the cases were removed to this court and consolidated. The government filed its complaints in intervention to reduce to judgment the unpaid individual income tax liabilities of Dorothea W. Huszagh for the 1984 tax year and to foreclose on certain tax liens against Mrs. Huszagh's property, including property transferred to R.L. Huszagh after the liens attached. Before this court now is the government's motion for summary judgment. For the reasons stated below, the motion is granted, except with respect to certain penalties.
Dorothea Huszagh was 88 years old in 1985, when her 1984 tax return was due. Because of her advanced age she did not maintain adequate records of her investments and income. She occasionally became confused and was very forgetful. On April 15, 1985, Mrs. Huszagh filed a Form 4868 requesting an extension of time to file her 1984 tax return. In July 1985, Mrs. Huszagh fell and broke several ribs, causing her great pain and making breathing difficult. Her son, Ralph Huszagh, tried to secure the documents necessary to prepare her return but was hindered by Mrs. Huszagh's age and physical condition. On August 15, 1985, she filed a Form 2688 requesting additional time to file. On September 16, 1985, Ralph Huszagh filed a second Form 2688 requesting additional time to file because of his mother's health problems and his difficulty in locating the records necessary to prepare a full return. On September 23, 1985, Ralph Huszagh filed a third Form 2688, stating that he had prepared a draft return but that his mother indicated that there were additional reports of interest and dividends that were not listed on the return. He also stated that his mother was ill and unable to properly assist in the preparation of the return. On September 30, 1985, Ralph Huszagh filed a return on behalf of his mother. On this return was a note which stated that the return was incomplete and that it would be amended once verification of additional income was received. Ralph Huszagh never followed up on amending the return and it was selected for audit by the Internal Revenue Service (IRS).
Dorothea Huszagh's return omitted substantial royalty and dividend income. On June 12, 1987, the IRS informed Mrs. Huszagh that its audit revealed that certain adjustments to her 1984 return were necessary and that her case would be processed, based on these findings, if she failed to respond within 30 days. Mrs. Huszagh did not respond to this letter. On February 16, 1988, the IRS issued a notice of deficiency letter which stated that Mrs. Huszagh owed an additional $ 104,052.00 in tax, plus substantial penalties. Mrs. Huszagh was given 90 days to file a petition with the Tax Court for a redetermination of the deficiency. She did not do so. On July 4, 1988, the IRS assessed an audit deficiency in the amount of $ 104,052.00 against Mrs. Huszagh. In addition, penalties were assessed as follows: $ 25,320.28 for negligence, $ 4,546.25 for delinquency, $ 26,013.00 for substantial understatement of taxes, and $ 8,164.38 in interest on the substantial understatement.
At the time of the determination of the deficiency and the issuance of the letters by the IRS, Dorothea Huszagh's health had begun to deteriorate to the point where she could no longer attend to her personal affairs. Soon thereafter, on April 13, 1989, a petition was brought in the Lake County Circuit Court for a determination that Dorothea Huszagh was a disabled person. The court found that Mrs. Huszagh was unable to care for her personal and financial affairs and appointed her daughter, Diane D'Amico, as her guardian. On July 12, 1991, D'Amico filed a request for abatement of penalties on behalf of Dorothea Huszagh with the Justice Department's Tax Division. The Tax Division has submitted the matter to this court for a determination.
From July 1988 to March 1989, Dorothea Huszagh transferred a number of oil and gas properties as gifts to three of her children: R.L. Huszagh, Richard Huszagh and Diane D'Amico. After she was appointed guardian, D'Amico returned to her mother's estate the properties transferred to her and brought an action in the Circuit Court of Lake County to, among other things, recover the properties transferred by her mother to R.L. Huszagh and Richard Huszagh in the nine months prior to Dorothea Huszagh's adjudicated disability. On September 8, 1989, R.L. Huszagh filed a "Petition for Termination of Guardianship, Dismissal of Petition for Citation to Recover Property and to Quash Citation as to Property and Other Relief" (petition to terminate) in the Lake County proceedings, which have now been transferred to this court.
The government has moved for summary judgment on the grounds that (1) Dorothea Huszagh is indebted to the United States for her unpaid tax liabilities, including penalties and interest to date;
(2) it has priority in regard to the federal tax liens as against R.L. Huszagh, who was given certain oil and gas properties by Dorothea Huszagh after the date of the assessment; and (3) that it is entitled to foreclose its liens upon the oil and gas interests transferred to R.L. Huszagh, have those properties sold in a judicial sale, and receive the proceeds therefrom.
In deciding a motion for summary judgment the court must read all facts in the light most favorable to the non-moving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 91 L. Ed. 2d 202, 106 S. Ct. 2505 (1986); Richardson v. Penfold, 839 F.2d 392, 394 (7th Cir. 1988). The facts recited above reflect this standard. Summary judgment is appropriate where the pleadings, depositions, answers to interrogatories and admissions on file, together with the affidavits, if any, show that there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c); Renovitch v. Kaufman, 905 F.2d 1040, 1044 (7th Cir. 1990).
I. Dorothea Huszagh's Tax Liabilities
A. Validity of Taxes Assessed
The IRS made an assessment against Dorothea Huszagh on July 4, 1988, finding that there was a deficiency in her 1984 return and imposing penalties and interest thereon. To demonstrate that valid assessments were made against Huszagh, the government has submitted a certificate of assessments and payments, which identifies the taxpayer, her social security number, the assessment date, the amount of the deficiency, additions to tax and interest, and the tax period (1984). The certificate was signed by an IRS official who certified that according to IRS records it was a true and complete transcript for the period stated.
Certificates of assessments and payments are generally regarded as being sufficient proof, in the absence of evidence to the contrary, of the adequacy and propriety of notices and assessments that have been made. United States v. Miller, 318 F.2d 637, 639 (7th Cir. 1963); Gentry v. United States, 962 F.2d 555, 557 (6th Cir. 1992); United States v. Bowers, 920 F.2d 220, 223-24 (4th Cir. 1990); United States v. Chila, 871 F.2d 1015, 1018 (11th Cir.), cert. denied, 493 U.S. 975, 107 L. Ed. 2d 501, 110 S. Ct. 498 (1989); Zolla v. United States, 724 F.2d 808, 810 (9th Cir.), cert. denied, 469 U.S. 830, 83 L. Ed. 2d 59, 105 S. Ct. 116 (1984). Accordingly, through its production of the certificate of assessments and payments, the government has established presumptive proof of the validity of the assessment. Given that neither D'Amico nor R.L. Huszagh have presented any evidence to counter this presumption, and in fact do not contest the validity of the assessment of taxes, the court finds that the government has established that the claimed tax liability was properly assessed against Dorothea Huszagh.
B. Penalties Assessed
The penalties imposed, however, are a different matter. D'Amico and R.L. Huszagh contend that the penalties should be abated because there was reasonable cause for the inaccuracies on Dorothea Huszagh's 1984 tax return. The government, on the other hand, maintains that the reasonable cause exception to the imposition of penalties does not apply in cases such as this where the taxpayer relied on an agent to file her return. However, before examining the propriety of the penalties the court must determine whether jurisdiction is proper.
Ordinarily a taxpayer who wishes to contest the validity of a deficiency or penalty before paying the amount requested must petition the Tax Court for relief. The taxpayer has 90 days from the issuance of the notice of deficiency to file his petition. The Tax Court cannot consider the case if the taxpayer fails to petition within this time frame. Where a taxpayer pays first and contests later, Section 1346(a)(1) of Title 28 of the United States Code provides that
the district courts shall have original jurisdiction, concurrent with the United States Court of Federal Claims, of:
(1) Any civil action against the United States for the recovery of any internal-revenue tax alleged to have been erroneously or illegally assessed or collected, or any penalty claimed to have been collected without authority or any sum alleged to have been excessive or in any manner wrongfully collected under the internal-revenue laws. . . .
Thus, for a taxpayer to bring suit to challenge an assessment or penalty in district court he must first pay the disputed amount.
This case, however, is before this court under a different procedural posture. The United States intervened in two ongoing state court actions and removed the cases to federal district court. This is not a case where the taxpayer has attempted to hale the government into federal court to challenge the validity of an assessment or penalty, without first paying the amount requested. See e.g., Flora v. United States, 357 U.S. 63, 2 L. Ed. 2d 1165, 78 S. Ct. 1079 (1958); Curry v. United States, 774 F.2d 852 (7th Cir. 1985). Rather, the United States brought the taxpayer into federal court -- the government is here as plaintiff-intervenor, not as defendant. Moreover, it is seeking to foreclose on certain properties to recover the amount assessed, plus penalties and interest. Because this case has already been properly removed to this court we can decide whether the penalties were correctly imposed. In United States v. Isaac, 1991 WL 138321 (E.D. Ky. 1991), aff'd, 968 F.2d 1216 (6th Cir. 1992), the United States sought to recover unpaid taxes and penalties in a Kentucky federal district court. The court exercised jurisdiction over the claim, finding that the taxpayer's illness constituted reasonable cause for his late filing and, therefore, the penalties were improperly assessed. In this case, just as in United States v. Isaac, the United States has brought suit to recover unpaid taxes and penalties. This court has jurisdiction to determine the propriety of the penalties.
2. Validity of Penalties Imposed
The Internal Revenue Code (the Code) provides for a number of penalties to be imposed in the event that a taxpayer fails to meet his or her obligations under the Code.
For the purposes of this motion, the government does not dispute Huszagh's version of the facts regarding the filing. However, the government maintains that, under these facts, the penalties were properly imposed. Conversely, D'Amico, in her capacity as guardian, challenges the validity of penalties assessed against Dorothea Huszagh under sections 6651(a), 6653(a)(1), 6653(a)(2) and 6661(a) of the Code.
Section 6651(a) imposes penalties on taxpayers who fail to file their returns in a timely fashion, unless the taxpayer can demonstrate that the late filing was due to reasonable cause and not willful neglect. An IRS regulation provides that
[a] failure to pay will be considered to be due to reasonable cause to the extent that the taxpayer has made a satisfactory showing that he exercised ordinary business care and prudence in providing for payment of his tax liability and was nevertheless either unable to pay the tax or would suffer an undue hardship . . . if he paid on the due date.