                                  145 T.C. No. 6



                        UNITED STATES TAX COURT



                FREDRIC A. GARDNER, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent

                ELIZABETH A. GARDNER, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket Nos. 14877-13L, 2940-14L.1            Filed August 26, 2015.



             Ps, husband and wife, marketed and promoted a plan involving
      the use of entities known as corporations sole. The Internal Revenue
      Service (IRS) determined this plan to be an abusive tax shelter.
      Agreeing with the IRS, the U.S. District Court for the District of
      Arizona (District Court) found that Ps (1) sold more than 300 of these
      plans and (2) engaged in conduct that violated the provisions of
      I.R.C. sec. 6700 in that they made false/fraudulent statements as to
      the availability of tax benefits that could be derived therefrom. The
      District Court enjoined Ps from further promoting this plan and
      ordered Ps to provide the IRS with a list identifying all purchasers
      thereof. Subsequently, the IRS assessed a $47,000 penalty pursuant


      1
      These cases were consolidated for trial, briefing, and opinion by order of
the Court dated February 3, 2015.
                                  -2-

to I.R.C. sec. 6700 against each P for 2003 although the activities
which the IRS determined to be in violation of I.R.C. sec. 6700
occurred in 2002, 2003, and 2004.

       After Ps failed to pay the assessed penalties, the IRS
commenced collection actions (lien and proposed levy actions). Ps
challenged the appropriateness of these collection actions before
different IRS settlement officers. Each settlement officer refused to
discuss the existence/amount of the underlying I.R.C. sec. 6700
penalty.

       Each IRS settlement officer sustained the lien and proposed
levy action. Thereafter, Ps each sought judicial review of the
settlement officer’s determination pursuant to I.R.C. sec. 6330(d)(1).

      Held: Pursuant to R’s concession, Ps may contest in this Court
the existence/amount of the underlying I.R.C. sec. 6700 penalties.

       Held, further, on the basis of the findings of the District Court,
Ps are collaterally estopped from disputing that they engaged in
activities in violation of the provisions of I.R.C. sec. 6700. R
established at trial that Ps sold the corporation sole plan to no fewer
than 47 individuals. Thus, R established that Ps were liable for the
underlying I.R.C. sec. 6700 penalties.

      Held, further, the I.R.C. sec. 6700 penalty is imposed on the
promoter of the plan/arrangement and is based on the promoter’s
actions, not the purchaser’s actions. The I.R.C. sec. 6700 penalty is
applicable even if the purchaser does not rely on the plan/arrangement
or does not underreport his/her Federal income tax.

       Held, further, I.R.C. sec. 6700 penalties are not assessed for
discrete taxable years but rather for conduct and transactions that may
occur over one or more taxable years. R’s designation of 2003 as the
tax period of imposition was for cogent administrative reasons and
did not prejudice Ps. Ps were afforded in this Court a meaningful and
                                        -3-

      full opportunity to contest the amounts of the assessed I.R.C. sec.
      6700 penalties.

             Held, further, the IRS settlement officers did not abuse their
      discretion in sustaining the IRS lien and proposed levy actions.



      Fredric A. Gardner and Elizabeth A. Gardner, pro sese.

      Doreen Marie Susi, Derek S. Pratt, J. Rob Gordon, and Rachael J. Zepeda,

for respondent.



      JACOBS, Judge: Fredric A. Gardner and Elizabeth A. Gardner (petitioners

or Gardners) are husband and wife. They marketed and promoted a plan or

arrangement involving the use of trusts, limited liability companies (LLCs), and

entities known as corporations sole which the Internal Revenue Service (IRS)

determined to be an abusive tax shelter. Agreeing with the IRS, the U.S. District

Court for the District of Arizona (District Court) determined that the Gardners had

engaged in conduct in violation of section 6700 by making statements as to the

availability of tax benefits that they knew or had reason to know were false or

fraudulent and enjoined them from promoting their plan in the future. United

States v. Gardner, No. CV05-3073-PCT-EHC, 2008 WL 906696 (D. Ariz. Mar.

21, 2008), aff’d, 457 Fed. Appx. 611 (9th Cir. 2011).
                                         -4-

      The District Court, among other matters, ordered the Gardners to provide

the IRS with a list identifying all persons who had purchased their corporation

sole plan. After receiving the list, the IRS assessed a $47,000 penalty pursuant to

section 6700 against each petitioner. After the Gardners failed to pay the assessed

penalties, the IRS commenced collection actions, specifically, filing a notice of

lien and proposing levies against the Gardners’ property. The Gardners

challenged the appropriateness of these actions separately before different IRS

settlement officers. Each settlement officer sustained the IRS’ collection action.

Thereafter, the Gardners timely sought review of those determinations in this

Court pursuant to section 6330(d)(1).

      The issues for decision are: (1) whether each petitioner is liable for the

assessed $47,000 section 6700 penalty and (2) whether the IRS settlement officers

abused their discretion in sustaining the IRS’ lien against Mr. Gardner and in

determining that the IRS’ proposed levy actions against both Gardners could

proceed.

      All section references are to the Internal Revenue Code of 1986 (Code), as

amended and in effect at all relevant times, and all Rule references are to the Tax

Court Rules of Practice and Procedure.
                                         -5-

                                FINDINGS OF FACT

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

and the accompanying exhibits are incorporated herein by this reference.2 At the

time they filed their petitions, petitioners resided in Arizona.

I.    Petitioners

      Mr. Gardner attended Kent State University from 1966 to 1971 where he

studied business and accounting and took at least one tax course. Both during and

after college Mr. Gardner worked in finance. In 1997 Mr. Gardner became a

certified estate planner and a financial planner. He holds himself out as an

accountant with special training in business and charitable planning. Mrs.

Gardner attended the Paralegal Institute of Arizona; she refers to herself as a

certified paralegal.

      From 1976 through 1978 both petitioners attended Christ for the Nations

Bible College in Dallas, Texas, where each received an associate’s degree in

theology. After graduation they moved to Arizona where they became ministers

and operated a Christian bookstore. After several years in operation the bookstore


      2
       We also have relied on certain facts set forth in (1) District Judge Earl H.
Carroll’s order in United States v. Gardner, No. CV05-3073-PCT-EHC, 2008 WL
906696 (D. Ariz. Mar. 21, 2008), and (2) Gardner v. Commissioner, T.C. Memo.
2013-67, appeal filed (9th Cir. Aug. 1, 2013).
                                         -6-

encountered financial and tax difficulties which ultimately resulted in the IRS’

assessing tax liabilities against each petitioner individually. The Gardners closed

the bookstore in 1992. That year was also the last year the Gardners filed a

Federal income tax return.

II.   Bethel Aram Ministries and Corporation Sole Plan

      In 1993 the Gardners formed Bethel Aram Ministries (BAM), an

unincorporated association, organized to be an “ecclesiastical church ministry”.

They did not file a Form 1023, Application for Recognition of Exemption Under

Section 501(c)(3) of the Internal Revenue Code. In 1999 petitioners each signed a

document entitled “vow of poverty” declaring his/her intent to “divest

[himself/herself] from earnings or wages from Bethel Aram Ministries”. The

vows of poverty stated that BAM would provide for each’s needs as a pastor of the

church ministry. They then transferred all of their assets, including title to their

home, to BAM. On September 27, 2001, Mrs. Gardner filed articles of

incorporation with the State of Nevada for “THE OFFICE OF PRESIDING HEAD

PROPHETESS of Elizabeth A. Gardner after The Order of the Lord Jesus Christ,

the High Priest and King after the Order of Melchizedek, and her Successors, a

corporation sole” of BAM.
                                         -7-

      Historically, a “corporation sole” is a succession of persons holding an

ecclesiastical or monarchical office. See Black’s Law Dictionary 342 (7th ed.

1999); Bryan A. Garner, A Dictionary of Modern Legal Usage 225 (2d ed. 1995).

Corporations sole are authorized under the laws of some States to enable religious

leaders to hold property and conduct business for the benefit of the religious

entity, as opposed to the benefit of the officeholder himself. See Rev. Rul. 2004-

41, 2004-1 C.B. 845. The purpose of a corporation sole is to ensure continuity of

ownership of property dedicated to the benefit of a religious organization. Title to

property that vests in the officeholder as a corporation sole passes to the

successors of the office by operation of law instead of passing to the officeholder’s

heirs. Id.; see also Chambers v. Commissioner, T.C. Memo. 2011-114.

      Mrs. Gardner learned about corporations sole by speaking with Catholic

bishops and canon law lawyers as well as through her own study. The Gardners

claimed that the use of their corporation sole plan could reduce an individual’s

Federal income tax liability. The Gardners told their customers that they could

assign their personal income to a corporation sole, thus transforming income

otherwise taxable into nontaxable income of the corporation sole. The Gardners

advised customers who earned income through an independent business to operate

their ministries through a corporation sole and to form an LLC to operate the
                                        -8-

business. The customers were further advised (1) to create a trust for the ministry

which would serve as the “majority member” of the LLC and (2) to hold

individually a minority interest in the LLC and individually serve as the LLC’s

“managing member”. The Gardners claimed that the income assigned to the trust

would be tax free and that if the customer donated 50% of the income of the LLC

allocated to him to his church, the donation would give rise to a charitable

deduction. The Gardners asserted that the corporation sole plan generated the

following benefits: (1) the corporation sole would not have to file a tax return; (2)

the corporation sole was not subject to the scrutiny of any government agency,

including the IRS; (3) the corporation sole had complete immunity from disclosure

to the government; (4) the corporation sole was subject only to the “private

government” of the person who created it; (5) there would be no withholding or

self-employment taxes; (6) persons working for the corporation sole ceased to be

classified as employees but rather would be classified as ministers of the

corporation sole; and (7) the corporation sole could operate as any individual

could.

         The Gardners promoted their corporation sole plan by holding seminars

where they claimed “that God has provided a way for you to be unencumbered in

his church today and not at odds with the government, whatsoever!”, and “Still not
                                          -9-

sure this is for real? See what the prominent ‘Blacks Law Library’ has to say

about ‘Corporation Sole’!” They also created a Web site that promoted their

corporation sole plan and held an annual retreat for individuals who participated in

the corporation sole plan. Moreover, Mrs. Gardner distributed at least 500 copies

of a book she wrote entitled “Corporation Sole vs. 501(c)(3) Corporation” to

interested individuals.

       In exchange for providing their corporation sole plan and assistance in

establishing corporations sole, the Gardners asked for “donations” to BAM. The

Gardners provided a “Donation Sheet” to interested individuals. Printed on BAM

letterhead, the Donation Sheet provided a list of BAM’s services and the amounts

to be donated, including discounts if multiple services were requested:

                                  Donation Sheet

                                 Corporation Sole
PLEASE MAKE SEPARATE CHECKS OUT TO:

            Name                        Amount                     For

  1) BETHEL ARAM MINISTRIES           $1200.00           CORPORATION SOLE
  2) CAROL SPACKMAN                     $80.00           RESIDENT AGENT FEE
  3) STATE OF NEVADA                    $85.00           FILING FEES
                                                         GOOD STANDING CERTIFICATE
                                                         CERTIFIED COPY OF ARTICLES

  4) STATE OF NEVADA                     $200.00         FOR EXPEDITING DOCUMENTS
                                                         [If you are Expediting your Documents]
  5) Bethel Aram Ministries          Total Amount        CORP SOLE, RESIDENT AGENT,
                                   [One check for all]   FILING, and EXPEDITING FEES
                                  Visa/MC is available
                                                 - 10 -

                                                 LLC
PLEASE MAKE SEPARATE CHECKS OUT TO:

  1) BETHEL ARAM MINISTRIES                     $700.00           LLC
  2) CAROL SPACKMAN                              $80.00           RESIDENT AGENT FEE




  3) STATE OF NEVADA                             $85.00                 FILING FEES
                                                                       GOOD STANDING CERTIFICATE
                                                                       CERTIFIED COPY OF ARTICLES
  4) STATE OF NEVADA                              $200.00              FOR EXPEDITING DOCUMENTS
                                  [If you are Expediting your Documents]


                                               TRUST
PLEASE MAKE SEPARATE CHECKS OUT TO:

  1) BETHEL ARAM MINISTRIES                    $1000.00            TRUST

Blessing Reduction...(2)Documents 10% (3) Documents 20%


        The Gardners’ promotion of their plan eventually drew the attention of the

IRS. In 2004 the matter was referred to IRS Senior Program Analyst Kurt

Kuxhausen, who focused on abusive transactions. Mr. Kuxhausen initiated his

investigation by mailing the Gardners an appointment letter and an information

document request (IDR).3 In the IDR the IRS requested anything related to the

Gardners’ corporation sole plan, including books, videos, recordings, bank

statements, canceled checks, and other information related to income received

from the sale of the corporation sole plan. Having received no information from

the Gardners, Mr. Kuxhausen went to the Gardners’ home where he personally


        3
      The IRS initially sent these documents to the wrong address. A second
appointment letter and a second IDR were sent to petitioners’ correct address.
                                       - 11 -

served them with summonses to appear at a local IRS office to discuss the

corporation sole plan and provide the IRS with the previously requested

documents. While Mr. Kuxhausen was serving the summonses, the Gardners gave

him a tour of their home, which also served as BAM’s church and office. Mrs.

Gardner gave Mr. Kuxhausen a copy of her book and a booklet entitled “Her

Touch”.

      The Gardners ignored the IRS summonses. The IRS then issued a summons

to BAM’s bank, requesting BAM’s account information. The Gardners attempted

to quash the bank summons; their petition to do so was dismissed. Following the

dismissal of the Gardners’ petition to quash the bank summons, the IRS received

BAM’s bank records for 2002 and 2003 and for nine months of 2004. Relying on

these records, Mr. Kuxhausen determined that the Gardners had caused

approximately 300 corporations sole to be organized.

      Mr. Kuxhausen reviewed BAM’s Web site as well as documents distributed

by the Gardners to individuals interested in the corporation sole plan and

concluded that the Gardners were promoting an abusive tax scheme. He

recommended that the Government seek a judicial decree enjoining the Gardners

from promoting their corporation sole plan.
                                        - 12 -

      Following this recommendation, the Government brought an action in the

U.S. District Court for the District of Arizona against the Gardners. On March 24,

2008, the District Court granted the Government’s motion for summary judgment,

denied the Gardners’ motion for summary judgment, and entered an order to

permanently enjoin the Gardners, individually and doing business as BAM or

through any other entity, from promoting their corporation sole plan. Gardner,

2008 WL 906696. The District Court found: (1) that the Gardners had organized

more than 300 corporations sole and 10 LLCs for individuals throughout the

United States; (2) the Gardners made material statements regarding the tax

benefits of creating corporations sole, LLCs, and trusts that they knew or had

reason to know were false or fraudulent, see supra pp. 7-8; and (3) the “donation

sheet” was a price list for the Gardners’ services.

      The District Court found that the Gardners had the educational and business

background to know that the statements they had made in connection with the so-

called tax benefits of their plan were false. Gardner, 2008 WL 906696, at *4. The

District Court concluded that in making material statements regarding both the tax

and nontax benefits of their corporation sole plan, which they knew or had reason

to know were false, the Gardners were “attempting to wrench tax statutes out of

context to encourage a willful misreading of the law.” Id. at *5.
                                        - 13 -

       Finding that (1) the Gardners’ customers were harmed by their reliance on

the structure of the corporation sole plan, (2) the United States was harmed as a

result of the Gardners’ clients’ failing to pay correct amounts of tax to the

Treasury, and (3) the public was harmed because the IRS was forced to devote

resources to identify and recover lost revenue, the District Court enjoined the

Gardners from:

              (a) Organizing, promoting, marketing, or selling corporations
       sole or any tax shelter, plan or arrangement, that advises, assists, or
       encourages taxpayers to attempt to violate the internal revenue laws
       or unlawfully evade the assessment or collection of their federal
       income tax liabilities;

              (b) Making false or fraudulent statements about the
       allowability of any deduction or credit, the excludability of any
       income, or the securing of any tax benefit by the reason of
       participating in such tax shelters, plans or arrangements;

              (c) Encouraging, instructing, advising or assisting others to
       violate the tax laws, including to evade the payment of taxes; and

             (d) Engaging in conduct subject to penalty under 26 U.S.C. §
       6700, i.e., by making or furnishing, in connection with the
       organization or sale of a shelter, plan, or arrangement, a statement the
       defendants know or have reason to know be false or fraudulent as to
       any material matter under the federal tax laws.

Id. at *6.

       After the District Court enjoined the Gardners from further promotion of

their corporation sole plan, the IRS, led by Mr. Kuxhausen, opened an income tax
                                       - 14 -

examination of the Gardners’ 2002, 2003, and 2004 tax years. As was noted supra

p. 6, petitioners ceased filing Federal income tax returns after 1992. Relying on

BAM’s bank records, Mr. Kuxhausen conducted a bank deposits analysis and

created substitutes for returns under the authority granted the IRS by section

6020(b). Thereafter the IRS mailed Mr. and Mrs. Gardner separate notices of

deficiency for 2002 and 2003 on March 21, 2006, and the IRS mailed Mr. and

Mrs. Gardner separate notices of deficiency for 2004 on March 30, 2007.

      The Gardners timely filed petitions in this Court seeking redetermination of

the IRS’ income tax determinations. In Gardner v. Commissioner, T.C. Memo.

2013-67, we upheld respondent’s determinations with respect to the Gardners’

income tax deficiencies, as well as certain additions to tax, for years 2002, 2003,

and 2004. The Gardners argued that the money deposited into the BAM bank

account did not constitute taxable income to them because (1) the deposits were

gifts/donations to a legitimate church, (2) they had taken vows of poverty, and (3)

they acted as agents of BAM. We rejected all of these arguments. We stated that

the deposits were not “donations” in that donations are transfers resulting from a

detached and disinterested generosity. We held that the Gardners had received

moneys from customers in consideration for organizing corporations sole, LLCs,

and trusts. We also rejected the Gardners’ arguments that they were agents of
                                        - 15 -

BAM and did not benefit from the income because they took vows of poverty. In

this regard, we found that the Gardners had exercised dominion and control over

BAM’s bank account and held that all taxable deposits into that account were

includible in their gross income. Gardner v. Commissioner, at *16-*17.4

      Concurrent with the income tax examination, Mr. Kuxhausen opened a

section 6700 penalty investigation. He identified approximately 300 corporations

sole organized by the Gardners. He was able to identify 200 purchasers of the

corporation sole plan through examination of BAM’s bank records. Mr.

Kuxhausen gave these names to a “list keeper”5 in the IRS’ abusive transactions

program who took the list to find tax returns for more than 100 of the listed

individuals. Mr. Kuxhausen and a technical analyst then conducted a

classification of tax returns for examination by reviewing each of the returns for

potential income and/or deduction issues, such as deductions that could not be


      4
       See Gunkle v. Commissioner, T.C. Memo. 2012-305, aff’d, 753 F.3d 502
(5th Cir. 2014), and Cortes v. Commissioner, T.C. Memo. 2014-181, where we
held that other individuals who participated in the Gardners’ corporation sole plan
understated their taxable incomes.
      5
       A list keeper is an IRS employee who takes information received by a
revenue agent and determines whether the taxpayer can be traced by way of a
Social Security number, employer identification number, or other tax identification
number. Once the individual is identified, the list keeper determines whether that
individual has filed tax returns. If returns have been filed, the list keeper acquires
copies which are then reviewed by a technical analyst or a revenue agent.
                                        - 16 -

justified with the income reported on a return. All returns having a discrepancy

were flagged for examination. Mr. Kuxhausen found potential discrepancies with

respect to income, deduction, and/or credit issues on 47 of the returns of

purchasers of the Gardners’ corporation sole plan and classified them for

examination.

      After Mr. Kuxhausen completed his investigation, the Gardners provided

the IRS with the customer list, as required by the District Court. The list

contained the names of 189 individuals and their church ministries that matched

those on Mr. Kuxhausen’s list. Mrs. Gardner informed Mr. Kuxhausen that the

Gardners had organized 57 corporations sole for their customers in 2003.

      The IRS entered the $47,000 section 6700 penalty assessments against Mr.

and Mrs. Gardner on September 19, 2011. Each assessment was designated for

year 2003. That year was selected because the investigation commenced in 2003;

the year 2003 was used merely to track the investigation.

      Also on September 19, 2011, respondent sent the Gardners notice and

demand letters. Mrs. Gardner acknowledged that she had received the notice and

demand letter addressed to her on September 23, 2011. Mr. Gardner asserted he

had never received a notice and demand letter addressed to him. Neither Mr. nor

Mrs. Gardner paid the section 6700 penalty.
                                        - 17 -

      The IRS mailed Mr. Gardner a Final Notice--Notice of Intent to Levy and

Notice of Your Right to a Hearing on August 27, 2012, at his last known address,

via certified mail. The notice was returned as undeliverable, presumably because

the Gardners had moved since the last time they had filed an income tax return.

The IRS ascertained the Gardners’ correct address and thereafter sent Mr. Gardner,

via certified mail, a second levy notice, which Mr. Gardner acknowledged

receiving. The IRS mailed Mr. Gardner a Notice of Federal Tax Lien Filing and

Your Right to a Hearing Under IRC 6320, via certified mail, on September 11,

2012, and filed a notice of lien against his property on the same date. Mr. Gardner

acknowledged receiving the lien notice on September 13, 2012.

      Mr. Gardner filed a Form 12153, Request for a Collection Due Process or

Equivalent Hearing, on September 10, 2012, requesting a hearing (referred to as a

section 6330 hearing), see infra pp. 21-22, as to both the lien and the IRS’ intent to

levy. Mr. Gardner objected to these collection actions claiming: “Do not owe.

Don’t know what is for.” Settlement Officer Michael Freitag was assigned to Mr.

Gardner’s case. Before commencing work, he confirmed that he had no prior

involvement with Mr. Gardner. Settlement Officer Freitag then scheduled a

telephone conference for November 27, 2012. He informed Mr. Gardner that he

could request collection alternatives but that in order to do so, Mr. Gardner had to
                                        - 18 -

file income tax returns for 2003 through 2011 and submit to the IRS a completed

Form 433-A, Collection Information Statement for Wage Earners and Self-

Employed Individuals, and Form 433-B, Collection Information Statement for

Businesses. Mr. and Mrs. Gardner both participated in the section 6330 hearing

on November 27. They declined to discuss collection alternatives but instead

focused solely on the underlying $47,000 penalty. Settlement Officer Freitag

declined to discuss the underlying liability, stating that Mr. Gardner had had a

prior opportunity to dispute it but he had not done so and therefore was not

permitted to raise the issue at the section 6330 hearing.

      The IRS mailed Mrs. Gardner a notice of intent to levy on February 27,

2012, which Mrs. Gardner acknowledged receiving on March 3, 2012. She mailed

a Form 12153 to the IRS on March 22, 2012. Her objection to the proposed

collection activity was identical to that of her husband: “Do not owe. Don’t know

what is for.”6 Settlement Officer Bernice Mason was assigned Mrs. Gardner’s

case. Before commencing work, she confirmed that she had no prior involvement

with Mrs. Gardner. Settlement Officer Mason then scheduled a telephone

conference call for November 26, 2013. Settlement Officer Mason informed Mrs.


      6
       We note that Mrs. Gardner also marked that she wished to challenge a filed
notice of Federal tax lien although such a challenge is inapplicable in her case.
                                        - 19 -

Gardner that she could request collection alternatives but that in order to do so

Mrs. Gardner would need to (1) file income tax returns for 2006 through 2012, (2)

provide proof that she had made estimated tax payments for 2013, and (3)

complete a Form 433-A. At the section 6330 hearing before Settlement Officer

Mason, both Mr. and Mrs. Gardner were present. Mrs. Gardner declined to

discuss collection alternatives. Rather, Mrs. Gardner wanted to discuss only the

section 6700 penalty assessment. Settlement Officer Mason concluded that Mrs.

Gardner had had a prior opportunity to litigate the underlying liability and refused

to allow her to raise that issue.

      The IRS issued a notice of determination to Mr. Gardner on May 31, 2013,

and to Mrs. Gardner on January 24, 2014. The Gardners timely filed separate

petitions with the Court, and their cases were consolidated for trial, which was

held in Phoenix, Arizona, on February 3, 2015.

                                     OPINION

I.    Introduction

      These cases involve a review of respondent’s determination to proceed with

collection of section 6700 penalties against Mr. Gardner via lien and levy actions

and Mrs. Gardner via levy action. The relevant portion of the statute provides:
                                 - 20 -

SEC. 6700. PROMOTING ABUSIVE TAX SHELTERS, ETC.

      (a) Imposition of Penalty.--Any person who--

            (1)(A) organizes (or assists in the organization of)--

                   (i) a partnership or other entity,

                   (ii) any investment plan or arrangement, or

                   (iii) any other plan or arrangement, or

                (B) participates (directly or indirectly) in the sale of
            any interest in an entity or plan or arrangement referred
            to in subparagraph (A), and

             (2) makes or furnishes or causes another person to make
      or furnish (in connection with such organization or sale)--

               (A) a statement with respect to the allowability of any
            deduction or credit, the excludability of any income, or
            the securing of any other tax benefit by reason of holding
            an interest in the entity or participating in the plan or
            arrangement which the person knows or has reason to
            know is false or fraudulent as to any material matter, or

              (B) a gross valuation overstatement as to any material
            matter,

shall pay, with respect to each activity described in paragraph (1), a
penalty equal to the $1,000 or, if the person establishes that it is
lesser, 100 percent of the gross income derived (or to be derived) by
such person from such activity. For purposes of the preceding
sentence, activities described in paragraph (1)(A) with respect to each
entity or arrangement shall be treated as a separate activity and
participation in each sale described in paragraph (1)(B) shall be so
treated. * * *
                                        - 21 -

      The section 6700 penalty is governed by the procedural rules of section

6703, which, in general, removes section 6700 penalty assessments from the

deficiency jurisdiction of this Court.7 However, section 6330(d)(1) provides this

Court with jurisdiction to review an appeal from the Commissioner’s

determination to proceed with collection activity regardless of the type of

underlying tax involved. And we have held that our jurisdiction includes

reviewing the Commissioner’s lien and levy activities regarding penalties

governed by the procedural rules of section 6703, including section 6700.

Williams v. Commissioner, 131 T.C. 54, 58 n.4 (2008); Harry v. Commissioner,

T.C. Memo. 2009-206; see Callahan v. Commissioner, 130 T.C. 44 (2008). Thus,

we have jurisdiction to review the notices of determination issued to petitioners.

II.   Sections 6320 and 6330 and the Standard of Review

      Section 6320(a) provides that written notice of the filing of a notice of

Federal tax lien must be furnished by the Secretary to the taxpayer whose property

is subject to the lien. Section 6320(b) provides that a taxpayer may thereafter


      7
        Sec. 6703(b) provides that subch. B of ch. 63 of the Code (relating to
deficiency procedures) does not apply with respect to the assessment or collection
of the penalties provided by secs. 6700, 6701, and 6702. Sec. 6703(c) provides
that a taxpayer may challenge a penalty under secs. 6700 and 6701 by paying 15%
of the assessed penalty, filing an administrative claim for refund, and if that claim
is not granted, filing a claim for refund in the appropriate U.S. District Court.
                                         - 22 -

request a hearing regarding the filing of the tax lien, and section 6320(c) provides

that the hearing must be conducted pursuant to the rules of section 6330 (thus the

hearing regarding the filing of a notice of Federal tax lien is referred to as a

“section 6330 hearing”).

      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 that person in writing of

the right to a hearing before the levy is made (the section 6330 hearing). Section

6330(b)(3) provides that if a person requests a section 6330 hearing, that hearing

shall be held before an impartial officer or employee of the IRS. During the

hearing the taxpayer may raise any relevant issue, including appropriate spousal

defenses, challenges to the appropriateness of the collection action, and collection

alternatives, including offers-in-compromise. Sec. 6330(c)(2)(A).

      A taxpayer is precluded from contesting the existence or amount of the

underlying tax liability at the section 6330 hearing unless the taxpayer did not

receive a notice of deficiency for the tax in question or did not otherwise have an

opportunity to dispute the underlying tax liability. Sec. 6330(c)(2)(B); see also
                                        - 23 -

Sego v. Commissioner, 114 T.C. 604, 609 (2000).8 In the instant cases, the

underlying liabilities are the section 6700 penalties imposed on petitioners.

       The IRS concedes that (1) petitioners did not have a prior opportunity to

contest the section 6700 penalties; (2) petitioners may challenge the existence

and/or amounts of the underlying liabilities (i.e., the section 6700 penalties), and

(3) the Court should use a de novo standard of review.9 We accept these

concessions, and on that basis we conclude we have jurisdiction to consider the

existence and amounts of the section 6700 penalties assessed against petitioners.

III.   Burden of Proof

       To prevail, respondent must prove: (1) that petitioners are liable for the

section 6700 penalties and (2) the amounts of the penalties.

       Section 6703(a) provides that the IRS bears the burden of proving that any

person is liable for a penalty pursuant to section 6700.10 Respondent argues that


       8
       We have interpreted the phrase “underlying tax liability” to include any
amounts a taxpayer owes pursuant to tax laws that are subject to the
Commissioner’s collection activities. Katz v. Commissioner, 115 T.C. 329, 338-
339 (2000).
       9
       The IRS also concedes that the record rule is inapplicable when a de novo
review is conducted. See Jordan v. Commissioner, 134 T.C. 1, 8-9 (2010).
       10
         The Court of Appeals for the Ninth Circuit affirmed a decision in which a
District Court applied a preponderance of the evidence standard in a sec. 6700
                                                                      (continued...)
                                        - 24 -

he has met his burden by (1) establishing by the defense of collateral estoppel that

the Gardners engaged in conduct which makes them liable for the section 6700

penalties, and (2) presenting evidence at trial which establishes that each petitioner

engaged in conduct making himself/herself liable for the section 6700 penalty no

fewer than 47 times.

      If respondent proves that violations of section 6700 have occurred, a penalty

of $1,000 applies to each violation unless petitioners establish that the amount of

gross income derived from the prohibited activity was less. See sec. 6700(a)

(flush language). Petitioners bear the burden of proving that the amount derived

from each prohibited activity was less than $1,000. See id.

IV.   Application of the Section 6700 Penalty

      A.     Penalty Liability

      In applying section 6700, courts have identified four elements the

Government must establish: (1) organization of or participation in the sale of

certain investment plans or arrangements; (2) statements regarding the allowability

of deductions or tax credits, the excludability of income, or the securing of other




      10
       (...continued)
case. Bond v. United States, 872 F.2d 898 (9th Cir. 1989).
                                        - 25 -

tax benefits; (3) knowledge or reason to know the statements are false; and (4) that

the statements pertain to a material matter. United States v. Stover, 650 F.3d

1099, 1107 (8th Cir. 2011); United States v. Estate Pres. Servs., 202 F.3d 1093,

1098 (9th Cir. 2000).

        Section 6700 makes no mention of whether a participant must rely on the

promoter’s statements or underreport his/her tax as a result of participation in the

promotion. However, the legislative history of the section states that the actions of

the plan participants are not relevant to the application of the section. “There need

not be reliance by the purchasing taxpayer or actual under-reporting of tax. These

elements have not been included because they would substantially impair the

effectiveness of this penalty. Thus, a penalty can be imposed based upon the

offering materials of the arrangement without an audit of any purchaser of

interests.” S. Rept. No. 97-494 (Vol. 1), at 267 (1982), 1982 U.S.C.C.A.N. 781,

1015.

        Respondent posits that he has established the Gardners’ liability through the

judicial doctrine of collateral estoppel. Respondent states in his brief that “[a]fter

applying collateral estoppel, the only issue for the Court to decide is if petitioners’

false statements were made in connection with at least 47 of the corporation sole

arrangements.”
                                         - 26 -

      Collateral estoppel11 is an affirmative defense barring a party from

relitigating an issue determined against that party in an earlier action, even if the

second action differs significantly from the first one. Black’s Law Dictionary

256.12 The collateral estoppel doctrine is also known as issue preclusion. Once an

issue of fact or law is “actually and necessarily determined by a court of competent

jurisdiction, that determination is conclusive in subsequent suits based on a

different cause of action involving a party to the prior litigation.” Montana v.

United States, 440 U.S. 147, 153 (1979) (citing Parklane Hosiery Co. v. Shore,

439 U.S. 322, 326 n.5 (1979)). Thus, if an issue has been resolved by a court, the

issue will not be taken up again by a subsequent court. The Commissioner may

assert the doctrine of collateral estoppel as an affirmative defense even though the

Commissioner was not a party to the prior proceeding. See Brotman v.

Commissioner, 105 T.C. 141, 148 (1995).



      11
        Sec. 6330(c)(4) bars a person from raising in a collection hearing an issue
that was raised and considered at a previous hearing or in any other administrative
or judicial proceeding in which the person seeking to raise the issue meaningfully
participated, thus codifying the doctrines of collateral estoppel and res judicata.
See Katz v. Commissioner, 115 T.C. at 339; McIntosh v. Commissioner, T.C.
Memo. 2003-279.
      12
        Respondent alleged collateral estoppel as an affirmative defenses in both
cases in his respective first amendments to answer, both filed January 23, 2015, by
leave of the Court pursuant to Rule 41(a).
                                         - 27 -

      Collateral estoppel applies in a factual dispute if the following conditions

are satisfied: (1) the issue in the second suit is identical in all respects with the

one decided in the first action; (2) there is a final judgment rendered by a court of

competent jurisdiction; (3) the party against which collateral estoppel is asserted is

either a party to the prior judgment or the privy of a party to the prior judgment;

(4) the parties actually litigated the issues and the resolution of these issues was

essential to the prior decision; and (5) the controlling facts and applicable legal

rules remain unchanged from those in the prior litigation. Peck v. Commissioner,

90 T.C. 162, 166-167 (1988), aff’d, 904 F.2d 525 (9th Cir. 1990).

      We agree with respondent that all five Peck elements are present in these

cases. With respect to the first element, the issues in both the District Court case

and these cases are identical. Section 7408(a) empowers a court to enjoin any

person from further engaging in “specified conduct”. Specified conduct is defined

in section 7408(c) and includes any action or failure to take action which is subject

to penalty under section 6700. Sec. 7408(c)(1). To enjoin the Gardners from

engaging in promoting and selling of an abusive tax shelter plan or arrangement,

the District Court necessarily determined that they engaged in conduct subject to

the section 6700 penalty. As the District Court stated in its order:
                                         - 28 -

            Section 7408 * * * authorizes a court to enjoin persons who
      have engaged in conduct subject to penalty under Code §6700 from
      engaging in further such conduct or any other conduct subject to
      penalty under the Code if the Court finds that injunctive relief is
      appropriate to prevent recurrence of the conduct. * * * Based on the
      evidence presented by the parties, the Court finds that the defendants
      are engaging in conduct in violation of Code §6700.

Gardner, 2008 WL 906696, at *5.

      With respect to the second element, the District Court’s order, upheld on

appeal by the Court of Appeals for the Ninth Circuit, is a final judgment by a court

of competent jurisdiction. With respect to the third element, petitioners and the

Government were both parties to the prior case (and the IRS may claim collateral

estoppel even if a different Government agency participated in the prior case). See

supra p. 26. With respect to the fourth element, the record makes it clear that

petitioners fully disputed and the parties fully litigated all issues with respect to

the injunction. With respect to the fifth element, there has been no modification to

section 6700 or the regulations promulgated thereunder since the prior litigation.

The facts of these cases have not changed since the end of the prior litigation. As

respondent points out in his brief: “The §6700 penalty naturally flows from the

injunction granted by the District Court. The District Court determined that the

Gardners violated §6700. Section 6700 provides that any person who violates

§6700 ‘shall pay’ a penalty.”
                                        - 29 -

      Petitioners reply that collateral estoppel is inapplicable in these cases. “It is

clear there are no abusive transactions to give rise to the penalty. Respondent did

not prove the abusive transaction. What the respondent is passing off as proof is

the District Court said that the Gardners engaged in conduct that violates IRC §

6700.” Petitioners then argue that the corporation sole plan was not an abusive tax

shelter. However, petitioners’ position is precisely what the doctrine of collateral

estoppel was intended to avoid: relitigating closed questions. Petitioners repeated

in this Court the same argument that they made in the District Court as well as the

same false statements made to their customers that led the District Court to enjoin

them.13 We thus hold that the doctrine of collateral estoppel applies in the instant

situation and that the District Court’s determination is conclusive. Consequently,

respondent has met his burden of establishing that the Gardners are liable for the

section 6700 penalties.




      13
        For example, in their brief, petitioners admit that they advised their
customers to use the structure reviewed by the District Court, see supra p. 12, in
which LLCs and trusts are used to divert up to 95% of their business income to a
church, making it “tax free”. Petitioners argue this admission supports their
position because “[t]he statements made of Mrs. Gardner with respect to the
benefits of a religious corporation sole are clearly consistent with current law.”
The District Court came to a different conclusion: that the advice given by the
Gardners constituted a false or fraudulent statement under sec. 6700.
                                        - 30 -

       B.    Amount of Penalty

       A taxpayer is liable for a $1,000 penalty for each violation of section 6700

unless the taxpayer can establish that the amount of gross income derived from the

activity was less than $1,000. Sec. 6700(a). The District Court did not address the

penalty amount for which the Gardners would be liable although it did find that

the Gardners had organized more than 300 corporations sole for their customers.

       To impose a $47,000 penalty against each petitioner, respondent is

obligated to establish that each petitioner committed 47 acts which made him/her

liable for the section 6700 penalty. At trial Mr. Kuxhausen did just that. He

explained in detail how he and his colleagues examined BAM’s bank accounts,

customers’ canceled checks, and customers’ tax returns and how he and his

colleagues were able to identify 47 corporations sole organized by petitioners and

correlate payments made by the customers. Mr. Kuxhausen classified only 47

income tax returns because they had the most potential for examination

adjustments (i.e., most likely to have issues with income, deductions, and/or

credits).

       The Gardners maintain that the IRS did not establish that any of the

individuals who purchased the corporation sole plan used the plan to avoid

Federal income tax. The Gardners allege that the purchasers were legitimate
                                         - 31 -

ordained bishops, pastors, elders, etc. who had purchased the plan for the

governance of their respective churches and/or ministries. In this regard, four of

the individuals that Mr. Kuxhausen identified testified on petitioners’ behalf.

Each individual credibly testified that he did not use his respective corporation

sole to avoid taxes, but rather each individual used his corporation sole to

administer his ministry in furtherance of what are unquestionably good works.

The IRS audited the returns of all four individuals. None had any corporation

sole-related adjustments made to his tax return. Indeed, one witness received a tax

refund after his audit.

      The focus of section 6700, however, is not on the recipient; it is on the

promoter of the abusive tax shelter. As the legislative history of the statute makes

clear, a promoter is liable for the section 6700 penalty even if the IRS does not

audit the return of the purchaser. Indeed, even if the purchaser makes no use of

the tax shelter and does not underreport his/her tax, the promoter is still liable for

the section 6700 penalty.14 See S. Rept. No. 97-494 (Vol. 1), supra at 267, 1982

U.S.C.C.A.N. at 1015.




      14
        In any case, petitioners’ witnesses acknowledged they received and
reviewed the information contained in the corporation sole plan, information that
the District Court concluded was false.
                                        - 32 -

      Section 6700(a)(2)(B) provides that if a tax shelter promoter establishes that

he/she derived less than $1,000 with respect to each promotional action, the

section 6700 penalty shall be that lesser amount. The Gardners have not done so.

      C.     Conclusion

      The District Court determined that the Gardners’ corporation sole plan

violated section 6700, and we so hold. The IRS established that the Gardners sold

the corporation sole plan to those 47 individuals, and we hold the Gardners sold

the corporation sole plan to at least 47 individuals.

V.    Year at Issue

      The notices of determination sent to the Gardners state that the year

involved is 2003. At trial we inquired how the IRS selected 2003 when the

Gardners sold their corporation sole plan in 2002, 2003, and 2004. In his brief,

respondent replied that the IRS investigation commenced in 2003 and for

administrative reasons the IRS tracked the Gardners’ section 6700 penalties in tax

modules designated year 2003.15 Respondent posits that section 6700 penalties are




      15
       Respondent states in his brief that the Form 8278, Assessment and
Abatement of Miscellaneous Civil Penalties, which revenue agents are required to
complete when requesting an assessment of the sec. 6700 penalty, requires that the
revenue agent assign a year to which the penalty applies. The form is not
processed if a year is not provided.
                                       - 33 -

not assessed for discrete taxable years but rather for conduct and transactions that

may occur over one or more taxable years.

      Courts have examined the period for a section 6700 penalty assessment

before. In Planned Invs., Inc. v. United States, 881 F.2d 340 (6th Cir. 1989), the

Court of Appeals for the Sixth Circuit was faced with a notice and demand

regarding a section 6700 penalty assessment which did not specify the period

involved. Subsection (a) of section 6671, which governs the assessment of all

penalties provided in subchapter B of chapter 68, including those of section 6700,

provides that such penalties shall be paid upon notice and demand and shall be

collected as taxes. Chapter 63 of the Code, specifically sections 6201 through

6245, governs assessment of taxes; consequently, that chapter of the Code controls

how the penalty is assessed.16 Similarly, chapter 64, which sets forth the rules for

the collection of taxes, governs the collection of the section 6700 penalty.

Specifically, section 6303(a) of chapter 64 provides: “After the making of an

assessment of a tax pursuant to section 6203, [the IRS shall] give notice to each

person liable for the unpaid tax, stating the amount and demanding [the] payment

      16
         The Court of Appeals noted that ch. 63 provides for two methods of
assessment: (1) subch. B’s special procedure for assessment of income, estate, and
gift taxes, and (2) subch. A’s general procedure for the assessment of other taxes.
However, subch. B is inapplicable pursuant to the provisions of sec. 6703(b). See
Planned Invs., Inc. v. United States, 881 F.2d 340, 343 (6th Cir. 1989).
                                        - 34 -

thereof.” The Court of Appeals in Planned Invs., Inc., 881 F.2d at 344, concluded:

“Section 6303 does not prescribe any particular form of notice. Treasury

Regulations promulgated under the authority of §6303 merely parrot the statutory

language that the notice shall state the amount of the tax and demand payment

thereof. 26 CFR §301.6303-1(a).” The Court of Appeals held:

            Construing the plain language of the statutes and regulations
      outlined above, it becomes evident that the form of notice of
      assessment of a §6700 penalty requires only a statement of the
      amount of the penalty and a demand for payment. It is also clear that
      the notice sent to the plaintiff in this case complied with these
      requirements as the notice identified the amount assessed and
      demanded payment.

Id. The Court of Appeals’ analysis did not end there. Notice must also meet the

general “fairness” requirement of due process. The Court of Appeals in Planned

Invs., Inc. stated that notices that contain technical defects are valid where the

taxpayer has not been prejudiced or misled by the error and is afforded a

meaningful opportunity to litigate his claims. Id.; see also Sage v. United States,

908 F.2d 18, 23 (5th Cir. 1990) (full opportunity to contest the amount of a section

6700 penalty constituted basic fairness).

      The rationale of Planned Invs., Inc. was followed by several other Courts of

Appeals. See In re MDL-731 Tax Refund Litig. of Organizers & Promoters of

Inv. Plans Involving Book Props. Leasing, 989 F.2d 1290, 1301 (2d Cir. 1993)
                                       - 35 -

(“The Internal Revenue Code thus does not obligate the IRS to assess Section

6700 penalties only on income actually earned during discrete taxable periods.”);

Sage, 908 F.2d 18 (finding the Court of Appeals for the Sixth Circuit’s reasoning

in Planned Invs., Inc. persuasive); Gates v. United States, 874 F.2d 584, 588 (8th

Cir. 1989) (“Indeed, it does not appear that section 6671 dictates any particular

assessment period for section 6700 penalties, which do not relate to any specific

tax.”). We are cognizant that the Court of Appeals for the Ninth Circuit, to which

appeal in this matter would normally lie, has taken a position that may appear

contrary to this precedent. In Bond v. United States, 872 F.2d 898, 901 (9th Cir.

1989) (issued before Planned Invs., Inc. or the other cases cited supra), the Court

of Appeals for the Ninth Circuit suggested that section 6700 penalties should be

assessed on an annualized basis. The court ruled that the section 6700 penalty was

properly calculated as a percentage of the gross income derived from the sales

made during the year or years involved.

      The language of section 6700 on which the Court of Appeals opined in

Bond has been superseded by an amendment to section 6700. In 1989 Congress

added the flush language to section 6700(a), to clarify that

      activities described in paragraph (1)(A) [referring to organization of a
      partnership or other entity, any investment plan or arrangement, or
      any other plan or arrangement] with respect to each entity or
                                        - 36 -

      arrangement shall be treated as a separate activity and participation in
      each sale described in paragraph (1)(B) [participation in the sale of
      any interest in an entity or plan or arrangement referred to in section
      6700(a)(1)(A)] shall be so treated.

Omnibus Budget Reconciliation Act of 1989, Pub. L. No. 101-239, sec.

7734(a)(1)-(3), 103 Stat. at 2403.

      We believe it proper to follow herein the analysis in Planned Invs., Inc. and

the other Courts of Appeals opinions that have followed it. In these cases, the

notices of determination identified the amounts assessed and made it clear that

payment was required. Although the tax year included in the notice of

determination was not relevant to petitioners’ cases, the IRS provided a cogent

administrative reason why a year was identified (i.e., administrative requirements)

and the Gardners were both knowledgeable as to all relevant facts and arguments

of the IRS and had a full opportunity to contest the $47,000 penalties at trial

before us. In sum, we find the notices of determination to proceed with lien and

levy actions that were provided to the Gardners with respect to the section 6700

penalties were adequate.17




      17
        We note that in the stipulation of facts, petitioners acknowledged they
organized at least 67 corporations sole during 2003. And at trial petitioners stated
they organized 57 corporations sole during 2003. In either case, petitioners were
well aware of the situation.
                                        - 37 -

VI.   Other Matters

      The remainder of these cases requires our review of the actions of the IRS’

Appeals Office. When the Court conducts a de novo review of the underlying

liability, we review all determinations not involving the underlying liability for

abuse of discretion. Craig v. Commissioner, 119 T.C. 252, 260 (2002). An action

constitutes an abuse of discretion if it is arbitrary, capricious, or without sound

basis in fact or law. Giamelli v. Commissioner, 129 T.C. 107, 111 (2007). The

Court of Appeals for the Ninth Circuit has specifically held that for section 6330

cases the scope of review is limited to the administrative record where the

standard of review is abuse of discretion. See Keller v. Commissioner, 568 F.3d

710, 718 (9th Cir. 2009), aff’g T.C. Memo. 2006-166, and aff’g and vacating

decisions in related cases.

      In deciding whether the IRS settlement officers abused their discretion in

sustaining the collection actions, we consider whether they: (1) properly verified

that the requirements of any applicable law or administrative procedure have been

met; (2) considered any relevant issues the taxpayer raised; and (3) determined

whether “any proposed collection action balances the need for the efficient

collection of taxes with the legitimate concerns of the person that any collection

action be no more intrusive than necessary.” See sec. 6330(c)(3).
                                        - 38 -

      Mr. Gardner asserts that he did not receive notice and demand for payment

of his section 6700 penalty. However, Settlement Officer Freitag reviewed the

Form 4340, Certificate of Assessments, Payments, and Other Specified Matters,

included in Mr. Gardner’s administrative file. It states that a statutory notice of

balance due (i.e., notice and demand) was mailed to Mr. Gardner on September 19,

2011. A settlement officer may rely on a Form 4340 to verify that a valid

assessment was made and that notice and demand was sent to the taxpayer in

accordance with section 6303. Nestor v. Commissioner, 118 T.C. 162, 166

(2002). Absent a showing of irregularity, a transcript with this information is

sufficient to establish that the procedural requirements of section 6330 have been

met. Id. at 167. The Gardners raised no other verification issues, and at trial the

IRS settlement officers each testified that they reviewed each petitioner’s

administrative file and verified that the requirements of applicable law and

administrative procedure had been met. The settlement officers also confirmed at

trial that the lien and proposed levy collection actions each balanced the need for

efficient collection of taxes with the Gardners’ concerns that the collection actions

be no more intrusive than necessary.
                                       - 39 -

VII. Conclusion

      After considering the merits of petitioners’ arguments, we hold that

petitioners are each liable for a $47,000 section 6700 penalty. Because we find

no abuse of discretion in the settlement officers’ determinations, we sustain the

IRS’ lien against Mr. Gardner and hold that the IRS’ proposed levy actions against

both Gardners may proceed.

      We have considered all of petitioners’ arguments, and to the extent not

discussed herein, we find them to be without merit and/or irrelevant.

      To reflect the foregoing,


                                                Decisions will be entered

                                       for respondent.
