Opinion
Civil Action No. 00-B-851.
December 5, 2000.
AMENDED MEMORANDUM OPINION AND ORDER
Plaintiff, Mesa Oil ("Mesa"), appeals the administrative decision of the Defendant, the Internal Revenue Service Appeals Office. The issues are fully briefed and argued. Jurisdiction is proper pursuant to 26 U.S.C. § 6330(d)(1)(B). For the reasons set forth below, I remand the case for further consideration.
I. Statement of Facts
Mesa Oil is an oil recycling company. In business since 1981, it is headquartered in Colorado and employs about sixty people. Mesa buys used oil, primarily from automobile oil change services, recycles it, and sells it to asphalt manufacturers. Prior to 1998, Mesa was current on all taxes.
In 1998 the price of crude oil began to fall. By February of 1999 it reached a twenty-year low. These market fluctuations had a negative impact on Mesa's cash flow, and it fell behind on its payroll tax deposits. From the second quarter of 1998 through the third quarter of 1999, Mesa accumulated approximately $425,000 in past due taxes.
As a result, on August 12, 1999 the Internal Revenue Service ("IRS") issued a Notice of Intent to Levy and Notice of Your Right to a Hearing, pursuant to I.R.C. § 6330. Four days later the IRS filed a Notice of Federal Tax Lien with the Colorado Secretary of State, and issued Mesa Oil a Notice of Federal Tax Lien Filing and Your Right to a Hearing, pursuant to I.R.C. § 6320. Mesa, through its President and co-founder Larry Meers, requested a collection due process hearing. At the same time Mr. Meers wrote to the IRS and proposed that the lien be released, and Mesa be allowed to make payments of $40,000 per month for 12 months. Mesa asserts that any levy would result in the sale of all assets required for day-to-day operations and, thus, sound the death-knell for the company.
The IRS responded to these requests via letter. Lavada Harmon, Appeals Settlement Officer ("AO"), wrote Mr. Meers on November 5, 1999. She informed him that a hearing had been scheduled and his proposed installment plan reviewed. The AO then recited the terms of I.R.C. § 6323(j), which sets out the circumstances under which a tax lien may be withdrawn. The AO determined that none of the provisions were met, but invited Mesa to suggest additional collection options.
The due process hearing was held on December 8, 1999. On March 27, 2000 the Rocky Mountain Appeals Office issued a "Notice of Determination Concerning Collection Action(s) Under Section 6320 and/or 6330." The Determination found that the Notice of Federal Tax Lien was appropriate and the Appeal should not restrict the proposed collection action. The Determination states that this conclusion was reached because: (1) the Secretary provided sufficient verification that applicable law and administrative procedure had been met; (2) No evidence had been provided to show that withdrawal was appropriate under 26 U.S.C. § 6323(j); (3) installment privileges were not appropriate because sufficient assets exist from which full payment can be secured as provided under Internal Revenue Manual Section 105.2.4.2.1; (4) installment privileges were further not appropriate because the taxpayer refused to provide a bond or letter of credit; and finally (5) the lien filed "and the proposed collection action balances the need for efficient collection of taxes with the taxpayer's legitimate concern that any collection action be no more intrusive than necessary." Plaintiff's Exhibit 6. There is no administrative or appeal record beyond these letters. Mesa appealed the AO's decision to this Court.
II. Standard of Review
Sections 6320 and 6330(d) of the I.R.C. provide for judicial review of an Appeals Office Determination. Although section 6330 does not prescribe the standard of review the Court must apply in reviewing the IRS's administrative determinations, the subject is addressed in the legislative history of the provision. In particular, H. Conf. Rept. 105-599 (1998) states, "Judicial review. The conferees expect the appeals officer will prepare a written determination addressing the issues presented by the taxpayer and considered at the hearing. . . . Where the validity of the tax liability was properly at issue in the hearing. . . The amount of the tax liability will in such cases be reviewed by the appropriate court on a de novo basis. Where the validity of the tax liability is not properly part of the appeal, the taxpayer may challenge the determination of the appeals officer for abuse of discretion. . . . ." See also Sego v. Commissioner, 114 T.C. No. 37 (2000) (setting out the same standard). Because Mesa did not challenge its tax liability, I review the administrative decision for abuse of discretion. In this circuit, abuse of discretion is defined as "`an arbitrary, capricious, whimsical, or manifestly unreasonable judgment.'" Coletti v. Cudd Pressure Control, 165 F.3d 767, 777 (10th Cir. 1999) (quotations omitted).
III. The Internal Revenue Service Restructuring and Reform Act of 1998
On 22 July 1998, President Clinton signed into law the Internal Revenue Service Restructuring and Reform Act of 1998 (the "RRA"), Pub.L. 105-206, 112 Stat. 685 (1998). The RRA followed a year of congressional investigations and hearings over the future of the IRS, resulting in highly publicized criticisms of the agency's collection methods. The legislation contains technical, clerical, and conforming amendments to the Taxpayer Relief Act of 1997 and other recently enacted legislation. It also changes the way in which the IRS governs itself, institutes new taxpayer rights, increases supervision of the agency, and mandates emphasis on electronic tax filing. The RRA contains over sixty provisions to fortify taxpayer rights and improve customer service.
A. The RRA Lien and Levy Due Process Provisions
Among the new provisions are I.R.C. §§ 6320 and 6330, which deal with the process due to taxpayers after a lien and/or prior to a levy. "Levy is the IRS's administrative authority to seize a taxpayer's property to pay the taxpayer's tax liability. The IRS is entitled to seize a taxpayer's property by levy if the Federal tax lien has attached to such property. The Federal tax lien arises automatically where (1) a tax assessment has been made; (2) the taxpayer has been given notice of the assessment stating the amount and demanding payment; and (3) the taxpayer has failed to pay the amount assessed within ten days after the notice and demand." S. Rep. No. 105-174.
"New Sections 6320 and 6330 provide comparable due process procedures under which a taxpayer can contest the filing of a levy or lien both administratively and judicially. These provisions have no counterparts in prior law . . . ." Gerald A. Kafka, Reformation of the Tax Collection Process-Cumulatively, A Giant Step, 89 J. TAX'N 207 (1998). According to the legislative history, "[t] he Committee believe[d] that taxpayers are entitled to protections in dealing with the IRS that are similar to those they would have in dealing with any other creditor." S. Rep. No. 105-174 (1998).
Under § 6320, the IRS must give the taxpayer notice in writing of the filing of a notice of lien under section 6323. See I.R.C. § 6320(a). The statute sets out the time and method for the notice, as well as the information that must be included. See id. at § 6320(a)(2)-(3). The taxpayer then has a right, within 30 days, to request a hearing with the IRS Office of Appeals. See id. at § 6320(a)(3)(B). "The hearing under this subsection shall be conducted by an officer or employee who has had no prior involvement with respect to the unpaid tax . . . before the first hearing under this section or section 6330. A taxpayer may waive the requirement of this paragraph." Id. at § 6320(b)(3). If practicable, a hearing under § 6320 shall be held in conjunction with a hearing under 6330. See id. at § 6320(b)(4). Further, certain provisions governing a § 6330 hearing apply to § 6320 hearings as well. See id. at § 6320(c).
Under § 6330, no levy of the taxpayer's property may occur before the IRS notifies the taxpayer in writing of the right to a hearing. See id. at § 6330(a). The time and method for service of notice is identical to the provision in § 6320. See id. The information which must be included in the notice is also set by statute. See id. at § 6330(a)(3). Any requested hearing must, as in § 6320, be held by an impartial officer. See id. at § 6330(b)(3).
At the hearing, "[t]he appeals officer shall . . . obtain verification from the Secretary that the requirements of any applicable law or administrative procedure have been met." Id. at § 6330(c)(1). The taxpayer may raise any relevant issue, including "offers of collection alternatives, which may include the posting of a bond, the substitution of other assets, an installment agreement, or an offer-in-compromise." Id. at § 6330(C)(2)(A)(iii). In formulating his or her Determination, the AO must take into consideration: "(A) the verification [that the requirements of any applicable law or administrative procedure have been met]; (B) the issues raised [by the taxpayer]; and (C) whether any proposed collection action balances the need for the efficient collection of taxes with the legitimate concern of the person that any collection action be no more intrusive than necessary." See id. at § 6330(c)(3). Following the hearing, the AO's Determination may be appealed to the Tax Court if that Court has jurisdiction over the underlying tax liability, or the United States District Court. See id. at § 6330(d). Any levy action is suspended during the period of the hearing and appeal. See id. at § 6330(e).
B. The Balancing Analysis
Mesa first argues that the AO abused her discretion in concluding that the proposed collection action balances the need for the efficient collection of taxes with the legitimate concern of the person that any collection action be no more intrusive than necessary. See Plaintiff's Exhibit 6. Mesa specifically asserts that the AO's Determination was incorrect because a levy would put Mesa out of business. I agree, to the extent that a proper balancing analysis did not occur.
As discussed above, I.R.C. § 6330(c)(3) requires that the AO balance the IRS's concerns regarding collection with the taxpayer's concerns regarding intrusion. Both the statute and the courts are silent on what factors must be considered in this analysis.
In cases where a statute is unclear as to its exact requirements, the court may engage in statutory construction. The purpose of statutory construction is to ascertain the intent of Congress. See Richardson v. Sullivan, No. 92-4209, 1993 WL 214569 (10th Cir. June 18, 1993). "To determine the intent of Congress, the court must look first to the language of the statute, and then to the legislative history of the Act." United States v. Hollis, 971 F.2d 1441, 1450 (10th Cir. 1992); United States v. Lovett, 964 F.2d 1029, 1041 (10th Cir. 1992); United States v. LaBonte, 70 F.3d 1396, 1405 (1st Cir. 1995) ("When the plain meaning of a law is not readily apparent on its face, the next resort is to the traditional tools of statutory construction — reviewing legislative history and scrutinizing statutory structure and design — in an effort to shed light on Congress's intent."), rev'd on other grounds, 520 U.S. 751 (1997) (concluding statute unambiguous).
Here, the legislative history addressed I.R.C. § 6330(c)(3). The Senate Committee Report for the RRA indicates that the legislature saw the hearings as a three-part process. First,
"during the hearing, the IRS is required to verify that all statutory, regulatory, and administrative requirements for the proposed collection action have been met. IRS verifications are expected to include (but not be limited to) showings that: . . . (4) with respect to the seizure of the assets of a going business, the revenue officer recommending the collection action has thoroughly considered the facts of the case, including the availability of alternative collection methods, before recommending the collection action." Id.
Next, the taxpayer may raise any relevant issue. Finally, the AO must make a Determination. "The determination of the appeals officer is to address whether the proposed collection action balances the need for the efficient collection of taxes with the legitimate concern of the taxpayer that the collection action be no more intrusive than necessary. A proposed collection action should not be approved solely because the IRS shows that it has followed appropriate procedures." Id.
In her Determination, the AO recites that applicable law and procedure have been followed, but does not address whether the collection officer considered appropriate factors given that Mesa Oil is an on-going business. The AO next states that "the proposed collection action balances the need for the efficient collection of taxes with the legitimate concern of the taxpayer that the collection action be no more intrusive than necessary." See Plaintiff's Exhibit 7. The AO gives no statement of facts, no legal analysis, and no explanation of how or why the proposed levy balanced the need for collection with Mesa's interests. The AO's declaration, written nine months after the hearing in this case, sheds no further light on the topic. See Declaration of Lavada Harmon. The Determination's blank recitation of the statute gives no indication that the statutory goal of a "meaningful hearing" was accomplished, or that actual balancing occurred. Instead, the sparse Determination gives every indication that the "proposed collection action [was] approved solely because the IRS show[ed] that it ha[d] followed appropriate procedures." S. Rep. No. 105-174.
The IRS makes a number of arguments for the propriety of the Determination, including that withdrawal of the lien was not required under I.R.C. § 6323(j); an installment agreement was not appropriate because sufficient assets existed to satisfy the lien and Mesa was not then current on employment taxes, and the AO considered less intrusive measures. It is unnecessary for me to consider each of theses contentions individually. There is no indication that the AO actually engaged in the required analysis prior to making her Determination. I therefore remand for consideration of the appropriate factors and a fully elucidated Determination that explains the reasons for the conclusion.
C. Other Statutory Violations
Even if I were to find that a proper analysis had been made, further statutory violations require remand. Mesa argues that the AO prejudged the case, and that the lack of an appeals record makes judicial review meaningless. Although Mesa raises these issues under the rubric of due process, I find they may be decided on narrower statutory grounds.
1. Appeals Officer Impartiality
Mesa first argues that the letter written by the AO indicates she prejudged the case, a violation of her statutory mandate. I agree. Under both I.R.C. §§ 6320 and 6330, the appeal must be heard by a neutral officer. "The hearing . . . shall be conducted by an officer or employee who has had no prior involvement with respect to the unpaid tax . . . before the first hearing . . . A taxpayer may waive the requirement of this paragraph." I.R.C. § 6320(b)(3), § 6330(b)(3).
Mesa requested a hearing and attached a letter setting out the company's financial problems and suggesting an installment payment plan. There is no indication that the right to an impartial AO was waived. In return, Mesa received a letter from the AO stating that the letter had been received and reviewed. The AO indicated that I.R.C. § 6323(j) set out the circumstances under which a lien may be withdrawn. That section states,
"The Secretary may withdraw a notice of a lien filed under this section and this chapter shall be applied as if the withdrawn notice had not been filed, if the Secretary determines that — (A) the filing of such notice was premature or otherwise not in accordance with administrative procedures of the Secretary, (B) the taxpayer has entered into an agreement under section 6159 to satisfy the tax liability for which the lien was imposed by means of installment payments, unless such agreement provides otherwise, (C) the withdrawal of such notice will facilitate the collection of the tax liability, or (D) with the consent of the taxpayer or the National Taxpayer Advocate, the withdrawal of such notice would be in the best interests of the taxpayer (as determined by the National Taxpayer Advocate) and the United States."
The AO went on to state that,
"My review of the facts of the case reflect that the filing of the NFTL was not premature. . . . The facts of the case indicate withdrawal of the NFTL would not facilitate collection because withdrawal would jeopardize the government's position in relation to other creditors. . . . Installment agreement privileges have been denied because Mesa Oil, Inc. has assets which can be levied and/ or liquidated to satisfy the tax obligations, and because Mesa Oil, Inc., is not in compliance with the tax laws. . . . If you have other evidence or arguments, or have other alternative collection proposals, please be prepared to discuss them during your hearing." Plaintiff's Exhibit 5.
The AO declares that, "In addition to scheduling the collection due process hearing, the purpose of the letter was to provide Mesa Oil with an opportunity to present facts and arguments to show why the decision reached by the Internal Revenue Service was incorrect. Additionally, I invited Mesa Oil to make other collection proposals." See Declaration of Lavada Harmon at ¶ 4.
The government argues that the AO did not prejudge the issues, and that the letter by the AO only set forth the conclusions reached by the Collection Function of the IRS, and informed Mesa of its burden at the Appeals Hearing. This contention is not supported by either the AO's declaration or the language of the letter. The AO's declaration does not indicate that the letter was nothing more than a restatement of the revenue officer's conclusions, and the letter itself states that its conclusions are based on "My [the AO's] review of the facts." See Plaintiff's Exhibit 5. The facts indicate that the AO conducted a thorough review of the file and the IRS's arguments prior to the first hearing. The statute requires the AO be impartial and have no involvement with the case prior to the hearing. I conclude that the letter from the AO was a violation of these statutory mandates. I therefore remand for a due process hearing before an impartial appeals officer.
2. Judicial Review
Mesa next argues that the IRS's failure to make an adequate record of the administrative proceedings has damaged Mesa's statutory right to judicial review. I agree. Congress has indicated its intent that the taxpayer have a "meaningful hearing." S. Rep. No. 105-174, followed by judicial review. See I.R.C. § 6330(d)(1)(B). Congress presumed that this review would be aided by a record of some sort. See H. Conf. Rept. 105-599 (1998) ("Judicial review. The conferees expect the appeals officer will prepare a written determination addressing the issues presented by the taxpayer and considered at the hearing. . . .").
Although Congress envisioned a review of the AO's Determination, "[h]earings at the Appeals level have historically been conducted in an informal setting." Davis v. Commissioner, 115 T.C. No. 4 (2000). "Proceedings before the Appeals are informal. Testimony under oath is not taken, although matters alleged as facts may be required to be submitted in the form of affidavits, or declared to be true under the penalties of perjury." C.F.R. § 601.106(c). "No stenographer is present to record the discussions of the facts and the law relating to the issue involved." SALTZMAN, IRS PRACTICE AND PROCEDURE, ¶ 9.05[3], at 9-37 (2d ed. 1991). Congress did not specifically vary that standard with the passage of I.R.C. § 6320 and 6330, and no new IRS regulations have been passed in this regard. Thus, the United States Tax Court has held that a taxpayer has no right to subpoena witnesses, despite the due process protections of § 6320 and 6330. See Davis v. Commissioner, 115 T.C. No. 4 (2000).
Here, no record of the hearing was kept, no record of the evidence or arguments presented at that hearing was made, and no analysis of the evidence or arguments was presented in the Determination.
The IRS argues that under the current appeals framework no record is required. It points to both the holding in Davis and C.F.R. § 601.106(c) for support. The government is correct that these rulings and provisions support the informal nature of the hearing. Yet informality does not completely obviate the need for a record of some sort. While a full stenographic record is not required, there must be enough information contained in the documentation created by the IRS for a court to draw conclusions about statutory compliance and whether the AO abused his or her discretion. Here, the scant letters and Notice of Determination make those tasks difficult if not impossible. The government's own arguments illustrate this problem. It asserts, for example, that Mesa points to no evidence or argument offered at the due process hearing which was ignored by the AO. Yet the lack of a record makes it impossible to tell what was discussed at the hearing, and what factors were considered by the AO in making her Determination. Thus, the lack of a record erodes Mesa's statutory right to judicial review, in violation of I.R.C. § 6330(d)(1)(B).
Accordingly, I ORDER that:
(1)The March 27, 2000 administrative decision is REMANDED to the Commissioner with directions to remand to a new Appeals Officer;
(2) A collection due process hearing be held upon adequate record which conforms to the statutory requirements of officer impartiality;
(3) An adequate record be created of proceedings at the administrative level sufficient to record the evidence or arguments presented at the hearing, as well as the analysis used by the Appeals Officer in making a Determination. This record may be made either through audio tape recording, video tape recording, or stenographer; along with all paper documents presented by the parties; and
(4) The Appeals Officer enter findings of fact and conclusions of law in her Notice of Determination, including a review those arguments raised by each side at the appeals hearing, those factors taken into consideration in the final conclusion, and citations to supporting statutes and regulations.
(5) Costs are awarded to the Plaintiff.