Appeals Abuses Discretion in a Collection Due Process Case by Failing to Engage in Financial Analysis

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.

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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.

 

Judge Gustafson Continues His Primer for Chief Counsel Attorneys on Motions for Summary Judgment

I recently wrote about an order issued by Judge Gustafson in the case of Vigon v. Commissioner in which he explained to a Chief Counsel attorney what the attorney needed to provide in order to succeed in a motion for summary judgment in a case involving a penalty.  In the case of Hill v. Commissioner, Judge Gustafson continued his lessons to Chief Counsel attorneys on this subject.  It appears that the attorney in the Hill case may have missed my prior post since it came out before he submitted his motion and could have been helpful to him in drafting the motion.

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Judge Gustafson has the unusual background for a Tax Court judge of service as a career attorney at the Department of Justice Tax Division.  Few Tax Court judges have a background as career civil servants litigating cases for the government because becoming a Tax Court judge requires a political appointment and such appointments do not usually go to individuals who have spent their careers working for the federal government in the executive branch where opportunities for the kinds of relationships that lead to a political appointment do not come easy.  At the time of his appointment, Judge Gustafson was the chief of the court of claims section of the Tax Division.  That section, not surprisingly, represents the IRS in cases brought before the Court of Federal Claims.  The work in that section differs from the work in the other civil trial sections at the Tax Division because of the limitations of the Court of Federal Claims.  Attorneys in that section do not typically handle bankruptcy cases, do not get involved in collection suits brought by the government, do not have jury trials but do, like the Tax Court, have some unique jurisdictional issues because of the nature of that court and do handle large, high profile refund matters.  Like all civil trial sections at the Tax Division, attorneys in that section do have a substantial practice in motions for summary judgment.

Unlike Tax Division attorneys, Chief Counsel attorneys do not have a long tradition in summary judgment work.  Prior to the passage of the collection due process (CDP) provisions in 1998, summary judgment motions in Tax Court cases were rare.  Even after 1998, it took some time, maybe a decade or so, before Chief Counsel’s office settled upon summary judgment motions as a go to option for resolving CDP cases.  So, many of the managers in Chief Counsel’s office did not cut their teeth on summary judgment motions and may not be in the strongest position to review and guide the attorneys in preparing such motions.  Judge Gustafson, who would have prepared many summary judgment motions as a DOJ trial attorney and reviewed many as a supervisor there, is in a good position to provide guidance on these motions and he does so again in the Hill case.  Now, the question is whether the Chief Counsel attorneys are paying attention to his orders since orders do not get published by the Tax Court in a formal manner but do go up on the Court’s web site each day and can be searched by issue or by judge.  Because IRS attorneys may view summary judgment motions against pro se taxpayers as shooting fish in a barrel, they may not take the time to develop all of the evidence necessary to support such motions.  They are finding in the recent orders issued by Judge Gustafson that even unrepresented taxpayers may present a challenge in successfully obtaining a summary judgment if the Court carefully reviews the motions submitted.

The IRS assessed a frivolous tax submission penalty against Ms. Hill.  The case is set for trial on March 27, 2017.  The IRS filed a motion for summary judgment in the case on January 25, 2017.  The timing of the filing of the motion is not accidental.  For the first several years after the IRS adopted motions for summary judgment as their go to option for CDP cases, they tended to file the motions the week before the trial calendar.  Carl Smith and I wrote about this in an article back in 2011.  The Tax Court changed Rule 121(a) regarding the timing of filing motions for summary judgment in 2011 to require that they be filed at least 60 days before the calendar.  The Tax Court rule drove the timing of the IRS filing of the motion on January 25 for a calendar 61 days later.  Keep in mind that some Chief Counsel attorney had this case in their inventory since shortly after it was filed on March 30, 2016.  CDP cases do not go back to Appeals after the filing of the petition since the notice of determination always issues from Appeals.  Chief Counsel attorneys each handle many cases.  Here the attorney decided to wait to the very last minute to file the motion for summary judgment.  There could be many reasons for the timing of the filing including that the case was only recently assigned to the attorney filing the motion but the timing of the motion was typical of the cases I see.  As with the Vigon case, Judge Gustafson did not wait until the last minute to issue his order in response to the summary judgment motion and did not require a response from the pro se taxpayer.

Judge Gustafson finds that the IRS did not support some of the factual predicates in the motion as required by Tax Court Rule 121(d), sent. 3 and did not address patent legal questions.  The IRS did not attach the allegedly frivolous return to the motion.  So, the Court could not see what made the return frivolous.  The Court describes the Form 12153 submitted by petitioner as containing “handwritten notations, words, and symbols, none of which we can understand” together with a four page handwritten attachment of “similarly indecipherable writing.”  The description raises my curiosity and reminds me of some handwritten law school exams I have had to grade.  The Court goes on to say that the written matter “does not appear to assert typical tax protestor contentions.”  This is important if you remember the types of things that can trigger the frivolous return penalty which we have discussed in a prior post.  The gibberish, if that is the right word, made it past the IRS filters for frivolous CDP requests (also discussed here and here) which differ from the filters for application of the frivolous return penalties.

The notice of determination issued by Appeals interpreted the difficult to read Form 12153 as one in which it could not determine if the petitioner intended to dispute the liability and so it did not seek to determine if the IRS should have asserted the frivolous return penalty.  The Court, however, assumes that it did.  Apparently, Appeals made no mention of a prior opportunity to contest the penalty which might have barred petitioner from raising the penalty in the CDP hearing.  Since Appeals did not consider the merits of the penalty and since Counsel did not attach the allegedly frivolous return to the motion, the motion will fail at least in part but the failure does not stop here.  The Court notes that on the penalty issue the IRS bears at trial the burden of production under IRC 7491(c) and the burden of proof under IRC 6703(a) which it fails to meet.

The liability at issue here is a penalty which raises the issue of appropriate approval which raises the issue of verification by Appeals.  Appeals determination makes no mention of its efforts to verify the IRS gave the necessary approval for assertion of the penalty as required by IRC 6751(b)(1).  The motion for summary judgment does not address this issue.  To show compliance with this issue, which the IRS would have known had it read Judge Gustafson’s order from December in the Vigon case, it “must show (1) the identity of the individual who made the “initial determination”, (2) an approval “in writing”, and (3) the identity of the person giving approval and his or her status as the “immediate supervisor”.”  The IRS failure to address any of these elements in its motion, including attaching the Form 8248 designed for this purpose dooms the motion.

I suspect that the Vigon and Hill motions for summary judgment are not the only ones out there in which the IRS has failed to meet its burden under section 6751.  The IRS routinely files summary judgment motions and often does so in rote, cookie cutter fashion based on the last summary judgment motion it filed.  A high percentage of cases have penalties.  Until it clears out of its system the summary judgment motions that fail to mention the verification process, it may be easy to push back on such motions.  Of course, many of these motions involve pro se taxpayers.  It will be interesting to see if other judges begin to push back as Judge Gustafson has done on this issue.

 

 

 

 

Verifying the Approval of the Immediate Supervisor As Required by IRC 6751

Last month we wrote about the fully reviewed Tax Court opinion in Graev v. Commissioner, 147 T.C. No. 16 (Nov. 30, 2016) in which the majority of a deeply divided Court held that the Court could not decide if the IRS had failed to follow the requirement in 6751 that the IRS obtain managerial approval before assessing a penalty because the assessment had not yet occurred.  The majority suggested that the taxpayer could raise the issue in a Collection Due Process (CDP) case after the assessment but not a deficiency case.  The Graev case was heard by Judge Gustafson though he ended up writing the dissent in the case once it went to Court conference.  Conveniently, a CDP case involving 6751 just happened to be pending in Judge Gustafson’s inventory and unfortunately for the Chief Counsel attorney, who filed a not carefully worded motion for summary judgement, it came up right after the Graev decision was issued.  The Chief Counsel’s attorney’s misfortune was good luck for practitioners following this issue since it allowed Judge Gustafson to highlight the language of the statute he had recently discussed with his colleagues in Court conference and point out what the IRS must do if it wants to prove its 6751 case.  Chief Counsel attorneys filing summary judgment motions in future CDP cases may want to pay attention to this order.

In Vigon v. Commissioner Judge Gustafson issued an order denying the motion for summary judgment filed by the IRS.  He did so for several reasons each of which deserves mention.  The case points out once again the importance of orders in Tax Court decisional matters even though orders have no precedent setting value.  The turnaround time on this order is worth noting.  We have discussed before the length of time it can take for a taxpayer to receive a decision from the Tax Court.  That was no problem here.  The motion for summary judgment was filed on December 21, 2016 and the order was entered on December 23, 2016.  Swifter justice could hardly have occurred.

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Background

The order entered on December 23, 2016, was not the first order entered in this case.  Petitioner requested place of trial in DC.  Petitioner indicated to the Court that he would have difficulty attending the trial because he was in Canada.  Then Chief Judge Thornton issued an order directing the clerk to send to petitioner information about how to resolve his case without trial.  The letter sent by the clerk is not available on the Court’s electronic docket but I presume it talks about settlement.  Settlement here may prove difficult because the issue appears to be the imposition of several frivolous tax submission penalties under IRC 6702(a).  Surprisingly, the IRS does not contest the ability of the taxpayer to raise the merits of his liability for these penalties because it generally takes the position that an administrative opportunity to contest the penalties prevents the taxpayer from raising the merits of standalone penalties in the CDP context.

When the case was scheduled for trial, petitioner’s wife wrote to the Court requesting a continuance because her husband was incarcerated. (As a side note I will mention that if he was incarcerated in Canada at the time he received his CDP notice it is surprising that he was able to timely file a CDP petition.  Being out of the United States imposes a significant barrier on receiving the notice and turning it around into a timely petition without the additional difficulty factor of the mail delays encountered by those who are incarcerated.)  Judge Gustafson granted the request for continuance but provided the following guidance to respondent in the second paragraph of his order:

“ORDERED that, no later than May 25, 2016, respondent shall file a motion for summary judgment or another appropriate motion. Presumably, respondent’s motion will undertake to show that the “verification” by the Office of Appeals pursuant to section 6330(c)(1) included a verification of compliance with section 6751(b)(1). See IRM pt. 25.25.10.8.1 (08-13-2015) (“Pursuant to IRC Section 6751(b), written management approval must be indicated before assessing the IRC Section 6702 penalty. This written managerial approval should be indicated on Form 8278”).”

 

The Chief Counsel attorney assigned to the case must have discovered that Appeals did not bother to verify compliance with 6751 as a part of its CDP verification process (shocking), and he came back to the Court requesting a remand of the case to Appeals to allow it to complete the verification process it missed during its initial consideration.  The Court granted this request.  The case went back to Appeals in late July or August of 2016 and returned to Chief Counsel’s Office in time for it to file the motion for summary judgement that is the subject of this post.  On the second trip through Appeals a verification of the approval required by 6751 occurred although, as discussed below, the verification did not satisfy the Court.

The December 23 Order

The first paragraph of the Order sets the tone for the problems the IRS faces in getting the summary judgement it has requested.  The Court states:

 

“Some of the factual predicate for the Commissioner’s motion is not “supported as provided in this rule”, Rule 121(d), sent. 3; and legal argument needed to address patent questions is not given in the motion. We will therefore not require Mr. Vigon to file a response but will deny the motion and will schedule this case for trial….”

 

The first problem with the motion that the Court addresses is that the IRS argued that the documents mailed to it that caused the imposition of the frivolous submission penalties were not amended returns; however, the Court points out that three of the nine documents in question had the amended return box checked.

Another problem with the motion for summary judgement concerned its description of the documents as returns.  The Court points out that three of the documents were unsigned and could not qualify as returns.

The most relevant problem for purposes of this post, however, comes with the verification of the immediate supervisor as required by IRC 6751.  Before analyzing the legal issue presented the Court makes the following observation about the verification:

 

“The Commissioner’s motion for summary judgment asserts that “before each of the I.R.C. section 6702 penalties was assessed, an immediate supervisor of the individual making the determination to assess the penalty approved that determination in writing”. The Forms 8278 do name an “Originator” on line 10a and a “Reviewer” on line 16. However, not in keeping with the remand memorandum, neither the motion nor any of its attachments (as far as we can tell) identify the person approving the penalty determination as being in fact the immediate supervisor of the individual making the initial determination of the penalty. (Rather, in an email to counsel (Ex. V), the settlement officer observed, “[T]he form 8278 shows a ‘Reviewer’ signature which everyone seems to constitute as a manager signature but it would be better presented in a court situation if the form was changed to notate Manager or Supervisor as the actual person signing the form.”)”

 

Leaving aside the statutory problem the IRS has with IRC 6702 and whether some the documents filed by petitioner meet the requirement of being a return, the Court focuses on the verification requirement under 6751 of approval.  The statute requires the approval of the immediate supervisor of the person making the penalty determination.  Although the statute would also allow approval by mangers higher up in the pecking order it does so by stating that those non-immediate supervisors must be delegated by the Secretary of the Treasury.  To date, the Secretary as not delegated anyone who can make this approval.  This means that the IRS must show, and Appeals must verify in a CDP case, that the immediate supervisor of the person making the penalty determination has approved the assertion of the penalty.

Looking at the description from Appeals described above, the form shows the signature of a reviewer but does not make clear that it is the signature of the immediate supervisor of the person making the determination.  The IRS fails to address this in its motion and instead glosses over it with a reference to the generic term of manager which is a broader term that immediate supervisor.  Because of a mismatch between the terms used by the IRS in its forms and in its arguments with the language of the statute, the Court denies the motion for summary judgment.

Conclusion

Perhaps the settlement letter sent almost two years ago by Chief Judge Thornton will gain increased importance or perhaps the IRS will seek to remand the case again to search to find out if the person signing the penalty approval form was the immediate supervisor of the person making the penalty determination.  The Vigon case points again to the problems the IRS encounters in administering this long forgotten and only recently focused upon requirement of the 1998 legislative changes.  If Mr. Vigon wins, he needs to send Frank Agostino a thank you note for bringing the issue to light and Judge Gustafson a note for requiring that the IRS adhere to the statute.  Because Mr. Vigon is representing himself and has sent in nothing in his defense that I can see on the electronic docket, he would have lost already if the Court were not actively looking out for his interests.  This puts a significant burden on the Court and one that it cannot always meet because the system is not designed for the judge to find all of the arguments that a taxpayer might want or need to make.

 

 

 

Misleading Taxpayers with Collection Letter

This is not the first post on the way the IRS collection letters mislead taxpayers.  This is also not the first post on the notice stream of letters sent in collection cases after assessment of tax.  This may be the first post in which I feel like I am writing about a deliberate attempt by the IRS to mislead taxpayers with a form.  I find the statements the IRS has deliberately chosen to make in Notice CP504 false and can only conclude that it has made these statements after giving thought to what it says in the letter because I know these letters receive much scrutiny before the IRS uses them.

Letters in the collection notice stream satisfy statutory requirements and collection goals.  Section 6303 requires the IRS send a notice and demand letter after it makes assessment when insufficient funds exist on the account to satisfy the liability.  The IRS should send this letter within 60 days of assessment; however, its failure to do so impacts the creation of the federal tax lien and not the validity of the assessment.

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The notice stream fulfills two other statutory requirements – those found in IRC 6331(d) and 6330.  The interplay of these two sections creates the basis for the discussion in this post.  Because the IRS has chosen to misrepresent its authority to levy in Notice CP504, examining the role of these sections must precede the discussion of the misrepresentation itself.

Dating back at least the 1860s, Congress gave the IRS, and its predecessors, authority to levy on the assets of taxpayers who failed to pay their federal taxes.  Levy provides the IRS with a powerful administrative tool which, prior to 1998, involved no judicial check on the IRS before the levy occurred.  Before 1998, however, Congress did require that the IRS send taxpayers a notice of intent to levy 30 days before it could begin administratively taking their property.  The code section requiring this notice is IRS 6331(d).  This section provides:

1.     In general. Levy may be made under subsection (a) upon the salary or wages or other property of any person with respect to any unpaid tax only after the Secretary has notified such person in writing of his intention to make such levy.

2.     30-day requirement. The notice required under paragraph (1) shall be –

  1. Given in person
  2. Left at the dwelling or usual place of business of such person, or
  3. Sent by certified or registered mail to such person’s last known address,

No less than 30 days before the day of the levy.

In 1998 Congress decided that IRC 6331(d) provided inadequate protection to taxpayers before the IRS could levy on their property.  To remedy this failing, Congress did not remove section 6331(d) but added section 6330.  Now, the IRS had two notices it must provide to taxpayers before it could levy.  The new notice created in section 6330 not only gives the taxpayer notice of the IRS intent to levy but also gives the taxpayer the right to contest the levy by filing a Collection Due Process (CDP) request before the levy may occur.  Today, it is easy to forget that the section 6331(d) requirement still exists because it receives almost no attention but the statute still requires the IRS to provide this notice as well and the IRS does so.

In 1998, the IRS decided to make the last letter of its notice stream of collection notices, normally the 4th letter, a letter that combined the taxpayer’s notice rights under both 6331(d) and 6330 into the same letter.  It continued this practice for many years though no legal requirement exists that the same letter provide the notice required by both statutes.  Conversely, no statutory requirement causes the IRS to put the notices into separate letters.

At some point in the recent past, the IRS decided that it would split the notice required by 6331(d) and 6330 into two separate letters.  One of the reasons, a major reason, for combining the two notice requirements into one letter was cost.  Each statutorily required notice came with a requirement that the IRS send the notice by certified mail.  The CDP notice requires not only that the IRS mail it certified, but also that the IRS request return receipt.  Combining the two notices allowed the IRS to meet the costly statutory requirement of certified mail with one rather than two mailings.  Because of the number of notices of intent to levy sent each year and the extra cost of sending two letters by certified mail, the IRS could save several million dollars each year simply by combining the two notices.

The IRS has now decided that it will send the taxpayer, as the third notice in the notice stream, a section 6331(d) notice.Here is the notice sent to one of the clients of the Harvard clinic.  The IRS titles the notice “Notice of Intent to Levy.”  In the body of the notice, the IRS says that if the taxpayer does not pay the tax by the date specified in the letter, the IRS may levy on the taxpayer’s property and rights to property including: 1) wages, real estate commissions, and other income; 2) bank accounts; 3) personal assets (e.g., your car and home) and 4) Social Security benefits.  The problem with this notice and with these statements (some might say threats) arises because, at the time the IRS sends this notice, it has not yet provided the taxpayer with the CDP notice.  Without the CDP notice, the IRS cannot levy upon a taxpayer after 1998 and yet, it says to taxpayers in Notice CP504 that it can.  At best, the letter misleads taxpayers about their rights and viewed at worst, the letter contains false statements known by the IRS employees designing this letter as such.

To test the letter and the statements that the IRS could levy as a result of it, the Harvard clinic sent a Form 12153 to the IRS requesting a CDP hearing for a client who had received Notice CP504.  Even though the letter does not mention section 6330, it describes a procedure the IRS can only take after sending a CDP notice.  So, we thought that by sending a CDP request we would see what would happen.  We expected that the IRS would not provide our client with a CDP hearing, but it seemed better to try and find out.  First, we obtained the permission of our client to file the CDP request after explaining to him our reasons for wanting to do so.  In the first case in which we requested a CDP hearing, we eventually received a letter from the IRS saying that the client could not have a CDP hearing because the IRS had not sent a CDP notice.  Before we could petition the Tax Court from that letter, which might be characterized as a notice of decision from which the Tax Court has in certain circumstances granted jurisdiction, the IRS sent another notice of intent to levy citing to section 6330, and we did not want to impair the taxpayer’s ability to use the CDP process, so we filed another CDP request based on the notice which cited to section 6330 and have our case under consideration for an offer in compromise.

Another client received this notice and we sent another CDP request to the IRS.  In the second case, the IRS has neither responded to our request nor sent a notice citing to section 6330.  We will continue, with client permission, to send in requests for CDP hearings whenever our clients receive a notice of intent to levy stating that the IRS can levy upon their property.  We hope one day to uncover the mystery of how the IRS thinks that it can levy in 2016 based on a 6331(d) notice without sending a 6330 notice.  If anyone out there can help us to solve this mystery, we would appreciate your assistance.  For the moment, I remain of the opinion that Form CP504 seeks to purposely mislead taxpayers.  I find the letter offensive.  I believe it violates taxpayer rights.  I think the IRS should immediately stop sending a letter entitled Notice of Intent to Levy containing instructions in the body of the letter about the taking of a taxpayer’s property when the IRS has no authority to do so.

After the Tax Court Finds It Lacks CDP Jurisdiction, Seventh Circuit Says It Should Keep Quiet About Other Collection Issues

We welcome back frequent guest blogger, Carl Smith, who discusses a recent 7th Circuit case that rejects a line of cases decided by the Tax Court concerning the scope of its authority when dismissing a Collection Due Process case.  Keith

In a precedential opinion issued on November 18 in Adolphson v. Commissioner, the Seventh Circuit affirmed the Tax Court’s dismissal of a Collection Due Process (CDP) petition under section 6330(d)(1) for lack of jurisdiction. The Tax Court dismissed the petition because the IRS had never issued a notice of determination after a CDP hearing – a ticket to the Tax Court.  But, the Seventh Circuit was unhappy that the Tax Court also went on to consider (though, ultimately reject) the taxpayer’s argument that there had been no CDP hearing and no notice of determination (NOD) only because the IRS failed to send a notice of intention to levy (NOIL) to the taxpayer at the taxpayer’s last known address.  In effect, the Seventh Circuit said that where the Tax Court lacks jurisdiction because of the lack of an NOD, the Tax Court should keep quiet about other potential collection issues – such as, in this case, whether the IRS had issued an NOIL to the taxpayer’s last known address before it had started levying.  The Seventh Circuit particularly rejected a line of Tax Court opinions beginning with Buffano v. Commissioner, T.C. Memo. 2007-32 – which, according to the Seventh Circuit, the Tax Court has only intermittently followed – in which the Tax Court has considered as part of its jurisdictional dismissals, issues going to the validity of NOILs.

This post will discuss Buffano, the unpublished order issued by Judge Carluzzo in Adolphson, and the Seventh Circuit opinion in Adolphson.

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Readers are no doubt aware that before the IRS issues a CDP NOD (a ticket to the Tax Court), the IRS Office of Appeals must hold a CDP hearing.  CDP hearings can only be requested after the IRS validly issues an NOIL or NFTL.  One way for the IRS to validly issue an NOIL or NFTL is to send it by certified or registered mail to a taxpayer’s last known address.  Sections 6320(a)(2)(C) and 6330(a)(2)(C).  If certified or registered mail is used for an NOIL, levy is prohibited for the 30-day period in which a taxpayer can request a CDP hearing.  Section 6331(d)(1) and (2).  If a CDP hearing is requested, no levy is allowed and the collection statute of limitations is suspended until the CDP hearing (and any judicial appeals) are over.  Section 6330(e)(1).

Buffano

In Buffano, the first the taxpayer knew about collection was when the IRS sent a levy to his employer.  The taxpayer was upset that he had not, before then, received an NOIL.  The taxpayer sent a Form 12153 requesting a CDP hearing with respect to the taxes being levied, and the IRS decided that, since it had sent an NOIL to what it had thought was the taxpayer’s last known address (even though the NOIL was returned by the USPS undelivered), the IRS had done all it needed to do to commence levy.  Since the request for a CDP hearing was made more than 30 days after the IRS mailed the NOIL, the IRS instead gave the taxpayer an equivalent hearing.  At the end of the equivalent hearing, the taxpayer was unsatisfied with the equivalent letter, and, within 30 days, filed a petition in the Tax Court under section 6330(d)(1).

The IRS moved to dismiss the case for lack of jurisdiction on the ground that no NOD following a CDP hearing had been issued.  Thus, the taxpayer had not received a ticket to the Tax Court.  The taxpayer cross-moved to dismiss for lack of jurisdiction on a different ground:  No NOIL had validly been sent to his last known address.  The court decided that it had to determine the reason for the jurisdictional dismissal that was inevitable in the case.  The Tax Court held that the NOIL had not been sent to the taxpayer’s last known address.  Thus, it was invalid, and the dismissal was predicated on the NOIL’s invalidity.  Presumably, the Tax Court expected that this holding would mean that the IRS had to send a new NOIL to the taxpayer for the same taxes before the IRS could commence any levy.

In subsequent cases presenting the same fact pattern as Buffano, the Tax Court has sometimes (but not always) followed Buffano and issued a ruling on whether or not the NOIL was mailed to the last known address.  If the NOIL was mailed to the last known address, then the Tax Court has dismissed for lack of jurisdiction on the basis of a lack of an NOD.  If the NOIL was not mailed to the last known address, the Tax Court has dismissed for lack of jurisdiction on the basis of a lack of a validly-mailed NOIL.  See, e.g., Anson v. Commissioner, T.C. Memo. 2010-119; Space v. Commissioner, T.C. Memo. 2009-230; Kennedy v. Commissioner, T.C. Memo. 2008-33.

Adolphson Tax Court Order 

Mr. Adolphson’s fact pattern was quite similar to Buffano – i.e., he first learned of collection from an actual levies on third parties who held his funds, but he had never before received an NOIL. Unlike Buffano, he did not thereafter ask for and get an equivalent hearing, but went straight to the Tax Court.  In the Tax Court, Mr. Adolphson first moved to restrain further levies and for the Tax Court to order the IRS to refund what had already been levied – arguing that the IRS had not sent an NOIL to his last-known address and citing Buffano.  Then, the IRS cross-moved to dismiss for lack of jurisdiction because of the absence of an NOD.  The IRS, however, attempted to show it had mailed an NOIL to his last known address.  Since Mr. Adolphson had not filed returns for many years, there was a serious issue as to which address was his last known address.

In an unpublished order at Docket No. 21816-14L, issued on February 3, 2015, Special Trial Judge Carluzzo granted the government’s motion, first stating:

Petitioner agrees that the Court is without jurisdiction in this matter. That being so, his motion to restrain must be denied as our authority to grant the relief he seeks arises only in cases where our jurisdiction under section 6330(d) has properly been invoked. See sec. 6330(e). Petitioner, however, disagrees with respondent’s ground for the dismissal.

Then, the judge distinguished Buffano as follows (footnote omitted):

Petitioner’s reliance upon Buffano is misplaced. The record in Buffano contained information showing the address shown on the taxpayer’s relevant Federal income tax return, the starting point for purposes of establishing a taxpayer’s last known address. See sec. 301.6212-2(a) Proced. & Admin. Regs.; Kennedy v. Commissioner, 116 T.C. 255 (2001); Abeles v. Commissioner, 91 T.C. 1019 (1988). Petitioner has not established what, if any, address was shown on his Federal income tax return(s) most recently filed before the relevant notices of intent to levy were issued.  Furthermore, under the circumstances before us and contrary to petitioner’s suggestion, the address shown on respondent’s November 5, 2012, letter to him is hardly determinative as to his “last known address” for purposes of section 6330.

Because of the paucity of information as to petitioner’s last known address, we decline to make any finding on the point in resolving the jurisdictional motion before us. To the extent that there are any irregularities in the assessment process giving rise to the above-mentioned liabilities, or to the collection of those liabilities, petitioner’s remedies, if any, lie in a different Federal court.

Adolphson Seventh Circuit Opinion 

The Seventh Circuit affirmed the Tax Court, but using a lot of words criticizing both the Tax Court’s rulings and the DOJ lawyers’ briefs and oral argument.  In a 16-page opinion, the panel took apart Judge Carluzzo’s barely 3-page order.

Initially, the panel stated that, if it were going to apply the Buffano line of cases, it disagreed that the IRS had shown that it mailed an NOIL to the taxpayer’s last known address.  In particular, the panel noted that some of the IRS evidence of mailing consisted of improperly-authenticated transcripts that only indicated the issuance of one or more NOILs, but there was no evidence in the record of any mailing or evidence of even the address used.  The panel accused Judge Carluzzo of improperly shifting the burden of proof on mailing to the taxpayer and wrote:  “In other words, had the tax court followed Buffano and required the Commissioner to prove proper mailing, the ‘paucity of information’ should have led to a win for Adolphson.” Slip op. at 10-11.

The panel was also critical of the DOJ lawyers for, among other things, (1) not taking a position on whether the Buffano line of cases was correct, (2) not taking a position on whether Judge Carluzzo correctly distinguished Buffano, (3) making no attempt to justify the IRS collection behavior in the case, and (4) unhelpfully arguing that “Adolphson, proceeding pro se, erred by asking the tax court to enjoin further collection efforts and refund money already collected, rather than asking the court to invalidate the levies.”  Id. at 11.  “Instead, the Commissioner insists that Adolphson is relegated either to an administrative claim before the IRS or a refund suit in district court, while maintaining that ‘whether the IRS mailed a Notice of Intent to Levy to taxpayer’s last known address is not relevant in this case.’” Id.

Turning to the law, the panel wrote:

Notwithstanding this unwillingness to confront the salient issue, the Commissioner is correct that, absent a notice of determination, the tax court lacks jurisdiction under 26 U.S.C. § 6330(d).  A decision invalidating administrative action for not following statutory procedures is a quintessential merits analysis, not a jurisdictional ruling. The Buffano line of cases therefore represents an improper extension of the tax court’s statutorily defined jurisdiction.

Id. at 12 (citations omitted).

The panel blamed the Tax Court’s error in Buffano on its uncritically importing into CDP, from its deficiency jurisdiction case law, the practice of allowing a taxpayer who files a late deficiency petition to ask that the court determine that the notice of deficiency was not sent to the last known address, and, so, the Tax Court lacked deficiency jurisdiction because of an invalid notice.  Calling the deficiency jurisdiction practice “less problematic”, the panel distinguished it from determining whether an NOIL was properly sent to a last known address, since the challenged notice in a deficiency case is the ticket to the Tax Court (the “jurisdictional hook”), whereas an NOIL is not.  In a passage I find confusing, the panel wrote:

Although calling this ground for dismissal [of an improperly-mailed notice of deficiency] “jurisdictional” is a misnomer, the logical underpinning is the same: The tax court is determining whether the IRS has met statutory requirements to proceed with collection, but there isn’t a question of whether or not the jurisdictional hook exists (were there no deficiency, there would be nothing to collect).

Id. at 14.  Earlier in the opinion, the panel had written:

This [Buffano] practice of invalidating collection activity [in a CDP case] where the tax court lacks statutory authority to proceed also violates the Tax Anti‐Injunction Act, 26 U.S.C. § 7421(a), which (with exceptions inapplicable here) provides that “no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person.” This statute deprives courts of jurisdiction to enter pre‐collection injunctions and “protects the Government’s ability to collect a consistent stream of revenue” by ensuring that “taxes can ordinarily be challenged only after they are paid, by suing for a refund” under 28 U.S.C. § 1346(a)(1). By invalidating levies despite the absence of a notice of determination under § 6330—a taxpayer’s jurisdictional hook to enter tax court—decisions such as Buffano stand in direct opposition to the Act.

Id. at 12-13 (citations omitted).

Ultimately, the panel concluded that a taxpayer in Mr. Adolphson’s position is left only the remedy of a refund suit.  I would call that remedy completely useless, since one can only get a court to order a refund in such a suit if one has overpaid one’s taxes.  Lewis v. Reynolds, 284 U.S. 281 (1932).  It is of no relevance in a refund suit whether the IRS improperly forced all or part of the tax payments by a procedurally-improper levy.

The panel regretted that it saw no statutory remedy for Mr. Adolphson’s plight:

The framework used in Buffano to scrutinize the IRS’s compliance with its statutory obligations does have equitable appeal; a taxpayer to whom the IRS fails to mail a Final Notice of Intent to Levy and, through no fault of her own, misses the 30-day window to request a CDP hearing might otherwise be left without an opportunity to petition the tax court prior to seizure of her assets. This is the system devised by Congress, however . . . .  Troubling though this [refund suit] “remedy” may be, given the expense and potential delays inherent in such a suit, there is no lawful basis for expanding the tax court’s jurisdiction to resolve the perceived problem. Absent a notice of determination, the tax court simply has no lawful authority to hear a taxpayer’s claim under § 6330(d).

Adolphson, at 15-16.

Observations

Because Mr. Adolphson was pro se and the DOJ’s briefing was so unhelpful, the panel may have misunderstood certain things about tax procedure when it wrote the opinion.  The opinion conspicuously fails to mention three possible avenues for relief for him.

First, section 6330(e)(1) suspends the collection statute of limitations if a person requests a CDP hearing.  In this case, no CDP hearing was requested because no NOIL was issued to the last known address (probably).  Section 6330(e)(1) goes on to provide:

Notwithstanding the provisions of section 7421(a), the beginning of a levy or a proceeding during the time the suspension under this paragraph is in force may be enjoined by a proceeding in the proper court, including the Tax Court.  The Tax Court shall have no jurisdiction under this paragraph to enjoin any action or proceeding unless a timely appeal has been filed under subsection (d)(1) and then only in respect of the unpaid tax or proposed levy to which the determination being appealed relates.

Since there was no NOD here to which an appeal under subsection (d)(1) could be timely, the Tax Court lacked that injunctive power under subsection (e)(1).  I don’t see the district court having injunctive power under (e)(1), either, since the injunctive power is provided during the period of the suspension.  Since no CDP hearing was requested (probably, since no NOIL was issued to the last known address), no suspension period is in effect.

Second, the Supreme Court acknowledged a judicial, equitable exception to the anti-injunction act in Enochs v. Williams Packing & Navigation Co., 370 U.S. 1 (1962).   To succeed under that exception, a taxpayer must show (1) that under no circumstance could the government prevail, and (2) that there is equity jurisdiction – i.e., that the taxpayer would suffer irreparable harm if the government’s actions were not enjoined.  While I think that an IRS levy made without previously sending a proper NOIL might meet the first requirement, merely being forced to pay money would doubtless not be considered irreparable injury.  However, there might be irreparable injury if, say, the levies would end up forcing the taxpayer’s business into bankruptcy.

Short of injunctive relief, though, Congress has provided in section 7433 a suit for money damages on account of negligent wrongful collection actions.  But, under this section, a taxpayer is limited to actual damages – and I am not sure merely paying taxes prematurely constitutes actual damages.  However, collateral damage – such as the levies ending up causing the taxpayer to lose clients or to go into bankruptcy – would seem to be compensable damages.

I also don’t think the Adolphson court appreciated how the dismissal of a deficiency petition for lack of jurisdiction because of an invalid notice doesn’t amount to an injunction against the IRS.  The Tax Court has jurisdiction to find facts necessary to its jurisdiction. When the Tax Court determines that a notice of deficiency wasn’t valid, that is a jurisdictional fact found by the court that could be used by a taxpayer in later litigation to collaterally estop the IRS from, say, judicially foreclosing on the tax lien that arose from the deficiency.  By contrast, if the Tax Court holds an NOIL was invalid, the court would be deciding an issue not necessary to its CDP jurisdiction, so the discussion would be dicta.  A taxpayer could not use this dicta to collaterally estop the IRS in later litigation from arguing that the NOIL was valid. The result of a ruling in a Buffano-type case that the NOIL wasn’t properly mailed is simply an advisory opinion to the IRS not to pursue collection under that NOIL. The IRS usually follows that advice. But, since the Tax Court shouldn’t be issuing advisory opinions, perhaps that is part of why I agree with the Seventh Circuit that Buffano is incorrect.

Finally, Adolphson may also call into question Craig v. Commissioner, 119 T.C. 252 (2002), where the Tax Court held that it has jurisdiction under section 6330(d)(1) to hear a case where the IRS mistakenly issued an equivalent hearing letter, rather than an NOD.  In Craig, the Tax Court said it would treat the equivalent hearing letter as an NOD.  Adolphson seems to suggest that when no NOD was actually issued, the Tax Court should just keep quiet about any other merits issue, as it lacks jurisdiction under section 6330(d)(1).

 

What is a Prior Opportunity to Contest the Liability for Purposes of Collection Due Process?

Today, we welcome back guest blogger A. Lavar Taylor.  Lavar’s practice is based in Southern California; however, he handles tax cases across the country.  His latest challenge involves representing taxpayers seeking the opportunity to litigate the merits of their liability in the Tax Court in the context of Collection Due Process (CDP) cases.  The Tax Court has followed the IRS’s lead in its interpretation of prior opportunity to dispute a tax liability.  Both the Tax Court and the IRS deny taxpayers the opportunity to litigate the merits of the underlying liability in many circumstances in which the taxpayer had the opportunity for an administrative hearing even though that administrative hearing with Appeals could not lead to a court hearing.  Because of Lavar, three Circuit Courts of Appeal will soon hear oral argument on the question of what is a prior opportunity to dispute a tax liability which bars a taxpayer from challenging the merits of the underlying tax liability in a collect due process tax case under IRC 6330(c)(2)(B).  Last year when I wrote a new chapter on CDP for the Saltzman and Book treatise, IRS Practice and Procedure, I was struck by the number of unresolved CDP issues that still remain.  I consider this issue the most vexatious of the unresolved issues and the one where the regulations deviate to the greatest extent from the intent of the statute.  We will closely follow Lavar’s efforts and we have written on this before here and here.  If he can succeed in pushing back on the current interpretation of prior opportunity, he will open up for many taxpayers the chance to litigate large liabilities without the need to pay to litigate.  Keith

Back in February of this year, Carl Smith noted in a guest post  that three Circuit Courts of Appeal would be considering the question of the circumstances under which a taxpayer is barred from challenging the merits of the underlying tax liability in a Collection Due Process case under section 6330(c)(2)(B) because of a “prior opportunity” to contest the underlying liability.  Our firm was retained to handle these appeals.  Briefing in all three cases is now complete.  Oral argument in the 7th Circuit case is set for November 9.  Oral argument in the 10th Circuit case is set for November 14.  Oral argument in the 4th Circuit case is set for the last week of January.

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This issue is an important one.  For taxpayers who lack the resources to pay the disputed liability in full and pursue a suit for refund in District Court or the Court of Claims, particularly those taxpayers against whom the IRS may assess (or has already assessed) taxes and/or penalties without resorting to the deficiency procedures, resolution of this issue could determine whether they will ever be able to challenge in court the merits of those taxes or penalties. (The prior statement ignores the fact that taxpayers theoretically can file bankruptcy and commence an objection to the IRS’s proof of claim or an adversary proceeding under section 505 of the Bankruptcy Code.  Bankruptcy is not a feasible option for many taxpayers, however.)

For those taxpayers who have the means to both pay the disputed liability in full and litigate the merits of the liability in a refund suit in District Court or the Court of Claims, resolution of this issue will decide whether they can ever challenge the disputed liability in the Tax Court, which is procedurally more “taxpayer friendly” than District Court or the Court of Claims and is far less expensive in which to litigate than either of these other two fora.

The parties’ briefs are lengthy, although none of the attorneys involved on either side were paid by the word. The briefs are lengthy because resolving this issue in a proper manner requires a detailed knowledge of tax procedure that most appellate Judges lack.  I’m not going to summarize the briefs here, but copies of our opening brief, the government’s responding brief, and our reply brief in the 7th Circuit case can be found here, here, and here.

If you have the time, I strongly recommend reading the briefs.  They contain a number of surprises.  Of particular interest is the fact that the government is arguing that the taxpayers in these three cases are also barred by section 6330(c)(4) from challenging the merits of the liabilities.   This is a new development.  Section 6330(c)(4) has previously been interpreted by the IRS Office of Chief Counsel as only applying to collection-related issues, not to liability-related issues.  IRS Chief Counsel’s prior position, however, has not prevented the Department of Justice from arguing that section 6330(c)(4) prohibits the taxpayers-appellants in these three cases from challenging  the merits of the underlying liabilities.   There are other surprises in the briefs as well, but I leave it to the readers of this blog post to discover them on their own.

The fact that three Courts of Appeal will be considering these issues simultaneously creates the possibility of a Circuit split.   Indeed, the “split” could even be a “fracture,” with the possibility of each Circuit going its own direction.  Of course, we hope for a unanimous reversal of the Tax Court by all three Circuits.

The last interesting point is that I will get to spend Election Day in Chicago.  Having grown up in downstate Illinois, I’m familiar with the unofficial state slogan of Illinois, which is “Vote Early, Vote Often.”  I jokingly suggested to one of my colleagues that, having voted early here in California, my trip to Chicago might afford me the chance to vote more than once.  He responded that I should check to see whether the records show that I have continuously voted in Illinois since leaving the state almost 40 years ago.  He has a point.  When I’m not busy preparing for oral argument, I will check that out.

 

Don’t File Your Collection Due Process Case Right Before the Statute of Limitations Expires

The case of United States v. Barbara Holmes provides an example of how a request for Collection Due Process (CDP) relief can extend the statute of limitations on collection and keep open the ability for the IRS to bring suit that might have otherwise expired.  Plaintiff’s attorney, who also happens to be her husband, may have made a reasonable decision to file the CDP request and the title of this post goes too far in suggesting that a taxpayer should never file a CDP request at the very end of the statute of limitations on collection; however, when the statute is short, careful thought about taking action, like making a CDP request or making an offer in compromise, must precede the request that will extend the statute of limitations on collection.

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The facts here demonstrate the dysfunction of the IRS more than the estate and bear discussion in analyzing what happened.

Mrs. Holmes is the executrix of the Estate of Shirley Bernhardt. The estate tax return was filed on July 16, 1998 and nothing in the opinion indicates that the return was untimely.  The estate tax return reported a liability of $700,024.34 which was remitted with the return.  The IRS audited the return, sent a notice of deficiency and eventually settled the Tax Court case.  As a result of the Tax Court case, on July 16, 2004, the IRS assessed an additional $233,309.20 plus interest; however, the assessment was erroneous because it failed to properly apply the state estate tax credit.  The opinion does state how the mistake was corrected but I expect that the IRS reduced the assessment with a partial abatement.  The remaining balance on the account at the time the IRS brought suit probably exceeded $200,000.

Although the opinion does not discuss it, I expect that the IRS properly issued notice and demand and then sent other letters in the notice stream. The opinion does state that on December 27, 2004, the IRS placed the case in the queue for collection by a revenue officer.  The opinion in this case comes from the Federal District Court in Houston causing me to believe that the collection case would have been assigned to a revenue officer group somewhere in southern Texas.   That group must be mighty shy of revenue officers because the case sat in the queue for approximately nine years.  The opinion does not state whether any payments occurred during that period or why the liability remained outstanding but on August 19, 2013, the opinion states that the IRS filed notices of federal tax lien in connection with the Estate’s unpaid taxes.

The filing of the notice of federal tax lien triggers the requirement that the IRS send to the taxpayer a CDP notice pursuant to IRC 6320 giving the taxpayer the opportunity for a hearing with Appeals and the opportunity to go to Tax Court, if Appeals issues a notice of determination.  The IRS has a lien under IRC 6324 for unpaid estate taxes that exists with full force without the need for the filing of a notice of federal tax lien. The IRS does not file a notice of federal tax lien for estate taxes but the estate tax lien expires after 10 years.  The IRS has the ability to file the notice of federal tax lien on the assessment it made after winning the Tax Court case.  Because of the gap here between the end of the estate tax lien in 2007 ten years after the death of the decedent and the filing of the notice of federal tax lien in 2013, the IRS placed the collection of the debt at risk to other creditors.  The actions regarding the collection of this debt suggest a high level of dysfunction in the collection division.

The opinion then says that the IRS sent to the taxpayer on September 27, 2013 the final notice of intent to levy. This notice would give the estate separate CDP rights and trigger its own 30-day period for filing a CDP request.  On October 5, 2013, the taxpayer sent to the IRS, by certified mail, a request for a CDP hearing.  That request clearly came within 30 days after the mailing of the levy notice and should have triggered a CDP hearing.  Assuming that nothing else had extended the statute of limitations on collection, the request for the CDP hearing also came during the 10th year after the assessment, at a time when there were about eight months left on the statute of limitations for collection.

When you get that close to the end of the statute of limitations on collection, you must carefully evaluate what you think will happen during the next eight months in order to decide if making the CDP request is in your best interest or if you think that letting the statute continue to march toward the end of the time period will bring the best result. There is no right answer because you do not know what the IRS will do during that eight months but you should have a very clear idea of what you expect to gain by bringing the CDP case if you go that route.

I do not know what benefit the taxpayer thought she might obtain by bringing the CDP case. She could not contest the underlying liability because the liability resulted from a Tax Court decision.  The one benefit I see to a CDP case in these circumstances is the ability to make an offer in compromise that you have the opportunity to have the Tax Court review if you think the IRS rejected it inappropriately.  I have written before that I think the IRS should not process offers in compromise from decedent’s estates for the same reasons it refuses to process offers from bankruptcy estates because a regime exists for contesting the non-payment of those types of liabilities.  Even though the IRS has not adopted my suggestion, getting an offer through on unpaid estate taxes can prove very difficult because of the personal liability of the executor and the existence of the like lien on the transferred property.

For some reason, Mrs. Holmes thought that brining a CDP case would prove beneficial; however, the IRS frustrated her attempt to obtain a CDP hearing. At the time of her request, the government was in the throes of one of the many government shut downs.  When the government shuts down, mail stacks up.  When mail stacks up, short cuts can occur in processing the mail when the disgruntled employees return from their paid time off.  For whatever reason, the CDP request was lost and this is where the case gets interesting.

The lost CDP request caused the general momentum on the case the IRS collection division was finally beginning to build to come to a standstill. The opinion does not say what happened between October 5, 2013 and May 2, 2014, just 10 weeks before the statute of limitations is set to expire if nothing suspends it.  On that day, counsel for the estate sent a letter to the IRS including a copy of the original CDP request from October 5, 2013.  Apparently, the May 2 letter did not convince the IRS that a timely CDP request was made by the estate because on June 2, 2014, counsel for the estate sent another letter to the IRS again arguing that the CDP occurred timely; however, this time he withdraws the CDP hearing request and instead asks for an equivalent hearing.

The estate sends a third letter on July 8 and on July 11, 2014, just five days before the statute of limitations would run on the 10-year period following assessment, the IRS sends the estate a letter saying it accepted the timely request for a CDP hearing. How nice.

The opinion does not say what happened as a result of the IRS accepting the CDP hearing request, but the parties must not have reached an agreement during the CDP process or this case would not exist. On March 10, 2015, the IRS filed suit against Mrs. Holmes individually, and in her capacity as executrix of the estate, and it filed suit against Mr. Holmes individually.  The estate argued that the suit was filed out of time.  The IRS argued that the estate’s timely request for a CDP hearing suspended the statute of limitations on collection and made the suit timely.

The Court found that the estate was estopped from making the argument that the misplacement of the CDP request by the IRS prevented the IRS from proving that the statute of limitations was suspended by that request. The Court ruled that the estate had a duty of consistency.  It had argued with the IRS and written to it several times that it had timely filed the CDP request and it could not argue that a timely CDP request did not exist.

“The elements of the duty of consistency are (1) a representation or report by the taxpayer; (2) on which the Commissioner has relied; and (3) an attempt by the taxpayer after the statute of limitations has run to change the previous representation or to recharacterize the situation in such a way as to harm the Commissioner.” Citing to Herrington v. Commissioner.

Because of its determination regarding the duty of consistency, the Court granted summary judgment with respect to the estate; however, the Court refused to grant summary judgment against Mr. and Mrs. Holmes in their individual capacities because of missteps the IRS had made with respect to the assessment. The estate may not have any funds remaining.  So, getting summary judgment against the estate provides a first step for the IRS to collect the unpaid estate tax liability but it may need to win the case against the individual defendants in order to collect the liability.  This could give further opportunity to report on the case.

No matter what the outcome, the filing of the CDP request during the final year of the statute of limitations on collection kept open the time frame for the IRS to bring this suit. Maybe the IRS would have brought the suit within the un-extended time frame.  We will never know.  The decision of the taxpayers to request the CDP hearing may have been the correct decision, but it is one that should occur only with a careful weighing of the perceived benefits against the granting to the government of additional time and the bringing to the government’s attention a case it has allowed to languish for almost 10 years.

You Can’t Get There From Here: Tax Court Rejects Partial Pay Installment Agreement Request

Last week in Heyl v Commissioner the Tax Court rejected a taxpayer’s request for a partial pay installment agreement (PPIA). We have not discussed that collection tool and the case provides a chance to do so.

Heyl filed returns for three years but failed to pay the tax; he owed about $15,000, including penalties. After receiving a notice of intent to levy and a notice of federal tax lien filing, he requested a CDP hearing. In the hearing request he stated that he could not pay the balance; there was no issue as to the amount he owed. There was a telephone hearing and correspondence; the settlement office requested (and received) other delinquent income tax returns, and Heyl submitted a collection information statement. The collection information statement (the Form 433 series) showed negative monthly income as well as few assets, with one exception: an unoccupied and unleveraged house in Maine that was worth $87,500. It was Heyl’s hope that he could live in retirement at the Maine house, and continue to keep it unleveraged despite the federal tax debt.

IRS had different views, and the order in this case discusses generally what a taxpayer with equity in an asset must demonstrate to keep that asset out of the collection mix.

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In one of the letters to the settlement officer (SO), Heyl requested to pay IRS about $100/year for five years. The SO recognized this as a partial pay installment agreement request. A PPIA allows for IRS to accept essentially on a payment plan a series of payments that will result in IRS receiving less than the full amount of the assessed liability. Congress amended the installment agreement and offer statutes in 2004 to allow IRS and taxpayers to enter into those. They are in effect offers in compromise which use the installment agreement process for a mutually agreed upon lesser amount than both the taxpayer and IRS agree is owed. The idea behind the PPIA is that it is better to get something rather than nothing.

The SO rejected the request based on the view that Hoyle should liquidate or leverage the Maine house and use those proceeds to fully pay the tax. Heyl appealed to Tax Court, and the Tax Court sustained the determination on summary judgment. Here’s how the court got there.

As with most installment agreements and with all offers, the IRS has wide discretion in granting an alternative to enforced collection. The discretion is not absolute, however.

The Internal Revenue Manual provides guidance:

[b]efore a PPIA may be granted, equity in assets must be addressed and, if appropriate, be used to make payment. In some cases taxpayers will be required to use equity in assets to pay liabilities.” IRM 5.14.2.1.2(2) (Sept. 19, 2014).

Taxpayers can push back on a request to use the equity in assets and withstand requests to leverage or liquidate assets if liquidating or selling would cause “economic hardship.” That is a term of art, and sweeps in standards in the regs under Section 6343 and the IRM. To show economic hardship Heyl would have to demonstrate that the sale or leveraging of the asset would render him unable to meet his necessary living expenses. Those relate to the health, welfare or production of income.

The order in Heyl provides some detail on those concepts:

Necessary expenses are those representing “the minimum a taxpayer and family needs to live.” See Thompson v. Commissioner 140 T.C. 173 (2013) (PPIA only allows for necessary expenses); IRM pt. 5.15.1.7(1) (Oct. 2, 2009). The regulations and administrative guidance reflect an understanding of economic hardship placing the taxpayer into “dire circumstances,” not merely being forced to change one’s accustomed to or desired lifestyle. See Speltz v. Commissioner, 454 F.3d 782, 786 (8th Cir. 2006) affg 124 T.C. 165 (2005).

Heyl argued that his was a hardship case because “his future retirement will bring a meager social security check, and that living rent or mortgage free upon retirement may make the difference between ‘misery and subsistence.’”

The Tax Court disagreed, though in so doing suggested ways that a taxpayer might be able to show hardship in differing circumstances:

Petitioner failed to allege any specific fact suggesting the sale or leveraging of the unoccupied Maine home will alter his income expense estimates and render him unable to meet his current necessary living expenses…

We also note that petitioner’s filing status is single and he has no dependents. Petitioner is in his early sixties and operates a sole proprietorship. In addition, he does not allege any disability or extraordinary circumstance prevents him from working, or continuing to operate his business. Petitioner argued that the economic downturn impeded his earning potential, but expresses a belief that his “piece of the economy won’t be weak forever.”

Parting Thoughts

The case reminds me that while this did not work out for Heyl, installment agreements generally are a good tool for taxpayers who may have equity in assets but who wish to avoid enforced collection, especially if there are circumstances that support economic hardship. For example, Keith previously discussed the power of installment agreements in our last discussion of the Antioco case in Appeals Fumbles CDP Case and Resulting Resolution Demonstrates Power of Installment Agreement. The PPIA can be a good option, though when there is an asset that can satisfy the liability the taxpayer will have to offer specific evidence as to why selling or borrowing against the asset jeopardizes the taxpayer’s ability to meet current or likely future necessary expenses. The taxpayer will have to put in evidence on, for example, health issues for the taxpayer or a dependent, or an imminent down the road downturn in income. General statements about the difficulties of a future life in retirement are insufficient. Given that in some circuits (as here) the taxpayer was bound to the record below, the offering of that specific evidence has to be done at Appeals, and not at Tax Court. Even with those good bad facts, when a taxpayer has a history of noncompliance, the IRS still has significant discretion to reject the alternative.