                            T.C. Summary Opinion 2020-11



                           UNITED STATES TAX COURT



                      FRIDAY O. JAMES, Petitioner v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 12911-15S L.                         Filed February 27, 2020.



      Friday O. James, pro se.

      Kirsten E. Brimer, for respondent.



                                SUMMARY OPINION


      GUY, Special Trial Judge: This collection review case involving a Federal

tax lien was heard pursuant to the provisions of section 7463 of the Internal

Revenue Code in effect when the petition was filed.1 Pursuant to section 7463(b),


      1
          All section references are to the Internal Revenue Code of 1986, as
                                                                        (continued...)
                                        -2-

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

shall not be treated as precedent for any other case.

       This matter is before the Court on respondent’s motion for entry of default

judgment, as supplemented, filed pursuant to Rule 123(a). There was no

appearance by or on behalf of petitioner when this case was called for trial. As

discussed in detail below, the Court will grant respondent’s motion and enter a

decision sustaining the collection action.

                                    Background

I. Petitioner’s Tax Return Preparation Activities

       In 2000 Friday O. James immigrated to the United States from Liberia. He

initially worked as a mathematics teacher and later as a tax return preparer for

H&R Block and Liberty Tax Service.

       Petitioner eventually started his own tax return preparation business,

operating under the name Frika Tax Services, where he and several employees

prepared and electronically filed Federal income tax returns on behalf of numerous

clients.




       1
       (...continued)
amended, in effect for the years in issue. All Rule references are to the Tax Court
Rules of Practice and Procedure.
                                          -3-

      In 2008 and 2009 (years in issue) petitioner prepared and signed

approximately 2,000 Federal income tax returns and amended tax returns. The

Internal Revenue Service (IRS) conducted audits and determined that

(1) approximately 150 of the tax returns included an erroneous claim for the first-

time homebuyer credit (FTH credit) and (2) many of the tax returns included

erroneous claims for deductions on Schedule A, Itemized Deductions, and

Schedule C, Profit or Loss From Business.

II. IRS Civil and Criminal Investigations

      In September 2009 the IRS opened a civil investigation focused on

petitioner’s potential liability for civil penalties related to his work as a tax return

preparer. In September 2010 Revenue Agent Julie Hersh (RA Hersh) sent a letter

and a detailed information document request to petitioner informing him that the

IRS was investigating his potential liability for various penalties.

      In the meantime, in early 2010 the IRS opened a criminal investigation and

interviewed several of petitioner’s clients. Some of those clients informed the IRS

that petitioner had ignored or altered tax information that they had provided to him

and improperly claimed the FTH credit and various deductions.
                                        -4-

III. Civil Injunction

      In February 2011 the United States filed a civil action seeking to enjoin

petitioner from preparing or filing Federal income tax returns for other taxpayers.

On April 12, 2011, the U.S. District Court for the Eastern District of Pennsylvania

issued a detailed memorandum and an accompanying order granting the

Government’s request for a preliminary injunction enjoining petitioner from

preparing or filing Federal income tax returns for other taxpayers claiming the

FTH credit and deductions for Schedule A expenses and Schedule C expenses. In

the memorandum the District Court found that petitioner engaged in “conduct that

is subject to penalty under 26 U.S.C. [sec.] 6701.” On June 2, 2011, the District

Court entered a stipulated permanent injunction barring petitioner from “acting as

tax return preparer” and “engaging in conduct that substantially interferes with the

administration or enforcement of the internal revenue laws.”

IV. Criminal Conviction and Incarceration

      In March 2012 petitioner was indicted and charged with willfully aiding or

assisting in the preparation of fraudulent or false Federal income tax returns under

section 7206(2). On October 30, 2013, following a jury trial, petitioner was found

guilty of 14 and 12 violations of section 7206(2) for the taxable years 2008 and
                                        -5-

2009, respectively. On January 2, 2014, petitioner began serving a term of 36

months in prison.

      Petitioner filed an appeal challenging his criminal conviction. On October

20, 2015, the U.S. Court of Appeals for the Third Circuit affirmed petitioner’s

conviction and his sentence.

      After completing his term of incarceration, petitioner was immediately taken

into custody by Immigration and Customs Enforcement personnel and was held in

detention pending deportation proceedings. In July 2018 petitioner was deported

to Liberia.

V. Assessment of Civil Penalties

      On December 12, 2013, after the conclusion of petitioner’s criminal trial,

RA Hersh prepared, and her immediate supervisor signed, a Form 8278,

Assessment and Abatement of Miscellaneous Civil Penalties, authorizing the

assessment of penalties under section 6701. On March 14, 2014, RA Hersh sent a

letter to petitioner notifying him that the IRS had determined that he was liable for

section 6701 penalties for the years in issue and informing him that he could

provide a written rebuttal by April 11, 2014. On March 24, 2014, petitioner sent a

rebuttal letter to RA Hersh challenging the penalties in relevant part on the ground
                                         -6-

that the “Eastern District of Pennsylvania already considered the matter, and

concluded that [the] fine is zero and restitution not applicable.”

      On July 28, 2014, respondent entered assessments against petitioner and

sent notices of penalty charge to him requesting that he pay section 6701 penalties

of $14,000 and $12,000 for the taxable years 2008 and 2009, respectively.

Petitioner failed to remit payment.2

VI. Collection Due Process Proceedings

      On January 6, 2015, respondent sent a notice of Federal tax lien filing to

petitioner in respect of the unpaid penalties for the years in issue. On January 12,

2015, petitioner mailed a Form 12153, Request for a Collection Due Process or

Equivalent Hearing, to the IRS Office of Appeals (Appeals Office) requesting that

the lien be withdrawn. Petitioner attached to Form 12153 a copy of the response

that he had filed in opposition to respondent’s motion to dismiss for lack of

jurisdiction filed at docket No. 19956-14S, which in turn referred to his letter to




      2
        In August 2014 petitioner filed a petition with the Court at docket No.
19956-14S attempting to challenge the notices of penalty charge on the grounds
that his criminal convictions were not final and sec. 6701 penalties are limited to
$1,000 per taxable year. The Court granted respondent’s motion to dismiss that
action because no notice of deficiency or notice of determination had been issued
to petitioner that would permit him to invoke the Court’s jurisdiction.
                                         -7-

RA Hersh dated March 24, 2014 (summarized above). Petitioner did not propose

an alternative to the collection action or suggest that the lien was overly intrusive.

      The Appeals Office informed petitioner that his administrative hearing

would take place by telephone on March 12, 2015. Petitioner was incarcerated at

the time and he did not call the Appeals Office as directed, nor did he submit any

other documents in support of his challenge to the lien.

      On April 17, 2015, the Appeals Office issued a Notice of Determination

Concerning Collection Action(s) under Section 6320 and/or 6330 to petitioner

sustaining the lien filing. On May 18, 2015, petitioner filed a timely petition for

review with the Court.3

      As previously mentioned, no appearance was entered by or on petitioner’s

behalf when this case was called for trial. Petitioner has not provided the Court

with his current address. Although the Court has mailed orders and notices to

petitioner at multiple addresses, he has not replied to respondent’s motion for

default judgment or otherwise made an effort to prosecute this case.




      3
        Although the notice of determination included a determination relating to
petitioner’s unpaid Federal income tax for 2010, 2011, and 2012, petitioner
subsequently paid those tax liabilities, and they are not at issue in this case.
                                         -8-

                                      Discussion

      Rule 123(a) allows the Court to enter a default judgment against a party

who “has failed to plead or otherwise proceed as provided by these Rules or as

required by the Court”. Rule 123(b) gives the Court even broader discretion to

dismiss a case “[f]or failure of a petitioner properly to prosecute or to comply with

these Rules or any order of the Court or for other cause which the Court deems

sufficient”. We have construed Rule 123 liberally to permit default or dismissal

consistent with our sound discretion and the interests of justice, see Stringer v.

Commissioner, 84 T.C. 693, 706 (1985), aff’d without published opinion, 789

F.2d 917 (4th Cir. 1986), and have invoked the Rule where a taxpayer fails to

appear at trial, see Ritchie v. Commissioner, 72 T.C. 126 (1979).

I. Collection Due Process

      Section 6321 provides that if any person liable to pay any tax neglects or

refuses to pay the same after demand, the unpaid amount, including any interest,

addition to tax, or assessable penalty, shall be a lien in favor of the United States.

Although section 6322 provides that the lien imposed by section 6321 generally

arises when the tax is assessed, section 6323(a) explains that the lien imposed by

section 6321 is not valid as against certain of the taxpayer’s creditors until a notice

of lien is filed in accordance with section 6323(f). Section 6320(a) provides that
                                        -9-

the Commissioner shall notify a taxpayer in writing when a notice of lien is filed

under section 6323 and inform the taxpayer of the right to request an

administrative hearing with the Appeals Office. See sec. 6330(b).

      If a taxpayer makes a timely request for an administrative hearing, the

hearing will be held before an impartial officer or employee of the Appeals Office.

Sec. 6330(b). When conducting administrative hearings in collection matters, the

Appeals Office must verify that the requirements of any applicable law or

administrative procedure have been met in processing the case. Sec. 6330(c)(1),

(3)(A). The Appeals Office also must consider any issues raised by the person

relating to the unpaid tax or proposed levy, including offers of collection

alternatives, appropriate spousal defenses, and challenges to the appropriateness of

the collection action. Sec. 6330(c)(2)(A), (3)(B). A person may challenge the

existence or amount of the underlying tax liability if the person did not receive a

notice of deficiency or did not otherwise have an opportunity to dispute such tax

liability. Sec. 6330(c)(2)(B). Finally, the Appeals Office must consider whether

the collection action balances the need for efficient collection against the person’s

concern that collection be no more intrusive than necessary. Sec. 6330(c)(3)(C).

      The Court has jurisdiction under section 6330(d) to review the

Commissioner’s administrative determinations in lien and levy actions. Where the
                                        - 10 -

underlying tax liability is properly at issue, the Court will review the matter on a

de novo basis. Goza v. Commissioner, 114 T.C. 176, 181-182 (2000). Where the

underlying liability is not properly at issue, the Court will review the

administrative determination for abuse of discretion. Id. at 182. An abuse of

discretion occurs if the Appeals Office exercises its discretion “arbitrarily,

capriciously, or without sound basis in fact or law.” Woodral v. Commissioner,

112 T.C. 19, 23 (1999).

      Section 6671(a) provides in relevant part that assessable penalties, including

section 6701 penalties, shall be assessed and collected in the same manner as

taxes. Inasmuch as section 6701 penalties are not subject to deficiency

procedures, see sec. 6703(b), petitioner was entitled to challenge his liability for

those penalties before the Appeals Office, see Kestin v. Commissioner, 153 T.C.

14, 23-24 (2019) (discussing penalties assessed pursuant to section 6702). With

regard to section 6701 penalties, the Commissioner has the burden of production

pursuant to section 7491(c) and normally bears the burden of proof under section

6703(a).

      As a preliminary matter, however, a taxpayer must properly present an

underlying liability challenge at the Appeals Office administrative hearing in order

to preserve that challenge for judicial review. See Thompson v. Commissioner,
                                          - 11 -

140 T.C. 173, 178 (2013) (“A taxpayer is precluded from disputing the underlying

liability if it was not properly raised in the CDP hearing.”); Giamelli v.

Commissioner, 129 T.C. 107, 115 (2007) (“We hold today that we do not have

authority to consider section 6330(c)(2) issues that were not raised before the

Appeals Office.”); sec. 301.6330-1(f)(2), Q&A-F3, Proced. & Admin. Regs. (“An

issue is not properly raised if the taxpayer fails to request consideration of the

issue by Appeals, or if consideration is requested but the taxpayer fails to present

to Appeals any evidence with respect to that issue after being given a reasonable

opportunity to present such evidence.”).

      A. Challenges to Underlying Liability

      Giving petitioner the benefit of the doubt, his request for an Appeals Office

administrative hearing raised at best two challenges to his liability for the section

6701 penalties in issue.4 Specifically, he asserted that the assessments were

      4
          Sec. 6701(a) provides in relevant part as follows:

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

                      (1) who aids or assists in, procures, or advises with
               respect to, the preparation or presentation of any portion of a
               return, affidavit, claim, or other document,

                     (2) who knows (or has reason to believe) that such
               portion will be used in connection with any material matter
                                                                        (continued...)
                                          - 12 -

improper because (1) he had filed an appeal challenging his criminal convictions

under section 7206(2) and (2) the penalty prescribed in section 6701 is limited to a

single penalty of $1,000 per taxable year.




      4
          (...continued)
                arising under the internal revenue laws, and

                      (3) who knows that such portion (if so used) would result
               in an understatement of the liability for tax of another person,

      shall pay a penalty with respect to each such document in the amount
      determined under subsection (b).

               (b) Amount of Penalty.--

                     (1) In general.--Except as provided in paragraph (2), the
               amount of the penalty imposed by subsection (a) shall be
               $1,000.

                     (2) Corporations.--If the return, affidavit, claim, or other
               document relates to the tax liability of a corporation, the
               amount of the penalty imposed by subsection (a) shall be
               $10,000.

                      (3) Only 1 penalty per person per period.--If any person
               is subject to a penalty under subsection (a) with respect to any
               document relating to any taxpayer for any taxable period (or
               where there is no taxable period, any taxable event), such
               person shall not be subject to a penalty under subsection (a)
               with respect to any other document relating to such taxpayer
               for such taxable period (or event).
                                         - 13 -

      Petitioner’s argument that the IRS erred in assessing civil penalties under

section 6701 while the appeal in his criminal case was pending is misplaced.

Although the IRS took note of petitioner’s criminal convictions in support of its

determination to assess the section 6701 penalties, the latter assessments were not

directly dependent upon a finding that petitioner was criminally culpable under

section 7206(2). Stated differently, civil penalties under section 6701 and criminal

penalties under section 7206(2) are separate and distinct penalties. Although they

share some common elements, one can be established wholly independent of the

other. See, e.g., Kapp v. Commissioner, T.C. Memo. 2019-84, at *100-*101.

      Petitioner’s argument that section 6701 penalties are limited to a single

penalty of $1,000 per year is likewise incorrect. Section 6701 provides for the

assessment of a penalty on any person who aids and abets another person in

understating his or her tax liability. In short, and as is relevant here, a tax return

preparer who is liable for a penalty under section 6701(a) may be assessed $1,000

for each document that would result in an understatement of a client’s tax liability,

subject to the limitation that only one penalty may be imposed on a tax return

preparer for an individual client for a particular taxable year. In this case the

cumulative assessments that respondent entered against petitioner for the years in

issue comply with the provisions of section 6701(a) and (b).
                                       - 14 -

      B. Verification

      As mentioned above, the Appeals Office must verify that the requirements

of any applicable law or administrative procedure were met in processing the

taxpayer’s case. Sec. 6330(c)(1). We review this verification requirement for

abuse of discretion, see Gardner v. Commissioner, 145 T.C. 161, 183 (2015),

aff’d, 704 F. App’x 720 (9th Cir. 2017), and do so without regard to whether the

taxpayer raised it at the Appeals Office hearing, see Hoyle v. Commissioner, 131

T.C. 197, 202-203 (2008), supplemented by 136 T.C. 463 (2011).

      Under sections 7491(c) and 6751(b), respondent bears the burden of

producing evidence to show that before the section 6701 penalties were assessed

they were “personally approved (in writing) by the immediate supervisor of the

individual making such determination”. See Graev v. Commissioner, 149 T.C.

485, 492-493 (2017), supplementing and overruling in part 147 T.C. 460 (2016).5

The Court has held that section 6751(b) requires written approval of the initial

penalty determination before the date when the taxpayer is first sent written

notification of the penalties proposed. Clay v. Commissioner, 152 T.C. 223, 249




      5
        Respondent does not contend that sec. 6701 penalties fall within either of
the statutory exceptions to the supervisory approval requirement under sec.
6751(b)(2).
                                         - 15 -

(2019); see also Chai v. Commissioner, 851 F.3d 190, 221 (2d Cir. 2017), aff’g in

part, rev’g in part T.C. Memo. 2015-42.

      The record shows that RA Hersh first notified petitioner in September 2010

that the IRS was investigating his potential liability for various civil penalties.

This tentative notification did not indicate that the IRS was proposing to impose a

specific penalty. See Belair Woods, LLC v. Commissioner, 154 T.C. ___, ___

(slip op. at 14-15) (Jan. 6, 2020) (holding that tentative proposed adjustments do

not constitute an “initial determination” within the meaning of section 6751(b)(1)).

      In December 2013 RA Hersh prepared, and her immediate supervisor

signed, a Form 8278 authorizing the assessment of section 6701 penalties totaling

$26,000 against petitioner. Thereafter, in March 2014 RA Hersh sent a letter to

petitioner notifying him that the IRS had determined that he was liable for section

6701 penalties for the years in issue and informing him that he could provide a

written rebuttal by April 11, 2014. Although petitioner sent a rebuttal letter to RA

Hersh challenging the penalties in question, the IRS subsequently entered

assessments and sent notices to him requesting that he pay section 6701 penalties

of $14,000 and $12,000 for the taxable years 2008 and 2009, respectively.

      In the light of the steps outlined above, respondent satisfied the

requirements of section 6751(b). RA Hersh’s immediate supervisor authorized the
                                         - 16 -

assessment of the penalties in dispute before petitioner was first informed that the

penalties would be imposed against him and before those penalties were actually

assessed. See Blackburn v. Commissioner, 150 T.C. 218, 223 (2018) (holding that

the existence of a penalty approval form in the record was sufficient to establish

the settlement officer’s verification of assessments when the administrative record

reflects compliance with administrative procedures); see also Kapp v.

Commissioner, at *94-*96.

II. Conclusion

      Petitioner failed to appear at the trial of this case, file a response to

respondent’s motion for default judgment, or inform the Court of his current

address. Other than the misplaced challenges to the civil penalties underlying the

lien action (discussed above), petitioner did not raise any issue regarding the

collection action or propose an alternative such as an offer-in-compromise or an

installment agreement. The Appeals Office did not abuse its discretion in this case

and properly verified that the requirements of any applicable law or administrative

procedure were met in processing petitioner’s case. Consequently, the Court will

grant respondent’s motion for default judgment, as supplemented, and enter a

decision sustaining the notice of determination upon which this case is based.
                            - 17 -

To reflect the foregoing,


                                     An appropriate order and decision

                            will be entered.
