BEVERLY B. MARTIN, District Judge
This action, requesting reprieve from a Notice of Federal Tax Lien filed by the Internal Revenue Service, comes before the court after an evidentiary hearing on June 5, 2003.
I. Factual and Procedural Background
On July 29, 2002, PCT Services, Inc. ("PCT"), a company in the business of providing janitorial and cleaning services to federal hospitals and military institutions, filed the instant lawsuit against the United States internal Revenue Service ("IRS"), asking the court to review the IRS's decision to recover PCT's unpaid employment taxes through the filing of a federal tax lien. From 1991 through 1995, PCT operated throughout the United States, but failed to pay its employment tax liabilities to the IRS. For the controverted period, PCT accrued tax liabilities totaling approximately $2.5 million. Due to PCT's extended nonpayment, significant penalties and interest have attached to these corporate tax liabilities.
Through various enforcement efforts, the IRS collected around $1.5 million from PCT in June 1995. As a result of these enforcement actions, PCT filed for Chapter 11 bankruptcy protection on September 15, 1995. During the bankruptcy proceedings, the IRS filed a proof of claim for PCT's unpaid taxes. PCT did not challenge the IRS's proof of claim, and, therefore, the claim was incorporated into PCT's reorganization plan, which the bankruptcy court confirmed on February 14, 1997. From that date until 1999, PCT made payments to the IRS under the reorganization plan. However, in June 1999, PCT could not secure any revenue-raising contracts, and it defaulted on its payments to the IRS.
Upon PCT's default, the outstanding employment tax liabilities were referred to the Collection Division of the IRS, and appropriate default notices were mailed to PCT. PCI informed the IRS, by letter, of its inability to continue payment under the Chapter 11 plan. Thereafter, the IRS decided to pursue PCT's unpaid liabilities through the levy and lien process. On September 6, 2001, the IRS filed a Notice of Federal Tax Lien. By letter dated September 11, 2001, the IRS advised PCI that the Notice of Federal Tax Lien had been filed. The IRS also advised PCI of its right to seek a collection due process hearing ("CDP hearing") to review the filing of the federal tax lien. PCT timely requested a CDP hearing.
The CDP hearing was held on May 6, 2002. IRS settlement officer Patricia Kukla ("Kukla") conducted the hearing and made several determinations. First, Kukla determined that the IRS had complied with all applicable law and procedures in the course of filing the Notice of Federal Tax Lien. Second, Kukla determined that, for the five quarters immediately preceding the hearing, PCT had not complied with its federal employment tax obligations. After making these findings, Kukla balanced the need for efficient collection of taxes with PCT's concern that the collection action be no more intrusive than necessary. In light of PCT's delinquencies in meeting its employment tax obligations, Kukla declined to consider collection alternatives and upheld the federal tax lien. On June 29, 2002, Kukla issued a notice of determination regarding her decision to uphold the lien.
PCT timely filed an appeal of Kukla's determination with this court. In its complaint, PCI presents two counts. The first count asks the court to review and overturn the IRS's determination that PCT was noncompliant with its employment tax obligations at the time of the CDP hearing. The second count alleges that the IRS incorrectly determined the appropriate amount of the federal tax lien. The IRS filed an answer on September 30, 2002, urging the court to uphold Kukla's determination regarding the tax lien. Thereafter, the parties engaged in four months of discovery. Finally, on March 19, 2003, the IRS filed a motion for summary judgment [Doc. No. 11-1].
Upon review of the applicable facts, the court granted the IRS's motion for summary judgment on PCT's first count. The undisputed evidence demonstrated that PCT was noncompliant with its employment tax liabilities at the time of the CDP hearing. Because the parties conceded as much, the court found that Kukla did not abuse her discretion by declining to consider tax collection alternatives. Accordingly, regarding PCT's first claim, the court found for the IRS on its motion for summary judgment. However, upon consideration of PCT's second count, the court found that it could not grant summary judgment to the IRS. Genuine issues of material fact remained outstanding regarding whether PCT had a prior opportunity to challenge its underlying tax liability, whether PCT raised the issue of its underlying tax liability at the CDP hearing, and whether the government afforded PCT proper credit for payments rendered. Therefore, the court declined to grant summary judgment to PCT.
To resolve the outstanding factual issues, the court held an evidentiary hearing on June 5, 2003 with testimony and oral argument. At the hearing, Sandra Johnson ("Ms. Johnson"), the sole shareholder of PCT, Melvin Johnson ("Mr. Johnson"), the corporate comptroller of PCT, and Kukla testified regarding the CDP hearing and the issues raised therein. Kukla also testified about PCT's underlying tax liability. Counsel for PCT admitted that, since the filing of the motion for summary judgment, the government had credited PCT's account for all payments rendered by PCI. Accordingly, the parties agree that previously unaccounted for checks, totaling around $50,000.00, have been properly credited by the IRS. Thus, the court now resolves the outstanding factual issues.
II. Legal Discussion
After the IRS files a federal tax lien and issues a Notice of Federal Tax Lien to a delinquent taxpayer, the taxpayer may request a CDP hearing. 26 U.S.C. § 6320. At the CDP hearing, the petitioner may, in general, raise "any relevant issue relating to the unpaid tax." Id. at § 6330(c)(2)(A). However, the taxpayer may only properly raise challenges to the existence or amount of the underlying tax liability, "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." Id. at § 6330(c)(2)(B). Accordingly, where a taxpayer has been given a prior opportunity to dispute the tax liability, the taxpayer may not properly raise the liability issue at the CDP hearing. Id. This rule applies, whether or not the taxpayer took advantage of his or her prior opportunity to dispute the tax liability.Maton v. Commissioner, No. 02 C 6609, 2003 WL 1860514, at *2 (N.D. Ill. Apr. 10, 2003).
If, after reviewing all issues properly raised at the hearing, the IRS officer decides to uphold the lien, but the taxpayer disagrees with the IRS officer's ultimate determination, the taxpayer may appeal the officer's decision to a federal district court. Id. at § 6330(d)(1). Issues not raised or addressed at the CDP hearing cannot be reviewed on appeal. Loofbourrow v. Commissioner 208 F. Supp.2d 698, 706 (S.D. Tex. 2002); Konkel v. Commissioner, No. 6:99-CV-1026-ORL-31C, 2000 WL 1819417, at *3 (M.D. Fla. Nov. 6, 2000); Miller v. Commissioner, 115 T.C. 582 (2000); see also Pelliccio v. United States, No. 3:01CV601, 2003 WL 1549397, at *3 (D. Conn. Feb. 4, 2003); Dean v. United States, No. 3:01-CV-430, 2002 WL 31662299, at *4 (N.D. Fla. Oct. 23, 2002). Likewise, issues not properly before the hearing officer cannot be raised on appeal. 26 U.S.C. § 6330(c)(2)(B); Maton, 2003 WL 1860514, at *2. However, where the validity of the underlying tax liability was properly at issue in the CDP hearing, the district court must review the matter on a de novo basis. IRS Restructuring Reform Act of 1998, H.R. Conf. Rep. No. 105-599, at 266 (1998); see also Goza v. Commissioner, 114 T.C. 176 (2000); MCRA Info. Servs. v. United States, 145 F. Supp.2d 194 (D. Conn. 2000); Sego v. Commissioner, 114 T.C. 604 (2000).
A. Issues Raised at CDP Hearing
Recognizing that issues must be raised at the CDP hearing to be addressed on appeal, PCT and the IRS dispute whether PCT raised the issue of its underlying tax liability at the CDP hearing. See Loofbourrow, 208 F. Supp.2d at 706. Each of the witnesses at the hearing testified as to whether or not the issue was raised at the hearing. Mr. and Ms. Johnson testified that they questioned the appropriate amount of PCT's underlying tax liability at the CDP hearing, while Kukla testified that the issue was not raised. Notably, Kukla testified that all issues raised at the hearing were recorded in her notice of determination letter issued on June 29, 2002. At no point in her letter does Kukla mention the proper amount of the underlying tax liability.
On this issue, the court is inclined to believe Kukla's testimony. She presented herself as an unbiased and credible witness. Importantly, the Johnsons, in their testimony, did not specify how they raised the issue of their underlying tax liability at the CDP hearing. Even if the Johnsons questioned whether PCT had received credit for all payments rendered, it does not appear that the Johnsons raised the issue of proper application of their payments to the oldest, trust fund portion of the outstanding tax liabilities at the CDP hearing. Such a distinction regarding the basis for the challenge to PCT's underlying liability is important because of concessions made by PCT at the hearing on June 5, 2003. PCT conceded that the IRS has credited its account for all payments rendered, and, therefore, the only possible remaining issue for appeal regarding the underlying liability is whether the IRS properly applied PCT's payments to the oldest, trust fund portions of the tax liabilities. If this specific issue was not raised at the hearing, it cannot be addressed on appeal.
In this regard, the court notes that, at the CDP hearing, the Johnsons presented no documents to Kukla demonstrating that they had requested, in writing, specific application of any of their payments to the oldest, trust fund portion of PCT's outstanding liabilities. See Rev. Rul. 79-284, 1979-2 C.B. 83 (stating that where a corporation makes a voluntary payment of delinquent tax liability, the corporation may, in writing, designate that the payment be applied to trust fund portion of liability). Indeed, no such writing was presented to the court or the IRS until PCT filed its response to the IRS's motion for summary judgment on April 9, 2003. Without such documentation, it is clear to the court that the Johnsons offered no proof at the CDP hearing that the IRS was required to apply their tax payments as allegedly designated. Id. Accordingly, the court finds that it is unlikely that PCT raised this issue at the CDP hearing, since PCT located no documentation of its own requests until the response to the IRS's motion for summary judgment.
Thus, based on Kukla's credible testimony, Kukla's failure to mention the issue in her notice of determination letter, the Johnsons' nonspecific testimony, and the Johnsons' failure to produce relevant documents until after the CDP hearing, the court finds that the application issue was not actually raised at the CDP hearing. Because the testimony proffered by the Johnsons at the June 5, 2003 hearing does not establish with any certainty that the specific issue of proper application of PCT's delinquent payments was raised at the CDP hearing, the court does not believe that the issue can be addressed in this court. Id. at 706; Konkel, 2000 WL 1819417, at *3; Miller, 115 T.C. at 582; see also Pelliccio 2003 WL 1549397, at *3; Dean, 2002 WL 31662299, at *4.
B. PCT's Prior Opportunity to Challenge Liability
Even if the issue was raised at the CDP hearing, the court finds that PCT had a prior opportunity to challenge its underlying tax liability, such that PCT was statutorily precluded from addressing the issue at the CDP hearing and, thus, on appeal. 26 U.S.C. § 6330(c)(2)(B); Maton, 2003 WL 1860514, at *2. When the IRS submits a proof of claim for unpaid federal tax liabilities in a taxpayer's bankruptcy action, the taxpayer and trustee may object to the IRS's proof of claim. Under 11 U.S.C. § 505(a), a taxpayer may challenge, "the amount or legality of any tax, any fine or penalty relating to tax, or any addition to tax, whether or not previously assessed, whether or not paid, and whether or not contested before and adjudicated by a judicial or administrative tribunal of competent jurisdiction." Accordingly, a bankruptcy proceeding, in which the IRS submits a proof of claim for unpaid taxes, serves as "an opportunity to dispute such tax liability." 26 U.S.C. § 6330(c)(2)(B).
PCT filed a voluntary bankruptcy petition on September 15, 1995. During the bankruptcy proceedings, the IRS filed a creditor's proof of claim for PCT's unpaid employment tax liabilities. The proof of claim covered each of the quarters at issue in the controverted Notice of Federal Tax Lien. PCT did not object to the IRS's proof of claim, nor did PCT file an adversary proceeding to challenge the underlying tax liability. Instead, the IRS's proof of claim was accepted by the trustee and incorporated into the Chapter 11 plan. The bankruptcy court confirmed the plan on February 14, 1997, which required PCT to repay the IRS in monthly installments. From February 1997 until June 1999, PCT sent payments to the IRS under the plan.
Despite an explicit opportunity under 11 U.S.C. § 505, PCT did not object to the IRS's proof of claim in its bankruptcy proceeding, thereby acknowledging the existence of a significant outstanding tax liability, totaling $3,703,425.42. Triad Microsys, Inc. v. United States, No. 02-206-A, 2002 WL 31777585, at *3 (E.D. Va. Oct. 31, 2002) (finding that plaintiff had opportunity to challenge its underlying tax liability at bankruptcy proceeding, but failed to take advantage of that opportunity by not objecting to the IRS's proof of claim). By entering into the bankruptcy plan whereby PCT agreed to repay the IRS in monthly installments, PCT accepted its underlying tax liability for the quarters involved in the current Notice of Federal Tax Lien. Id. see also Internal Revenue Manual § 8.7.2.3.8 (Nov. 13, 2001) (stating that, where taxpayer had opportunity to challenge liability in bankruptcy proceeding, but failed to do so, issue cannot be considered on appeal).
Because PCT had a prior opportunity to object to the amount of the underlying tax liability for each quarter at issue in the current appeal, the issue of the amount of the liability would not have been properly before Kukla, even if the Johnsons had raised the issue. 26 U.S.C. § 6330(c)(2)(B); Maton, 2003 WL 1860514, at *2. Given that PCT "otherwise ha[d] an opportunity to dispute such tax liability" during the bankruptcy case, PCT is precluded from challenging the underlying amount at the CDP hearing or on appeal. 26 U.S.C. § 6330(c)(2)(B).
C. Lien Upheld
Finally, even if the issue had been properly raised at the CDP hearing, and the court engaged in a de novo review of PCT's appeal, the court finds that the Notice of Federal Tax Lien would still be upheld. IRS Restructuring Reform Act of 1998, H.R. Conf. Rep. No. 105-599, at 266 (1998); see also MCRA Info. Servs., 145 F. Supp.2d at 194; Goza, 114 T.C. at 176; Sego, 114 T.C. at 604.
To begin with, the court finds that PCT has received credit for each payment it has rendered to the IRS. The court bases this finding on the testimony of Kukla and the concession of the plaintiff at the June 5, 2003 hearing. Specifically, Kukla testified by declaration and at the evidentiary hearing that, after PCT claimed its tax account should be further credited, she took all steps that she would have taken, had the issue of the underlying tax liability been raised at the CDP hearing. She solicited cancelled checks from PCT and traced the funds to PCT's transcripts of account. Through this step, Kukla was able to account for nearly every payment. For monies she could not locate, Kukla requested help from other IRS divisions. After this step, PCT received some additional credits on its accounts. Given Kukla's efforts, the plaintiff concedes that it has received credit for all payments it has rendered to the IRS. As admitted by PCT, there are no other outstanding payments for which PCT is entitled to receive credit. Therefore, PCT no longer challenges the underlying amount of tax liability on the basis that it has not received credit for payments rendered.
Instead, PCT continues to challenge the outstanding tax liability on the basis that the IRS failed to apply the payments as requested by PCT. Specifically, PCT alleges that, if the IRS had applied its payments to the oldest, trust fund portions of the outstanding liability, PCT would now owe approximately $1.5 million, rather than approximately $2.5 million. Although admitting that a significant liability remains unpaid, PCT believes that such a discrepancy between the amounts believed by the opposing parties to be owing under the lien renders the current Notice of Federal Tax Lien unenforceable.
The court is not persuaded by PCT's argument for two reasons. First, there is no evidence that PCT requested, in writing, that its payments be applied to any specific liability. The only written request proffered by PCT is a letter drafted by Ms. Johnson in June 1995. This request was made three months before PCT filed bankruptcy and three months before PCT failed to object to the IRS's proof of claim. Without a written request, the IRS has no obligation to apply PCT's payments to any specific liability. Rev. Rul. 79-284, 1979-2 Cum. Bul. 83, 1979 WL 51935. Instead, the IRS may apply the payments to the portion of the outstanding liability most beneficial to the government. Id. Thus, without evidence of written requests to specifically apply the bankruptcy payments to the oldest, trust fund portions of PCT's outstanding liability, the IRS was under no obligation to do so, and PCT's argument that the IRS improperly applied its payments fails.
Second, contrary to PCT's argument, application of PCT's payments to the oldest, trust fund portions of the outstanding liability does not affect the total amount PCT owes to the IRS today. This is because employment taxes consist of three, distinct parts: (1) income tax that an employer is required to withhold and deduct from an employee's wages; (2) the employee's share of social security taxes, which the employer is also required to withhold and deduct; and (3) the employer's share of the social security taxes. 26 U.S.C. § 3101(a), 3102(a), 3111, 3402(a);see also Schultz v. United States, 19 Cl.Ct. 280, 283-84 (1990). The taxes withheld from each employee's wages constitute a special fund held in trust for the exclusive use of the United States. 26 U.S.C. § 7501. Under section 6672, people responsible for the failure to pay the trust fund liability are liable for a penalty equal to the amount of those taxes. Smith v. United States, 894 F.2d 1549, 1553 (11th Cir. 1990). The employer is not liable for a section 6672 penalty for failure to pay the employer's share of the social security liability, or the non-trust fund portion of the employment lax, and liability for a section 6672 penalty is separate and distinct from the corporation's liability for the underlying employment tax. United States v. Huckabee Auto Corp., 783 F.2d 1546, 1548-49 (11th Cir. 1986).
As discussed above, if a corporation makes a voluntary payment of an outstanding tax liability, the corporation may, in contemporaneous writing, designate that the payment be applied to the "trust fund portion of the liability." Rev. Rul. 79-284, 1979-2 C.B. 83 (stating that the revenue ruling applies only "where the taxpayer provides specific written instructions for application of a voluntary partial payment"); see also United States v. Energy Resources, Inc., 495 U.S. 545 (1990). If a corporation has a past due employment tax liability, it is advantageous for corporate officers to request that the payments be applied to the trust fund portion of the liability, because it reduces the amount of the section 6672 penalty that may be assessed against them. However, application of the payment to the trust fund portion of the delinquent liability has no effect on the outstanding corporate liability.
Moreover, there would be no difference in the outstanding liability, if the IRS had applied the payments to the oldest liabilities. As noted during oral argument at the June 5, 2003 hearing, this is because interest accrues on the total amount of an outstanding tax liability. A particular liability begins to accrue interest, together with any other outstanding liabilities, from the date a tax payment is due. 26 U.S.C. § 6601(a). The applicable interest rate on the entire outstanding liability changes and is compounded daily. Id. at §§ 6621, 6622. Hence, PCT's lump sum of delinquent liability accrues interest at an equal rate each day. Applying payments to later periods, instead of earlier ones, does nothing to reduce the overall liability. The lump sum owing is reduced by the same amount, whether payments are applied to earlier or later liabilities.
For these reasons, the court rejects PCT's argument that different application of its tax payments would alter the current amount outstanding. Even if PCT's payments had been applied to the oldest, trust fund liabilities, the amount of the lien would not change. Accordingly, the court must uphold the IRS's Notice of Federal Tax Lien.
III. Summary
Based on the testimony and evidence provided at the hearing held on June 5, 2003, the court finds that PCT's appeal of the IRS officer's decision to uphold the Notice of Federal Tax Lien is without merit. For the quarters at issue in this litigation, the IRS is entitled to a lien in the amount of $2,497,649.25. It is hereby ORDERED that judgment be entered in favor of the IRS. This case is DISMISSED.
IT IS SO ORDERED.