A Pro Se King Royally Wins Interest Abatement on Employment Taxes

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Carlton Smith recently emailed us regarding King v. Commissioner, a Tax Court case dealing with interest abatement on employment taxes- a fairly infrequent occurrence. The taxpayer in King successfully obtaining the interest abatement was interesting (bad pun not intended) by itself, but the case also touched on the Court’s jurisdiction to review an abatement action arising from the CDP context where the tax had been paid, and reinforced the Tax Court’s view on what is excessive interest (which is contrary to the IRS’s position and perhaps the most important aspect of the case).

Although Mr. King was pro se, he was a lawyer (50 years of experience) and his tax practice is what gave rise to the employment tax liability.  He was a solo lawyer, but employed at least one person in most quarters from 2002 to 2008.  Apparently, not all employment taxes were paid, and the IRS assessed taxes and penalties of just under $50k.  Most of Mr. King’s assets were real estate or his law practice, which would have been difficult or costly to liquidate.  Mr. King requested an installment agreement, which became a long, drawn out fiasco, resulting in Mr. King being passed around to various agents, TAS, and others in collections.  The IA was eventually denied due to the equity Mr. King had in various assets, and he requested a CDP hearing related to filed lien, which the IRS declined to withdraw.  In October of 2011, Mr. King was finally able to contact Arthur Fonzarelli (come on Henry, you are better than that) and obtain a reverse mortgage to pay the taxes.  Following the payment of the tax, Mr. King petitioned the Tax Court to review the denial of the installment agreement, and the IRS denial of penalty and interest abatement on the employment taxes.

The Court had to grapple with whether or not it could take jurisdiction over a CDP case where the tax had been paid (usually, no), whether interest abatement applied to employment taxes (usually, no), and if the Service’s increasing usual game of pass off and wait could result in excessive interest (usually, no).  As discussed below, the Tax Court for Mr. King (not to be confused with the Court of the King before the King Himself) was persuaded by the regal arguments, and held for the taxpayer on all three issues.

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Jurisdiction

As many of our readers know, in general if a taxpayer pays the assessment that gave rise to the CDP hearing, the Tax Court is divested of jurisdiction over the matter, and a taxpayer is forced to request a refund in a district court or the Court of Federal Claims.  See Sections 6320 and 6330; Green-Thapedi v. Comm’r, 126 TC 1 (2006) (though in the SaltzBook upcoming chapter on CDP we also discuss some cracks in the no refund in a CDP case, an issue Les touched on in in June in the post Recent Order Explores Scope of Tax Court powers in CDP Cases).  In the CDP hearing for Mr. King, however, Appeals considered the collection actions and alternatives, but also reviewed the interest abatement request.  Recent case law has made it clear that the Tax Court views the CDP decision as a final determination regarding the abatement of interest.  Although it is related to the CDP determination on the other matters, the abatement is independent and can provide jurisdiction on its own.  In 2012 and 2013, the Tax Court in Gray v. Comm’r, 138 TC 298,  declined to follow the IRS position that it lacked jurisdiction because the interest had been paid.  It held that it retained its jurisdiction under Section 6404(h); Section 6404(h)(2)(B) provides in interest abatement claims that the Tax Court had overpayment jurisdiction.  The Court, in foot note 12, gave the taxpayer a hand, by laying out how this was a claim for overpayment of interest due to failure to abate, as the petition did not specifically state an overpayment.

Section 6404(e) – (e) is not for “employment taxes”

Mr. King apparently argued that Section 6404(e) should have been a valid provision to rely upon for abatement of the interest related to his employment tax liability.  Section 6404(e) allows for the abatement of interest on any deficiency attributable to the IRS’s unreasonable error or delay, and is frequently relied upon for income tax interest abatement.  Unfortunately for the taxpayer here, there is pesky qualifying language relating to (e)(1)(B) that states the Service can only abate tax described in Section 6212, which restricts abatement to taxes imposed by subtitle A or B or chapter 41, 42, 43, or 44.  This generally includes income, gift, estate, gst and various excise taxes on nonprofits or retirement plans – not employment taxes.  King does not discuss (e)(1)(A), which allows for abatement of “any deficiency attributable in whole or in part to any unreasonable error or delay by [the IRS] in performing a ministerial or managerial act”, which does not contain the same reference to Section 6212.  As (e)(1)(B) speaks of payment of the tax and (e)(1)(A) the assessment of the deficiency, my assumption is the timing on the assessment was not an issue, only the prolonged process of the taxpayer being able to pay.  The Service position on (A) may be that the qualifying language applies to it also, but that may be susceptible to attack – I haven’t really researched the matter, but it seems like the key aspect is reliance on regulations that state the position, which seems outside the scope of the statutory language.

Section 6404(a) and when the IRS causes “excessive” interest

So when is the assessment of interest excess?  Probably not as often as taxpayers believe, but more often than the IRS would like.  Section 6404(e) did not provide relief, but Section 6404(a) provides for the abatement of the portion of an assessment, including interest, which “(1) is excessive in amount…or (3) is erroneously or illegally assessed.”  There is no restriction on the type of tax.

Mr. King claimed that the interest was excessive because of the various delays created by the IRS.  The Service position on this matter is that “excessive” is essentially a restatement of the third option of “erroneously or illegally assessed.”  The Service has lost on this matter before in the Tax Court in H&H Trim & Upholstry v. Commr, TC Memo 2003-9, and Law offices of Michael BL Hepps v. Comm’r, TC Memo 2005-138, so this is not breaking new ground, but good reinforcement of a taxpayer friendly ruling.  The Tax Court in the previous cases had interpreted “excessive” to “include the concept of unfairness under all of the facts and circumstances.”  A bit broader than simply erroneously or illegally assessed.   In H&H Trim, the taxpayer was able to show the interest would not have accrued “but for” the Services dilly-dallying.  In King, the Service argued that the prior case law was incorrect, but also argued that the taxpayer could have made a voluntary payment to stop the interest and was requesting an installment agreement, which would have incurred interest.  The Court essentially held that the taxpayer showed he would have perfected the installment agreement and paid it the underlying amount more quickly but for the IRS taking its sweet time and failing to follow its own IRM procedures in responding to the taxpayer’s IA request (albeit imperfect), and abatement was therefore appropriate.  As to the voluntary payment, the Tax Court stated that Section 6404(a) has no language barring abatement when a portion of the error or delay could have been attributable to the taxpayer (Section 6404(e) has that language).  Even if the taxpayer could have made the payment, the failure to do so did not alleviate the IRS’s requirement to abate.

Overall, a very instructive case on making employment tax and interest abatement claims.  Also helpful for those seeking abatement under Section 6404(a) who are arguing the tax is excessive, if the taxpayer can show that but for the IRS’s actions in inappropriately slowing the process the interest would have been less.

Stephen Olsen About Stephen Olsen

Stephen J. Olsen’s practice includes tax planning and controversy matters for individuals, businesses and exempt entities for the law firm Gawthrop Greenwood, PC.

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