10th Cir. 1992); see also Hansen v. United States, 7 F.3d 137,
9

138 (9th Cir. 1993) (per curiam); Psaty v. United States, 442
F.2d 1154, 1160 (3d Cir. 1971).

Without more, a taxpayer’s

assertion that notice and demand were not received is
insufficient to create a triable question of fact.

Hansen, 7

F.3d at 137.
The Shafmasters assert that neither they nor their attorney
ever received the notice and demand.

Perhaps understanding that

such denials are insufficient by themselves to create a triable
issue of fact when a Form 4340 certification states that notice
and demand was made, see, e.g., id., they have also produced an
IRS record to buttress their claim.

That record, a September 5,

2001 “Request for Quick or Prompt Assessment,” includes a
handwritten notation that states:
SEND ALL COPIES OF BILL TO
APPEALS ADDRESS ABOVE
DO NOT BILL TAXPAYER
IMMINENT STATUTE
(Doc. No. 29-2).

Because this document appears to have been

prepared only a few days before the IRS claims notice and demand
was made, it is sufficient when considered with the other
evidence in the record to permit a reasonable factfinder to
question whether the IRS sent the notice and demand to the
Shafmasters’ last known address as the statute requires.
Accordingly, I deny the government’s request for summary
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judgment with respect to the Shafmasters’ claim for a refund of
the failure-to-pay penalty.
2.

Equitable Estoppel

The Shafmasters alternatively rest their claim for a refund
of the failure-to-pay penalty on the doctrine of equitable
estoppel.
The elements of equitable estoppel are: (1) a
misrepresentation by one party who had reason to believe that
the other party would rely on the misrepresentation; (2)
detrimental reliance by the other party; and (3) reasonableness
of reliance, in that the relying party did not and should not
have known that the other party’s conduct was misleading.
Ramirez-Carlo v. United States, 496 F.3d 41, 49 (1st Cir. 2007)
(citing Heckler v. Cmty. Health Servs., 467 U.S. 51, 59 (1984)).
An additional element must be proved when equitable estoppel is
asserted against the government.
842 (1st Cir. 1982).

Akbarin v. INS, 669 F.2d 839,

In such cases, the party invoking the

doctrine must demonstrate that it “reasonably relied on some
‘affirmative misconduct’ attributable to the sovereign.”

United

States v. Ven-Fuel, Inc., 758 F.2d 741, 761 (1st Cir. 1985)
(citing Akbarin, 669 F.2d at 842).
The government challenges the Shafmasters’ equitable
estoppel claim on several different grounds but I need only
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explain why they could not have reasonably relied on the
statements on which their claim is based to resolve the issue in
the government’s favor.
Congress has expressly limited the power of Treasury
Department officials to compromise tax claims.
7121, 7122.

See 26 U.S.C. §§

The Treasury Department regulations that implement

these statutes establish procedures that must be complied with
by taxpayers in order to bind the government to a settlement, 26
C.F.R. § 301.7122-1(d)-(e), and ample case law clearly provides
that “the statutory procedure ‘is the exclusive method by which
tax cases should be compromised.’”

Luxton v. United States, 340

F.3d 659, 663 (8th Cir. 2003) (quoting Botany Worsted Mills v.
United States, 278 U.S. 282, 288-89 (1929)); Klein v. Comm’r,
899 F.2d 1149, 1152 (11th Cir. 1990); Brooks v. United States,
833 F.2d 1136, 1145-46 (4th Cir. 1987).
The Shafmasters do not claim that any of the statements
they rely on meet the statutory requirements for a binding
settlement.

Absent unusual circumstances that are not present

here, this dooms their equitable estoppel claim because, “those
who deal with the government are charged with knowledge of
applicable statutes and regulations.”

Boulez v. Comm’r, 810

F.2d 209, 218 n.68 (D.C. Cir. 1987) (dictum); see also Heckler,
467 U.S. at 64-65; Fed. Crop Ins. Corp. v. Merrill, 332 U.S.
12

380, 384-85 (1947).

Accordingly, I agree with those courts that

have declined to apply equitable estoppel to enforce purported
settlements with the IRS that do not conform to statutory
settlement procedures.

See Meyers v. Comm’r, 79 F.3d 1150

(table), 1996 WL 116818, at *2 (7th Cir. 1996); Heffelfinger v.
United States, 1994 WL 836368, at *5 (M.D.Pa. 1994); Delohery v.
IRS, 843 F.Supp. 666, 669 (D. Colo. 1994); Aken v. United
States, 31 Fed. Cl. 89, 97 (1994).

Because the Shafmasters

could not reasonably have relied on the statements on which
their claim is based, their equitable estoppel claim necessarily
fails.1

IV.

CONCLUSION

For the reasons set forth in this Memorandum and Order, the
government’s motion to dismiss or in the alternative for summary
judgment (Doc. No. 19) is granted in part and denied in part.
The Shafmasters’ claim for a refund of interest paid with
1

The Shafmasters attempt to repackage their equitable estoppel
claim as a claim that they should not have had to pay the
penalty because they had reasonable cause to delay payment. See
26 U.S.C. 6651(a)(3). This argument fails for the same reasons
that they are not entitled to equitable estoppel. Moreover, to
the extent that they claim reasonable cause that gives rise to
the revised tax assessments, their argument is unsupported by
precedent and is unpersuasive because their obligation to pay
the specified taxes was fixed by the agreement between the
parties that was later embodied in the tax court decisions.
13

respect to the 1993 and 1994 tax years is dismissed for lack of
subject matter jurisdiction.

The government is entitled to

summary judgment with respect to the Shafmasters’ claim that the
government is equitably estopped from subjecting them to a
failure to file penalty.

The only issue that remains for trial

is the Shafmasters’ claim that they are entitled to a refund of
the failure-to-pay penalty because the government failed to
issue a proper notice and demand for payment.
SO ORDERED.
/s/Paul Barbadoro
Paul Barbadoro
United States District Judge
September 30, 2011
cc:

James E. Higgins, Esq.
James E. Brown, Esq.
W. Damon Dennis, Esq.

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