                         T.C. Summary Opinion 2017-61



                         UNITED STATES TAX COURT



               CHARLES EDWARD FAGAN, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 28981-15S L.                      Filed August 9, 2017.



      Charles Edward Fagan, pro se.

      Jeremy D. Cameron, for respondent.



                              SUMMARY OPINION


      GERBER, Judge: This case was heard pursuant to the provisions of section

7463 of the Internal Revenue Code in effect when the petition was filed.1



      1
      Unless otherwise indicated, all section references are to the Internal
Revenue Code in effect at all relevant times.
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Pursuant to section 7463(b), 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.

Respondent made the determination to proceed to collect petitioner’s 2011 income

tax liability by levy. Petitioner seeks review of that determination under section

6330. We consider whether there was an abuse of discretion due to respondent’s

refusal to treat petitioner’s 2011 income tax liability as satisfied by means of

payments that respondent had misapplied.

                                     Background

      Petitioner was a resident of Florida at the time his petition was filed in this

case. He was a practicing attorney in Buffalo, New York, until his retirement,

when he moved to Florida. This collection case emanated from a March 16, 2015,

notice to petitioner that respondent intended to proceed with collection of a 2011

income tax liability of $2,346.46. Petitioner sought a hearing alleging, essentially,

that previous payments were misapplied and should have been applied to pay his

2011 tax liability. The March 16, 2015, notice was not petitioner’s first encounter

with respondent. It was the culmination of a long and protracted history of

collection and tax issues spanning more than 15 years.

      During the mid-1990s petitioner and his wife’s divorce resulted in personal

difficulties, including tax problems. Petitioner also encountered problems with
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his accountants which exacerbated his tax problems, all beginning around 1996.

Between 2001 and through 2005, petitioner attempted to file all delinquent returns

and to pay back taxes. His goal was to retire at the end of 2008 without tax debt.

      During 2005 petitioner was contacted by Kenneth Heidle, a collection

officer in respondent’s Buffalo office, regarding withholding tax returns going

back to 1996 and running through 2001. Beginning in 2006 petitioner engaged in

a series of about 20 meetings with Mr. Heidle. The meetings resulted in the

resolution of numerous issues for various taxable periods.

      The unresolved tax periods resulted in a collection due process case that

was scheduled for a hearing before this Court sitting in Buffalo, New York, during

October 2008. Petitioner met with respondent’s trial attorney in an effort to settle

issues involving the remaining tax liabilities, including income tax for 1996, 1997,

and 1998, and withholding tax for the fourth quarter of 2007 and first quarter of

2008. A settlement was reached and memorialized in the parties’ notes and

agreements. The documentation reflects that the income tax liabilities, including

penalties for 1996, 1997, and 1998, totaled $24,183.93 and that the two

withholding liabilities totaled $6,160.01, or total tax liabilities of $30,343.94.

Respondent’s counsel conceded $4,947.97 in income tax penalties for 1996, 1997,
                                        -4-

and 1998, resulting in a net settlement of $25,395.97 which petitioner was to pay

off in 12 monthly payments of $2,125.

      In the decision entered by this Court, the parties’ stipulation included

mention of respondent’s concession of the penalties and that the case had been

settled by the parties’ execution of an installment agreement. With respect to the

withholding tax liabilities, however, there remained a question. Despite the fact

that the parties’ notes and the agreed settlement included the $6,160.01

withholding tax liabilities, petitioner explained to Mr. Heidle that the 2007

employment tax liability had been paid in full. The fourth quarter 2007

employment tax liability constituted $3,139.35 of the $6,160.01 in employment

tax liabilities. Petitioner supplied Mr. Heidle, during October 2008, with

documents showing a Federal tax lien, dated April, 22, 2008, for fourth quarter

2007 withholding tax of $4,955.77 and three checks, all dated in June of 2008, that

reflected that respondent had been paid in full and the lien had been released.

After supplying proof of payment, petitioner asked Mr. Heidle why the $3,139.35,

fourth quarter 2007 liability continued to be part of the installment agreement; and

Mr. Heidle advised that payments petitioner made for 2007 would be available to

him after the final payment on the installment agreement.
                                        -5-

      Petitioner complied with the installment agreement, making all agreed

payments during an approximately one-year period. During the intervening years

numerous transactions and interactions occurred between petitioner and

respondent. When petitioner filed his 2011 income tax return showing a

$2,346.46 tax liability, he attempted to convince respondent that the 2011 tax

liability was satisfied by $2,900 that was a result of errors and misapplications

resulting from the ongoing collection issues between the parties. During 2013

petitioner received a notice that he owed additional interest and penalties for the

very same years that had been resolved in the settlement and covered by the

installment agreement. Petitioner pursued an administrative appeal and convinced

the Internal Revenue Service (Service) that those matters had been resolved.

Ultimately, the Service agreed.

      While petitioner was convincing respondent that liabilities had been

duplicated, the Service seized $8,700 of petitioner’s funds and applied them

toward liabilities that were already satisfied but had mysteriously reappeared on

respondent’s records. Ultimately, the Service sent petitioner an $8,700 check.

Petitioner also overpaid $1,758 on a related matter and asked that it be refunded or

returned to him. The explanation he received as to why he did not receive the

$1,758 is that he had outstanding withholding tax liabilities. That was the first
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time since the settlement and the installment agreement that petitioner heard that

any withholding tax liabilities remained outstanding or in dispute. At this time

petitioner was no longer practicing law and no longer generating employment tax

liabilities.

       Between 2008 and 2013 the Service sent petitioner bills for taxes, penalties,

and interest (involving around $17,000 to $18,000) for the same tax periods which

petitioner had paid off as part of his settlement and installment agreement. In each

instance, petitioner convinced the Service that these claims had been resolved in

the settlement and paid as part of the installment agreement.

       Petitioner also discovered in respondent’s records that one of the $2,125

installment payments that the parties agreed would pay off income tax for 1996,

1997, and 1998 was applied to withholding tax for the fourth quarter of 2007.

Respondent also applied another $1,024.75 from the installment agreement to the

fourth quarter 2007 employment tax, which petitioner had shown that he had paid

in full. The net effect of these misapplications and confusion is that $2,900

remained available to satisfy the outstanding 2011 income tax liability, for which

petitioner admits he is liable.
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                                     Discussion

      The record in this case reveals a convoluted and complex relationship

between respondent’s collection offices and petitioner. The record of these

interactions consists of several hundred pages of correspondence, transcripts,

reports, and notes of the parties. Although the parties had settled one collection

due process case and entered into an installment agreement with which petitioner

complied, the Service was not able to adjust its records to properly reflect the

resolution; and it continued to issue notices and seize property in satisfaction of

tax liabilities that had been settled and satisfied. The interaction and confusion

began in 2006 and has continued through the instant collection due process case.

      The only position advanced by petitioner is that this complex series of

transactions between him and the Government results in no collectible outstanding

2011 income tax liability. The main thrust of respondent’s argument is that the

Service has absolute authority to apply overpayments in any manner it chooses.

Petitioner counters that his is not a question of the application of an overpayment

but involves the misapplication of payments and a duplication of paid tax

liabilities resulting in a $2,900 difference from respondent’s records that should be

used to satisfy the 2011 income tax liability.
                                        -8-

      Petitioner does not question the amount of the underlying income tax

liability for 2011, and we do not address the merits of that liability. The question

we consider is whether the payments petitioner made were misapplied, resulting in

no tax due for 2011. This question does not involve a challenge to the merits of

the underlying liability and is properly before the Court to decide whether

respondent’s decision to proceed with collection is an abuse of discretion. See

Weber v. Commissioner, 138 T.C. 348, 355 (2012); see also Goza v.

Commissioner, 114 T.C. 176, 182 (2000).

      Respondent contends that section 6402 provides the Commissioner with

authority to apply overpayment to any outstanding tax liability. Section 6402, in

pertinent part provides:

            SEC. 6402(a). General Rule.--In the case of any overpayment,
      the Secretary, within the applicable period of limitations, may credit
      the amount of such overpayment, including any interest allowed
      thereon, against any liability in respect of an internal revenue tax on
      the part of the person who made the overpayment * * *.

However, petitioner is not claiming an overpayment or credit. He has shown that

his payments, both under the installment agreement and otherwise, satisfy all

outstanding liabilities against him, including the 2011 income tax which

respondent seeks to collect.
                                         -9-

      Respondent’s position that this case involves an overpayment is incorrect.

There were payments that were made in satisfaction of a series of outstanding tax

liabilities. There were misapplications of payments that petitioner and respondent

had agreed were to be applied against specific liabilities. Such payments are not

“overpayments” which are covered by section 6402 as they were payments that

respondent agreed to apply against specific tax liabilities. One of those tax

liabilities had been fully satisfied. In addition, respondent applied one of

petitioner’s refunds to accounts that had been satisfied. These errors and

misapplications totaled $2,900, an amount sufficient to satisfy the 2011 income

tax liability respondent seeks to collect.

      Accordingly, the record supports petitioner’s position that respondent

misapplied $2,900, an amount which exceeds the outstanding balance of the 2011

liability for which collection is being pursued. We agree with petitioner that his

payments cover the amount due for 2011 and that it was an abuse of discretion for

respondent to pursue collection.

      To reflect the foregoing,

                                               Decision will be entered for

                                        petitioner.
