Christine Speidel

About Christine Speidel

Christine Speidel is Assistant Professor and Director of the Federal Tax Clinic at Villanova University Charles Widger School of Law. Prior to her appointment at Villanova she practiced law at Vermont Legal Aid, Inc. At Vermont Legal Aid Christine directed the Vermont Low-Income Taxpayer Clinic and was a staff attorney for Vermont Legal Aid's Office of the Health Care Advocate.

Retroactive Math Error Notices May Be on the Horizon

Earlier this week the IRS publicly released a Program Manager Technical Advice (PMTA) memo evaluating the time limits on math error assessment authority. (POSTS-129453-17, 4/10/18) In it, the IRS concludes that it can lawfully make a math error assessment at any time within the assessment statute of limitations. The IRS currently and traditionally uses its math error authority to make corrections during the initial processing of returns. The potential for a change in this practice is the subject of the National Taxpayer Advocate’s 2019 Objectives Report, Area of Focus #7 

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Section 6213(b)(1) allows the IRS to make a streamlined assessment without issuing a Notice of Deficiency if the assessment arises from a math or clerical error. This is not as straightforward as it seems. Congress has gradually expanded the definition of a math error in section 6213(g)(2) to encompass situations that do not fit the commonsense definition or a math or clerical error. Math error authority is attractive to Congress and the IRS because theoretically it prevents clearly erroneous spending at a fraction of the cost of a correspondence audit. However, it is not always that simple, as the National Taxpayer Advocate has repeatedly pointed out. Les has discussed the issues on PT here and here 

Background 

The April 10th PMTA was written in response to TIGTA Report 2017-40-042 (July 17, 2017). On pages 5-7 of that report, TIGTA dings the IRS for not incorporating PATH Act restrictions into its return processing procedures for the 2016 filing season. Specifically, the PATH Act prohibited taxpayers from claiming certain credits unless the TINs used to qualify for the credits were issued prior to the due date of the return. The IRS has math error authority to reject claims without the required TIN, but it was unable to put math error procedures in place for the PATH Act TIN requirements until the 2017 filing season. 

The IRS points out that the new restrictions were enacted 32 days before the start of the filing season, which was simply not enough time to adjust its processes and inter-agency agreements. The IRS simply did not have TIN issuance dates available during the 2016 filing season. However understandable the situation, the IRS acknowledged that due to the time crunch it issued improper refunds during the 2016 filing season, and it agreed with TIGTA’s recommendation that it take steps to recover the improper refunds. The PMTA is one such step.

Time Limits on Math Error Assessment 

Both the PMTA and the NTA’s response in the 2019 Objectives Report are well worth reading for a deeper understanding of the history of math error assessments and the administrative and policy considerations involved in their use. While the PMTA indicates that the IRS is considering the use of math error authority to recover the specific post-PATH Act refunds identified by TIGTA, its analysis is not limited to that situation.  

The memo points out that section 6213 places no time limits on math error assessments. Likewise, section 6501 setting time limits on assessments does not mention math error assessments or set a different rule for them. Given this statutory structure, and Congress’s repeated expansion of math error authority, the memo concludes that use of math error after return processing is consistent with Congressional intent.

The National Taxpayer Advocate acknowledges that the statute is silent, but she takes issue with the IRS’s ability to significantly expand its use of math error authority after 92 years without explicit Congressional approval or at least a public notice and comment period. She disputes the memo’s interpretation of the 1926 legislative history, since from 1926 to 1976 math error authority was limited to actual arithmetic errors. Congress may never have anticipated that the IRS would change its use of math error procedures so dramatically.  

Finally, the IRS and the National Taxpayer Advocate disagree over whether the use of math error procedures after return processing is necessarily consistent with constitutional due process rights guaranteed by the 5th Amendment. This issue deserves its own post so I will only flag it here. The National Taxpayer Advocate does not claim that retroactive use of math error can never be constitutional, but she urges the IRS to more seriously consider the hurdles and limitations faced by the targeted taxpayers, as well as the importance to the taxpayers of the tax credits being targeted. These factors affect not only policy considerations, she argues, but also constitutional due process analysis.  

Policy and Fairness Concerns 

Erroneous math error assessments abridge taxpayer rights and cause hardships. The NTA does not argue that taxpayers who received erroneous refunds should be allowed to keep them. Her concern is systemic: even a fact as simple as a TIN issuance date is subject to error. The 2019 Objectives Report cites a study from the 2011 Annual Report to Congress in which 55% of TIN-based “math errors” were subsequently reversed at least in part. The July 2017 TIGTA report also raises concerns about the accuracy of the IRS’s TIN issuance data (“The Methodology for Recreating the Individual Taxpayer Identification Number Issuance Date Resulted in Errors).  

The 2019 Objectives Report notes several other concerns: 

As discussed in prior reports, the IRS’s pre-existing [math error authority] raises the following concerns when the resulting assessments are (or may be) erroneous:  

  • The IRS does not try to resolve apparent discrepancies before burdening taxpayers with summary assessments that they are expected to disprove; 

  • IRS communication difficulties, fewer letters (i.e., one math error notice vs. three or more letters from exam), and shorter deadlines (i.e., 60 days vs. more than 120 days in an exam) make it more difficult for taxpayers to respond timely (e.g., because they want to call the IRS to make sure they understand the letter before responding);  

  • Because it is easier to miss math error deadlines, more taxpayers — particularly low income taxpayers — will lose access to the Tax Court; and  

  • Internal Revenue Code § 7605(b) generally prohibits the IRS from examining a return more than once, but the IRS can examine a return after making a math error adjustment. 

(footnotes omitted). The expansion of math error to post-processing situations only heightens these concerns. As the NTA explains,  

Post-processing adjustments make it more difficult for taxpayers to:  

  • Discuss the issue with a preparer who could help them respond;  

  • Access underlying documentation to demonstrate eligibility;  

  • Recall and explain relevant facts;  

  • Return any refunds (or endure an offset) without experiencing an economic hardship; and  

  • Learn how to avoid the problem before the next filing season. 

The PMTA acknowledges that there are legitimate fairness concerns associated with post-processing math error assessments, and notes that the IRS could choose as a matter of policy to take a different approach to the errors identified in the TIGTA report.

Are Math Error Notices Coming Soon for Returns Filed in 2016? 

When the PMTA was written last April, the IRS was contemplating using math error authority to reclaim erroneous credits issued in 2016. For example, a 2014 return filed in spring 2016 with an EIC claim, if some SSNs on the return were issued after the original due date of the 2014 return. This was kosher before the PATH Act but not after. The assessment statute of limitations for that return is coming up next spring, so IRS will need to decide what to do soon, if it has not already decided.  

Before the IRS starts using math error authority 2 ½ years after issuing a refund, I hope it will seriously consider the National Taxpayer Advocate’s concerns and solicit public comments. Many of the taxpayers affected by the PATH Act changes are immigrants. The need for more Spanish-language and other translated correspondence has been a concern since the PATH Act and is just one example of an issue likely to be raised in public comments.  

The erroneous credits flagged by TIGTA primary affect immigrant taxpayers, but the issues raised by the PMTA and the 2019 Objectives Report affect all taxpayers. Once the IRS begins to use math error notices in post-refund situations, further expansion may be irresistible.  

IRS Office of Chief Counsel Gives Direction on Graev Compliance in Litigation

The IRS issued Chief Counsel Notice 2018-006 advising its attorneys how to address compliance with section 6751’s requirement for supervisory approval of penalties in light of the Tax Court’s decision in Graev III. The notice covers a lot of ground in a short number of pages. It reviews several different ways an IRS attorney might encounter Graev issues in litigation and instructs the attorney how to proceed in each situation. I will not review each issue covered by the notice; I encourage readers to read it in full. This blog post discusses two of the items mentioned in Notice 2018-006: the application of section 6751 to the trust fund recovery penalty and the exception in subsection 6751(b)(2) for penalties automatically calculated through electronic means. 

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IRS asserts supervisory approval is not required before imposition of a Trust Fund Recovery Penalty 

Section 6751(b) begins, “No penalty under this title shall be assessed unless…” In a brief paragraph, Chief Counsel Notice 2018-006 directs IRS attorneys to argue that the trust fund recovery penalty (TFRP) under section 6672 is a tax, rather than a penalty. Therefore, the argument goes, supervisory approval for assertion of a TFRP is not required by section 6751. The Notice also flags this issue generally, noting “there may be other taxes that taxpayers will contend are penalties.”  

In support of the IRS position the Notice cites United States v. Rozbruch, 28 F. Supp. 3d 256 (S.D.N.Y. 2014), aff’d on other grounds, 621 Fed. Appx. 77 (2d Cir. 2015). In Rozbruch the government had filed suit under section 7403 to reduce its tax assessments to judgment and to foreclose on property owned by the Rozbruchs. The taxpayers defended in part by arguing that the TFRP assessments were invalid for failure to comply with section 6751’s supervisory approval requirement.  

The Rozbruchs pointed out that section 6672 explicitly calls the TFRP a penalty. Penalties may not be imposed on top of the TFRP. (I have not read the case documents apart from the court’s decision; the taxpayers may have made additional points not mentioned in the decision.) On the other side, the government pointed out that individuals who make payments towards a TFRP are really paying the underlying trust fund taxes; liability for a TFRP is co-extensive with the employment taxes that remain to be paid over. The district court in Rozbruch agreed with the government, citing an Eighth Circuit decision and several Second Circuit district court cases finding the TFRP to be a tax.  

However, the government’s position is not yet established in the Tax Court. The court declined to decide the issue in its April 2018 decision in the CDP case of Blackburn v. Commissioner, 150 T.C. No. 9. (The case was first noted on PT in a Designated Order post by Professor Caleb Smith.) In Blackburn Judge Goeke found that it was unnecessary to decide whether supervisory approval is required for TFRPs because the IRS had satisfied the requirement in any event. The IRS had a Form 4183, Recommendation re: Trust Fund Recovery Penalty Assessment, bearing the approval of the recommending Revenue Officer’s immediate supervisor, the Acting Group Manager. This was enough to support the Settlement Officer’s finding under section 6330(c)(1) that IRS had complied with administrative procedures in making the assessment. Judge Goeke rejected the taxpayer’s argument that the Settlement Officer should have looked beyond the form to investigate whether the supervisor’s review was “meaningful.” As the opinion points out, Tax Court “caselaw acknowledges that reliance upon standard administrative records is acceptable to verify assessments.” Blackburn, slip op. at 10 (citing Nestor v. Commissioner, 118 T.C. 162, 266 (2002); Davis v. Commissioner, 115 T.C. 35, 41 (2000)).  

Judge Holmes also raised the issue in a TFRP CDP case, Humiston v. CommissionerDocket No. 25787-16 L. In Humiston, no Form 4183 was mentioned in the Settlement Officer’s determination or apparent from the record before the court. In a May 24 order denying the IRS’s motion for summary judgment, Judge Holmes notes that the TFRPs “are called penalties under the Code,” and determines that the novelty of the legal issue weighs in favor of permitting petitioner to raise it at calendar call. I do not know whether petitioner did so, but he now has counsel so perhaps the case will result in a decision on the issue. It appears that case would be appealable to the 2d Circuit Court of Appeals, which of course started all this with Chai 

Next up, Judge Lauber may have the intersection of 6751 and the TFRP before him in the Florida case of Kane v. CommissionerDocket No. 10988-17 L (hat tip: Lew Taishoff). Under a recent order, the IRS has until June 28 to file “a Form 4183 or any other relevant documentation concerning supervisory approval of the TFRPs in question.”  

The way a provision is titled or described does not trump its function for constitutional purposes, but it does provide evidence of Congressional intent for purposes of statutory construction. See National Federation of Independent Business v. Sibelius, 567 U.S. 519, 543-546, slip op. at 12-13 (2012) (finding the individual shared responsibility provision a penalty for purposes of the Anti-Injunction Act but a tax for purposes of constitutional validity). Taxpayers arguing this issue before the Tax Court will need to address both form and function of the TFRP.  

Uncertainty continues around penalties automatically calculated through electronic means 

Readers of this blog know that penalties which are “automatically calculated through electronic means” do not require supervisory approval under section 6751(b)(2). For background, see my previous post on the issue. Chief Counsel Notice 2018-006 largely repeats the position taken in prior IRS guidance (linked in the prior post). The 2018 Notice says, in part:  

Penalties appearing in a statutory notice of deficiency as a result of programs such as the Automated Underreporter (AUR) and the Combined Annual Wage Reporting Automated programs will fall within the exception for penalties automatically calculated through electronic means if no one submits any response to the notice, such as a CP2000, proposing a penalty. However, if the taxpayer submits a response, written or otherwise, that challenges a proposed penalty, or the amount of tax to which a proposed penalty is attributable, then the immediate supervisor of the Service employee considering the response should provide written supervisory approval prior to the issuance of any statutory notice of deficiency that includes the penalty. A penalty is no longer automated once a Service employee makes an independent determination to pursue a penalty or to pursue adjustments to tax to which a penalty is attributable.  

This is in line with prior IRS guidance but it does not do a whole lot to clear up unresolved issues. For one thing, the notice does not mention correspondence examinations. It is unclear whether we should read anything into that. Perhaps the IRS is not ready to publicly take a consistent position on correspondence examinations, but it is a shame the issue was not explicitly addressed in Notice 2018-006. The Notice also fails to clarify the issue of timing, and when precisely a taxpayer’s response arrives too late take a penalty out of section 6751(b)(2)’s ambit.   

The prior post on section 6751(b)(2) examined a nondesignated order in Triggs v. Commissioner. Triggs involves a correspondence examination where the taxpayer did not respond during the audit. The IRS argued that the correspondence exam function had automatically asserted the penalties according to its computer programming without the independent intervention of any human IRS employee, and therefore no supervisory approval was required for either the negligence penalty or the substantial understatement penalty. Although penalty assertion in correspondence examinations may be fully automated in practice, several IRM provisions appear to conflict with this view and require examiners to exercise responsibility for penalty assertions. On April 5, 2018 Judge Leyden ordered further submissions to address these IRM provisions.  

The Triggs case is still pending. The IRS filed its supplement in response to the April 5 order, and subsequently Judge Leyden gave the petitioner until June 29 to respond. The court also provided him with a list of local low-income taxpayer clinics. Unfortunately, to date Mr. Triggs remains pro se. 

IRM provisions also muddy the waters for Judge Lauber in the case of Bowse v. CommissionerBowse has a fact pattern similar to Triggs but in it arises from the AUR program rather than correspondence exam. It also deals solely with the substantial understatement penalty rather than both negligence and understatement. Like Triggs, the Bowse case was brought to my attention by Carl Smith.  

In Bowse, Judge Lauber highlights the timing problems that muddle the application of section 6751(b)(2) to a deficiency case in the Tax Court. Remember, it is the “initial determination” of a penalty “assessment” that requires supervisory approval under section 6751. Professor Bryan Camp has an excellent post explaining why the statutory language does not make much sense and inevitably causes courts to engage in interpretive gymnastics. We can clearly see this in Bowse 

Mr. Bowse and his wife Ms. Vaes were picked up by the AUR program, but they did not respond to the IRS’s letters until after the AUR program issued them a statutory notice of deficiency (SNOD). The SNOD included a 20% substantial understatement penalty. At that point, the taxpayers submitted an amended return, and in response the Office of Appeals reduced the proposed deficiency and understatement penalty amounts. The penalty was still 20% of the proposed deficiency; it was reduced in proportion to the deficiency amount. The taxpayer then appealed the SNOD to the Tax Court.  

On those facts, what constitutes the “initial determination” of the penalty “assessment”? Was it the automated proposal by AUR in the SNOD? Or did the individualized review by Appeals take the case out of 6751(b)(2) territory? Does it matter that the proposed penalty amount changed? To answer this question, one needs to consider both what “initial determination” means and what qualifies as the “assessment” under section 6751.  

As Professor Camp explains, in Graev III the Tax Court interpreted the word “assessment” to essentially mean “penalty assertion.” And so Graev III examines whether certain IRS employees had “authority to make the initial determination of a penalty,” among other issues. 149 T.C. No. 23, slip op. at 17. But before Graev III the word “assessment” in section 6751 was taken at its ordinary meaning in the tax context – the official recording of a liability. Because of this, pre-Graev IRS guidance and IRMs are not wholly consistent with the IRS’s current litigating position. The IRMs in particular raise questions for Judge Lauber, as they did for Judge Leyden in Triggs. 

In Bowse, the IRS argued that no supervisory approval was required because the AUR program had automatically proposed the penalty in its SNOD without any human employee review. However, Judge Lauber is not sure it’s that simple and requests further briefing from the parties on several points.  

In his order Judge Lauber quotes several IRM sections, including this one: 

‘…However, if a taxpayer responds either to the initial letter proposing a penalty or to the notice of deficiency that the program automatically issues, an IRS employee will have to consider the taxpayer’s response. Therefore, the IRS employee will have to make an independent determination as to whether the response provides a basis upon which the taxpayer may avoid the penalty. The employee’s independent determination of whether the penalty is appropriate means the penalty is not automatically calculated through electronic means. Accordingly, IRC 6751(b)(1) requires managerial written approval of an employee’s determination to assert the penalty.’ IRM pt. 20.1.5.1.6(9) (Jan. 24, 2012); see also IRM pt. 4.19.3.2.1.4(2) and (3) (Sept. 1, 2012).  

(Emphasis added.) The IRM clearly suggests that the taxpayer can escape automatic penalty calculation by responding to the AUR program’s SNOD. Judge Lauber asks for briefing to address the following five questions: 

(1) By filing a Form 1040X for 2014 after receiving the notice of deficiency, did petitioners “respond * * * to the notice of deficiency that the [AUR] program automatically issue[d],” within the meaning of the IRM provision quoted above?

(2) If so, after considering petitioners’ response, did an IRS employee “make an independent determination as to whether the response provides a basis upon which the taxpayer may avoid the penalty,” within the meaning of the IRM provision quoted above?

(3) By accepting petitioners’ amended return and reducing the deficiency and penalty amounts, did the IRS made a new “initial determination” of the assessment of the penalty?

(4) If so, was that new initial determination of the penalty “automatically calculated through electronic means”?

(5) If not, what IRS officer made the “initial determination” of the reduced penalty, and who was the immediate supervisor of that individual? 

This order is interesting coming from Judge Lauber, whose concurrence in Graev III suggests a straightforward approach. He describes the majority opinion as “requiring supervisory approval the first time an IRS official introduces the penalty into the conversation.” Graev III, Lauber, J., concurring, slip op. at 27. That reading of “initial determination” appears narrower than the IRM’s, since under the IRM a taxpayer’s response to a SNOD can take a penalty out of section 6751(b)(2)’s ambit.  

I suspect the conflict between the IRS’s litigating position and the IRM is temporary. The IRMs cited by Judges Lauber and Leyden (like the 2002 Service Center Advice) reflect the IRS’s pre-Graev III understanding of what “assessment” means in section 6751. If assessment meant the official recording of the liability, then naturally a taxpayer’s response after an AUR SNOD but prior to assessment could take the final penalty decision out of the computer’s hands. Now that penalty “assessment” means penalty “proposal,” though, I would expect to see the IRMs on section 6751(b)(2) changing to remove references to taxpayers responding to the SNOD. It is somewhat puzzling, however, that Chief Counsel Notice 2018-006 does not explicitly mention this change or clarify whether, in the IRS’s view, the SNOD is the cut-off point for taxpayers to respond to an automated penalty proposal in order to trigger supervisory review.  

 

Insolvency Exclusion for Canceled Debt Nixed by Nominee Bank Account

I have been thinking about alter ego, nominee, and transferee issues recently. At the ABA Tax Section 2018 May Meeting I moderated a panel discussing these issues in the tax lien context. (Materials here, membership or meeting registration may be required.) Normally these topics come up with taxpayers while we are preparing for an offer in compromise, installment agreement, or innocent spouse request. The recent case of Hamilton v. Commissioner, T.C. Memo. 2018-62, reminds us that the nominee doctrine can also be relevant outside of the collection setting.

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Facts

Mr. Hamilton took out student loans to finance his son Andrew’s education, as many parents do. Sadly Mr. Hamilton later injured his back and became permanently disabled. (We have little information about Andrew, so I like to think that he graduated and used his education to succeed in his chosen career.) Due to Mr. Hamilton’s disability, his lenders discharged his student loans in 2011.

Unfortunately Mr. Hamilton’s problems went beyond his physical disability, and he began spending money erratically. As a result, his wife took over managing their finances. Mr. Hamilton had a large amount of cash, which was placed in Andrew’s savings account on April 1, 2011. We do not know the thinking behind this move, but perhaps Mr. Hamilton felt better about placing his money with Andrew for safekeeping than about placing it with his wife. After April 1, Andrew allowed Mrs. Hamilton to use his online banking credentials and to freely transfer funds from his savings account back to the petitioners’ joint account. Mrs. Hamilton regularly did this, and she paid household bills from the joint account.

Next we come to the Hamiltons’ 2011 joint tax return. Canceled debt is normally gross income under Code section 61(a)(12). However, section 108 lists several exclusions including the insolvency exclusion in section 108(a)(1)(B). It is not always easy for taxpayers to win an exclusion. A recent Designated Order post by William Schmidt includes two cases in which the taxpayers failed to prove that canceled debt should not be income to them. William also discusses the mechanics of claiming the insolvency exclusion.

Insolvency is defined in section 108(d)(3) as “the excess of liabilities over the fair market value of assets,” determined just before the discharge. The amount of canceled debt excluded from income can’t exceed the amount of insolvency. IRC § 108(a)(3). So, a taxpayer with total assets worth $3,000 and total liabilities of $6,000 could exclude up to $3,000 of canceled debt from her income under section 108(a)(1)(B).

One question for the Hamiltons, then, was the fair market value of Mr. Hamilton’s assets immediately before the discharge. The Hamiltons must have transferred the cash to Andrew’s account before the student loans were discharged, because they excluded that cash from their insolvency calculations. On their 2011 tax return the Hamiltons claimed they were insolvent by more than the amount of discharged debt, and therefore they excluded all the canceled debt from their income. Mr. Hamilton would have been solvent if the cash placed in Andrew’s account had been included in the equation.

The IRS examined the return, disagreed with the insolvency conclusion in a notice of deficiency, and the Hamiltons appealed to the Tax Court.

On a side note – readers may be wondering if the 2017 Tax Act would change the analysis in this case. Student loans discharged in 2018 through 2025 due to the death or total and permanent disability of the student are not includable in gross income. See code section 108(f)(5). Unfortunately, Mr. Hamilton was not the student (Andrew was) so I do not think this case would come out any differently if it involved tax year 2018.

In the Tax Court, the IRS argued that the cash in question was still Mr. Hamilton’s property after he placed it into Andrew’s bank account and that Andrew merely owned the account as nominee for Mr. Hamilton. Therefore, the IRS argued that Mr. Hamilton was solvent immediately before the student loans were canceled and therefore he owed income tax on the canceled debt.

The nominee doctrine is really common sense. It applies where a transfer occurs in name only, and the transferor retains beneficial ownership of the property. (Keith previously discussed nominee liens here; guest blogger A. Lavar Taylor discussed purported nominees’ CDP rights in a two-part series here and here.) The Internal Revenue Manual has a summary of the doctrine and it details how the IRS will go about enforcement action when a delinquent taxpayer’s assets are held by a nominee. IRM section 5.17.14.1.4 explains the theory:

The nominee theory is based on the premise that the taxpayer ultimately retains the benefit, use, or control over property that was allegedly transferred to a third party. Thus, the nominee theory focuses on the relationship between the taxpayer and the transferred property. A transfer of legal title may or may not have occurred, but the government does not believe a substantive transfer of control over the property in fact occurred.

Courts generally look to state law to determine a taxpayer’s property rights, including whether property belongs to the taxpayer under the nominee doctrine. See Fourth Inv. LP v. United States, 720 F.3d 1058, 1066 (9th Cir. 2013). These factors vary somewhat in their wording from state to state but they are remarkably consistent.

In Mr. Hamilton’s case, the Tax Court looked at the nominee factors under Utah law:

(i) the taxpayer exercises dominion and control over the property while the property is in the nominee’s name; (ii) the nominee paid little or no consideration for the property; (iii) the taxpayer placed the property in the nominee’s name in anticipation of a liability or lawsuit; (iv) a close relationship exists between the taxpayer and the nominee; (v) the taxpayer continues to enjoy the benefits of the property while it is in the nominee’s name; and (vi) the conveyance to the nominee is not recorded.

In the recently-blogged Kraus case, the court looked to the nominee factors found in Washington State law:

(1) Whether the nominee paid no or inadequate consideration…; (2) Whether the property was placed in the name of the nominee in anticipation of litigation or liabilities; (3) Whether there is a close relationship between the transferor and the nominee; (4) Whether the parties to the transfer failed to record the conveyance; (5) Whether the transferor retained possession; and (6) Whether the transferor continues to enjoy the benefits of the transferred property.

The Utah and Washington nominee factors are quite similar to the nonexclusive factors listed in the IRM at 5.17.2.5.7.2 (3):

a. The taxpayer previously owned the property.

b. The nominee paid little or no consideration for the property.

c. The taxpayer retains possession or control of the property.

d. The taxpayer continues to use and enjoy the property conveyed just as the taxpayer had before such conveyance.

e. The taxpayer pays all or most of the expenses of the property.

f. The conveyance was for tax avoidance purposes.

From these examples one can appreciate the flexibility of the common law as well as its ultimate convergence with common sense (at least in this instance).

In Mr. Hamilton’s case, the Tax Court easily concluded that the transferred funds still belonged to Mr. Hamilton, as Andrew was only holding on to them as Mr. Hamilton’s nominee. The Hamiltons retained full use of the funds. I think this is cleary the right result. The April 1 transfer may have been for the legitimate purpose of protecting Mr. Hamilton’s cash from his erratic spending impulses, but the Hamiltons should not have pushed their luck by excluding the account as an asset in their insolvency calculations.

This case illustrates the importance of asking about potential nominee property in all contexts where a taxpayer’s assets are relevant to a tax issue. Also, it provides an example of a complicating situation that could be easily missed if a tax preparer does not take (or have) time to conduct a thorough interview.

Low-income taxpayer advocates have long complained that free tax assistance sites are not permitted to help taxpayers claim the insolvency exclusion. Taxpayers who have no money to pay a preparer are often forced to borrow to come up with the funds, or else try to self-prepare, which can result in a controversy case when they cannot figure out how to properly exclude the income. This issue was highlighted by the National Taxpayer Advocate in her 2017 Annual Report to Congress, in Most Serious Problem No. 11. The IRS could delineate appropriate boundaries and provide worksheets to facilitate the insolvency determination by VITA, TCE, and AARP assisters and it would be a significant help to many taxpayers. I do not think the Hamilton case detracts from that argument too much. Most taxpayers whose student loans are canceled due to disability do not have $300,000 in cash to worry about. Nevertheless, the Hamilton case illustrates how the insolvency determination is not always straightforward.