In an order issued on January 24, 2017, in the case of Brown v. Commissioner, Judge Holmes declines to uphold the determination by a Settlement Officer because she did not engage in an analysis of the impact of the taxpayer’s monthly shortfall in income necessary to pay expenses as it related to the assets he had available to satisfy his outstanding tax liability. The analysis in the case provides an important look at how at least one judge on the Tax Court looks at the duty of Appeals in reviewing a CDP case as well as how he calculates ability to pay in the context of someone with assets but a negative monthly balance sheet. The decision does not mean that the IRS cannot require the taxpayer use the assets to satisfy the outstanding liability but does mean that in the CDP process Appeals must analyze the need for the asset in order to make ends meet in the future. We have talked about abuse of discretion previously but the Brown case seems to place a higher, though not inappropriate, burden on the IRS that most other cases we have reviewed. The approach also follows a similar path to the one taken by Judge Gustafson in in some of his recent holdings discussed here and here and breaks from some older opinions that did not delve as deeply into a situation the IRS appeared to ignore.read more...
The IRS determined that Mr. Brown was a responsible officer of Hudson Steel Fabricators & Erectors, Inc. After going through the appropriate process, it assessed a trust fund recovery penalty against him of almost $200,000. He engaged in an administrative appeal of the determination of the TFRP and lost. Eventually, the IRS sent him a CDP notice which caused him to timely request a hearing. He wanted to bring back up the merits in the CDP concerning his underlying liability for the TFRP but Appeals said he could not and the Court agreed. Based on the information available in the order, nothing suggests that he had failed to receive a fair hearing on the issue prior to assessment or that he had a clear basis for overturning the assessment, as in a case Les discussed previously. In addition to trying to seek to have another hearing on the correctness of the TFRP assessment, he also raised the issue that his account should be placed into Currently Not Collectible (CNC) status rather than have the IRS levy upon his assets. The Court focused on the CNC issue and how Appeals should go about determining when someone qualifies for CNC status.
Though not quick to do so, Mr. Brown submitted to the Settlement Officer not too long after the CDP hearing a Form 433-A, also known as a collection information statement (CIS). The Settlement Officer reasonably told him that if he wanted her to consider CNC as an option he had to give her the CIS so that she would have a basis for making a decision. The CIS showed that each month his income was less than his allowable living expenses. The Settlement Officer seemed to accept that the income and expenses on the CIS correctly stated his living situation; however, the ability to qualify for hardship status, a predicate to CNC designation, also includes the taxpayer’s assets. A taxpayer could have a negative monthly cash flow but have a savings account with a million dollars. The IRS would not, in those circumstances, stand back from collection just because of the negative monthly cash flow.
In analyzing Mr. Brown’s assets, the Settlement Officer found that he had equity in a retirement account that totaled nearly $70,000 and a whole life policy worth more than $20,000. The inquiry does not, or should not, however, stop once the SO finds assets of value. In order to determine if a hardship situation exists, the SO should consider other factors. Judge Holmes went to two IRS regulations from which he pulled guidance regarding the situation in which a taxpayer has an asset but also has expenses exceeding current income. Treas. Reg. 301.6343-1(b)(4)(ii) discussing hardship status provides that the SO could consider a host of factors including: age, employment status, employment history, medical expenses, earning capability, number of individuals the taxpayer supports as well as the necessary reasonable expenses. Treas. Reg. 301.7122-1(c)(3)(iii) discussing effective tax administration offers in compromise gives examples of hardship even where a taxpayer could fully pay the liability. The regulation gives an example of someone whose retirement account represented their only asset. The regulation provides that if “liquidation of the retirement account would leave him without adequate means to provide for basic living expenses, that is hardship.
Judge Holmes says that his role is not to decide whether Mr. Brown’s circumstances satisfied the conditions of hardship but whether the SO abused her discretion in denying him the relief he requested in the CDP case. He describes his review as constrained by the Supreme Court’s decision in SEC v. Chenery Corp., 332 U.S. 194 (1947). We have discussed Chenery before here (in a post that links to several other posts discussing Chenery), but it does not get cited in many CDP cases by judges other than Judge Holmes. Here, the SO’s determination simply stated that Mr. Brown had an ability to pay because of his assets. The SO made no effort to determine if he would need those assets in order to cover the monthly shortfall of expenses over income. Judge Holmes cites to the case of Riggs v. Commissioner, TCM 2015-98 in which the Court held in a non-precedential opinion that if a taxpayer makes a request for CNC status a part of the CDP hearing the SO “must determine whether or not there is financial hardship.” (emphasis in original). Here, the SO states Mr. Brown has an ability to pay but does not perform the analysis set forth in the Internal Revenue Manual which discusses whether enforced collection “would not cause hardship.”
Because she did not analyze what would happen if the IRS took away all of his assets leaving him with an income shortfall each month, the determination abuses the discretion given to Appeals which means that the Court will not sustain the determination. Judge Holmes denied the summary judgment request filed by the IRS but stated that it did not know if Mr. Brown would prefer a supplemental hearing on remand or an entry of decision in his favor. I discussed before the uncertainty of victory in a CDP case and Judge Holmes acknowledges that in the choices he offers to Mr. Brown. In an order entered in the case of Stark v. Commissioner Judge Holmes provided a significant discussion of the choices facing a CDP petitioner who succeeds in showing that Appeals abused its discretion in sustained a CDP Notice. The petitioner must choose whether to allow the court to deny permission to levy in the CDP Notice and “win” the CDP case in Tax Court or have the case remanded to Appeals to try to work out a collection alternative. Judge Holmes allows victorious petitioners to choose after counseling them on the pluses and minuses of their options. Winning means that the IRS cannot levy until it issues another CDP notice and, as Judge Holmes points out, it is unclear if the language of IRC 6320(b)(2) “means the taxpayer isn’t entitled to another hearing if the IRS issues a new notice of lien or levy after we don’t sustain the first one…. To date, no court has answered this question, and we don’t do so here either. We bring it up to highlight the potential risk to the taxpayer.”
The order here is important for anyone arguing a CDP case and seeking CNC status which is a high percentage of persons seeking relief in the CDP process. The fact pattern presented here is quite common. Many taxpayers, at least a high percentage of taxpayers coming into my clinic, have allowable expenses that exceed their income. Many taxpayers with tax liability are at or near the end of their working careers and hoping to rely on their savings to assist them in retirement. Almost anyone on social security, even those with the highest monthly amounts of social security which my clients rarely receive, can have allowable expenses that exceed their monthly social security payments. Judge Holmes’ approach would shelter from collection savings set aside to supplement the social security payments to the extent the income from those savings does not cause the taxpayer’s income to exceed allowable expenses. Practitioners who have not regularly been making this argument should be taking a copy of this order together with the sources cited by Judge Holmes into their CDP hearings but also citing the same material to the ACS employee who the taxpayer will encounter before the collection of the account reaches the point of a CDP hearing. The order should also cause Appeals to take notice and give direction to its employees about their responsibilities in reaching the determination and it gives Counsel employees another lesson in the primer on summary judgment motions that Judge Gustafson’s recent orders have provided.