MEMORANDUM OPINION
HOLMES,
This case is one of several arising from a long-running dispute between Robert Kovacevich and the IRS about whether he was an employee or an independent contractor of his law firm. The firm changed its name during the years this dispute raged, which can make following the cases from year to year confusing. But the year before us is 1992, so we begin there.
In 1992, Robert's firm (which he had incorporated) 2009 Tax Ct. Memo LEXIS 160">*161 was named Robert E. Kovacevich, P.S., and he treated himself as an independent contractor -- meaning that the firm did not withhold payroll taxes from what it paid him. This was to the firm's advantage, because employers must generally deduct and withhold payroll taxes -- including income tax, Social Security (FICA) tax, Medicare tax, and unemployment (FUTA) tax -- from their employees' paychecks.The income tax withheld is a credit against the income tax owed by the taxpayer at the end of the year. FICA tax has two portions, one paid by the employer and one paid by the employee; the employer pays its portion and withholds the employee's. Employers must deposit withheld income and FICA taxes into a bank account within a short time after the employee's paycheck is cut. This is called the "trust fund" system because it is deemed a special fund in trust for the United States under
By characterizing Robert as a self-employed individual, his firm was making him responsible for paying all those taxes otherwise collected through payroll deductions. When he and his wife filed their 1992 tax return, they reported $ 90,000 that he got from the firm as self-employment income, and paid $ 5,570 in self-employment tax under
The Commissioner disagreed with the Kovaceviches about whether Robert was an independent contractor. He asserted that Robert was an employee, and sent the Kovaceviches a notice of deficiency based in part on that belief, but also disallowing various deductions and claiming that Robert and Yvonne had failed to report about $ 45,000 in additional income.
The Kovaceviches filed a petition with our Court. After finding in the Commissioner's favor on most issues, we ordered 2009 Tax Ct. Memo LEXIS 160">*163 a computation under
The Commissioner's recharacterization of Robert as an employee of his law firm had a couple important effects. The first was to eliminate the Kovaceviches' liability for Robert's self-employment tax, but also eliminate their right to deduct half that tax as a personal deduction.
The second important effect was to cast the entire obligation to pay employment taxes onto Robert's firm, which by then had changed its name to Western Management, Inc. The Commissioner went after the firm for its failure to pay employment 2009 Tax Ct. Memo LEXIS 160">*164 taxes for Robert's services by issuing it a notice of deficiency for 1994 and the first quarter of 1995. Western Management also filed a petition with our Court, but we again upheld the Commissioner's determination.
But the Kovaceviches' 1992 individual income-tax case 2009 Tax Ct. Memo LEXIS 160">*165 and Western Management's 1994-and-a-bit-of-1995 employment-tax case were only two fronts in their war with the IRS. The Commissioner also determined that Western Management owed employment taxes for 1991, 1992, and 1993. Western Management paid up and sued for a refund in the Court of Federal Claims.
In 2004, the Commissioner opened another front by assessing a trust-fund-recovery penalty under
And that brings us back to the 1992 tax year for the Kovaceviches themselves. We had entered decision against them in 2003 and, though they had appealed our decision, the Commissioner assessed the amount we found due, see
She also rejected the Kovaceviches' request that she contact the Social Security Administration to ensure the proper crediting of Robert's SSA account once the question of his status as an employee or independent contractor was settled, stating that this claim could be made only via a claim for refund outside of the collections hearing process. 52009 Tax Ct. Memo LEXIS 160">*168 But then, perhaps out of an abundance of caution, she attached a table showing that she had researched three of the four checks and found them applied to liabilities other than the Kovaceviches' unpaid 1992 liability.
On appeal, the Kovaceviches argue mainly that the Appeals officer abused her discretion in finding that the four checks they brought to her attention did not need to be credited to their 1992 tax debt. 6 They also argue that the Commissioner should have credited their 1992 account for the amount of a fifth check -- number 10376 -- which they produced at trial.
The checks in question are:
Check | Date | Amount | Payor | Apply to |
No. | ||||
3747 | 3/30/91 | $ 21,985.48 | Robert E. | "Employment tax 3-31- |
Kovacevich, | 88-9/30/88; 1989; | |||
P.S. | 3/31/89-9/30/89; | |||
3/31/909/30/90" | ||||
7438 | 9/30/95 | $ 22,583.20 | Robert E. | "941 taxes n.7 3/31/92- |
Kovacevich, | 12/31/92; 941 taxes | |||
P.S. | 3/31/93-12/31/93. | |||
For payment of 941 | ||||
taxes only no | ||||
interest or | ||||
penalties" | ||||
10161 | 9/29/03 | $ 7,682.00 | Robert and | "Payment of |
Yvonne | employment tax | |||
Western Management | ||||
Inc. For 6672 | ||||
penalty to | ||||
withholding tax | ||||
only. Directed | ||||
payment for 1994 | ||||
taxes of Robert E. | ||||
Kovacevich | ||||
classified as | ||||
employee" | ||||
10376 | 4/28/04 | $ 7,514.40 | Robert and | "Payment of |
Yvonne | employment tax ONLY | |||
Western Management | ||||
Inc. Directed | ||||
payment for TAX ONLY | ||||
1994 for Robert E. | ||||
Kovacevich | ||||
classified as | ||||
employee" | ||||
7641 | 11/23/04 | $ 8,276.50 | Robert and | "6672 penalty on |
*5*n.7 We assume the Kovaceviches intended "941 taxes" to mean Western | ||||
*5*Management's quarterly employment taxes, which would have been | ||||
*5*submitted with a Form 941, "Employer's Quarterly Federal Tax Return." |
The 2009 Tax Ct. Memo LEXIS 160">*169 Kovaceviches resided in Spokane, Washington when they filed their petition.
The Kovaceviches ask us to resolve the check-crediting issue and also object to the Appeals officer's refusal to transmit certain information to the Social Security Administration. Their case -- perhaps an easy one if the Appeals officer had simply reviewed IRS records to see whether any of the checks the Kovaceviches showed her should have had any effect on their 1992 individual income-tax liability -- instead raises some difficult procedural questions that we need to discuss before reaching the merits of the crediting question: o Can we look at the crediting of check 10376, which the Kovaceviches didn't present at the CDP hearing? o Is an examination of the crediting of payments to the IRS a challenge to a taxpayer's "underlying tax liability" or a dispute about whether the IRS followed an "administrative procedure?" -- a question that determines our standard of review; and o Does collateral estoppel or res judicata bar later administrative challenges to crediting when they could have been made at the computational stage of an earlier deficiency case?
Check 10376 stands 2009 Tax Ct. Memo LEXIS 160">*170 by itself because the Kovaceviches did not put that check in front of the Appeals officer during the CDP hearing -- meaning we have no determination to review on that question. The Commissioner argues in his brief that we shouldn't consider that check because it was not part of the administrative record. We have already held, however, that we are not limited to the administrative record in reviewing CDP determinations.
Because we do not follow the record rule, we will consider evidence not produced at the CDP hearing if it is relevant to issues raised 2009 Tax Ct. Memo LEXIS 160">*171 during the hearing and is admissible under the Federal Rules of Evidence. The Commissioner, however, will often object to evidence that a taxpayer introduces for the first time at trial in our Court on the ground that evidence not put before the Appeals officer during the CDP hearing is irrelevant to the question of whether that officer abused her discretion.
The Commissioner next concedes on brief that the Appeals officer was wrong to conclude that she need not, or could not, or should not, investigate whether the checks should have been credited against the Kovaceviches' unpaid 1992 liability. We need to explain this concession to explain the problems that it creates.
The concession springs from the Commissioner's reading of (1) Requirement of investigation. -- The appeals officer shall at the hearing obtain verification from the Secretary that the requirements of any applicable law or administrative procedure have been met. (2) Issues at hearing. -- (A) In general. -- The person may raise at the hearing any relevant issue relating to the unpaid tax or the proposed levy, including -- (i) appropriate spousal defenses; (ii) challenges to the appropriateness of collection actions; and (iii) offers of collection alternatives, which may include the posting of a bond, the substitution of other assets, installment agreement, or an offer-in compromise. (B) Underlying liability. -- The person may also raise at the hearing challenges to the existence or amount of the underlying tax liability for any tax period if the person did not receive any statutory notice of deficiency for such tax liability or did not otherwise have an opportunity to dispute such tax liability. [Emphasis added.]
Because the Kovaceviches received a notice of deficiency for 1992, their "underlying liability" 2009 Tax Ct. Memo LEXIS 160">*173 could not have been properly at issue in the CDP hearing. The Appeals officer clearly understood this as a general principle. The Kovaceviches do not, as is plain from their reliance on
Our analysis requires a brief detour into tax jargon: liability, deficiency, and assessment. A tax liability is the tax imposed by the Code on a particular taxpayer for a particular tax year.
With these definitions in place, it might seem at first reading that challenges to the proper crediting of checks that a taxpayer sends to the IRS are not "challenges to the underlying liability," because they don't raise questions of the amount of tax imposed by the Code for a particular tax year. They raise, instead, questions of whether that liability remains unpaid. The Commissioner agrees, arguing that "the very structure of considering the terms of the statute in their ordinary meaning, a "relevant issue relating to the unpaid tax or the proposed levy" surely includes 2009 Tax Ct. Memo LEXIS 160">*175 a claim, such as the one here, that the "unpaid tax" has in fact been satisfied by a remittance that the Commissioner improperly applied elsewhere.
So we agree with the Commissioner on this one, and hold that questions about whether a particular check was properly credited to a particular taxpayer's account for a particular tax year are not challenges to his underlying tax liability. 10 The consequence here is that we review the Appeals officer's determination for abuse of discretion: 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 2009 Tax Ct. Memo LEXIS 160">*176 of the appeal, the taxpayer may challenge the determination of the appeals officer for abuse of discretion. H. Conf. Rept. 105-599, at 266 (1998).
See also, e.g.,
Our agreement with the Commissioner on this point, though, may end up causing him a problem -- it means that the Appeals officer committed an error of law when she labeled the check-crediting argument a challenge to the underlying liability. This means that she necessarily abused her discretion, unless her error was harmless. See
The Commissioner next argues that the Kovaceviches could have raised the proper crediting of these checks in previous litigation, even though they didn't. This is an argument about res judicata. But applying res judicata in this case turns out to be quite complicated. The first problem for the Commissioner is that, as with his
The check numbered 10161 was written in September 2009 Tax Ct. Memo LEXIS 160">*180 2003, after the trial but before entry of the
That leaves us with the decisive question of whether the IRS properly credited the disputed checks. The Kovaceviches make two arguments. The first is that the checks were credited to the wrong tax years. The second is that overpayments of employment taxes for some years should have been carried over to reduce their 1992 income-tax liability.
A taxpayer who makes a voluntary payment may designate which liability he or she wishes to pay.
Check 3747, for $ 21,985.48, was written on the account of Robert E. Kovacevich, P.S., on March 30, 1991. The check bears the employer identification number of Robert E. Kovacevich, P.S., and directs that it should be credited for "Employment tax 3-3188-9/30/88, 1989, 3/31/89-9/30/89, 3/31/90, 9/30/90." The Appeals officer did not research this check, and the Commissioner entered no transcripts for tax years before 1992 into evidence at trial. However, the Appeals officer wrote in the Notice of Determination that this check pertained to "years outside the CDP." This finding was not an abuse of discretion; it was not clear error for her to determine that this check was meant to pay for years before 1992 and was meant to reduce the firm's own unpaid tax liabilities. And, if it is up to us to make a finding of our own on the basis of the trial record, we find it more likely than not that the check was credited as the Kovaceviches wished.
Check number 7438, for $ 22,583.20, was written on the account of Robert E. Kovacevich, P.S., on September 30, 1995. 2009 Tax Ct. Memo LEXIS 160">*182 It reads "941 taxes 3/31/92-12/31/92; 941 taxes 3/31/93-12/31/93. For payment of 941 taxes only no interest or penalties." This check also has the firm's employer identification number on it. The back of this check bears an obscured document locator number (DLN) 13 which reads in part "291172772." This matches an October 4, 1995 IRS computer-transcript entry labeled "payment" for Western Management's tax period ending March 1992. This makes it highly likely that check 7438 is the very same check that triggered the refund litigation in the Court of Federal Claims. As the opinion in that case states: On September 30, 1995, a check in the amount of $ 22,530.20 from account no. *** [XXXXX-XXX] was paid to the Internal Revenue Service. *** The check was paid on amounts billed by the IRS for alleged FICA, FUTA, and other employment taxes solely on a dispute of one worker Robert Kovacevich for the calendar year 1992.
The Kovaceviches wrote check 10161 September 29, 2003. They directed that this $ 7,682 check be put toward "Payment of employment tax Western Management Inc. For 6672 penalty to withholding tax only. No interest or penalty payment. Directed payment for 1994 taxes of Robert E. Kovacevich classified as employee." Analyzing the crediting of this check is complicated; although Western Management's employer identification number is handwritten at the top, Robert's Social Security number and the words "1994 tax" are typed at the 2009 Tax Ct. Memo LEXIS 160">*184 bottom. This makes the job of discerning the Kovaceviches' intended crediting very confusing. On the one hand, they designated it for payment of the "6672 penalty." On the other, it also has Robert's Social Security number typed on the check and a second note directing that it should be put toward "1994 taxes of Robert E. Kovacevich." This suggests it should pay his tax. If we had a third hand, we could also point out that it's designated for "payment of employment tax Western Management Inc.," indicating payment of 941 taxes, reinforced by the handwritten employer identification number on the check.
The Commissioner apparently resolved this issue by crediting the checks to Western Management's account. The DLN on the back of the check is 29117282040043; this matches an October 3, 2003 entry on Western Management's account transcript showing a $ 1,920 payment for the firm's first quarter 1994 taxes. The Appeals officer found that the IRS had credited the remainder of the check to the rest of Western Management's 1994 tax year. The following payment entries appear in the transcripts:
Period | Payment Amount | Payment Date |
3/31/94 | $ 1,920.50 | 10/3/03 |
6/30/94 | $ 1,920.50 | 10/3/03 |
9/30/94 | $ 1,920.50 | 10/3/03 |
12/31/94 | $ 1,920.50 | 10/3/03 |
Based 2009 Tax Ct. Memo LEXIS 160">*185 on the evidence, the Appeals officer did not abuse her discretion in finding that the check was credited across all four quarters of Western Management's 1994 tax year. It was also not clear error for her to find that this accorded with the taxpayer's confusing directions -- those directions as stated on the check could have supported any one of three different conclusions as to their intentions. "Where there are two permissible views of the evidence, the factfinder's choice between them cannot be clearly erroneous."
Check 10376 was for $ 7,514.40 and dated April 28, 2004. It was drawn from the personal account of Robert and Yvonne Kovacevich, but written on it is "Payment of employment tax ONLY Western Management Inc. Directed payment for TAX ONLY 1994 for Robert E. Kovacevich classified as employee." The only identification number on the check is Western Management's. And that is what we find was done: On Western Management's transcript for March 1994, there is an entry 2009 Tax Ct. Memo LEXIS 160">*186 for a "subsequent payment" of $ 7,514.40. Although some of the numbers on the back of the check are obscured, the digits "31105004" are clear and match the DLN on the transcript corresponding to the May 3, 2004 payment. The Appeals officer didn't analyze where this check went -- remember, it was the check the Kovaceviches introduced only at trial. But it's plain to us that when they wrote it, the Kovaceviches designated the check to pay 1994 taxes. The 1994 tax quarters for Western Management do not overlap with the Kovaceviches' 1992 individual tax year, so we find that the Commissioner properly did not credit it to the Kovaceviches' individual account.
The Appeals officer addressed the last of these five checks, number 641 for $ 8,276.50, by verifying that it had been applied to Western Management's deficiency for the first quarter of 1995. The Kovaceviches wrote this on November 23, 2004, directed that it should be put toward the "6672 penalty on 3/27/1995," and wrote Robert Kovacevich's Social Security number on it. The Western Management transcript for the period ending March 31, 1995 has an entry on November 23, 2004 for a "subsequent payment -- trust fund" in the amount of $ 2009 Tax Ct. Memo LEXIS 160">*187 8,276.50. The number printed on the back of the check again matches the "DLN" indicated on Western Management's transcript.
The Kovaceviches plausibly argue that they wanted this payment applied to Robert's 1995 trust-fund-recovery penalty under
Robert even admitted at trial that he wanted this applied to the 1995
The Kovaceviches briefly argue about something called 2009 Tax Ct. Memo LEXIS 160">*189 "contribution basis." They believe the Commissioner overcollected employment taxes for 1988, 1989, and 1990 by applying check number 3747 to that debt, and should therefore credit the overpayments toward their 1992 deficiency.
The Kovaceviches are partly correct about the "contribution basis;" that part of the remuneration which, after remuneration * * * equal to the contribution and benefit base (as determined under
We sidestep the problem (and the need to parse the passage just quoted): The short answer to the Kovaceviches' argument is that they didn't provide any evidence that they met the requirements for this exemption. They didn't enter into evidence their tax returns or other evidence of Robert's income for 1988-90. They also didn't tell us (or the Appeals officer) specific amounts that should be credited toward 1992 or how those 2009 Tax Ct. Memo LEXIS 160">*190 credits reduce the deficiency. This attack on the notice of determination must also fail.
The Kovaceviches finally urge us to find an abuse of discretion in the Appeals officer's refusal to send information about their additional income to the Social Security Administration. Although this seems like a strange line of argument, it has real-life effects on the Kovaceviches. They argue that if the Commissioner told the SSA about the additional 1992 income on which they must now pay taxes, they could increase their monthly Social Security payout by a small amount.
We are sympathetic to this desire to increase their retirement income. But a CDP hearing is not the right forum -- getting information from the IRS to the SSA about whether Social Security taxes have been paid is not an issue related to an unpaid tax and is not related to a levy. It is thus not an issue that may be raised at a CDP hearing. See
1. This background information comes from
2. Unless otherwise indicated, references to sections in this opinion are to the Internal Revenue Code as amended, and all references to Rules are to the Tax Court's Rules of Practice and Procedure.↩
3.
4.
5. The Kovaceviches also paid a filing fee for the IRS to consider a collections alternative. The IRS later returned the fee after the Kovaceviches failed to provide any of the required information.
6. The Kovaceviches make one meritless argument -- that it was an abuse of discretion not to give them a certified transcript, Form 4340, at the hearing. We routinely hold that nothing in the Code requires an Appeals officer to furnish a taxpayer with a Form 4340 during a CDP hearing. See, e.g.,
They also ask us to reopen the trial record so they can call the IRS employee who they say was responsible for the audit of their 1992 taxes. But what goes on during audits is immaterial to the de novo record on which we decide deficiency cases.
8. In a very recent decision, the Ninth Circuit cited the Eighth Circuit's opinion in
9. Another vocabulary problem is that "credit" can mean two different things in tax law. It can mean amounts subtracted from the computation of tax otherwise owed, rather than (as with deductions) from the amount of income on which the tax is computed. But it can also mean the reduction in unpaid liability that occurs when a taxpayer pays his tax and his account is "credited." The parties, and sometimes our own cases, don't always make this distinction clear.↩
10. We also carefully distinguish cases like
11. Instead, the Commissioner pleaded
12. The application of payments is almost always part of overpayment cases where the final decision document includes a statement of account showing assessments and payments. See
13. The IRS assigns a DLN to each document it processes. IRS employees can then refer to the DLN to find out which taxpayer sent the document and where the document is stored.↩
14. There is a discrepancy of $ 94.04 between the check and the transcript entry, but the parties did not address it. We find it to be immaterial.↩
15. Since Western Management's 1992 employment-tax liability is still pending in Claims Court, Western Management may not yet have computations sufficient to put together a revised Form W-2.