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WHEATON v. UNITED STATES

June 13, 1995

FRANK H. WHEATON, JR., Plaintiff,
v.
UNITED STATES OF AMERICA, Defendant.



The opinion of the court was delivered by: JOSEPH E. IRENAS

 IRENAS, District Judge:

 The current action for injunctive relief stems out of tax penalties assessed by the Internal Revenue Service ("IRS") against plaintiff for failure to report income allegedly derived from the ownership of certain foreign corporations. As a result of an audit of plaintiff's personal tax returns from 1979 to 1990, the IRS concluded that plaintiff had a controlling interest in fifteen foreign corporations scattered throughout the Caribbean and South America. Plaintiff admitted ownership of five of these corporations, and reported all necessary information on Form 5471 as required by I.R.C. § 6038(a). The penalties at issue here involve plaintiff's failure to file Form 5471 for the ten remaining corporations, which plaintiff denies owning.

 On October 25, 1990, plaintiff received a letter from the IRS informing him of his obligation to file Form 5471 for the ownership of foreign corporations, and describing the penalties imposed by I.R.C. § 6038(b) and Treas. Reg 1.6038-2 for failure to file. (Plaintiff's Ex. "A".) Plaintiff received a follow-up letter on September 22, 1992, which specifically requested that plaintiff file a Form 5471 with respect to Caribe International, a company in which plaintiff denies holding a controlling interest. On May 11, 1993, plaintiff received another letter requesting that he file Form 5471 for fifteen foreign corporations, ("Plaintiff's Ex. "F"), although plaintiff denies ownership of ten of the corporations and alleges that he filed Form 5471 for the remaining five. At some point, the audit examiner prepared a report indicating that plaintiff should be assessed $ 2,950,000 in penalties for failure to file Form 5471 over the course of nine years. (Plaintiff's Ex. "C".) Plaintiff alleges that he did not receive a copy of this report until July 14, 1994.

 On June 29, 1993, pursuant to I.R.C. § 6212, the IRS issued statutory Notices of Deficiency to both plaintiff and Dorchester Industries Inc., a foreign corporation of which plaintiff admits ownership. While the notice to Dorchester indicated that pursuant to Treas. Reg. 1.6038-2(k)(2), its foreign tax credit was reduced by 10% for failure to file Form 5471, (Plaintiff's Ex. "E"), the notice to plaintiff, which enumerated deficiencies from 1979 to 1988, did not mention penalties for failure to file Form 5471, (Plaintiff's Ex. "D"). Plaintiff alleges that he timely filed a petition with the United States Tax Court ("Tax Court") to challenge this deficiency, which stayed collection of the deficiency pending the Tax Court's final determination. See I.R.C. § 6213(a).

 Plaintiff then alleges that on August 2, 1993, he received a penalty assessment for failure to file Form 5471 in 1983, and that on August 16, 1993, he received both: (1) a penalty assessment for failure to file form 5471 for the years 1982, 1983, 1985, 1986, 1987, and 1988; and (2) a Notice of Penalty Charges for $ 350,000 for each of the years 1982, 1984, 1985, and 1986, $ 250,000 for 1987 and 1988, and that the figure for 1983 was not provided. (Complaint at PP 16-18.) Plaintiff also alleges that he requested an abatement of these penalties, (Id. at P 21), although the record does not contain proof to support these allegations. The record does indicate that on September 24, 1993, the IRS wrote plaintiff a letter indicating the IRS's position that plaintiff owned the ten contested foreign corporations and was liable for failure to file Form 5471 in connection with these corporations. (Plaintiff's Ex. "G"). On October 18, 1993, the IRS notified plaintiff that his request for an abatement had been denied.

 On October 8, 1993, plaintiff received a second Notice of Deficiency for the IRS for 1989. Once again, the notice of deficiency made no mention of penalties for failure to file Form 5471. Plaintiff once again challenged the deficiency in the Tax Court. Furthermore, the record indicates that on October 25, 1993, a $ 250,000 penalty for failure to file Form 5471 in 1989 was assessed against plaintiff. (See Plaintiff's Ex. "K".)

 Robert Bencie, plaintiff's accountant, indicates that on November 8, 1993, he filed with the IRS a challenge to the penalties assessed against plaintiff for failure to file Form 5471, (Plaintiff's Ex. "I", Bencie Aff. at P 3), although it is unclear exactly which penalties were challenged in that proceeding. In any case, on March 25, 1994, Bencie received a call from the IRS Appeals Officer, who stated that he would not address the penalties until completion of the Tax Court case. (Id. at P 4.) However, by letter dated March 20, 1995, the Appeals Officer indicated that the penalties would be abated in the amount of $ 480,000, all of which related to the five corporations in which plaintiff admits ownership. (Id. at PP 5-6; Plaintiff's Ex. "L".) The Appeals Officer deferred ruling on three other corporations because plaintiff's ownership of them was at issue in the matter before the Tax Court, and simply refused to reach the merits on the seven remaining corporations. (Id. at P 6.) Bencie also states that the IRS to date has refused to provide plaintiff with any information regarding his alleged ownership of these seven corporations. (Id. at P 7.)

 On September 9, 1994, plaintiff received a third Notice of Deficiency for 1990. (Plaintiff's Ex. "J".) The notice once again did not refer to penalties under § 6038(b) and plaintiff once again challenged the notice in the Tax Court. On September 12, 1994, plaintiff received a third penalty assessment for failure to file Form 5471 in 1990, (Complaint at P 27), although once again there is no evidence of this assessment in the record.

 On November 17, 1994, the IRS filed a federal tax lien against plaintiff in the amount of $ 2,599,432.39 for failure to pay penalties pursuant to § 6038(b). (Plaintiff's Ex. "K".) On March 17, 1995, the IRS served a Notice of Levy on Wheaton, Inc., in the amount of $ 2,940,848.11, representing the above figure plus statutory additions. (Plaintiff's Ex. "M".) Plaintiff also alleges that the IRS intends to initiate further collection activities against him in the next few weeks. (Complaint at P 32.)

 Plaintiff claims that by omitting the § 6038(b) penalties from the notice of deficiency, the IRS has subverted his right to challenge the assessment in the Tax Court and concomitant right to a stay of enforcement proceedings pending the final decision of that court. Furthermore, the Appeals Officer has indicated that he will not address plaintiff's claim that he does not control the ten corporations until the Tax Court proceeding is complete, so plaintiff is faced with collection activities by the IRS without any opportunity for review. Plaintiff also claims that he cannot afford to pay the full penalty assessment and file a claim for refund of the amount. (Wheaton Aff. at P 5). He therefore seeks a preliminary injunction (1) compelling the government to remove all tax liens filed against him, (2) preventing any further collection proceedings against him, including the filing of any levies or the enforcement of any tax liens previously filed, and (3) compelling the government to adjudicate the § 6038(b) penalties in the case currently pending before the Tax Court.

 ANALYSIS

 The government argues that plaintiff's action is barred by the Tax Anti-Injunction Act, 26 U.S.C. § 7421. That section provides, in relevant part:

 
Except as provided in sections 6212(a) and (c), 6213(a), . . . no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person, whether or not such ...

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