Gibson v. US, CV 90-5390 SVW (GX).

• Decision Date: 04 April 1991
• Docket Number: No. CV 90-5390 SVW (GX).,CV 90-5390 SVW (GX).
• Citation: 761 F. Supp. 685
• Court: U.S. District Court — Central District of California
• Parties: David A. GIBSON and Jean E. Jaros (formerly Jean E. Gibson), Plaintiffs, v. UNITED STATES of America, Defendant.

761 F. Supp. 685

David A. GIBSON and Jean E. Jaros (formerly Jean E. Gibson), Plaintiffs, v. UNITED STATES of America, Defendant.

No. CV 90-5390 SVW (GX).

United States District Court, C.D. California.

April 4, 1991.

Robert B. Martin, Jr., Martin & Hudson, Pasadena, Cal., for plaintiffs.

Mason C. Lewis, Asst. U.S. Atty., Los Angeles, Cal., for defendant.

MEMORANDUM OF DECISION

WILSON, District Judge.

INTRODUCTION

Plaintiffs filed this action to enjoin the Internal Revenue Service ("IRS") from collecting past due taxes, interest, and penalties allegedly owed by plaintiffs for the tax years 1980, 1981, and 1983. The basis for plaintiffs' action is that the IRS failed to provide the plaintiffs with proper notice of the deficiency prior to the running of the statute of limitations for the tax years at issue since it mailed the deficiency notice to an address other than the taxpayers' last known address. Further, since plaintiffs did not receive notice of the deficiency within 90 days of the IRS notice, they were not able to file a petition for redetermination in the Tax Court, which would have allowed them to contest the deficiency notice without payment of the deficiency and without risk of further accruals of penalties. Additionally, plaintiffs claim that the current sum due is in excess of their combined net worth and that they would suffer great hardship if forced to pay the tax and then seek a refund. Thus, plaintiffs claim that they have suffered irreparable injury such that their remedy at law is inadequate and that, therefore, they should be granted injunctive relief. This action was tried to the court on March 19, 1991.

STATEMENT OF FACTS

Plaintiffs were husband and wife and filed joint tax returns in 1980, 1981, and 1983, the tax years for which the IRS recomputed their tax liability. The plaintiffs resided at 13557 Rose Street, Cerritos, California 90701 during those tax years and continued to reside there until approximately August 12, 1986. On that date, plaintiffs moved to a home at 18328 Summer Avenue, Artesia, California 90701. On January 26, 1987, plaintiffs filed a joint tax return for 1986, at the Fresno Service Center of the IRS, in which they listed their new Summer Avenue address.¹ On March 27, 1987, the Fresno Service Center of the IRS, having processed their return, sent the plaintiffs a refund check to their Summer Avenue address. On the same day, March 27, 1987, the IRS Audit Division office in Laguna Niguel, California, sent the plaintiffs by certified mail a statutory notice of deficiency for tax years 1980, 1981, and 1983. However, the deficiency notice was sent to the plaintiffs' old address on Rose Street. The statute of limitations for those tax years was to and did expire on April 15, 1987. In June, 1987, the plaintiffs separated and were subsequently divorced. Both plaintiffs have remarried.

On August 12, 1986, the plaintiffs had filed a change of address form with the Artesia-Cerritos Post Office, which served both their old and new homes. While no percipient witness testified at trial as to the path of the IRS notice, the IRS did offer the testimony of David Lopez, a postal employee, to establish the normal postal procedures for certified and forwarded mail. When the IRS notice was received by the local post office and distributed to the carrier for the Rose Street address, the carrier, knowing of the address change, would have sent the letter to Central Forwarding Unit at the Long Beach Post Office. The forwarding unit would then generate a change of address sticker with the plaintiff's new address and affix it to the IRS notice envelope. The letter would then be sent to the post office serving the new address. This procedure was almost certainly followed in this case since the IRS notice envelope contains a yellow sticker dated 3/31/87 with plaintiff's new address.²

According to David Lopez, the certified letter then would have been distributed to the carrier for the Summer Avenue address, who would have and apparently did attach a yellow Form 3849-A to the envelope. The markings on the Form 3849-A indicate to Mr. Lopez that the carrier attempted to deliver the IRS notice on April 1, 1987. Under normal procedures, the April 1, 1987 delivery attempt would have been made at plaintiff's new residence. Further, since no signature was obtained for the letter, the carrier would have left the other portion of the Form 3849-A at the plaintiff's home, thereby providing the plaintiffs with notice that certified mail was being held at the post office for pickup by them. The envelope markings indicate that a second delivery was attempted on April 8 with no success and that a second notice was left at the place of delivery. The markings on the envelope further indicate that the notice was returned to the IRS as sender on April 21 as having been unclaimed. David Gibson and Jean Jaros testified that they had no recollection of receiving a notice to claim certified mail at the post office in March or April of 1987. The IRS did not present any evidence that the plaintiffs were not being truthful. Further, since the portion of Form 3849-A normally left at the addressee's residence does not identify the sender of the certified mail, even if a notice to claim certified mail was left at plaintiffs' residence, it is unlikely that the plaintiffs would have known that the certified mail awaiting them at the post office was an IRS deficiency notice. Hence, plaintiffs would not have had any reason not to claim any such certified mail. Thus, the court finds that the plaintiffs never received the notices to claim certified mail.³

In September, 1987, the plaintiffs received a statement from the IRS for the deficiency plus interest and penalties. In October, 1987, plaintiffs received a certified letter from the IRS titled "Past Due — Final Notice (Notice of Intention to Levy)." While it is unclear what happened in the interim, plaintiff David Gibson was notified in June, 1990, that the tax refund due to him and his new wife for 1989 was being applied to his unpaid tax liability for 1980. David Gibson had his accountant contact the IRS, which then sent him a copy of the original notice of deficiency.

The plaintiffs' assets are not insubstantial. Plaintiff David Gibson earns approximately $72,000.00 per year and his current wife earns approximately $30,000.00 per year. He and his current wife purchased a single family home for $210,000.00 approximately two years ago. Of that $210,000.00, David Gibson and his current wife borrowed approximately $182,000.00. While David Gibson has made improvements to the house costing approximately $15,000, Mr. Gibson testified that similar homes in his neighborhood, with improvements such as those added to his current home, recently have been sold for approximately the same price for which he purchased his current home. Further, the Gibsons have a retirement account valued at about $65,000.00, from which David Gibson testified he could borrow half that amount subject to tax and interest forfeiture penalties. Further, as of July 31, 1990, David Gibson had $21,000.00 cash and approximately $25,000.00 worth of personal property including his car. Additionally, David Gibson testified that, prior to the plaintiffs' divorce, he had established a $50,000.00 unsecured credit line at a time when the plaintiffs' combined earnings were not much greater than the combined earnings of him and his current wife. On the other hand, in addition to his mortgage debt, David Gibson also had credit card and other liabilities of approximately $18,000.00. Further, David Gibson's accountant estimated that Mr. Gibson would need approximately $33,000.00 to pay taxes resulting from a forced liquidation of his assets and early distribution from his retirement plan.

Plaintiff Jean Jaros earns approximately $55,000.00 per year. Her current husband and his partner own a foundry that employs 35 people. Jean Jaros testified that she took a distribution of $30,000.00 from her pension plan from a previous job sometime last year and that she gave the money to her husband to invest in the foundry.⁴ Mr. Jaros testified that his initial investment in the foundry was approximately $150,000.00. The foundry is only a few years old and has sales of approximately $100,000.00 per month. However, Mr. Jaros testified that the foundry is barely breaking even, that any revenues generated in excess of expenses are reinvested in the business, and that the foundry has no line of credit. Further, Mr. Jaros does not draw any salary from the foundry as of yet. Since Mr. Jaros' investment was made prior to his marriage to plaintiff Jean Jaros, his interest in the foundry is his separate property under California law. Cal. Civ.Code sec. 5108. While his return on his separate property investment, even during marriage, remains his separate property, Mrs. Jaros does have a community property interest in the earnings of her husband even if they are reinvested in the foundry. See Beam v. Bank of America, 6 Cal.3d 12, 17, 490 P.2d 257, 98 Cal.Rptr. 137, 140-41 (1971) (income resulting from spouse's labor during marriage is community property). In the present case, the amount of Mr. Jaros' foregone earnings, and hence Mrs. Jaros' community interest, is speculative given the foundry's performance to date. Further, given the foundry's performance, the $30,000.00 debt owed to Jean Jaros is unlikely to be repaid in the near future, if at all. Jean Jaros testified that she and her husband pay all of their expenses from her salary, which is just under $4,600.00 per month before taxes. Those expenses include $1,100 per month in alimony payments to Mr. Jaros' former wife, $1,000 per month rent, $500 per month in car payments, and other daily living expenses. Jean Jaros testified that she and her current husband have no assets other than their personal belongings and their cars.

DISCUSSION

Under 26 U.S.C. section 7421(a),⁵ th...