Carnick v. U.S. Dept. of Treasury Internal Revenue

459 F.Supp.2d 602

Robert C. CARNICK, Plaintiff, v. UNITED STATES OF AMERICA DEPARTMENT OF TREASURY INTERNAL REVENUE SERVICE, Defendant.

No. 05-CV-73622.

United States District Court, E.D. Michigan, Southern Division.

October 25, 2006.

Steven Rabinovitz, Cohen, Lerner, Royal Oak, MI, for Plaintiff.

Richard C. Ambrow, Jr., U.S. Department of Justice, Washington, DC, for Defendant.

OPINION AND ORDER GRANTING DEFENDANT'S MOTION TO AFFIRM DETERMINATION CONCERNING COLLECTION ACTION

ROSEN, District Judge.

I. Introduction

Plaintiff Robert C. Carnick commenced this suit in this Court on September 21, 2005, challenging a determination by the Internal Revenue Service ("IRS") that he is liable for a Trust Fund Recovery Penalty ("TFRP") assessed against him for over $45,000.00.

On March 27, 2006, Defendant United States of America filed a motion requesting that the challenged IRS determination be affirmed, on the ground that the IRS appeals officer did not abuse his discretion in issuing the Notice of Determination Concerning Collection Action that is the subject of this suit. On May 1, 2006, Plaintiff responded to this motion by filing an answer, requesting that the motion to affirm be denied. Defendant then filed a reply brief on May 5, 2006 in further support of its motion. Having reviewed the parties' submissions and the record as a whole, the Court finds that it is appropriate to resolve this matter "on the briefs." See Eastern District Local Rule 7.1(e)(2). For the reasons set forth below, the Court concludes that Defendant's motion should be granted.

II. Factual and Procedural Background

In 1999, the IRS assessed a Trust Fund Recovery Penalty ("TFRP") against Plaintiff Robert C. Carnick, as a "responsible person" for Copco Door Company, for unpaid trust fund taxes during the period ending September 30, 1999. On September 2, 2004, the IRS sent Carnick a Final Notice of Intent to Levy and Notice of Your Rights to a Hearing for unpaid trust fund taxes, notifying Carnick of the agency's intent to collect the TFRP assessment and advising him of his right to request a collection due process ("CDP") hearing with the IRS Appeals Office.

On September 14, 2004, the IRS received a timely request from Carnick for a CDP hearing with an IRS appeals officer. In the request, Carnick claimed he was not a "responsible person" within the meaning of the Internal Revenue Code and that he was not given the appropriate notice to contest the assessment.¹ Carnick did, however, indicate that he would submit an offer in compromise as a collection alternative during the CDP hearing. Carnick was subsequently contacted by Lawrence Phillips, a Settlement Officer for the IRS, located in Grand Rapids, Michigan. Although Carnick requested an in-person conference, Phillips mentioned that an informal telephone conference was the only option because no IRS appeals offices were located near Carnick's residence. Phillips originally scheduled the telephone conference for January 18, 2005, but Carnick's attorney requested that the conference be rescheduled because he had not yet gathered and reviewed all of the pertinent information. Phillips agreed to reschedule the telephone conference for January 27, 2005. Again, Carnick's attorney called Phillips and requested that the hearing be postponed because he had received new information and claimed that he needed additional time to review it. Again, Phillips agreed to reschedule the telephone conference for February 2, 2005.

Finally, on February 1, 2005, Carnick sent an offer in compromise to Phillips in preparation for the telephone conference. In this initial offer in compromise, Carnick calculated a proposed offer of $6,300.00 payable within 90 days by subtracting his actual monthly living expenses from his monthly income. On February 2, 2005, Phillips conducted an informal telephone conference with Carnick and his attorney to discuss the offer in compromise. Phillips was unable to reach a final decision at this time because neither Carnick nor his attorney provided sufficient documentation supporting the offer in compromise. A communication breakdown apparently occurred between Carnick and his attorney.

Neither Carnick nor his attorney had any other questions during the telephone conference, and they requested several days to gather the information that Phillips needed to reach a decision. During the months of March and April of 2005, Phillips reviewed the offer in compromise and Carnick's personal finances, eventually concluding that Carnick had the ability to pay over $52,000.00. In a series of correspondence between Phillips and Carnick's attorney, Phillips requested additional information to substantiate Carnick's calculation of actual living expenses. Some, but not all, of this information was produced. Without sufficient information to justify Carnick's claimed actual living expenses, Phillips based his determination on the difference between Carnick's monthly income and national standard expenses.²

Dissatisfied with this amount, Carnick thereafter amended his offer in compromise by increasing the offer to $12,000. Phillips reviewed the second offer and reduced the amount he believed Carnick could pay to $45,216.00. Phillips indicated that unless and until Carnick offered to pay roughly $45,000.00, he could not recommend that the IRS accept the offer. Phillips also concluded that Carnick did not have any economic hardship that prevented him from paying close to $45,000.00. In July 2005, Carnick's attorney requested another two weeks to produce documentation to substantiate Carnick's actual living expenses. This documentation was never produced. Finally, on August 25, 2005, Phillips issued a Notice of Determination Concerning Collection Action rejecting Carnick's offer in compromise and reiterating a taxliability of $45,216.00. The Notice of Determination stated that relief could not be granted because Carnick did not "propose an acceptable collection alternative." (Defendant's Motion, Ex. 1)

Carnick then initiated the present action on September 21, 2005, challenging the IRS Notice of Determination Concerning Collection Action. Carnick does not contest the underlying tax liability but believes the IRS acted unreasonably in rejecting his offers in compromise. Specifically, Carnick argues that Phillips's Notice of Determination rejecting the offers in compromise was an abuse of discretion because the IRS failed to consider the increased offer submitted by Carnick, failed to allow Carnick to use actual expenses instead of national standard expenses, disallowed certain actual expenses, failed to consider Carnick's poor credit history, and failed to consider Carnick's current financial hardship. Defendant then filed the present motion, requesting that this Court affirm the Notice of Determination Concerning Collection Action.

III. Analysis

Defendant argues that the Settlement Officer, Lawrence Phillips, did not abuse his discretion when he rejected Carnick's offers in compromise. The Court agrees with Defendant.

Before the IRS can levy on a taxpayer's rights or property, the taxpayer is entitled to a collection due process hearing conducted by an IRS employee with no prior involvement in the taxpayer's case. See generally 26 U.S.C. § 6330. During the CDP hearing, the taxpayer can raise "any relevant issue relating to unpaid tax or the proposed levy," including "challenges to the appropriateness of collection actions," and "offers of collection alternatives, which may include ... an offer-in-compromise." See § 6330(c)(2)(A). The IRS employee then must determine whether all the legal and procedural requirements of any applicable laws have been met, whether the taxpayer has proposed any reasonable collection alternatives, and whether the proposed levy activity fairly balances the need for the efficient collection of taxes with the concern that the collection activity be no more intrusive than necessary. See § 6330(c)(3). After the IRS issues a Notice of Determination stating its findings, the taxpayer has 30 days to seek judicial review of that determination. See § 6330(d)(1).

The Sixth Circuit recently addressed the standard of review in cases such as this one, where a taxpayer is challenging an IRS Notice of Determination. In Living Care Alternatives of Utica v. United States, 411 F.3d 621 (6th Cir.2005), the Sixth Circuit stated that "it is proper to review the IRS Appeals Office de novo with respect to decisions about the underlying tax liability and for abuse of discretion with respect to all other decisions. ..." Id. at 625. Significantly, the Sixth Circuit commented that district courts, under the abuse of discretion standard, should be more deferential when reviewing determinations made by the IRS than when reviewing determinations made by other administrative agencies. Id. The Sixth Circuit also noted that in providing for CDP hearings on what is ordinarily a scant record, Congress "must have been contemplating a more deferential review of these tax appeals than of more formal agency decisions." Id.

Here, the parties agree that Carnick failed to challenge the underlying tax liability during the informal telephone CDP conference. Instead, Carnick made several offers in compromise that were rejected by IRS Settlement Officer Phillips. Carnick is now challenging only the Settlement Officer's Notice of Determination Concerning Collection Action rejecting those offers in compromise. In his complaint, Carnick initially requested this Court to "redetermine an appropriate offer in compromise based on Plaintiffs actual expenses and ability to pay." (Plaintiffs Complaint at 4). The Court will not conduct such an analysis. Living Care Alternatives of Utica requires this Court to review the decision by the Settlement Officer for an abuse of discretion. "[W]ithout a clear abuse of discretion in the sense of clear taxpayer abuse and unfairness by the IRS, as contemplated by Congress, the...