In re Settles

• Citation: 452 B.R. 637
• Decision Date: 10 June 2011
• Docket Number: Adversary No. 10–1322.,Bankruptcy No. 09–16159.
• Parties: In re Thomas E. SETTLES, Sr., Debtor.Thomas E. Settles, Sr., Plaintiff,v.United States of America, Defendant.
• Court: United States Bankruptcy Courts. Sixth Circuit. U.S. Bankruptcy Court — Eastern District of Tennessee

452 B.R. 637
107 A.F.T.R.2d 2011-2552
2011-1 USTC P 50,458

In re Thomas E. SETTLES, Sr., Debtor.Thomas E. Settles, Sr., Plaintiff,
v.
United States of America, Defendant.

Bankruptcy No. 09–16159.

Adversary No. 10–1322.

United States Bankruptcy Court, E.D. Tennessee, Winchester Division.

June 10, 2011.

[452 B.R. 641]

Christopher M. Kerney, Lefkovitz & Kerney, PLLC, Chattanooga, TN, for Debtor.

Memorandum SHELLEY D. RUCKER, Bankruptcy Judge.

Plaintiff Thomas E. Settles, Sr. (“Plaintiff” or “Debtor”) brought an action against the United States of America, through its agency, the Internal Revenue Service (“IRS”), seeking this court's determination of the appropriate amount of taxes owed by the Plaintiff pursuant to 11 U.S.C. § 505(a)(1). [Doc. No. 1–1, Complaint].¹ The IRS responded that its total assessment of $641,201.58 in taxes, penalties, and interest as of the petition date is accurate.

The IRS has filed a motion for summary judgment regarding its assertion that the total amount of taxes, penalties, and interest listed in its Proof of Claim is accurate. [Doc. No. 24]. The Plaintiff opposes the motion for summary judgment. [Doc. No. 38]. In the Motion, the IRS specifically

[452 B.R. 642]

sought rulings on whether the debtor could claim different amounts for his income and deductions than those which the IRS had previously allowed in its Notice of Deficiency, whether the debtor could use the tax rates for individuals married filing jointly, whether the debtor was entitled to claim expenses incurred in the operation of a horse training and breeding business, and whether the debtor was estopped from challenging the penalties imposed on him for accuracy and promoting a tax shelter. The court has reviewed the briefing, the applicable law, and the record and has determined that the IRS's motion will be GRANTED as to the specific issues raised, but DENIED as to the specific amount of the tax liability.

I. Background

Because the IRS has filed a motion for summary judgment the court must review the facts in the light most favorable to the non-moving party, in this case the Plaintiff. Viewing the facts in this light, for purposes of this motion only, the court finds the following facts.

A. The IRS's Proof of Claim

The Debtor filed his Chapter 11 bankruptcy petition on September 25, 2009. Complaint, ¶ 1; see also [Case No. 4:09–bk–16159, Doc. No. 1]. On October 26, 2009 the Defendant IRS filed a Proof of Claim in the amount of $641,201.58 with $487,270.33 listed as secured by a recorded tax lien and $153,931.25 listed as unsecured. See [Case No. 4:09–bk–16159, Claim 1–1(“Proof of Claim”) ]. The Proof of Claim lists the following taxes, penalties and interest that the IRS claims the Plaintiff owes it:

+--------------+
                ¦Secured Claims¦
                +--------------+
                

Kind Date Penalty to Interest to
                of Tax Tax Period Assessed Tax Due Petition Date Petition Date
                Income 12/31/1999 6/23/2003 $ 66,737.00 $ 41,213.00 $ 54,949.35
                Income 12/31/2000 6/23/2003 $ 97,111.00 $ 64,064.76 $ 64,814.95
                Income 12/31/2001 6/10/2002 $ 2,396.80 $ 91.00 $ 1,844.25
                Income 12/31/2001 8/2/2004 $ 24,017.00 $ 7,211.49 $ 13,352.21
                Income 12/31/2002 12/22/2003 $ 0.00 $ 184.70 $ 15.11
                Income 12/31/2002 2/9/2004 $ 32,274.00 $ 0.00 $ 15,156.06
                Income 12/31/2002 8/2/2004 $ 1,203.00 $ 69.77 $ 564.88
                Total: $223,738.80 $112,834.72 $150,696.81
                

Total Amount of Secured Claims: $487,270.33
                

+----------------+
                ¦Unsecured Claims¦
                +----------------+
                

Kind of Tax Tax Period Date Tax Assessed Tax Due Interest to Petition Date
                Income 12/31/1998 6/23/2003 $37,857.20 $48,769.97
                Civil 12/31/1998 1/5/2004 $ 0.00 $ 3,788.52
                Penalty
                Civil 12/31/1999 1/5/2004 $ 0.00 $ 2,946.66
                Penalty
                Civil 12/31/2000 1/5/2004 $ 0.00 $ 4,997.32
                Penalty
                Civil 2/31/2001 1/5/2004 $ 0.00 $ 1,262.85
                Penalty
                Total: $37,857.20 $61,765.32
                

Penalty to Date of Petition on Unsecured General Claims: $54,308.73
                Total Amount of General Unsecured Claims: $153,931.25
                

[452 B.R. 643]

See Proof of Claim.

The IRS asserts that its Proof of Claim relates to unpaid income taxes for 1998 to 2002 and unpaid promoter penalties from 1998 to 2001. See [Doc. Nos. 24–4, 24–5, 24–6, Exs. 101, 102, 103]. The IRS assessed the 1998, 1999, and 2000 taxes after it conducted an audit of the Plaintiff's tax returns in 2001. See [Doc. No. 38–14, Plaintiff's Affidavit in Support of Brief in Opposition to Defendant's Motion for Summary Judgment (“Plaintiff's Aff.”), ¶ 1]. The 2001 and 2002 income tax liabilities alleged by the IRS derive from the amended returns that the Plaintiff filed that eliminate his tax shelter strategy. See [Doc. No. 24–1, IRS' Memorandum in Support of Motion for Summary Judgment (“IRS Memo”), p. 2]; [Doc. Nos. 24–7, 24–8, Exs. No. 104 and 105, Settles' Amended Tax Returns for 2001 and 2002]; [Doc. No. 24–2, IRS's Statement of Facts]. The Plaintiff filed his amended return for 2001 on or about March 1, 2004 and his amended return for 2002 on or about December 19, 2003. IRS's Statement of Facts, ¶¶ 4–5. The IRS asserts that it assessed civil penalties pursuant to 26 U.S.C. § 6700 against the Plaintiff at $1,000 for each of 31 different client entities to whom he promoted his tax strategy. IRS Memo, p. 3. The penalties assessed were $9,000 in 1998, $7,000 in 1999, $12,000 in 2000, and $3,000 in 2001. See [Doc. No. 24–6, Ex. No. 103]. The IRS also supplied transcripts of the debtor's payments toward these liabilities which have been made. [Doc. No. 24–6 and 7, Exs. No. 102 and 103].

The Plaintiff's position is that the amount of taxes claimed by the IRS is incorrect and that the assessments for negligence penalties and late payment penalties against him are improper. He further contends that the accrual of interest should have been suspended or was to have been abated. [Doc. No. 38, p. 38] Plaintiff also files his contention of how the payments and assessments should have been calculated. [Doc. No. 48–9].

B. Plaintiff's Disbarment Proceedings Before the IRS

In support of its motion for summary judgment, the IRS has filed a Decision issued by the Office of Professional Responsibility (“OPR”) of the IRS, Department of the Treasury on March 2, 2006. [Doc. No. 24–11, Ex. No. 108, (“OPR Decision”) ]. The OPR Decision summarizes the investigation undertaken by the IRS into the Plaintiff's income, expenses, and taxes owed. The OPR Decision concludes by disbarring the Plaintiff from practicing before the IRS.

Because the OPR Decision provides a helpful background into the basis of the IRS' investigation into the Plaintiff's financial affairs, the court has relied on it for a summary of the factual history of the relations between the parties as asserted by the IRS. Although the Plaintiff disagrees with the findings in the OPR Decision, the Plaintiff does not deny that the OPR Decision was issued and that, following an appeal, remand, and subsequent appeal, the decision resulted in his disbarment from practice before the IRS. The Plaintiff asserts that he did not participate in the hearing before the OPR because the OPR did not accommodate his hearing disability. He contests the findings of the OPR as inaccurate and asserts that he was denied his due process rights at the hearing based on his inability to participate because the court did not make modifications to allow him to hear and understand the proceeding.

The OPR Decision found that the Plaintiff is an attorney and a certified public accountant who was licensed to practice

[452 B.R. 644]

before the IRS. OPR Decision, p. 1. According to the OPR Decision, the Plaintiff began a solo practice in estate and tax planning in Tennessee in 1989. Id. at p. 2.

The OPR Decision summarizes the IRS' findings as follows:

In 1992, Settles began developing a tax strategy involving the transfer and lease of a tax payer's goodwill as well as the setting up of related entities such as living trusts, limited partnerships and management companies. In 1998, he began selling this tax strategy to his clients. In 2000, the Respondent set up a website providing income tax planning information to his clients and the public.

In August 2001, Settles was notified by the IRS that his personal tax returns for 1998, 1999, and 2000 were being audited. On April 1, 2002, Settles was informed that the IRS was considering action under sections 6700, “Promoting abusive tax shelters, etc.,” and 7408, “Action to enjoin promoters of abusive tax shelters, etc.,” of the IRS Code, 26 U.S.C. §§ 6700 and 7408, based on the tax strategy that he had developed.

In August 2002, Settles was notified that, as a result of the examination of his tax returns, changes in his 1998, 1999 and 2000 tax returns would be made. The adjustments to his income were made because of disallowance of parts of his tax strategy. In March 2003, Notices of Deficiency were issued to him for his 1998, 1999 and 2000 returns. Settles did not avail himself of his right to contest the deficiencies in the Tax Court, so on June 23, 2003, the deficiencies were assessed against him. Federal Tax Liens were filed against him on October 31 and November 14, 2003. As of the date of the hearing, these remain unpaid.

A Final Judgment of Permanent Injunction was entered by the United States District Court for the Middle District of Tennessee against Settles on March 24, 2003. In it, Settles was enjoined from organizing, promoting, marketing or selling his tax strategy.

OPR Decision, p. 2. The OPR Decision relates that in January of 2004, the IRS informed the Plaintiff that it was charging him penalties for the tax years of 1998 to 2001 for promoting an abusive tax shelter. Id. The penalties consisted of $1,000.00 for each client who had utilized the tax strategy that the IRS deemed to be an abusive tax shelter. Id.

The IRS selected Plaintiff's tax returns for audit based on a “claimed rent expense deduction in the form of a facility fee.” OPR Decision, p. 4. In conducting an investigation into the Plaintiff's financial affairs, a Senior Revenue Agent with the IRS,...