                  T.C. Summary Opinion 2005-59



                     UNITED STATES TAX COURT



          DAVID E. AND SUSANA V. JUDD, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 873-04S.                Filed May 18, 2005.



     Paul C. Allred, for petitioners.

     Marty J. Dama, for respondent.



     DEAN, Special Trial Judge:   This case was heard pursuant to

the provisions of sections 6330(d) and 7463 of the Internal

Revenue Code in effect at the time that the petition was filed.

Unless otherwise indicated, all section references are to the

Internal Revenue Code in effect for the year in issue.   The

decision to be entered is not reviewable by any other court, and

this opinion should not be cited as authority.
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     The petition in this case was filed in response to a Notice

of Determination Concerning Collection Action(s) Under Section

6320 and/or 6330 (notice of determination).   Pursuant to section

6330(d), petitioners seek review of respondent’s determination to

proceed with collection of their tax liability for 1996.

     After a concession,1 the issues for decision are:   (1)

Whether respondent impermissibly applied petitioners’ overpayment

for 1995 against their unpaid tax liability for 1985 rather than

for 1996; and (2) whether the Appeals officer abused her

discretion in sustaining a proposed levy to collect petitioners’

unpaid 1996 tax liability.

                             Background

     The stipulation of facts and the exhibits received into

evidence are incorporated herein by reference.   Petitioners

resided in Dallas, Texas, at the time the petition was filed.

     During 1995, petitioner David E. Judd was an attorney, and

petitioner Susana V. Judd did not work outside the home.

     Petitioners timely filed Form 4868, Application for

Automatic Extension of Time to File U.S. Individual Income Tax

Return, for 1985.   They then filed Form 2688, Application for

Additional Extension of Time To File U.S. Individual Income Tax

Return.   On October 22, 1986, petitioners jointly filed with the



     1
      Respondent concedes that petitioners’ estimated tax
payments for 1995 totaled $29,000.
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Internal Revenue Service (IRS) a Form 1040, U.S. Individual

Income Tax Return, for tax year 1985, showing a tax liability of

$12,428.61.   No payment was remitted with the return.

     During 1995 and in January 1996, petitioners made estimated

tax payments for tax year 1995 totaling $29,000.   Petitioners did

not timely file a Form 1040 for 1995.   On January 15, 1996,

respondent applied $7,879.24 from petitioners’ 1995 and January

1996 estimated tax payments to petitioners’ outstanding tax

liability for 1985.

     On October 15, 1996, petitioners filed a chapter 13

bankruptcy petition in the U.S. Bankruptcy Court for the Eastern

District of Texas (bankruptcy court).   Respondent filed proofs of

claim which included petitioners’ 1985 income tax liability as a

general unsecured claim.

     During the pendancy of their chapter 13 bankruptcy,

petitioners timely filed a joint Form 1040 for 1996, showing a

tax liability of $10,506.   A payment of $2,802 was remitted with

the return.

     On July 23, 1997, the bankruptcy court issued an Agreed

Order Allowing Claim of Internal Revenue Service, which allowed

respondent a general unsecured nonpriority claim of $148,734.40,

and a secured claim of $17,247 against petitioners.   On October

21, 1997, the bankruptcy court confirmed petitioners’ chapter 13

plan.
                                - 4 -

     On April 15, 1998, petitioners filed their joint Form 1040

for 1995 showing a total tax of $21,295.90 and an overpayment of

$7,704.10.   On the Form 1040, petitioners indicated that they

wanted the overpayment to be applied to their 1996 estimated

taxes.   On August 31, 1998, respondent assessed tax of $21,120.76

on petitioners’ 1995 return.

     Petitioners’ chapter 13 bankruptcy case was completed on

March 6, 2001, and a Notice of Plan Completion was filed on July

11, 2001.    On August 13, 2001, the bankruptcy court entered its

Order Discharging Debtor After Completion of Chapter 13 Plan.

     On October 27, 2002, respondent issued to petitioners a

Final Notice of Intent to Levy and Notice of Your Right to a

Hearing regarding collection of petitioners’ 1996 income tax

liability.   Petitioners timely filed a Form 12153, Request for a

Collection Due Process Hearing (hearing).

     During the hearing, petitioners asserted that their tax

liability for 1996 was paid in full through the application of

the overpayment from their 1995 return in addition to the payment

submitted with the 1996 return.   Appeals Officer Deborah Glover

(Ms. Glover) informed petitioners that the 1995 overpayment had

been applied to their 1985 tax liability.   Petitioners asserted

that since they had undergone a bankruptcy, they should not owe

anything.
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     Ms. Glover attempted to discuss collection alternatives with

petitioners, but they declined to provide any financial

information.    She informed petitioners that they were not

eligible for an installment agreement because they were not

current in their estimated tax payments or their filing

obligations.    Petitioners had not filed a tax return since 2002.

On December 17, 2003, respondent sent petitioners a notice of

determination sustaining the proposed levy to collect their 1996

income tax liability.

     Petitioners timely filed a petition in this Court in which

they alleged that “the Internal Revenue Service violated an order

of the U.S. Bankruptcy Court, Eastern District of Texas in the

manner and time of its allocation of funds in its possession for

payment to tax years covered in the bankruptcy.    In the

alternative, the Internal Revenue Service violated the intent of

the bankruptcy court’s orders.”

                              Discussion

1.   IRS’s Application of Petitioners’ 1995 Funds Against
Petitioners’ 1985 Tax Liability

     a.   Did the IRS Violate a Bankruptcy Order by Applying
     Petitioners’ 1995 Overpayment to Their 1985 Tax Liability?

     Petitioners allege that the IRS violated an order of the

bankruptcy court in the manner and time of its allocation of

funds in its possession for payment to tax years covered in the

bankruptcy.    The Certificates of Official Record for petitioners’
                              - 6 -

1995 and 1985 tax years reflect that the application of the funds

from petitioners’ 1995 account to their outstanding 1985 tax

liability occurred on January 15, 1996.   Petitioners did not file

their bankruptcy petition until October 15, 1996.   Therefore, the

Court concludes that there could not have been a violation of any

bankruptcy order prior to the filing of a bankruptcy petition.

     In any event, if the IRS has violated an order of the

bankruptcy court, it has not been definitively established that

the authority of this Court extends to such questions and, if so,

the appropriate remedy for such violation.2   Even if we had the

authority, this Court might still defer to the bankruptcy court

based on comity and judicial efficiency, as well as our

recognition that this Court does not deal with bankruptcy matters

and does not have the expertise that the bankruptcy court would.

Meadows v. Commissioner, 95 AFTR 2d 2005-1785, 2005-1 USTC par.

50274 (11th Cir. 2005) (citing Washington v. Commissioner, 120

T.C. 114, 125 (2003) (Wells, J., concurring)).



     2
      We note that actions against creditors for violations of
automatic stays are to be brought in the bankruptcy court. See
11 U.S.C. sec. 362(h) (2000); see also Meadows v. Commissioner,
95 AFTR 2d 2005-1785, 2005-1 USTC par. 50274 (11th Cir. 2005)
(citing Langlois v. United States, 155 Bankr. 818 (N.D.N.Y.
1993)) (sitting in bankruptcy jurisdiction and holding that the
IRS’s application of a collected amount to penalties that were to
be discharged in bankruptcy was a violation of the automatic
stay). Thus, it is clear that the bankruptcy court is more
knowledgeable than the Tax Court about the scope and effect of
the automatic stay and about appropriate remedies.
                                - 7 -

     b.     The Right of Setoff Under Section 6402(a)

     The IRS’s right to set off derives from section 6402(a),

which permits the IRS to set off any existing tax deficiencies

against any tax refunds due the taxpayer.    Section 6402(a)

provides:

     In the case of any overpayment, the Secretary, within the
     applicable period of limitations, may credit the amount of
     such overpayment, including any interest allowed thereon,
     against any liability in respect of an internal revenue tax
     on the part of the person who made the overpayment and
     shall, subject to subsections (c) and (d), refund any
     balance to such person.[3]

     Effectively, section 6402(a) provides that a party is

entitled to a tax refund only of the amount which exceeds any

outstanding tax liabilities.    In re Davis, 889 F.2d 658, 661 (5th

Cir. 1989); Kabbaby v. Richardson, 520 F.2d 334 (5th Cir. 1975);

United States v. Rochelle, 363 F.2d 225, 232-233 (5th Cir. 1966).

     Petitioners contend that respondent could not apply the

overpayment of their voluntary 1995 estimated taxes to their

outstanding 1985 tax liability because on their 1995 return

petitioners directed that the overpayment should be applied to

their 1996 estimated taxes.

     When a taxpayer makes voluntary payments to the IRS, he or

she has a right to direct the application of those payments to


     3
      Sec. 6402(a) was amended by the Internal Revenue Service
Restructuring and Reform Act of 1998, Pub. L. 105-206, sec.
3711(a), 112 Stat. 779, to include a reference to subsec. (e).
That amendment applies to refunds payable after Dec. 31, 1999,
and is not applicable to this case.
                               - 8 -

whatever type of liability he chooses.     Wood v. United States,

808 F.2d 411, 416 (5th Cir. 1987); Muntwyler v. United States,

703 F.2d 1030, 1032 (7th Cir. 1983); O’Dell v. United States, 326

F.2d 451, 456 (10th Cir. 1964).   Under the voluntary payment

rule, when a taxpayer who has outstanding tax liabilities

voluntarily makes a payment, the IRS usually will honor a

taxpayer’s request as to how to apply that payment.    In re Ryan,

64 F.3d 1516, 1522 (11th Cir. 1995).   However, the Treasury

regulations promulgated under section 6402(a) demonstrate that

the IRS does not apply the voluntary payment rule to

overpayments.

     The regulations do provide that a taxpayer can instruct the

IRS to credit his overpayment against the estimated tax for the

taxable year immediately succeeding the overpayment.    Sec.

301.6402-3(a)(5), Proced. & Admin. Regs.    However, the

regulations mirror the statute and authorize the IRS to override

that election and apply the overpayment against “any outstanding

liability for any tax”.   Sec. 301.6402-3(a)(6)(i), Proced. &

Admin. Regs.; see N. States Power Co. v. United States, 73 F.3d

764, 767 (8th Cir. 1996) (citing In re Ryan, supra at 1523

(“[Section 6402], plainly gives the IRS the discretion to apply

overpayments to any tax liability”)); Pettibone Corp. v. United

States, 34 F.3d 536, 538 (7th Cir. 1994) (section 6402(a) “leaves

to the Commissioner’s discretion whether to apply overpayments to
                               - 9 -

delinquencies or to refund them to the taxpayer”); Kalb v. United

States, 505 F.2d 506, 509 (2d Cir. 1974) (rejecting the argument

that because tax overpayment was voluntary, IRS was bound to

comply with the taxpayer’s direction about how to apply that

payment; section 6402(a) “clearly gives the IRS discretion to

apply a refund to ‘any liability’ of the taxpayer”).

     Clearly, petitioners’ right to designate payments does not

extend to overpayments.   Respondent’s application of petitioners’

1995 overpayment to their 1985 liability falls within his

authority to credit overpayments to any liability for any tax

year and was, therefore, proper.

2.   Whether the Appeals Officer Abused Her Discretion in
Sustaining the Proposed Levy

     Section 6330(c) prescribes the matters that a person may

raise at an Appeals Office hearing.    Section 6330(c)(2)(A)

provides that a person may raise collection issues such as

spousal defenses, the appropriateness of the Commissioner’s

intended collection action, and possible alternative means of

collection.   See Sego v. Commissioner, 114 T.C. 604, 609 (2000);

Goza v. Commissioner, 114 T.C. 176, 180 (2000).

     The taxpayer may raise challenges “to the existence or

amount of the underlying tax liability”, however, only if he “did

not receive any statutory notice of deficiency for such tax

liability or did not otherwise have an opportunity to dispute

such tax liability.”   Sec. 6330(c)(2)(B).   Pursuant to section
                                - 10 -

6330(c)(2)(B), petitioners were entitled to challenge the

existence or amount of the underlying tax liabilities for 1996 at

their Appeals Office hearing.    If the validity of those

underlying tax liabilities is properly at issue, the Court

reviews the matter de novo.     Poindexter v. Commissioner, 122 T.C.

280, 284 (2004); Sego v. Commissioner, supra at 610.

     Petitioners did not address their 1996 tax liability in the

hearing or at trial and have failed to aver or prove facts

sufficient to show error in the assessments.    Where, as is the

case here, the validity of the underlying tax liability is not

properly placed at issue, the Court will review the

administrative determination of the Appeals Office for abuse of

discretion.   Sego v. Commissioner, supra at 610; Goza v.

Commissioner, supra at 181-183.    The Court reviews only whether

the Appeals officer’s decision to sustain the proposed levy was

arbitrary, capricious, or without sound basis in fact or law.

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

     During the hearing, petitioners did not challenge the amount

of their underlying 1996 tax liability.    They were ineligible for

an installment agreement because they were not current in their

tax obligations and estimated tax payments.    Petitioners declined

to give Ms. Glover any financial information with which she could

determine the appropriateness of any other collection

alternatives.
                                - 11 -

     Petitioners have failed to present grounds on which this

Court could find that the Appeals officer abused her discretion

in sustaining the proposed levy.    Accordingly, collection by levy

of petitioners’ unpaid 1996 tax liability reflected in the notice

of determination may proceed.

     Reviewed and adopted as the report of the Small Tax Case

Division.

                                          Decision will be

                                     entered for respondent.
