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JOHNSON HOME CARE SERVICES, INC. v. U.S.

September 13, 2005.

JOHNSON HOME CARE SERVICES, INC., Plaintiff,
v.
UNITED STATES OF AMERICA, Defendant.



The opinion of the court was delivered by: FREDERIC BLOCK, District Judge

MEMORANDUM AND ORDER

Plaintiff Johnson Home Care Services, Inc. ("Johnson Home") filed suit pursuant to 26 U.S.C. § 6630(d)(1)(B), seeking review of an administrative decision of the Internal Revenue Service ("IRS"), which upheld a levy on Johnson Home's property for unpaid federal employment taxes, interest, and penalties. Johnson Home moved for summary judgment pursuant to Fed.R.Civ.P. 56, and defendant United States of America ("United States") cross-moved for an order affirming the IRS's determination.*fn1 For the reasons set forth below, the Court denies Johnson Home's motion and grants the United States' motion.

  I.

  Johnson Home, a corporation in the business of providing home health care services to individuals, incurred a federal tax liability comprised of quarterly withholdings for the quarters ending September 30, 2001 through September 30, 2002; unemployment taxes for the year ending December 31, 2001, and a civil penalty for failing to furnish timely information for the year ending December 31, 1998. According to Johnson Home, the tax liability accrued during these periods as a result of a twenty-five percent loss in business, which rendered it unable to pay its employment taxes, including withholding from employees' wages and its employer's contribution. Johnson Home initially attempted to negotiate a payment plan with an IRS Revenue Officer, proposing to make monthly payments of $3000 per month to the IRS; the Revenue Officer rejected the plan, noting that these monthly payments would be insufficient to fully pay the amount of the liability prior to the expiration of the statute of limitations.*fn2 On December 24, 2002, Johnson Home received a Final Notice of Intent to Levy and Notice of Right to a Hearing ("Final Notice") from the IRS. The Final Notice advised Johnson Home that if it did not pay the full amount due within 30 days, the IRS would exercise its right to take Johnson Home's property, or rights to property, to satisfy the liability.

  Johnson Home exercised its right to a collection due process ("CDP") hearing under 26 U.S.C. § 6330(c), which provides for the right to a hearing before an IRS Appeals Officer ("AO") before a levy may be made on any property or right to property. In determining whether to sustain a levy action, an Appeals Officer must consider (1) whether the requirements of any applicable law or administrative procedure have been met; (2) any issues raised by the taxpayer, which may include challenges to the appropriateness of collection actions and offers of collection alternatives such as offers in compromise or installment plans, and (3) "whether any proposed collection action balances the need for efficient collection of taxes with the legitimate concern of the person that any collection action be no more intrusive than necessary." 26 U.S.C. § 6330(c)(3).

  On March 12, 2003, a CDP hearing was held with IRS Appeals Officer Gerard Ohrtman ("Ohrtman" or "AO"). During the hearing, at which Johnson Home was represented by counsel, Ohrtman advised Johnson Home that its then-current tax liability was $1,119,752, in addition to the amount owed on Johnson Home's quarterly withholding return for the period ending December 31, 2002. Johnson Home did not contest the amount of the tax liability, but proposed an installment payment plan in lieu of the levy. Johnson Home advised Ohrtman that it was in the process of moving to a new location which, after the payment of unspecified but "substantial" start-up costs, would cut down on its administrative expenses and allow it to begin making payments of $3000 per month toward the liability; Johnson Home also stated that once "this matter with the IRS and a few other matters" were resolved, its monthly professional fees would decrease, allowing it to put additional funds toward the installment plan. Case Activity Records at 1; Ltr. of April 1, 2003, at 2.*fn3 Johnson Home additionally informed Ohrtman that its president, Grace Johnson ("Ms. Johnson") owned substantial equity in a home located in New York state, but that her involvement in a "messy divorce" had prevented her from borrowing against the equity in the residence in order to make a lump sum payment on the tax liability. Case Activity Records at 1. Johnson Home represented that because the equity could not be immediately accessed, Ms. Johnson was willing to offer the IRS a mortgage on her home and commit to selling the property in order to make the payment once her divorce issues were resolved. Given the information Johnson Home provided about Ms. Johnson's residence, Ohrtman gave Johnson Home an additional three weeks to suggest a collection alternative that would be in the interest of both the government and Johnson Home.

  On April 1, 2003, Johnson Home responded to Ohrtman by letter, stating that Johnson Home did not have the ability to make a substantial payment towards the liability, as the assets that might be used to fund such a substantial payment were "not assets of this taxpayer." Ltr. of April 1, 2003, at 3. Instead, Johnson Home proposed a second installment agreement whereby it would pay $3000 per month for the first twelve months, increased to $5000 per month for the following six months, after which time Johnson Home's monthly payments would be increased to $14,000 per month. As of December 31, 2002, Johnson Home's balance sheet showed total assets of approximately $1.25 million, and total liabilities of approximately $1.5 million. In support of its ability to make payments under the second proposed installment plan, Johnson Home submitted a signed declaration from Ms. Johnson, which included a projected profit and loss statement predicting that a net income of $16,350 per year was "reasonably achievable absent an unanticipated change in circumstances." Ltr. of April 2, 2003, Attach. at 1. Johnson Home also stated that should the IRS reject its proposed payment agreement and decide to levy upon its accounts receivables, it would be forced to liquidate.

  The IRS Case Activity Records, which describe the CDP hearing as well as subsequent correspondence between Ohrtman and Johnson Home, show that Ohrtman reviewed Johnson Home's tax and financial history and concluded that it was a bad risk for a payment agreement; Ohrtman also noted that Johnson Home was "heavily indebted" to the Service, and that it had not given any indication of where the additional revenue to fund its second proposed installment agreement would be found "beyond the fact that [Johnson Home is] moving to new quarters where the rent will be decreased." Case Activity Records at 2. Ohrtman reported that following the CDP hearing Johnson Home abandoned its representations regarding the possibility of funding a substantial first payment through an equity loan on Ms. Johnson's residence, and that while an agreement under which Johnson Home would borrow on the equity to make a large payment up front "seemed like a balance between the taxpayer and the Service," the proposal for an installment agreement without such a payment was not in the government's interest. Id. Ohrtman also noted that "[i]t does not seem in the interest of the Service to accept a mortgage on a property as a contingent to an agreement. Divorce litigation can drag on for years." Id. at 1. Finally, Ohrtman observed that even if Johnson Home agreed to an extension of the CSED to 15 years, full payment within that time frame would require that Johnson Home begin making monthly payments of over $13,000 starting immediately, and not in the following year as envisioned by Johnson Home's second proposed installment plan.

  The IRS issued a Notice of Determination ("Determination") on December 17, 2003, sustaining the levy on Johnson Home's property. The Determination explained that because Johnson Home was not current on its tax deposits for the previous two quarters it was not entitled to submit an offer in compromise. The IRS also rejected Johnson Home's proposed collection alternatives, noting that its first proposed installment plan of $3000 per month would not fully pay the taxes due within the statutory period for collection, and that the second proposed installment plan was not acceptable because a review of Johnson Home's financial information failed to explain the source of the money needed to make the payments. The IRS concluded that absent Johnson Home's willingness to provide an acceptable alternative to the proposed action, the proposed levy action "balances the efficient collection of the taxes with your legitimate concern that the collection be no more intrusive than necessary." Determination at 4.*fn4

  Johnson Home challenges the IRS's final determination upholding the levy on the grounds that Appeals Officer Ohrtman (1) did not adequately conduct the balancing test required by 26 U.S.C. § 6330(c)(3)(C); (2) abused his discretion in rejecting the proposed installment plan because he (a) failed to consider the fact that recovery of the plaintiff's trust fund recovery penalty could be secured through a mortgage on Ms. Johnson's residence,*fn5 (b) erroneously concluded that Johnson Home withdrew its offer to pay its tax liability through proceeds from the sale of Ms. Johnson's home, and (c) incorrectly determined that Johnson Home's second proposed installment plan would not pay the full amount of the liability within the statutory period; (3) imposed more onerous requirements on Johnson Home than the IRS revenue officer; and (4) confused the taxpayer, Johnson Home, with its principal, Ms. Johnson.

  II.

  A. Standard of Review under 26 U.S.C. § 6330(d)

  When the underlying tax liability is not at issue, as in this case, the Court reviews the final IRS determination for abuse of discretion. See Ramos v. IRS, 351 F. Supp. 2d 5, 9 (N.D.N.Y. 2004) (citing Pelliccio v. United States, 253 F. Supp. 2d 258, 262 (D. Conn. 2003)); see also Living Care, 411 F.3d at 626 (noting that the statute's legislative history establishes that where the validity of the liability is not part of the appeal, the taxpayer may challenge the IRS determination only for abuse of discretion). A decision is an abuse of discretion if it is "`made without a rational explanation, inexplicably depart[s] from established policies, or rest[s] on an impermissible basis, or . . . on other considerations that Congress could not have intended to make relevant.'" Ramos, 351 F. Supp. 2d at 9 (quoting MRCA Info. Servs. v. United States, 145 F. Supp. 2d 194, 199 (D. Conn. 2000)). Under this standard of review, the final determination of the IRS Appeals Officer is given significant deference. See Olsen v. United States, 411 F.3d 144, 150 (1st Cir. 2005) ("[I]n providing for CDP hearings on what is ordinarily a scant record, Congress `must have been contemplating a more deferential review of these tax appeals than of more formal agency decisions. . . . [W]ithout ...


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