Drake v. Comm'r of Internal Revenue, 20454–03L.

• Decision Date: 12 October 2005
• Docket Number: No. 20454–03L.,20454–03L.
• Citation: 125 T.C. 201,125 T.C. No. 9
• Parties: Gregory DRAKE, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

125 T.C. 201

125 T.C. No. 9

Gregory DRAKE, Petitioner

v.COMMISSIONER OF INTERNAL REVENUE, Respondent

No. 20454–03L.

United States Tax Court.

Oct. 12, 2005.

Prior to a scheduled sec. 6330, I.R.C., hearing with P, R's settlement officer received a memorandum from R's insolvency unit advisor that questioned the credibility and motives of P's counsel in a prior court proceeding. P was not provided an opportunity to participate in the ex parte communication.

Held: The memorandum constitutes a prohibited ex parte communication pursuant to Rev. Proc.2000–43, 2000–2 C.B. 404, and therefore the instant case will be remanded to R's Appeals Office for a new hearing.

Timothy J. Burke, for petitioner.

Louise R. Forbes, for respondent.

OPINION

WELLS, J.

Respondent's Appeals Office determined that a proposed levy should be sustained against petitioner, who timely filed a petition for review of the determination. We review the determination for abuse of discretion. Unless otherwise indicated, all section references are to the Internal Revenue Code, as amended, and all Rule references are to the Tax Court Rules of Practice and Procedure.

Background

Some of the facts have been stipulated and are so found. The stipulation of facts and the accompanying exhibits are incorporated herein by this reference.

Petitioner Gregory Drake and Barbara Drake are husband and wife. At the time of the filing of the petition, petitioner resided in South Yarmouth, Massachusetts.

As of August 19, 1997, respondent had filed Notices of Federal Tax Lien against petitioner for income tax liabilities for 1991, 1992, and 1995. On that date, Barbara Drake and petitioner filed a joint bankruptcy petition under chapter 13 of the Bankruptcy Code with the U.S. Bankruptcy Court for the District of Massachusetts. In the bankruptcy proceedings, Barbara Drake and petitioner received authority to sell three properties which were subject to Federal tax liens. The properties were sold free and clear of the tax liens, with a tax lien attaching to the sale proceeds.¹ Subsequently, the bankruptcy trustee filed a motion to dismiss the case for failure to file a repayment plan,² and Barbara Drake and petitioner filed a Motion for Authority to Disburse Funds.³ The court granted the motion to dismiss and issued an order mooting the Motion for Authority to Disburse Funds. Upon the dismissal of the case on June 30, 1999, the attorney representing Barbara Drake and petitioner in the bankruptcy proceedings distributed to Barbara Drake and petitioner sale proceeds in the amount of $151,139.74.⁴ Petitioner subsequently transferred, for no consideration, the sale proceeds to his sons, Darren Drake and Gregory Drake, Jr. On October 6, 1999, Notices of Federal Tax Lien were filed against Barbara Drake and petitioner with respect to their 1994, 1995, and 1997 tax years.

On July 19, 2000, respondent mailed to Barbara Drake and petitioner a Final Notice, Notice of Intent to Levy and Notice of Your Right to a Hearing, with respect to their 1991, 1992, 1994, 1995, and 1997 tax years. The notice asserted an unpaid tax of $121,478.17 and penalties and interest of $88,607.27. Pursuant to a power of attorney, Timothy J. Burke (Mr. Burke) submitted a timely Form 12153, Request for a Collection Due Process Hearing, on behalf of Barbara Drake and petitioner. Subsequently, on behalf of Barbara Drake, Mr. Burke submitted a Form 8857, Request for Innocent Spouse Relief, with respect to each of the years in dispute.

Settlement Officer Eugene O'Shea was assigned to conduct the requested section 6330 hearing, and he determined from Internal Revenue Service records that petitioner had previously filed for bankruptcy protection. On January 30, 2002, prior to the section 6330 hearing, Settlement Officer O'Shea conferred with Advisor Sid Gordon of the Internal Revenue Service Insolvency Unit regarding the bankruptcy case and requested related documentation. On the same date, Advisor Gordon faxed to Settlement Officer O'Shea a copy of Advisor Gordon's prior memorandum to respondent's counsel Louise R. Forbes (Attorney Forbes).⁵ In the memorandum, dated October 5, 1999, Advisor Gordon stated that proceeds from the prior sale of the three properties subject to Federal tax liens had been distributed to Barbara Drake and petitioner, that the proceeds should have been distributed to the creditors of Barbara Drake and petitioner, and that Advisor Gordon believed that the attorney of Barbara Drake and petitioner had “used the Court to bypass the Federal tax Lien.” The memorandum further stated:

According to the settlement sheets the debtor received $161,094.73 from the three sales. Although the Bankruptcy Court approved the sales under 11 USC 363 the IRS received nothing. Attorney Satran had knowledge of the Internal Revenue Service Federal Tax Liens due to the considerable litigation involved in this case. In fact Attorney Satran filed a motion with the Court to disburse the funds including [sic] the IRS liens. It is a mockery to the integrity [of the] Bankruptcy Court if an Attorney can use it to defeat a Federal Tax Lien allowing a Debtor to walk away with the proceeds. The Bankruptcy Code was used because 11 USC 363 was authorized by the Court.

I informed Attorney Campobasso that Attorney Satran had previously been suspended by the Bankruptcy Court. Chief, U.S. Bankruptcy Court Judge Carol J Keener suspended attorney Satran from 01/30/1996 through 11/29/1996. The action of Attorney Satran in a Chapter 11 case [involving] Paula Wyner, Carlton House of Brockton, Inc. was the cause of the suspension. I think the Court should be informed of the conduct of Attorney Satran in this case.

On January 30, 2002, Mr. Burke attended a meeting with Settlement Officer O'Shea, who did not inform petitioner of his communications with Advisor Gordon. Mr. Burke provided a copy of Form 433–A, Collection Information Statement for Wage Earners and Self–Employed Individuals, and Form 433–B, Collection Information Statement for Businesses. A Form 656, Offer–in–Compromise, had been completed but was not submitted to Settlement Officer O'Shea for consideration. Petitioner concedes that the parties informally suspended consideration of any offer-in-compromise pending a determination of Barbara Drake's request for innocent spouse relief, which would influence whether petitioner filed an individual offer-in-compromise or a joint offer-in-compromise.

By letter dated February 5, 2002, respondent made a preliminary determination denying Barbara Drake's request for innocent spouse relief, and she appealed the determination to respondent's Appeals Office. The Appeals Office assigned Appeals Officer Jeffrey Kaplan to the case.

On September 4, 2002, petitioner submitted to respondent's Appeals Office an “amended” Form 656, Offer–in–Compromise, offering to pay $5,500 in satisfaction of petitioner's tax liabilities for 1991, 1992, 1993, 1994, 1995, 1997, and 1999.⁶ In a letter to petitioner dated September 4, 2002, Settlement Officer O'Shea acknowledged receiving the amended offer-in-compromise but noted that consideration of the original offer-in-compromise had been informally suspended by the parties pending the determination of Barbara Drake's request for innocent spouse relief. Accordingly, Settlement Officer O'Shea informed Mr. Burke that no original offer-in-compromise had been submitted for consideration and returned the amended Form 656 to Mr. Burke. Petitioner concedes that the reason for returning the Form 656 was to avoid any administrative confusion.

On January 17, 2003, the section 6330 matter was transferred from Settlement Officer O'Shea to Appeals Officer Kaplan,⁷ who subsequently advised Mr. Burke that no offer-in-compromise was presently before the Appeals Office, as no original offer-in-compromise had been submitted for consideration and the amended offer-in-compromise had been returned to Mr. Burke. Appeals Officer Kaplan informed Mr. Burke that any offer-in-compromise should be larger than the $5,500 amount of the amended offer-in-compromise submitted on September 4, 2002. Appeals Officer Kaplan also noted that the former residence of Barbara Drake and petitioner was now owned by their son and that the transfer appeared questionable.

In a conversation on June 16, 2003, Mr. Burke informed Appeals Officer Kaplan that Darren Drake, the son of Barbara Drake and petitioner, had foreclosed upon and bought petitioner's house. Appeals Officer Kaplan requested documentation related to the foreclosure and transfer.

In a letter dated July 2, 2003, Appeals Officer Kaplan informed Mr. Burke that he would proceed with the section 6330 determination against Barbara Drake and petitioner. The letter made the following request, reproduced verbatim, for the production of documents:

1. Documentation regarding what was done with the funds received by the taxpayers from the sale of property as part of their bankruptcy proceedings, along with how much was actually received.

2. Documentation of the value of the property located at 40 Keel Cape Drive, South Yarmouth, MA, prior to the foreclosure.

3. Documentation of the foreclosure.

4. Documentation regarding the amount owed on the mortgage by the taxpayers at the time of the foreclosure.

5. Documentation regarding the entity that acquired the mortgage from the prior mortgage holder prior to the foreclosure.

6. Copies of the mortgage.

7. Documentation of the acquisition of the property by Darren Drake.

8. An updated Collection Information Statement for Mr. and Mrs. Drake.

9. Completed Offer–in–Compromise Questionnaire.

10. An updated Collection Information Statement for their businesses.

Appeals Officer Kaplan informed Mr. Burke that he would make a section 6330 determination based on information already within his possession unless Mr. Burke submitted the requested documents by July 30, 2003. In addition, Appeals Officer Kaplan informed Mr. Burke that any offer-in-compromise...