                        T.C. Memo. 2009-64



                      UNITED STATES TAX COURT



                SANTINI STONE, LLC, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 126-07L.               Filed March 25, 2009.



     Thomas H. Curran, for petitioner.

     Daniel P. Ryan, for respondent.



                        MEMORANDUM OPINION


     WELLS, Judge:   Respondent’s Appeals Office determined that a

lien and proposed levy should be sustained against petitioner,

which, pursuant to section 6330,1 timely filed a petition for



     1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code, as amended, and all Rule references
are to the Tax Court Rules of Practice and Procedure.
                                 - 2 -

review of the determination.    We review the determination for

abuse of discretion.

                             Background

     The parties submitted this case fully stipulated, without

trial, pursuant to Rule 122.    The stipulated facts and

accompanying exhibits are incorporated herein by reference and

are found as facts.    At the time the petition was filed,

petitioner’s business was in Massachusetts.

     On January 17, 2003, petitioner filed a voluntary petition

with the U.S. Bankruptcy Court for the District of Massachusetts

(bankruptcy court) under chapter 11 of the Bankruptcy Code, 11

U.S.C. ch. 11, Reorganization.    At the time, petitioner had

outstanding employment tax liabilities, interest, and penalties

for taxable years 1998 through 2002.2     On March 31, 2003,

respondent filed a claim against petitioner (called a “proof of

claim” in bankruptcy parlance) with the bankruptcy court for

$458,532, which included secured claims of $26,000, unsecured

priority claims of $278,399, and general unsecured claims of

$154,133.   Petitioner subsequently filed the first amended plan

of reorganization (plan), which included, without objection from

petitioner, all of respondent’s aforementioned claims.     On




     2
      Petitioner filed partnership returns (Forms 1065) for all
years at issue.
                              - 3 -

December 18, 2003, the plan was confirmed by order of the

bankruptcy court.

     Under the plan, petitioner was to pay respondent $490.77 per

month for 60 months on the secured claims and $7,086.41 per month

for 44 months on the unsecured priority claims.3    The plan

further provided that installments paid on the unsecured priority

claims were to “first be applied to any ‘trust fund’ portion of

such tax,4 then to any ‘non trust fund’ portion of said tax, and

then to any outstanding interest, in that order.”    As to the

general unsecured claims, petitioner was required to pay a single

lump-sum dividend equal to 8 percent of respondent’s listed

claims of $154,133, or $12,330.64.5

     On February 10, 2004, petitioner tendered a check in the

full amount owed on the general unsecured claims.    Petitioner’s

     3
      The plan entitles respondent to collect interest on his
secured and priority claims at a rate determined under sec. 6621.
Petitioner, in calculating the installment payments due under the
plan, estimated interest at a rate of 5 percent.
     4
      As an employer, petitioner was required to withhold from
its employees’ paychecks the employees’ personal income taxes and
Social Security taxes. See secs. 3102(a), 3402(a). Because
Federal law requires employers to hold these funds in “trust for
the United States”, sec. 7501(a), these taxes are commonly
referred to as “trust fund” taxes, Slodov v. United States, 436
U.S. 238, 242-243 (1978).
     5
      The general unsecured claims represent penalties assessed
on respondent’s unsecured priority claims for taxable years 1998
through 2002, with the exception of a sec. 6721 penalty assessed
in taxable year 1998, included in respondent’s proof of claim as
an unsecured priority claim. Notably, respondent claimed zero
for the sec. 6721 penalty in his proof of claim.
                                - 4 -

$12,330.64 check, however, was dishonored that same day.    Over

the following 7 months, an additional five checks totaling

$19,366.78 were dishonored as well.6    Petitioner’s delinquency

prompted respondent to issue a default notice to petitioner.

     On January 24, 2006, respondent sent petitioner a Notice of

Federal Tax Lien Filing and Your Right to a Hearing Under Section

6320 (lien notice), informing petitioner that respondent had

filed notices of Federal tax lien for tax periods ending

September 30, 1998, June 30, 1999, September 30, 1999, March 31,

2000, and September 30, 2000, through December 31, 2002, and for

a civil penalty assessed under section 6721 for taxable year

1998.    The liabilities for the quarterly tax periods, as well as

the civil penalty, were listed in the plan as unsecured priority

claims.

     On January 25, 2006, respondent sent petitioner a Final

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

(levy notice), covering tax periods ending September 30, 1998,

and June 30, 2001, through December 31, 2002, advising petitioner

that respondent intended to levy to collect the unpaid employment

tax assessments set forth in the levy notice.    These tax periods

were also listed in the plan as unsecured priority claims.



     6
      From Feb. 10, 2004, through Feb. 18, 2005, respondent
received a total of $75,059.81 in checks from petitioner. Checks
worth only $43,362.39 were honored.
                               - 5 -

     On February 13, 2006, petitioner requested a collection due

process hearing (hearing) for both the lien and levy notices.7

Respondent’s Appeals Office assigned the case to Settlement

Officer Lisa S. Boudreau (Settlement Officer Boudreau), an

impartial officer with no previous involvement with the unpaid

taxes.   On July 26, 2006, Settlement Officer Boudreau held a

face-to-face hearing with petitioner’s representative, Thomas

Curran (Mr. Curran).

     At the hearing Mr. Curran made the following contentions:

(1) Respondent had not abated all Form 941, Employer’s Quarterly

Federal Tax Return, penalties as required under the plan; (2) the

section 6721 civil penalty for taxable year 1998 was discharged

in the bankruptcy case; (3) respondent was not properly

designating plan payments; (4) the February 10, 2004, check was

not dishonored; and (5) respondent was not charging the

appropriate interest rate on petitioner’s outstanding liability

pursuant to the plan.8

     On November 30, 2006, Settlement Officer Boudreau issued

Notices of Determination Concerning Collection Action(s) Under

     7
      In accordance with sec. 6320(b)(4), the lien hearing was
held in conjunction with the levy hearing.
     8
      In its brief petitioner did not address whether the amount
of interest being charged petitioner on its outstanding liability
is commensurate with the express terms of the plan. Accordingly,
we consider this issue to have been waived or conceded. See
Estate of Atkinson v. Commissioner, 115 T.C. 26, 35 (2000), affd.
309 F.3d 1290 (11th Cir. 2002).
                                 - 6 -

Section 6320 and/or 6330 sustaining the lien filing and the

proposed levy.     In reaching her decision Settlement Officer

Boudreau concluded that all Form 941 penalties had been abated

and that the section 6721 civil penalty had not been discharged.

Settlement Officer Boudreau further concluded that respondent

was, in most cases, designating payments received as required

under the plan.9    She also found that petitioner had not met its

burden in proving that the February 10, 2004, check was not

dishonored.   As to the interest charged on petitioner’s

outstanding liability, Settlement Officer Boudreau determined

that the plan expressly provided for interest to be calculated

“based on the rate established from time to time by the Secretary

of the Treasury” as provided in section 6621.10

     On January 3, 2007, petitioner timely filed a petition with

the Court.




     9
      Settlement Officer Boudreau intimated that compliance “will
review the payments and correct any that were not properly
designated.”
     10
      At the hearing petitioner proposed a short-term
installment agreement as a collection alternative. Respondent
did not, however, consider petitioner’s request, given
petitioner’s failure to provide financial information and to
remain current with its income and employment tax return filing
and payment obligations. See McCorkle v. Commissioner, T.C.
Memo. 2003-34 (refusal of an installment agreement not an abuse
of discretion when taxpayer fails to provide financial
information and is not current with estimated tax payments).
                               - 7 -

                            Discussion

     Sections 6320 (lien notice) and 6330 (levy notice) entitle a

person to notice and the opportunity for a hearing when the

Commissioner files a lien or proposes to levy in furtherance of

the collection from the taxpayer of unpaid Federal taxes.      At the

required hearing the Appeals officer conducting the hearing must

verify that the requirements of any applicable law or

administrative procedure have been met.     Sec. 6330(c)(1).   The

taxpayer may raise any relevant issue relating to the unpaid tax,

the filing of the lien, or the proposed levy, including spousal

defenses, challenges to the appropriateness of the collection

action, and collection alternatives.     Sec. 6330(c)(2)(A).   The

taxpayer may also 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.”

Sec. 6330(c)(2)(B).   Following the hearing, the Appeals officer

must determine whether the collection action is to proceed,

taking into account the verification the Appeals officer has

made, the issues the taxpayer raised, and “whether any proposed

collection action balances the need for the efficient collection

of taxes with the legitimate concern of the * * * [taxpayer] that

any collection action be no more intrusive than necessary.”      Sec.

6330(c)(3).
                               - 8 -

     Where the validity of the underlying tax liability is

properly in issue, the Court will review the matter de novo.

Respondent argues, and the Court agrees, that section

6330(c)(2)(B) precludes petitioner from challenging the

underlying tax liabilities because respondent’s submission of his

proof of claim in the bankruptcy case afforded petitioner the

opportunity to contest respondent’s claims.    See Kendricks v.

Commissioner, 124 T.C. 69 (2005).     Consequently, the validity of

the underlying tax is not properly in issue and the Court will

review Settlement Officer Boudreau’s determination for abuse of

discretion.   See Sego v. Commissioner, 114 T.C. 604, 610 (2000);

Goza v. Commissioner, 114 T.C. 176, 181-182 (2000).     The abuse of

discretion standard requires the Court to decide whether the

Appeals officer’s determination was arbitrary, capricious, or

without sound basis in fact or law.     Middleton v. Commissioner,

T.C. Memo. 2007-120.

     Petitioner asserts that Settlement Officer Boudreau abused

her discretion in sustaining the lien filing and proposed levy.

Specifically, petitioner maintains that Settlement Officer

Boudreau erroneously determined the following:    (1) The plan

entitled respondent to collect $27,948.89 for the section 6721

civil penalty assessed in taxable year 1998; (2) petitioner had

the burden of proving the February 10, 2004, payment was not

dishonored; (3) petitioner’s payments under the plan were
                               - 9 -

properly credited to trust fund taxes; and (4) respondent had

abated all preconfirmation penalties.

A.   Whether Settlement Officer Boudreau Abused Her Discretion in
     Determining That the Plan Entitled Respondent To Collect
     $27,948.89 for the Section 6721 Civil Penalty

      Petitioner claims the section 6721 penalty assessed for

taxable year 1998 was discharged in the bankruptcy case as a

general unsecured claim.   Respondent contends that the penalty

was listed as an unsecured priority claim in the plan, entitling

respondent to collect the $27,948.89 penalty upon default.

      The parties agree that a confirmed chapter 11 plan will bind

the debtor and all creditors to the terms of a confirmed plan.

11 U.S.C. sec. 1141(a) (2006); In re Space Building Corp., 206

Bankr. 269 (D. Mass. 1996); In re Penrod, 169 Bankr. 910 (Bankr.

N.D. Ind. 1994) (the plan is essentially a new and binding

contract between debtor and creditor) affd. 50 F.3d 459 (7th Cir.

1995); In re Stratton Group, Ltd., 12 Bankr. 471, 474 (Bankr.

S.D.N.Y. 1981) (the appropriate remedy on default of a bankruptcy

plan is enforcement of the plan promises).   Upon the taxpayer’s

default the Internal Revenue Service may enforce payments due

under a bankruptcy plan through its own administrative processes.

In re Jankins, 184 Bankr. 488 (Bankr. E.D. Va. 1995).

      Respondent’s proof of claim, incorporated within the plan

without objection from petitioner, lists the section 6721 penalty

as an unsecured priority claim.   Respondent was therefore well
                                - 10 -

within his rights to proceed with collection of the discharged

tax liability.    However, respondent’s remedy is limited to the

obligations contained in the plan.       In re Depew, 115 Bankr. 965

(Bankr. N.D. Ind. 1989).    Respondent assigned a value for the

penalty at zero in the columns marked “Tax Due” and “Interest to

Petition Date.”    Moreover, the total amount included for

respondent’s unsecured priority claims does not account for the

penalty.     Consequently, respondent is not entitled to collect the

civil penalty.    Settlement Officer Boudreau abused her discretion

in determining to proceed with collection of the section 6721

penalty.11


     11
      At the hearing Settlement Officer Boudreau erroneously
concluded that because the penalty maintained its character as a
tax following confirmation, In re Official Comm. of Unsecured
Creditors of White Farm Equip. Co., 943 F.2d 752 (7th Cir. 1991),
respondent could revive the original, preconfirmation debt upon
petitioner’s default. Respondent’s reliance on White Farm is
misplaced.
     In White Farm, a debtor filed successive ch. 11 cases, the
second for the purpose of liquidation after the confirmed plan in
the first ch. 11 case could not be fulfilled. Despite the
intervening confirmed plan the U.S. Court of Appeals for the
Seventh Circuit found that a priority claim of the Commissioner
for trust fund taxes retained its priority status in the second
ch. 11 proceeding. In other words, the Court of Appeals
recognized that tax characteristics survive confirmation and
discharge.
     White Farm does not operate, as Settlement Officer Boudreau
would have it, to permit respondent to collect $27,948.89 more
than respondent was entitled to under the plan. The creditor in
White Farm sought priority in the second ch. 11 case for trust
fund taxes that remained due under the first ch. 11 plan. The
status of the tax claim did not entitle the creditor in White
Farm, as respondent appears to argue here, to reinstate debt
discharged under the first ch. 11 plan.
                               - 11 -

B.   Whether Settlement Officer Boudreau Abused Her Discretion in
     Determining That Petitioner Had the Burden of Proving the
     February 10, 2004, Payment Was Not Dishonored

      Petitioner argues that the February 10, 2004, check for

$12,330.64 was not dishonored.    Respondent claims the check was

dishonored and that petitioner has failed to meet its burden to

prove otherwise.   We agree with respondent.

      Petitioner has the burden of proving that the check was not

dishonored.   See Hardie v. Commissioner, T.C. Memo. 2007-335.

Respondent’s Form 4340, Certificate of Assessments, Payments, and

Other Specified Matters, shows a dishonored check of $12,330.64,

and petitioner has submitted no evidence to contradict the

inference to be drawn from that entry that the check was returned

for insufficent funds.    Petitioner had ample opportunity to

produce a copy of the canceled check and failed to do so.

Consequently, petitioner failed to meet its burden.    Settlement

Officer Boudreau’s determination on this issue was appropriate.

C.   Whether Settlement Officer Boudreau Abused Her Discretion in
     Determining That Plan Payments Were Properly Allocated
     Towards Trust Fund Payments and That Respondent Had Abated
     All Preconfirmation Penalties

      Petitioner maintains that the plan payments were not

properly credited to trust fund taxes as required under the plan.

Respondent admits that the improper application of the payments

has not been corrected.    Indeed, respondent concedes on brief

that he is currently in the process of ensuring that two payments

labeled “Undesignated Bankruptcy” of $859.41 and $3,264.48 are
                             - 12 -

properly applied to the trust fund portion of petitioner’s

liabilities.

     Petitioner also maintains that Settlement Officer Boudreau

abused her discretion in determining that respondent had abated

all penalties assessed before the confirmation of the plan.

Respondent further concedes on brief, and respondent’s Form 4340

reveals, that all penalties assessed before the confirmation of

the plan have not been abated.   In particular, penalties for tax

periods ending September 30, 2001, and December 31, 2002, remain.

     As to the foregoing concessions, we will remand this case to

provide respondent the opportunity to correct these erroneous

items and to comply with the terms of the plan and this opinion.

     Petitioner’s request for attorney’s fees and costs will be

denied because the request is premature.    See Rule 231(a)(2).

     We have considered all of the parties’ contentions and

arguments that are not discussed herein, and we find them to be

without merit, unnecessary to reach, irrelevant, or moot.

     To reflect the foregoing,


                                           An appropriate order will

                                    be issued.
