Shafmaster et al v. USA
Filing
39
///ORDER granting 36 Motion for Summary Judgment. So Ordered by Judge Paul J. Barbadoro.(jna)
UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW HAMPSHIRE
Jonathan Shafmaster
Carol Shafmaster
v.
Civil No. 09-cv-238-PB
Opinion No. 2012 DNH 091
United States of America
MEMORANDUM AND ORDER
The government seeks summary judgment with respect to the
Shafmasters’ claims for a refund of a failure-to-pay penalty.
The sole question raised by the present motion is whether a
Notice of Tax Lien that was sent to the Shafmasters satisfies
the notice and demand requirement that is a prerequisite for the
imposition of a failure-to-pay penalty under 26 U.S.C. §
6651(a)(3).
For the reasons provided below, I determine that it
does, and I therefore grant the government’s motion for summary
judgment.
I.
A.
BACKGROUND1
History of Dealings Between Shafmasters & IRS
After an audit of the Shafmasters’ personal income tax
returns for the 1993 and 1994 tax years, the IRS issued notices
1
A more developed recitation of the facts of this case can be
found in my order of September 30, 2011. Doc. No. 31.
of deficiency and proposed assessments.
The Shafmasters
petitioned the tax court for a redetermination of the proposed
assessments.
They were referred to an IRS appeals officer, with
whom they worked from 1999 until early 2001 to resolve their
objections.
On March 19, 2001, the Shafmasters entered into
three written Stipulations of Settlement.
On April 25, 2001 the
tax court issued two brief orders implementing the settlement
agreements.
The tax court decisions and the settlement
agreements were both silent on the issue of whether the
Shafmasters would owe failure-to-pay penalties.
The government asserts that on September 10, 2001, it sent
the Shafmasters a notice stating the amount they owed and
demanding payment.
The Shafmasters assert that such document
was not sent to their address.
On October 7, 2002, a document
titled “Notice of Federal Tax Lien” was sent to the Shafmasters.
The contents of that document are described in some depth infra.
On January 6, 2004, the Shafmasters submitted a Form 870AD, in which they sought specific reductions in the amounts owed
for the 1992-1994 tax years based on net operating carryback
losses they had incurred subsequent to those years.
The IRS
accepted the offer shortly after it was submitted.
On August 4, 2004, the Shafmasters and the IRS entered into
an installment agreement establishing a schedule for payment of
2
the outstanding tax liabilities.
The agreement identifies the
Shafmasters’ liability, sets a payment schedule, and states that
the Shafmasters agree to “pay the federal taxes shown, PLUS
PENALTIES AND INTEREST PROVIDED BY LAW.”
Doc. No. 25-1.
On April 17, 2006, the IRS imposed a failure-to-pay penalty
for the 1994 tax year.
B.
Procedural History
After paying off their balance in full, the Shafmasters
filed a refund claim on September 18, 2008.
They argued, inter
alia, that they were entitled to a refund of the failure-to-pay
penalty.
The IRS filed a motion for summary judgment which I
granted in part and denied in part, Doc. No. 31.
I rejected the Shafmasters’ claim that certain
representations by IRS agents equitably estopped the government
from imposing the failure-to-pay penalty.
I agreed with the
Shafmasters, however, that a triable issue of fact existed as to
whether the IRS had sent notice and demand to the Shafmasters’
last known address, a prerequisite to imposition of the penalty.
Although the government produced a Form 4340 indicating that
notice and demand had been properly sent on September 10, 2001,
I determined that the presumption of correctness typically
accorded to that form had been sufficiently rebutted by the
Shafmasters’ submissions.
In conjunction with their averments
3
that they never received the notice and demand, the Shafmasters
also presented a handwritten notation on a “Request for Quick or
Prompt Assessment” form, dated September 5, 2001, that reads:
SEND ALL COPIES OF BILL TO
APPEALS ADDRESS ABOVE
DO NOT BILL TAXPAYER
IMMINENT STATUTE
Doc. No. 29-2.
After considering the notation’s indication that
the IRS should not directly bill the Shafmasters, and in light
of the document’s temporal proximity to the date the IRS
contends notice and demand was issued, I concluded that a
reasonable factfinder could question whether notice and demand
had been properly sent.
Based on assertions that it could explain away the
notation, I permitted the government to again move for summary
judgment.
After a second round of summary judgment filings,
however, I was again unable to conclude on the basis of the
government’s submissions that notice and demand was sent to the
Shafmasters on September 10, 2001.
Nonetheless, among its
submissions accompanying the motion, the government also
produced a Notice of Tax Lien form that was sent to the
Shafmasters on October 7, 2002.
The document appears on its
face to satisfy the notice and demand required by statute, and
the Shafmasters do not contest that the form was properly sent
4
to them.
I directed the government to submit a third summary
judgment motion to fully articulate the argument that the Notice
of Tax Lien sent to the Shafmasters permits imposition of the
failure-to-pay penalty.
That motion is the subject of this
order.
C.
Notice of Tax Lien Form
The form relevant to this order is an IRS Form 668(Y)(c)
that is titled “Notice of Federal Tax Lien.”
Lien, Doc. No. 33-10 at 4.
Notice of Tax
The document indicates that it was
prepared on October 1, 2002, and a cover page indicates that it
was sent to the Shafmasters on October 7.
Id. at 2, 4.
The
form contains a table that lists dates and balances due for the
1993 and 1994 tax years.
Id. at 4.
In the same row as the most
recent date of assessment for each year, the table states the
unpaid balance of assessment for that year.
Id.
For 1994, the
tax year in question, the unpaid balance was $2,156,919.
Id.
A box toward the top of the document states, in bold type:
As provided by section 6321, 6322, and 6323 of the
Internal Revenue Code, we are giving a notice that
taxes (including interest and penalties) have been
assessed against the following-named taxpayer. We
have made a demand for payment of this liability, but
it remains unpaid. Therefore, there is a lien in
favor of the United States on all property and rights
to property belonging to this taxpayer for the amount
of these taxes, and additional penalties, interest,
and costs that may accrue.
5
Id.
Underneath, the Shafmasters’ names and address are listed.
Id.
To the right, another box contains a series of bullet
points in small type, one of which reads: “IRS will continue to
charge penalty and interest until you satisfy the amount you
owe.”
Id.
II.
STANDARD OF REVIEW
A summary judgment motion should be granted when the record
reveals "no genuine dispute as to any material fact and that the
movant is entitled to judgment as a matter of law."
Civ. P. 56(a).
Fed. R.
The evidence submitted in support of the motion
must be considered in the light most favorable to the nonmoving
party, drawing all reasonable inferences in its favor.
See
Navarro v. Pfizer Corp., 261 F.3d 90, 94 (1st Cir. 2001).
A party seeking summary judgment must first identify the
absence of any genuine issue of material fact.
Catrett, 477 U.S. 317, 323 (1986).
Celotex Corp. v.
The burden then shifts to
the nonmoving party to "produce evidence on which a reasonable
finder of fact, under the appropriate proof burden, could base a
verdict for it; if that party cannot produce such evidence, the
motion must be granted."
Ayala-Gerena v. Bristol Myers-Squibb
Co., 95 F.3d 86, 94 (1st Cir. 1996); see Celotex, 477 U.S. at
323.
6
III.
ANALYSIS
The Shafmasters argue that the Notice of Tax Lien sent to
them by the IRS cannot constitute the notice and demand
necessary to impose a failure-to-pay penalty.
They assert that
its status as notice and demand is invalidated by three
deficiencies: (1) its inaccuracy in stating the Shafmasters’
liability; (2) its failure to demand payment; and (3) its
issuance beyond 60 days after taxes were assessed.
Additionally, the Shafmasters contend that even if the Notice of
Tax Lien does qualify as notice and demand, the failure-to-pay
penalty was improperly imposed because the maximum penalty was
assessed prior to the date it would have fully matured.
A.
Legal Background
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).
When tax assessments of over $100,000
are not paid within 10 business days after notice and demand,
the penalty accrues at a monthly rate of 0.5% of the taxes owed.
Id.
The failure-to-pay penalty is capped at 25%.
Id.
The notice and demand requirement can be satisfied by
leaving the notice and demand at the taxpayer’s dwelling or
usual place of business.
26 U.S.C. § 6303(a).
7
Alternatively,
the IRS can mail the notice and demand to the taxpayer’s last
known address, in which case it is effective even if never
actually received by the taxpayer.
Id.; United States v. Zolla,
724 F.2d 808, 810 (9th Cir. 1984).
The form on which notice and
demand is made is irrelevant as long as it “gives notice to each
person liable for the unpaid tax, stat[es] the amount and
demand[s] payment thereof.”
26 U.S.C. § 6303(a); see United
States v. Roccio, 981 F.2d 587, 591 (1st Cir. 1992) (noting that
26 U.S.C. § 6303(a) “does not mandate the use of any specific
form of notice”); Elias v. Connett, 908 F.2d 521, 525 (9th Cir.
1990) (explaining that form of notice and demand “is irrelevant
as long as it provides the taxpayer with all the information
required under 26 U.S.C. § 6303(a)”).
And although the
government must issue notice and demand within 60 days of the
assessment, 26 U.S.C. § 6303(a), “the failure to give notice
within 60 days does not invalidate the notice.”
26 C.F.R. §
301.6303-1(a).
B.
Validity of Notice and Demand
1.
Inaccuracy
The Shafmasters argue that the Notice of Tax Lien cannot
constitute notice and demand because the amount listed on the
document as their liability for the 1994 tax year is inaccurate.
Although presented as one argument, the Shafmasters actually
8
make two distinct claims.
First, they assert that the amount
listed is inaccurate as the result of IRS error.
Second, they
argue that both parties understood that the amount listed was
only a preliminary figure that was not representative of what
the Shafmasters would actually owe for the 1994 tax year.
I
address each argument in turn.
The first claim is based on inconsistencies between the
liability listed for the 1994 tax year on the Notice of Tax Lien
and the liabilities listed for that year on other forms.
The
Notice of Tax Lien, dated October 1, 2002, states that the
Shafmasters had an unpaid balance for the 1994 tax year of
$2,156,919.
Notice of Tax Lien, Doc. No. 33-10 at 4.
The
account transcript for the 1994 tax year states that a liability
of $2,069,035.23 was imposed on September 10, 2001.2
Transcript, Doc. No. 33-3 at 3.
Account
And a Form 3552, also dated
September 10, 2001, puts the Shafmasters’ overall liability for
the 1994 tax year at $2,070,497.23.3
Form 3552, Doc. No. 33-5.
2
This amount is the sum of three parts: (1) the additional tax
assessment of $1,167,380; (2) a late-filing penalty of $49,545;
and (3) interest that had accrued totaling $852,110.23. Account
Transcript, Doc. No. 33-3 at 3. The former two numbers are the
same amounts listed on the tax court’s order. See Tax Ct.
Decision for 1994 Tax Year at 1, Doc. No. 25-6. The tax court
did not address the interest that would be due. Id.
3
As with the account transcript, see supra note 2, the Form 3552
breaks the total liability into three component parts. Form
9
The Shafmasters argue that because these documents are
inconsistent, the Notice of Tax Lien must be inaccurate and
therefore cannot constitute an effective notice and demand.
It is apparent from the liability breakdown on the two 2001
forms that the discrepancy in the total between those documents
is due to a difference of $1,462 in the amount of the latefiling penalty.
I am unable to ascertain why these two
documents would contain slightly divergent penalty amounts.
I
therefore assume, without deciding, that the Shafmasters have
satisfied their burden of showing an IRS error in regard to the
$1,462 divergence in amounts between the 2001 documents.
See
United States v. Schroeder, 900 F.2d 1144, 1148 (7th Cir. 1990)
(noting that Commissioner’s tax deficiency determinations are
presumed correct and taxpayer has burden of production and
persuasion to show otherwise).
It is not surprising, however, that the Notice of Tax Lien,
prepared more than a year later, states an amount that is
substantially higher than the amounts stated on the 2001
documents.
Interest would have continued to accrue between
September 2001 and October 2002, and the additional balance of a
little over $85,000 appears in line with what the interest would
3552, Doc. No. 33-5. The additional tax and the interest on the
Form 3552 are the same as on the account transcript, but the
penalty amount is slightly higher.
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have been on approximately 13 months of additional nonpayment on
the Shafmasters’ outstanding liability.4
By simply drawing
attention to an increase in liability in a situation where an
increase would be expected, the Shafmasters have not satisfied
their burden of showing IRS error.
See id.
Therefore, the
Shafmasters have failed to show any mistake in calculation
subsequent to September 10, 2001.
I proceed on the assumption that the Shafmasters have shown
only that the $1,462 divergence in amounts between the 2001
documents may be inaccurate.
Even assuming that this error was
unresolved by the time the IRS issued the 2002 Notice of Tax
Lien,5 however, an error of such a small magnitude would not
affect the document’s ability to serve as notice and demand.
See Sage v. United States, 908 F.2d 18, 22 (5th Cir. 1990)
(“Clearly a notice of assessment and demand for payment that
contains a technical error will be held valid where the taxpayer
4
As a point of comparison, I note that the account transcript
lists the interest charged as of February 23, 2004 at
$173,659.60. Account Transcript, Doc. No. 33-3 at 4. I take
this figure to represent the entire interest accruing between
September 10, 2001 and February 23, 2004, inclusive of the
approximately $85,000 that had accrued as of October 2002.
5
Although I assume its truth, I am skeptical about the existence
of any persistent IRS error. The Shafmasters have had a full
opportunity to litigate their 1994 tax liability and its
associated penalties, and have never claimed that an IRS
calculation error is a distinct basis for a refund of some
amount they have paid.
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has not been misled by the error.”); Planned Inv., Inc. v.
United States, 881 F.2d 340, 344 (6th Cir. 1989) (same); see
also Schroeder, 900 F.2d at 1148 (holding that taxpayers owed
the government the amount of their actual liability
notwithstanding the IRS notifying taxpayers that their liability
was $6,000 in excess of the approximately $125,000 they owed).
The Shafmasters have failed to produce any evidence that would
tend to show that the liability amount listed on the Notice of
Federal Tax Lien contained an error of material dimension.
The Shafmasters’ second argument is based on their mutual
understanding with the IRS that future calculations would reduce
their actual liability for the 1994 tax year.
The IRS did not
finish calculating net operating loss carrybacks from the 19951998 tax years until late 2003, and interest netting
calculations were not completed until the summer of 2004.
Burke Aff. ¶ 5-6, Doc. No. 38-1.
Supp.
These calculations both
significantly altered the Shafmasters 1994 tax year liability.
At heart, the Shafmasters’ argument is that the 2002 Notice of
Tax Lien could not have stated the amount they owed, and
therefore could not demand payment of that amount, because both
the IRS and the Shafmasters were awaiting additional
calculations that would reduce the liability for the 1994 tax
year.
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I find their argument unpersuasive.
Framed differently,
the Shafmasters urge that they were entitled to further delay
payment for a tax assessment that was already nearly a decade
overdue because the final calculation of their taxes for
intervening years might eventually reduce the amount owed for
that year.
The Shafmasters have not cited to any statute or
case law that supports that position, and my research has
revealed a number of cases that strongly weigh against their
contention.
See, e.g., Simon v. Comm’r, 248 F.2d 869, 877 (8th
Cir. 1957) (“The carryback provision does not relieve the
taxpayer of the obligation to pay the tax in full when it falls
due, and cannot be interpreted as deferring taxpayer's duty to
pay the tax promptly.”); Olsen v. Comm’r, T.C. Memo. 1993-432
(1993) (holding that because “carrybacks reflect future events
that are unforeseeable at the time when tax liability is
initially determined, they may not be used to reduce the net
amount due” and cannot be used as a shield from a failure-tofile penalty); Swafford v. Comm’r, T.C. Memo. 1973-122 (1973)
(“[T]he fact that there may be loss carrybacks which may
eliminate any tax for a particular year does not wipe out the
existence of a deficiency for the purpose of computing any
additions to tax.”).
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In sum, I conclude that the Notice of Tax Lien fulfilled
the requirement of 26 U.S.C. § 6303(a) that a notice and demand
“stat[e] the amount” of a taxpayer’s liability.
I reject the
Shafmasters’ arguments that putative inaccuracies in the Notice
of Tax Lien invalidate it as notice and demand.
2.
Lack of Demand
The Shafmasters assert that the Notice of Tax Lien cannot
constitute notice and demand because it does not explicitly
demand payment.
I disagree.
A number of statements on the
document clearly direct the recipients to immediately pay their
outstanding balance.
Notably, the form states, “We have made a
demand for payment of this liability, but it remains unpaid”;
and “IRS will continue to charge penalty and interest until you
satisfy the amount you owe.”
at 4.
Notice of Tax Lien, Doc. No. 33-10
I reject the argument that the form does not demand
payment.
3.
Lateness of Notice
The Shafmasters note that the Notice of Tax Lien was issued
over a year after the date the taxes were assessed, well beyond
the 60-day period within which the government is supposed to
issue notice and demand.
They concede, however, that notices
sent more than 60 days after the assessment are still effective
so long as the notice is otherwise valid.
14
Pl.’s Mem. in Supp.
of Obj. to Summ. J. at 15, Doc. No. 38; see 26 C.F.R. §
301.6303-1(a).
In conceding that lateness is not a distinct
basis for invalidating a notice and demand, the Shafmasters
essentially rely on their prior arguments, which I have already
rejected.
In conclusion, I determine that the Notice of Tax Lien
constitutes a valid notice and demand.
The government was
therefore entitled to impose a failure-to-pay penalty on the
Shafmasters when they did not pay the amount due.
The penalty
would have begun to accrue on October 17, 2002, ten days after
the Notice of Tax Lien was sent.
C.
See 26 U.S.C. § 6651(a)(3).
Penalty Date Relating Back to Notice of Tax Lien
The final argument pressed by the Shafmasters is based on
the date the failure-to-pay penalty was assessed.
The full
penalty was assessed on April 17, 2006, but if notice and demand
was sent in October 2002 (when the Notice of Tax Lien was sent),
the full penalty would not have accrued until December 2006 (50
months from the date of notice and demand).
Therefore, the
Shafmasters contend, “the penalty does not properly relate to
the notice of lien” and “there is a genuine issue of material
fact as to whether the penalty was properly assessed.”
Mem. Obj. to Summ. J. at 16, Doc. No. 38.
15
I disagree.
Pl.’s
Clearly, the IRS based its imposition of the failure-to-pay
penalty on having sent notice and demand in September 2001, more
than a year prior to the time it sent the Notice of Tax Lien.
In my first order, I determined that the IRS had failed to prove
that it had properly sent such prior notice.
The Shafmasters’
claim is nonetheless without merit, however, because the
Shafmasters did not satisfy their liabilities for the 1994 tax
year within fifty months of October 7, 2002, the date I have
determined that notice and demand was sent.
As such, although
the IRS may have assessed the penalty earlier than it should
have been assessed, the failure-to-pay penalty was still
justified.
The Shafmasters present no argument that would
suggest the IRS must issue a refund under such circumstances.
IV.
CONCLUSION
For the reasons stated above, I grant the government’s
motion for summary judgment (Doc. No. 36).
The clerk shall
enter judgment accordingly and close the case.
SO ORDERED.
/s/Paul Barbadoro
Paul Barbadoro
United States District Judge
May 7, 2012
cc: James E. Higgins, Esq.
James E. Brown, Esq.
W. Damon Dennis, Esq.
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