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BURD v. U.S.

October 8, 1991

ELENA ZAHOS BURD, PLAINTIFF.
v.
UNITED STATES OF AMERICA, DEFENDANT.



The opinion of the court was delivered by: Clarkson S. Fisher, District Judge.

OPINION

Before this court is a motion by plaintiff, Elena Zahos Burd, to deny the United States' motion for summary determination and in support of plaintiff's motion for summary determination. The issue presented in this action is whether the Internal Revenue Service's jeopardy assessment pursuant to 26 U.S.C. § 6862 was reasonable under the circumstances. For the following reasons, the court determines that the jeopardy assessment was not reasonable under the circumstances and, therefore, the defendants' motion for summary determination is denied and the plaintiff's motion for summary determination is granted.

Elena Zahos Burd ("plaintiff"), was formerly married to James Zahos ("Zahos"). Complaint ¶ 6. Plaintiff and Zahos filed a 1987 joint federal income tax return. Id. at ¶ 6. In 1988, plaintiff filed a "married filing separately" federal income tax return. Id. at ¶ 7. On June 5, 1991, the Internal Revenue Service ("IRS") made a "jeopardy assessment" against the plaintiff of $26,900.52 for the tax year 1987. Id. at ¶ 9. Additionally, that same day, the IRS made a "jeopardy assessment" against the plaintiff for $3,072.73 for the tax year 1988.

Also, on June 5, 1991, the IRS made a "jeopardy assessment" of $18,262.00 against the plaintiff based on transactions conducted between plaintiff as transferee and Zahos Pools, Inc. as transferor for the taxable years 1987 and 1988. Complaint ¶ 11. Zahos was a 98% shareholder of Zahos Pools, Inc. Plaintiff Aff. ¶ 9. Plaintiff was a 1% shareholder in the corporation. Id. The other 1% belonged to the incorporating attorney. Id. All of the foregoing tax assessments were made by the IRS pursuant to the recommendations of Agent Elaine During of the IRS's Newark, New Jersey, office. See Durning Certif. The recommendations were made by Agent Durning because of certain information she received during the course of her inquiry into the corporation's tax liability.

Agent Durning met with plaintiff in June of 1990. At that meeting plaintiff told Durning that corporate funds were not used to pay personal expenses but that if a personal check was unavailable corporate funds might be used to pay personal expenses and the corporation would be reimbursed. Id. at ¶ 7. Plaintiff explained that if no reimbursement occurred, the expenses would not be deducted by the corporation as business expenses, and a bonus would be declared by the corporation and reflected on the plaintiff's tax returns. Id. Upon examination of the corporate records, however, Agent Durning found that for the years 1987 and 1988 plaintiff used corporate funds to pay personal expenses, plaintiff did not reimburse the corporation, the corporation deducted the expenses as business expenses and plaintiff never declared a bonus on her tax returns. Id. The amount of the tax liability is not an issue before this court.

In September of 1990, a divorce decree was entered in the Superior Court of New Jersey, Family Part, Hunterdon County, between plaintiff and Zahos. Pursuant to the divorce decree, plaintiff was awarded the Zahos' marital home. Id. at ¶ 11. In November of 1990, Zahos informed Agent Durning that the plaintiff had listed the house for sale and that plaintiff was planning on moving to Japan to live with her brother. Id. at ¶ 12. Agent Durning confirmed that the house was on the market but did not attempt to ascertain whether plaintiff was planning on moving to Japan. On April 29, 1990, Agent Durning learned that the plaintiff's house, her "only known asset" would be sold for the purchase price of $395,000. Id. at 13. Agent Durning states:

  Since Elena Zahos was about to convert her only known asset
  (her house) to cash (there was no indication that the proceeds
  from the sale would be converted into something other than
  cash) and quite possibly move to Japan, I determined that
  collection of the taxpayers deficiencies would be in jeopardy
  if there was not an immediate assessment, especially in light
  of Ms. Zahos' history of participation in, and having knowledge
  about, the diversion of corporate assets and use of corporate
  funds to pay personal expenses.

Id. at ¶ 15.

Based on this information, Agent Durning determined that a jeopardy assessment under 26 U.S.C. § 6861 was necessary. Durning Certif. at ¶ 15. The District Director approved this recommendation on June 4, 1991. Id. at ¶ 16. On June 5, 1991, the IRS sent plaintiff a Notice of Jeopardy Assessment and Right of Appeal. Id. at 17. On June 6, 1991, one day after the jeopardy assessment was made against plaintiff, plaintiff conveyed to her daughter Christine DeFino title to her house for $345,000. Id. at ¶ 18. On June 17, 1991, Agent Durning learned that the property was conveyed by her daughter to a third party. Id.

Generally, if the IRS makes a determination that a tax is due to the United States Government by a taxpayer, it may make an assessment as to the amount owed and bring an action to collect that amount. Under normal assessment procedure, there is usually a considerable lapse of time between a taxpayer's first notice that the IRS is seeking to collect the tax and the actual enforced collection of the tax. This is due in part to the taxpayer's right to contest, in the United States Tax Court, whether a tax is owed and the amount of the tax owed.

When the IRS, however, determines that the collection of a tax may be in jeopardy, it may forego the normal time-consuming collection process and immediately assess and collect the tax by way of a jeopardy assessment procedure provided for in 26 U.S.C. § 6862. Under the statute if the IRS determines that the assessment or collection of the tax would be jeopardized by delay, the IRS is authorized to immediately assess and levy upon the taxpayer's property. The taxpayer then is forced to litigate the merits of the assessment and the amount of such assessment after the tax has already been collected.

Realizing the drastic nature of this proceeding, Congress concluded that the taxpayer should be able to obtain immediate judicial review of the propriety of the jeopardy assessment. 26 U.S.C. § 7429. Section 7429 empowers the taxpayer to bring an action in the district court for review of the IRS's determination. The district court will make de novo determinations as to whether the IRS's making of the jeopardy assessment was reasonable under the circumstances, and whether the amount assessed is appropriate under the circumstances. The government bears the burden of proving the reasonableness of the jeopardy determination and the plaintiff bears the burden of proof as to the amount of such determination. 26 U.S.C. § 7429(g).

In this case, the plaintiff does not challenge the amount of the assessment, and the court is precluded from addressing the merits of the tax liabilities owed by the plaintiff. Therefore, the only issue presented is whether the IRS's jeopardy assessments were reasonable under the circumstances. It should be noted that the IRS must show by a preponderance of the evidence presented to the court that the assessment was reasonable under the circumstances. Northeast Chemical, Inc. v. I.R.S., Dept. of Treasury, 48 A.F.T.R.2d 81-5801 (W.D.N Y 1981). Because the IRS has not carried its burden, and because the plaintiff has demonstrated that the IRS's actions were not reasonable under all of the circumstances of this case, the plaintiff's motion for summary determination is granted, and the defendant's motion for summary determination is denied.

In assessing the reasonableness of the IRS's actions, the Court is not limited to consideration of the information available to the IRS at the time of the assessment but must also consider any subsequently available information that might impact of the reasonableness of the determinations. "[A]ny relevant information should be considered." Loretto v. United States, 440 F. Supp. 1168, 1173 (E.D.Pa. 1977). Additionally, the court may evaluate evidence that would ...


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