                                T.C. Memo. 2017-43



                          UNITED STATES TAX COURT



               MICHAEL HOWARD DALTON, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 11987-13L.                          Filed March 13, 2017.



      Michael Howard Dalton, pro se.

      Jeremy D. Cameron, for respondent.



            MEMORANDUM FINDINGS OF FACT AND OPINION


      VASQUEZ, Judge: This case arises from a petition for review filed in

response to a Notice of Determination Concerning Collection Action(s) Under

Section 6320 and/or 6330 (notice of determination) in which respondent sustained

a notice of intent to levy with respect to petitioner’s Federal income tax liabilities
                                        -2-

[*2] for the 2006 and 2008 tax years.1 Petitioner is challenging respondent’s

determination for the 2008 tax year only. The issues for decision are: (1) whether

petitioner had passthrough income of $451,531 from his 50% shareholder interest

in an S corporation; and (2) whether respondent abused his discretion in sustaining

the levy notice.

                               FINDINGS OF FACT

      Some of the facts have been stipulated and are so found. The stipulation of

facts and the attached exhibits are incorporated by this reference. Petitioner

resided in Florida when he timely filed his petition.

      In 1994 petitioner and his brother, John E. Dalton, organized Resort

Builders, Inc. (Resort Builders), a construction company. Petitioner and John

were each 50% shareholders of Resort Builders, which elected to be treated as an

S corporation for Federal tax purposes. John served as Resort Builders’ president,

and from 1994 to 2007, petitioner served as its vice president.

      In 2007 petitioner told John that he wanted to resign from Resort Builders

and turn in his stock. Consequently, relations between the brothers became

acrimonious. John changed the locks to the corporation’s offices and withheld

      1
         All section references are to the Internal Revenue Code in effect at all
relevant times, and all Rule references are to the Tax Court Rules of Practice and
Procedure.
                                         -3-

[*3] Resort Builders’ books and records from petitioner. In 2008 petitioner filed a

lawsuit against John and Resort Builders in Florida State court seeking, among

other relief, dissolution of the corporation and an accounting.

      After participating in mediation, the brothers agreed to settle the lawsuit. In

a written “Mediation Settlement Agreement” (mediation agreement), petitioner

agreed to transfer his Resort Builders shares to John. The mediation agreement

also provided that “[s]uch transfer shall be effective no earlier than January 1,

2008, and no later than July 24, 2008, as determined by Defendants [John and

Katherine L. Dalton] in their sole discretion.” In accordance with this agreement,

petitioner transferred his shares to John.2

      Resort Builders subsequently filed a final Form 1120S, U.S. Income Tax

Return for an S Corporation, for its short taxable year beginning January 1, 2008,

and ending July 24, 2008. Resort Builders reported $903,063 of ordinary income

and indicated that it was using the completed contract method of accounting.

Resort Builders issued a Schedule K-1, Shareholder’s Share of Income,




      2
        The administrative record contains an unsigned copy of the mediation
agreement. At trial petitioner identified this document as the agreement he had
reached with John. We credit petitioner’s testimony and find that he transferred
his Resort Builders stock to John pursuant to the terms of the mediation
agreement.
                                        -4-

[*4] Deductions, Credits, etc., to petitioner (Resort Builders K-1).3 The Resort

Builders K-1 reported petitioner’s share of ordinary business income as $451,531.

The accounting firm of Carr, Riggs & Ingram, LLC (Carr, Riggs & Ingram),

prepared the final corporate return and the Resort Builders K-1.

      In October 2010 petitioner and his wife, Anna Dalton, filed a Form 1040,

U.S. Individual Income Tax Return, for the 2008 tax year. Petitioner and Mrs.

Dalton’s Form 1040, which was also prepared by Carr, Riggs & Ingram, included

a Schedule E, Supplemental Income and Loss, reporting $451,531 of passthrough

income from Resort Builders. On line 17 of the Form 1040 petitioner reported

Schedule E income of $323,777.4 Several lines below line 17, petitioner wrote:

“(LINE 17 IS INCORRECT * * * WILL FILE AMENDED RETURN)”.

Nevertheless, petitioner and Mrs. Dalton signed page 2 of the Form 1040, thereby

certifying: “Under penalties of perjury, I declare that I have examined this return

and accompanying schedules and statements, and to the best of my knowledge and




      3
         We infer from Resort Builders’ short taxable year ending July 24, 2008,
that pursuant to the mediation agreement, John determined the effective date of
petitioner’s stock transfer to be July 24, 2008.
      4
        This number reflects $451,531 of passthrough income from Resort
Builders less $127,754 of carryover losses and losses from other business
ventures.
                                         -5-

[*5] belief, they are true, correct, and complete.” Petitioner never filed an

amended return.

      On February 21, 2011, the Internal Revenue Service (IRS) assessed the tax

shown on petitioner’s Form 1040, along with section 6651(a)(1) and (2) additions

to tax. On January 3, 2012, the IRS issued petitioner a Letter 1058, Final Notice

of Intent to Levy and Notice of Your Right to a Hearing, for the 2006 and 2008 tax

years. Petitioner timely filed a Form 12153, Request for a Collection Due Process

or Equivalent Hearing. On the Form 12153 petitioner wrote: “2008 TAX

CALCULATED INCORRECTLY. ACCOUNTANT USED CREDIT LINE

TRANSACTION AS INCOME”. Petitioner did not check any of the boxes

denoting a request for a collection alternative.

      Petitioner’s case was assigned to Settlement Officer (SO) Sean Franklin in

the IRS Appeals Office (Appeals). After discussing the case with his manager, SO

Franklin concluded that it would be better handled by an Appeals field office.

Accordingly, petitioner’s case was reassigned to SO Joe Breazeale.

      On April 25, 2012, SO Breazeale issued a letter to petitioner and his

authorized representative. In the letter SO Breazeale asked petitioner or his

authorized representative to contact him and enumerated collection alternatives

petitioner could request. On June 19, 2012, SO Breazeale conducted a telephone
                                         -6-

[*6] hearing with petitioner. During the hearing petitioner stated that the income

reported on the Resort Builders K-1 was incorrect. He did not request a collection

alternative. After the hearing SO Breazeale consulted his supervisor about the

correct way to address petitioner’s underlying liability challenge. In a followup

call, he instructed petitioner to file an offer-in-compromise on the basis of doubt

as to liability (OIC-DATL).

      Petitioner promptly sent SO Breazeale a completed Form 656-L, Offer in

Compromise (Doubt as to Liability), in which he offered to pay $10,000 to settle

his 2008 tax liability. Petitioner also submitted a cover letter, a copy of the State

court complaint that he had filed against John and Resort Builders, bank

statements for the period January 2007 through April 2008, a “check register”

report for the period January through June 2008, and Resort Builders’ income tax

returns for 2006, 2007, and its short taxable year ending July 24, 2008. SO

Breazeale subsequently transferred petitioner’s OIC-DATL to Appeals Officer

(AO) Joseph P. Taranto. After reviewing petitioner’s submission and speaking

with petitioner by phone, AO Taranto recommended rejecting the OIC-DATL. He

returned the case to SO Breazeale.

      On March 25, 2013, SO Breazeale called petitioner and, in a voice message,

told petitioner that Appeals had rejected the OIC-DATL and reiterated his
                                         -7-

[*7] willingness to consider other collection alternatives. On April 3, 2013,

petitioner attempted to return the telephone call, but SO Breazeale was

unavailable. Later that day SO Breazeale returned petitioner’s phone call and left

petitioner another voice message. Petitioner did not return SO Breazeale’s

telephone call. On April 23, 2013, Appeals issued a notice of determination

sustaining the levy notice.

                                      OPINION

I.    Jurisdiction and Standard of Review

      Section 6331(a) authorizes the Secretary to levy upon property and property

rights of a taxpayer liable for tax if the taxpayer fails to pay the tax within 10 days

after notice and demand for payment is made. Section 6330(a) provides that no

levy may be made on any property or right to property of any person unless the

Secretary has notified such person in writing of the right to a hearing before the

levy is made.

      If a taxpayer requests a hearing in response to a levy notice pursuant to

section 6330, a hearing shall be held before an impartial officer or employee of

Appeals. Sec. 6330(b)(1), (3). At the hearing the taxpayer may raise any relevant

issue, including appropriate spousal defenses, challenges to the appropriateness of

the collection action, and collection alternatives. Sec. 6330(c)(2)(A). A taxpayer
                                         -8-

[*8] is precluded from contesting the existence or amount of the underlying tax

liability unless the taxpayer did not receive a notice of deficiency for the liability

in question or did not otherwise have an earlier opportunity to dispute the liability.

Sec. 6330(c)(2)(B); see also Sego v. Commissioner, 114 T.C. 604, 609 (2000).

      Following a hearing Appeals must determine whether proceeding with the

proposed levy action is appropriate. In making that determination Appeals is

required to take into consideration: (1) verification presented by the Secretary

during the hearing process that the requirements of applicable law and

administrative procedure have been met, (2) relevant issues raised by the taxpayer,

and (3) whether the proposed levy action appropriately balances the need for

efficient collection of taxes with the taxpayer’s concerns regarding the

intrusiveness of the proposed collection action. Sec. 6330(c)(3).

      Section 6330(d)(1) grants this Court jurisdiction to review the determination

made by Appeals in connection with the section 6330 hearing. Where the validity

of the underlying tax liability is properly at issue, we review the taxpayer’s

liability de novo. See Sego v. Commissioner, 114 T.C. at 610; Goza v.

Commissioner, 114 T.C. 176, 182 (2000). We review all other determinations for

abuse of discretion. Sego v. Commissioner, 114 T.C. at 610; Goza v.

Commissioner, 114 T.C. at 182.
                                         -9-

[*9] The parties agree that petitioner did not receive a notice of deficiency or

otherwise have an opportunity to dispute his underlying tax liability for 2008.

Therefore the underlying tax liability for 2008 is properly at issue, see

Montgomery v. Commissioner, 122 T.C. 1, 9-10 (2004), and we review it de novo.

Petitioner bears the burden of proving that the underlying tax liability is incorrect.

See Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).

II.   Underlying Liability

      Petitioner argues that he should not have to report the income shown on the

final corporate return and the Resort Builders K-1 because he did not receive a

distribution and was not otherwise enriched by Resort Builders in 2008.

Respondent counters that petitioner failed to establish that the final corporate

return and the Resort Builders K-1 were inaccurate. For the reasons stated below,

we agree with respondent.

      An S corporation is not subject to Federal income tax at the entity level.

Sec. 1363(a); see also Taproot Admin. Servs., Inc. v. Commissioner, 133 T.C. 202,

204 (2009), aff’d, 679 F.3d 1109 (9th Cir. 2012). Instead, an S corporation’s

items of income, gain, loss, deduction, and credit--whether or not distributed--flow

through to the shareholders, who must report their pro rata shares of such items on

their individual income tax returns for the shareholder taxable year within which
                                        - 10 -

[*10] the S corporation’s taxable year ends. Sec. 1366(a); Mourad v.

Commissioner, 121 T.C. 1, 3 (2003), aff’d, 387 F.3d 27 (1st Cir. 2004); see, e.g.,

Dunne v. Commissioner, T.C. Memo. 2008-63; sec. 1.1366-1(a), Income Tax

Regs.

        Petitioner was a 50% shareholder of Resort Builders until July 24, 2008, the

last day of Resort Builders’ short taxable year. Accordingly, 50% of Resort

Builders’ income for its short taxable year ending July 24, 2008, flowed through to

petitioner. Petitioner was required to report this income on his 2008 Form 1040

even if he did not receive a distribution that year. See sec. 1.1366-1(a), Income

Tax Regs.

        While petitioner contends that Resort Builders earned less income than it

reported on its final corporate return, the record does not support this factual

position. At trial petitioner could not explain why the final corporate return and

the Resort Builders K-1 were incorrect without resorting to speculation, and he did

not call any witnesses. While petitioner submitted a “check register” report and

statements for a BankTrust account owned by Resort Builders for the period

January 2007 through December 2008, the deposits shown therein do not

necessarily reflect Resort Builders’ income for the short taxable year ending July

24, 2008. For example, petitioner failed to establish that the BankTrust account
                                         - 11 -

[*11] was Resort Builders’ only bank account. Furthermore, Resort Builders used

the completed contract method of accounting, under which taxpayers report as

income the gross contract price, less all allocable contract costs, for the taxable

year in which a contract is completed. See sec. 1.460-4(d), Income Tax Regs. For

contracts completed in 2008, Resort Builders could have received a payment in a

prior year that was reportable as income for 2008. We therefore sustain

respondent’s determination with respect to petitioner’s underlying tax liability.

III.   Abuse of Discretion

       We now turn to respondent’s determination to proceed with collection,

which we review under an abuse of discretion standard. Appeals abuses its

discretion if it acts “arbitrarily, capriciously, or without sound basis in fact or

law.” Woodral v. Commissioner, 112 T.C. 19, 23 (1999).

       Petitioner has not advanced any argument that SO Breazeale’s actions were

an abuse of discretion. Additionally, petitioner did not offer any collection

alternative during the course of the hearing. Furthermore, SO Breazeale

determined that the requirements of applicable law and administrative procedure

were met and concluded that sustaining the levy notice appropriately balanced the

need for efficient collection of taxes with petitioner’s concerns regarding the
                                        - 12 -

[*12] intrusiveness of the levy action. Accordingly, we hold that respondent did

not abuse his discretion in sustaining the levy notice.

      In reaching our holding, we have considered all arguments made, and to the

extent not mentioned, we consider them irrelevant, moot, or without merit.

      To reflect the foregoing,


                                                 Decision will be entered for

                                       respondent.
