Romano-Murphy v. Comm'r
| Decision Date | 21 May 2019 |
| Docket Number | 152 T.C. No. 16,Docket No. 27236-09L. |
| Parties | LINDA J. ROMANO-MURPHY, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
On July 26, 2006, R (or the IRS) mailed a Letter 1153, Trust Fund Recovery Penalty Letter, to P, notifying her that she would be subject to the assessment of a penalty under I.R.C. sec. 6672(a). That section imposes a penalty on any person who is responsible for withholding amounts of federal tax and paying them over to the United States and who willfully fails to fulfill these obligations. The penalty is referred to as the trust-fund-recovery penalty.
In response to the Letter 1153, P sent the IRS a timely protest of the proposed assessment and a request for a conference with the IRS Office of Appeals. The IRS's Office of Appeals did not hold a conference with P. Nor did the IRS make a final administrative determination with respect to the protest.
On Oct. 15, 2007, the IRS assessed the trust-fund-recovery penalty against P. Then the IRS engaged in actions to collect the penalty. In particular, it sent P a notice of intent to levy and filed a notice of lien on P's property. These actions triggered P's right to a collection-review hearing under I.R.C. sec. 6330. At this collection-review hearing, the Office of Appeals determined that P was liable for the trust-fund-recovery penalty. The Office of Appeals also determined to sustain the collection actions.
P petitioned the Tax Court for review of the determination of the Office of Appeals. We held that P was liable for the penalty. Romano-Murphy v. Commissioner, T.C. Memo. 2012-330, vacated and remanded, 816 F.3d 707 (11th Cir. 2016). We also determined that the IRS was not required to make a final administrative determination regarding the protest before assessing the penalty against P.
P appealed our decision to the U.S. Court of Appeals for the Eleventh Circuit. The Court of Appeals held that the IRS was required to make a final administrative determination regarding P's protest before assessing the penalty. Romano-Murphy v. Commissioner, 816 F.3d at 717. The Court of Appeals held that the source of this requirement is I.R.C. sec. 6672(b). I.R.C. sec. 6672(b)(1) provides that the trust-fund-recovery penalty cannot be imposed on a person until the IRS notifies that person that he or she will be subject to an assessment of the penalty. It is the IRS's practice to give this preliminary penalty notice using Letter 1153, the notice it used in this case. I.R.C. sec. 6672(b) alters the three-year period during which the IRS is entitled to assess the trust-fund-recovery penalty. It does so in two ways. First, under I.R.C. sec. 6672(b)(3)(A), the three-year period is held open for 90 days after the mailing of the preliminary penalty notice. Second, under I.R.C. sec. 6672(b)(3)(B), if the person makes a timely protest of the proposed assessment in response to the preliminary penalty notice, the three-year period is held open until the date that is 30 days after the IRS makes a final administrative determination with respect to the protest. The Court of Appeals held that I.R.C. sec. 6672(b)(3)(B) requires the IRS to make a final administrative determination in response to a timely protest before it can assess the penalty. The requirement so identified by the Court of Appeals was violated in this case because the IRS assessed the penalty against P without making a final administrative determination.
The Court of Appeals remanded the case for us to determine what action, if any, should be taken to remedy the IRS's error in assessing the penalty against P before making a final administrative determination.
1. Held: The requirement identified by the Court of Appeals is one of the "requirements of applicable law or administrative procedure", compliance with which must be verified by the Office of Appeals in an I.R.C. sec. 6330 collection-review hearing.
2. Held, further, the assessment of the trust-fund-recovery penalty is invalid and we do not sustain the determination of the Office of Appeals.
Linda J. Romano-Murphy, pro se.
Kimberly A. Daigle and John T. Arthur, for respondent.
CONTENTS
SUPPLEMENTAL OPINION ......................................... 5
Background ........................................................ 6
Discussion ........................................................ 21
a. From the filing of the return to assessment .................... 21
b. Collection .............................................. 28
c. The trust-fund-recovery penalty ............................ 30
d. 1998 collection-review provisions .......................... 34
e. Tax-refund litigation ..................................... 38
a. The requirement identified by the Eleventh Circuit, that the IRS must make a final administrative determination before assessing the trust-fund-recovery penalty, should be considered a requirement of applicable law or administrative procedure that must be verified as part of a collection-review hearing ........... 40
b. The assessment of the trust-fund-recovery penalty against Romano-Murphy is invalid, and the Office of Appeals erred in sustaining actions to collect the assessment .................... 51
c. Our holding is consistent with the harmless-error principle ....... 55
d. Summary .............................................. 75
The Internal Revenue Service ("IRS") sent the petitioner, Linda J. Romano-Murphy, a notice that it would assess a section 6672 trust-fund-recovery penalty against her.1 The penalty related to the failure of Nurses PRN, LLC ("NPRN"), to withhold Federal Insurance Contributions Act ("FICA") taxes and income tax from its employees' wages for the second quarter of 2005. Although Romano-Murphy timely protested the penalty administratively, the IRS did not make a final administrative determination regarding her protest. Instead, the IRS assessed the penalty. It then took actions to collect the penalty, i.e., a notice of proposed levy and a filing of a notice of lien. These actions triggered Romano-Murphy's right to a collection-review hearing (also known as a collection-due-process hearing or a CDP hearing) with the Office of Appeals. At the hearing she challenged her liability for the penalty. The Office of Appeals determined that she was liable for the penalty and sustained the proposed levy and the filing of the notice of lien. The Tax Court reviewed the determination of the Office of Appeals; we held that she was liable for the penalty. Romano-Murphy v. Commissioner, T.C. Memo. 2012-330, at *107, vacated and remanded, 816 F.3d707 (11th Cir. 2016). We also determined that the IRS was not required to make a final administrative determination regarding her protest before assessing the penalty. In the appeal of our decision, the U.S. Court of Appeals for the Eleventh Circuit held that section 6672(b)(3)(B) required the IRS to make a final administrative determination before assessing the penalty. Romano-Murphy v. Commissioner, 816 F.3d at 714. The Eleventh Circuit remanded the case for us to determine what corrective action should be taken to remedy the IRS's violation of this requirement. Id. at 721. On remand, we hold that the assessment is invalid and that the Office of Appeals abused its discretion in upholding the proposed levy and the filing of the notice of lien to collect the assessment. We do not sustain the determination of the Office of Appeals.
Romano-Murphy was the chief operating officer and the corporate secretary of NPRN. NPRN was a nurse-staffing company.
On July 29, 2005, NPRN filed a Form 941, "Employer's Quarterly Federal Tax Return", for the second quarter of 2005. NPRN reported that $403,019.72 was the amount of its liability to the IRS for FICA and income tax that it was required to withhold from its employees' wages. FICA taxes and income tax must be withheld from wages by the employer and paid over to the United States. Secs. 3102(a), 3402(a)(1), 7501; Lee v. Commissioner, 144 T.C. 40, 46 (2015). These withholding obligations are among the types of taxes called trust-fund taxes. See Pollock v. Commissioner, 132 T.C. 21, 25 n.10 (2009).
On July 26, 2006, the IRS mailed Romano-Murphy a Letter 1153, "Trust Fund Recovery Penalty Letter". The letter stated that NPRN had failed to pay $346,732.38 of trust-fund taxes for the second quarter of 2005. The letter stated that the IRS proposed to assess that amount against Romano-Murphy as a trust-fund-recovery penalty under section 6672. The letter stated that she could appeal the proposed assessment by mailing a written protest to the IRS within 60 days along with a request for a conference with the Office of Appeals.
In the meantime, NPRN's operations had been taken over by another company, Nurses Onsite Corp. Romano-Murphy worked for the new company until August 7, 2006.
On September 6, 2006, Romano-Murphy wrote the IRS a letter appealing the proposed assessment of the penalty and requesting a conference with the Office of Appeals. The parties agree that this letter was a timely protest. The IRS did not take any action in response to the letter.
On December 27, 2006, Nurses Onsite Corp. went into bankruptcy.
On October 15, 2007, the IRS assessed the trust-fund-recovery penalty of $346,732.38 against Romano-Murphy for NPRN's unpaid trust-fund taxes for the second quarter of 2005. The IRS sent her a notice of the assessment with a demand for payment within 60 days of the assessment.
On August 25, 2008, the IRS served Romano-Murphy a notice that it proposed to levy to collect from her the trust-fund-recovery penalty for NPRN's trust-fund taxes for the second quarter of 2005. The...
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