Isley v. Comm'r

• Decision Date: 06 November 2013
• Docket Number: No. 5616–11L.,5616–11L.
• Parties: Ronald ISLEY, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Tax Court

141 T.C. No. 11

141 T.C. 349

Ronald ISLEY, Petitioner

v.COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 5616–11L.

United States Tax Court.

Nov. 6, 2013

Decision for IRS in part and for taxpayer in part.

P was a founding member of the popular Isley Brothers singing group, which for many years generated substantial income from personal appearances and record sales. P failed to pay Federal income tax on much of that income. The Commissioner sought to collect unpaid tax for all but five years within the 1971–95 period by filing proofs of claim in two bankruptcy proceedings (bankruptcies I & II), which resulted in his collection of substantial amounts from P. The United States also obtained P's criminal conviction for tax evasion and willful failure to file with respect to 1997–2002 (conviction years), which resulted in his being sentenced, on Sept. 1, 2009, to 37 months in prison followed by a three-year probationary period during which P was required to discharge his liabilities for the conviction years and his tax filing and payment obligations for the probation years. After bankruptcy II, P instituted an unsuccessful suit for the refund of amounts that the Commissioner collected in that bankruptcy proceeding that P alleged should have been offset by payments emanating from bankruptcy I.

R issued to P two notices of Federal tax lien (NFTLs) and two notices of levy that together covered P's assessed liabilities for the conviction years plus 2003, 2004, and 2006. P requested a collection due process (CDP) hearing, which resulted in his offer and the Appeals officer's preliminary acceptance of an offer-in-compromise (OIC). The Appeals officer referred the OIC to C, an attorney in R's Office of Chief Counsel, for review. C recommended the OIC be rejected because the conviction years (which were covered by the OIC), had been referred to the Department of Justice (DOJ) for prosecution so that R was prohibited by I.R.C. sec. 7122(a) from unilaterally compromising P's liabilities for those years, and also because the Appeals officer had overlooked (1) potential sources for the collection of more than P had offered and (2) P's noncompliance with the terms of the OIC. Following C's advice, Appeals rejected the OIC and sustained the NFTL filings and the levy notices.

P seeks to have the OIC reinstated on the ground that (1) I.R.C. sec. 7122(a) did not prohibit Appeals from entering into an OIC pursuant to I.R.C. sec. 6330(c)(2) and (3); (2) C's involvement effectively made him the “de facto” Appeals officer, and, because of his earlier involvement in bankruptcy II, his involvement in P's CDP hearing violated the “impartial officer” requirement of I.R.C. sec. 6330(b)(3); and (3) as the “de facto” Appeals officer, his improper ex parte communications with non-Appeals IRS personnel require that we disregard his rejection of the OIC and ratify Appeals' initial acceptance of it. P also renews the argument, made in his unsuccessful refund suit, that the assessed liabilities are overstated because the Commissioner did not properly credit to P's account payments made to the Commissioner at the conclusion of bankruptcy I (offset issue). Lastly, P argues that, should we uphold Appeals' rejection of his OIC, we must order a refund of the 20% partial payment that he made pursuant to I.R.C. sec. 7122(c) because P was induced to submit the OIC under false pretenses.

1. Held: I.R.C. sec. 7122(a) barred Appeals' unilateral acceptance of P's OIC.

2. Held, further, C's advice was properly requested and furnished to the Appeals officer pursuant to I.R.C. sec. 7122(b). Thus, his involvement did not cause him to become the “de facto” Appeals officer and, therefore, could not and did not result in (1) a violation of the “impartial officer” requirement of I.R.C. sec. 6330(b)(3), or (2) improper ex parte communications between Appeals and non-Appeals IRS personnel.

3. Held, further, because (1) bankruptcy II gave P a prior opportunity to raise the offset issue, and (2) P's position with respect to that issue was rejected in his unsuccessful refund suit, I.R.C. sec. 6330(c)(2)(B) and (4)(A) alternatively barred him from raising that issue during his CDP hearing.

4. Held, further, P was not invited to submit his OIC under false pretenses. Therefore, pursuant to the normal rules providing for the nonrefundability of the 20% partial payment required by I.R.C. sec. 7122(c) (which P does not dispute), P is not entitled to a refund of that payment.

5. Held, further, Appeals' determination not to withdraw the NFTLs is sustained.

6. Held, further, Appeals' determination to sustain the notices of levy and proceed with collection by levy of the assessed liabilities is rejected and the case is remanded to Appeals to explore the possibility of a new OIC or installment agreement, not to be finalized until approved by DOJ pursuant to I.R.C. sec. 7122(a).

Steven Ray Mather, for petitioner.

Cassidy B. Collins, Katherine Holmes Ankeny, and Carolyn A. Schenck, for respondent.

HALPERN, Judge:

This case is before the Court to review determinations made by the Internal Revenue Service (IRS) Appeals Office (Appeals) in four notices issued to petitioner after a collection due process (CDP) hearing conducted pursuant to sections 6320(b) and (c) and 6330(b) and (c).¹ Together, those determinations sustained (1) respondent's right to proceed to collect by levy petitioner's assessed liabilities for 1997 through 2003 and (2) the filing of notices of Federal tax lien (NFTLs) with respect to those years plus 2004 and 2006. In response thereto, petitioner, pursuant to section 6330(d)(1), timely filed a petition with this Court in which he assigns error on the grounds that respondent should have (1) determined that the assessed liabilities for the years in issue were overstated and (2) accepted petitioner's offer-in-compromise (OIC) as a collection alternative. Petitioner also alleges that (1) if we determine that Appeals did not err in rejecting his OIC, we should order the return to petitioner of his 20% partial payment made pursuant to section 7122(c)(1)(A)(i) ( section 7122(c) payment),² and (2) we have jurisdiction to adjudicate his challenge to the underlying liabilities based upon respondent's alleged failure to properly credit against those liabilities amounts paid to respondent in prior years that should have been credited to his delinquent account.

FINDINGS OF FACT

Some facts are stipulated and are so found. The stipulation of facts, with accompanying exhibits, is incorporated herein by this reference.

Petitioner resided in St. Louis, Missouri when he filed his petition.

Petitioner's Musical Career

Petitioner's musical career generated considerable income. His failure to pay Federal income tax with respect to much of it led to his perhaps even more considerable problems with the law.

Petitioner was the third of six brothers, three of whom (petitioner and his two older brothers, O'Kelly and Rudolph) moved to New York as teenagers and launched what became a successful recording and concert career as the Isley Brothers. Years later, the group also included two younger brothers, Ernie and Marvin. Their musical genres included rhythm and blues, doo-wop, funk, and contemporary R & B. Various versions of the group had top 40 singles and/or top 20 albums during a period stretching from 1962 to 2006, which ultimately led to various accolades including the induction of petitioner and four of his brothers into the Rock and Roll Hall of Fame. Late in his career, petitioner focused on solo work, and as late as 2011 he was still performing with his younger brother Ernie.

The New Jersey Bankruptcy

On August 23, 1984, petitioner and his two older brothers, O'Kelly and Rudolph, each filed for bankruptcy protection in a proceeding under chapter 11 of the Bankruptcy Code, with the U.S. Bankruptcy Court for the District of New Jersey, subsequently converted to a chapter 7 bankruptcy proceeding (New Jersey bankruptcy). Upon motion by the trustee, the three bankruptcy estates were consolidated. Thereafter, the bankruptcy court issued an order determining the extent, validity, and priority of respondent's claims against the three brothers. Respondent's approved claims against petitioner were for tax years 1971–76, 1978, and 1980–83. The trustee satisfied all of respondent's prepetition claims against the consolidated bankruptcy estate, and ordered that, because respondent also had postpetition claims against the consolidated estate, any funds left in the estate after discharge of the prepetition claims would also be paid to respondent. Respondent applied almost all of those postpetition liability payments in discharge of O'Kelly's outstanding liabilities, with little or nothing applied to the outstanding liabilities of petitioner and Rudolph.

The California Bankruptcy

On April 2, 1997, petitioner filed a voluntary petition for bankruptcy protection in a proceeding under chapter 11 of the Bankruptcy Code (also subsequently converted to a chapter 7 bankruptcy proceeding) with the U.S. Bankruptcy Court for the Central District of California (California bankruptcy). Respondent filed proofs of claim in the California bankruptcy for tax years 1976, 1978,³ 1985, 1986, 1988, 1989, and 1991–95. The bankruptcy court approved a settlement agreement whereby a number of petitioner's “songwriter interests” (then belonging to the bankruptcy estate) were sold, and, on June 23, 2000, $2 million was paid to respondent (June 23, 2000, payment) and applied to petitioner's outstanding liabilities to respondent for all of the foregoing years except 1992. During the bankruptcy proceeding, neither petitioner nor the trustee objected to respondent's proofs of claim (satisfied by the June 23, 2000, payment) on the basis that respondent had misapplied (to O'Kelly's account) payments received from the New Jersey bankruptcy trustee.

Petitioner's Suit For Refund

On June 19, 2002, peti...