Some Developments on CDP Statutes of Limitation: US v Hendrick and Weiss v Commissioner

In this post I will discuss  two cases involving statutes of limitation and CDP, US v Hendrick and Weiss v Commissioner.

US v Hendrick is a recent federal district court opinion out of the Western District of PA that concluded that the statute of limitations on collection was tolled for the 30-day period following a CDP determination even when the taxpayer chose not to challenge the determination in Tax Court. Weiss v Commissioner is a case on appeal in the DC Circuit that addresses when a 30-day period runs requesting a CDP hearing when the date the CDP notice was mailed differs from the date on the notice itself.

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First Hendrick. Simplifying somewhat, the case involved trust fund assessments, the taxpayer’s timely filing of a CDP request, and the IRS’s issuing of a Notice of Determination sustaining the proposed levy action which informed the taxpayer of the right to appeal the determination in Tax Court within 30 days (I note, and perhaps will return in a later post, to the possible significance of the 2015 legislative change substituting the word “petition” for “appeal” in Section 6330, a subtle point made in Judge Holmes’ Kasper opinion concerning the relationship of the APA and administrative law generally to the mix of non deficiency cases in Tax Court).

The taxpayer did not file an appeal in the 30-day window. Moving with not much speed, the government waited about ten years to file a suit to reduce the assessment to judgment. (It is possible that the government had made administrative efforts to collect; the opinion is silent on that).

As most readers know, under Section 6502 the government may bring a suit within ten years. The government’s collection suit was outside the ten-year period if you did not include in the tolling period the 30-day period that the taxpayer could have filed a petition for review to the Tax Court. Not surprisingly, the taxpayer argued that the 30-day appeal window should not count when in fact the taxpayer does not exercise his appeal rights and challenge a CDP determination in Tax Court.

Section 6330 essentially states that the ten-year period is suspended while a CDP hearing and any appeal is pending. The case turned on whether the hearing or an appeal was pending in that 30-day window when the taxpayer could have filed a petition to Tax Court. The statute does not define the term pending, though regulations provide that the period when the taxpayer could have appealed the determination is part of the time that the statute is suspended:

[t]he period of limitation under section 6502 (relating to collection after assessment) … [is] suspended until the date the IRS receives the taxpayer’s written withdrawal of the request for a CDP hearing by Appeals or the determination resulting from the CDP hearing becomes final by expiration of the time for seeking judicial review or the exhaustion of any rights to appeals following judicial review. 26 C.F.R. § 301.6330-1(g)(1).

This precise issue was addressed in a 2014 Ninth Circuit case, US v Kollman, that Keith blogged about here. The district court opinion, as did the Ninth Circuit, concluded that the statute itself was not clear and the regulation under a Chevron Step Two analysis was a reasonable interpretation of an ambiguous statute.

In finding for the government, the opinion notes that in analogous areas IRS and courts have taken a consistent approach and concluded that limitations periods are tolled pending periods when appeals could be taken. From a policy perspective, the decision is correct, as apart from offset,  the IRS cannot take administrative collection action during that 30-day period.

Weiss: A Case for the Dogs?

Another case involving a CDP statute of limitations issue is percolating its way through the DC Circuit Court of Appeals, Weiss v Commissioner, a case that Keith blogged here. The case involves some colorful facts: the revenue offer attempted to hand deliver the notice of intent to levy but a dog prevented him from making it up the driveway. After failing to successfully hand deliver the notice, when he returned the office two days later, the Revenue Officer mailed it using certified mail but did not change the date on the notice.The taxpayer claimed that the earlier date on the notice governed the 30-day period to make the CDP request.

The taxpayer in Weiss was trying to wait out the SOL on collection, as an equivalent hearing filed outside the 30-day window does not toll the SOL, and if the request was considered an equivalent hearing the IRS was out of time to collect. The Tax Court did not buy the argument, and held that the actual date of mailing controlled the 30-day period, and since Weiss filed within that 30-day period, the request was for a full blown CDP hearing and not an equivalent hearing.

On brief, Weiss also argues in the alternative that the government should be estopped from arguing that the mailing date controls, since it showed the earlier date in the notice of intent to levy. This argument presupposes that the deadline at issue is not jurisdictional, an issue that should be familiar to our readers, though the taxpayer did not press the jurisdictional predicate on brief.

For those wanting a deeper dive, an audio recording of the Weiss oral argument can be found here. Weiss’ brief can be found here; government brief here; and taxpayer’s reply here.

Designated Orders for week of 3-12-2018

Guest blogger Samantha Galvin from University of Denver brings us up to date on the designated orders this week.  (We are a bit behind on publishing these but will catch up soon.)  I had the chance to see Samantha recently at the Tax Court Judicial Conference and to hear comments from many readers of this feature. As always in 2018 there are orders on issues concerning the Graev case. Michael Jackson’s estate continues to provide fodder as well. Perhaps the most interesting case is the first one she discusses. The issue of obtaining a refund in a CDP case is one we thought was settled with the answer being that it was not possible to obtain a refund in that forum. Perhaps the Tax Court has decided to revisit the area. See here and here for prior discussion of that issue. There is also a lengthy discussion of the issue in the Collection Due Process chapter of Saltzman and Book. Keith

The Tax Court designated seven orders the week of March 12, 2018. Three are discussed below, the orders not discussed are: 1) an order ruling on a motion for continuance and motion to dismiss involving the Court’s discretion to grant a continuance shortly before trial (here); 2) a ruling on evidentiary matters in the Michael Jackson Estate case (here); 3) an order involving partnership issues where petitioner filed a motion in limine and motion to dismiss for lack of jurisdiction (here); and 4) an order reopening the trial record in a case involving a Graev III analysis (here).

A Novel Jurisdictional Question – Can the Court Order Refund in a CDP Case?

Docket No. 20317-13, Brian H. McClane v. C.I.R. (Order here)

In this designated order the Tax Court directs the pro se petitioner to contact LITCs in the Baltimore area because it confronts a novel issue, which is whether the Court has jurisdiction to determine and order the credit or refund of an overpayment in a CDP case. The case is before the Court to review a determination sustaining an NFTL for tax years 2006 and 2008.

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It is important to note that the parties dispute whether respondent properly mailed a notice of deficiency (“NOD”) for the years at issue, but both parties agree that the petitioner did not receive a notice of deficiency.

During and after trial, respondent accepted petitioner’s substantiation of deductions for 2008 which results in petitioner’s tax liability being less than the amount reported on his return and eliminates the need for the Court to sustain the NFTL for that year. As a result, the Court asks if the parties object to a decision upholding respondent’s determination for 2006 only, and petitioner objects because he believes he is due a refund for 2008.

Petitioner did not claim a refund in his petition, but that does not preclude him from pursuing a refund claim now because Rule 41(b)(1) requires that any issues tried by express or implied consent are treated as if they were raised in the initial pleadings. The Court views respondent’s concessions as implied consent to the issue of whether petitioner is entitled to a refund. The fact that the issue is raised, however, does not establish the Court’s jurisdiction over the issue. This bring us to the focus of the designated order – does the Court have jurisdiction to order a refund here?

The Court requests that the parties submit supplemental briefs on this issue before the Court resolves it but provides guidance in the form of observations and questions.

Sections 6330(d)(1) and 6512(b)(1) are relevant to the issue of the Court’s jurisdiction to determine and order the refund or credit of an overpayment in a CDP case. Section 6330(d)(1) is the principal, and perhaps the only, basis for jurisdiction and allows the Court to review a determination made by Appeals. The authority is generally regarded as limited to matters within scope of Appeals’ determination. This permits the Court to decline to uphold the determination to sustain the NFTL for 2008, but can they go further and order a refund? Did Appeals have the authority to order a refund and does that matter?

The Court asks petitioner to advise the Court on whether he views the Court’s ability to order a refund within the jurisdiction of 6330(d)(1) and what analysis or authorities support that view. The Court similarly asks respondent to advise the Court on whether the Court’s jurisdiction is limited under section 6330(d)(1) and whether Appeals has the authority to order a refund.

Section 6512(b)(1) gives the Court jurisdiction to determine and order the refund or credit of an overpayment in deficiency cases, but this is not a deficiency case.

Section 6512(b)(3) limits the Court’s ability to order a credit or refund to only that portion of tax paid after the mailing of a NOD or the amount which a timely claim for refund was pending (or could have been filed) on the date of mailing of the NOD. Is this limitation a further indication that overpayment jurisdiction by section 6512(b)(1) is ancillary to deficiency jurisdiction under section 6214(a)?

Respondent’ efforts to collect a deficiency that petitioner did not previously have an opportunity to contest puts into play the amount of his tax liability for that year under section 6330(c)(2)(B), but it is not clear that respondent’s efforts had any effect on petitioner’s ability to pursue a refund claim in other ways (by filing an amended return or responding to the NOD). The Court is not aware of any reason why petitioner could not have pursued his refund claim independently of respondent’s collection action and the section 6330 petition.

Petitioner filed the return at issue in 2009 but made payments from 2009 and 2012 meaning that the latest he could have claimed a refund for some of the amount paid was 2014, so the Court wonders to what extent petitioner’s claim is timely. Did respondent’s issuance of NFTL or any other event that occurred as part of the CDP case suspend the section 6511(a) period of limitations? Or any action on part of petitioner? If respondent’s issuance of the NFTL did not affect petitioner’s ability to pursue a refund claim that has since become time-barred, then petitioner has no ground to complain about the Court’s inability to entertain a belated refund claim as part of the present case.

Supplemental briefs on the issue are due on or before April 30, 2018.

Simple, Concise and Direct

Docket No. 14619-10, 14687-10, 7527-12, 9921-12, 9922-12, 9977-12, 30196-14, 31483-15, Ernest S. Ryder & Associates, Inc., APLC, et al. v. C.I.R. (Order here)

This designated order is somewhat unique because it contains a lesson for Respondent.

These consolidated docket cases had been tried in two special sessions in 2016. During trial, Respondent made an oral motion to conform the pleadings to proof (which means that the Court treats the issues tried by the parties’ express or implied consent as if they were raised in the initial pleadings) pursuant to Rule 41(b) and the Court directs respondent to put his motion in writing so it can serve as an amended pleading. Rule 41(d) requires that amended pleadings to relate back to the original pleading.

The motion filed by respondent has two attachments (issues raised in the NOD and issues raised at trial) which contain over 100 different numbered items which are duplicative to some extent. Despite the voluminous nature of the attachments, respondent also states that the lists are not exhaustive. The Court finds deciphering the issues raised by respondent to be confusing and since the Court is confused, it understands that the petitioner may also be confused.

Petitioner argues that respondent’s evolving theories prejudice him by making it difficult to know which theories warrant a response. Rule 31(b) requires that pleadings be simple, concise and direct. The Court has discretion to allow amended pleadings but denies respondent’s motion because it violates Rule 31. The Court directs respondent to make his motion describe the issues more clearly if he plans to resubmit it.

Three Attorneys and Levy Still Sustained

Docket No. 26364-16, Patricia Guzik v. C.I.R. (Order here)

 

The petitioner is in Tax Court on a determination to sustain a levy on income tax and section 6672 trust fund recovery penalties. Respondent moves for summary judgment and argues that the settlement officer did not abuse her discretion since petitioner’s offer in compromise could not be processed due to an open examination and petitioner could not establish an installment agreement because she failed to propose a specific monthly payment amount. The Court grants respondent’s motion.

Petitioner is very sympathetic. She was diagnosed with Multiple Sclerosis, pregnant and on bed rest when she first began working with Appeals in her collection due process hearing. Her attorney, the first of three over 14 months, requests an extension to submit a collection statement and an offer in compromise, which the settlement officer grants. Because petitioner’s 2011 return was being audited, the settlement officer informed the attorney that an offer would not be processable unless the audit was closed by the time the offer was considered, but an installment agreement may be an option.

The first attorney faxes over a collection information statement and requests another extension to submit an offer in compromise which the settlement officer grants, but this deadline is ultimately missed.

Petitioner hires new representation in the meantime and the second attorney requests an extension which, again, the settlement office grants. This time the offer is submitted, but it is not processable due to the still open audit. While the offer is being considered, petitioner hires new representation for the third time. The newest attorney informs the settlement officer that because the offer is not processable, petitioner wants to propose an installment agreement. Petitioner’s counsel asks if the settlement officer has an amount in mind and the settlement officer states that proposing an amount is not her role, it is petitioner’s. The settlement officer also states that petitioner’s assets may need to be liquidated before the installment agreement can be considered. At this point, petitioner has not paid her 2015 liability and has not made estimated tax payments for 2016.

Petitioner pays nearly all her trust fund recovery penalties, which she argues is a material change in circumstances, and because of that change the Court should remand her case back to Appeals for review.

The Court can remand cases back to Appeals but typically does so if a taxpayer’s ability to repay has diminished and does not necessarily do so when a taxpayer’s ability to pay has improved – so the Court chooses not to remand the case.

Petitioner’s health issues are very unfortunate, but she had three attorneys in 14 months all of whom requested extensions which the settlement officer allowed. Even with the additional time, petitioner never submits an installment agreement proposal, so the Court sustains the levy finding that the settlement office did not abuse her discretion.

 

TBOR and CDP

On March 20, the Tax Court entered an order remanding a Collection Due Process (CDP) case back to Appeals to consider the collection alternative requested by the taxpayer. The remand resulted from the request of the IRS over the strenuous objection of the taxpayer. That’s not the normal scenario for a remand. The taxpayer also sought to have the IRS levy, which it refused to consider at the Appeals level of this CDP case. The facts explain the reason for this seemingly topsy turvy situation. The case also involves significant arguments by the taxpayer about the Taxpayer Bill of Rights and how the actions of the IRS are abrogating those rights. Les and I discussed this case, and others, in our panel presentation this week at the Tax Court Judicial Conference. I will briefly touch on the other cases that we discussed during the panel.

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Mr. Dang is a refugee from Vietnam. After arriving in the United States and quickly integrating, he eventually went into business. Although the business had success initially, it subsequently failed. Mr. Dang had the misfortune to hire a disreputable tax advisor who got him into trouble with the IRS during the period in which the business operated. He has an outstanding liability in the neighborhood of $100,000. That amount of liability allowed Mr. Dang to have his case handled by a revenue officer.

Mr. Dang, through his counsel at a low-income taxpayer clinic, explained to the revenue officer that his IRA was the only asset he had with which he could satisfy his outstanding tax obligation. He asked the revenue officer to levy on his IRA so that he could avoid the 10% (approximately $10,000) excise tax under IRC section 72(t). After some initial resistance, he appeared to have succeeded in convincing the revenue officer to levy on the IRA; however, before the levy occurred, the IRS assigned the case to a new revenue officer and she declined to levy on the retirement account. Instead, she asked Mr. Dang to pull the money out of the IRA and pay off the debt.

Eventually, the IRS issued a CDP notice and Mr. Dang requested a hearing. At the hearing, he requested that the IRS levy on his retirement account. The Appeals employee declined to accept that levying on his retirement account could serve as a collection alternative. He denied relief and issued a determination letter sustaining the right of the IRS to levy on Mr. Dang. A Tax Court petition followed and in their answer to the petition, the lawyers at Chief Counsel IRS admitted that the Appeals employee should have considered Mr. Dang’s request and considered whether a levy on the retirement account would serve as the best way to collect from Mr. Dang. The answer filed on December 1, 2017, stated “respondent will seek to remand this case to Appeals for a supplemental Collection Due Process hearing in which the Settlement Officer’s errors can be corrected.” The answer also stated that respondent “admits petitioner’s CDP hearing was incomplete and did not properly consider all collection alternatives.”

On January 3, 2018, the IRS filed its motion to remand. In that motion, respondent said:

  1. SO True incorrectly believed this request did not qualify as a ‘collection alternative’ and was thus outside the scope of Appeals CDP hearing jurisdiction….
  2. SO True’s determination regarding Appeal’s ability to consider the request was incorrect. Appeals should have evaluated petitioners’ request to pay his liability via a levy on petitioner husband’s Individual Retirement Account and determined whether it was in the best interests of the taxpayers and the government.
  3. Pursuant to Treas. Reg. 301.6330-1€(3) Q&A-E6, taxpayer can request a ‘substitution of assets’ be considered as a collection alternative during a CDP hearing. Requesting respondent collect from a specific revenue source or asset is an acceptable ‘collection alternative’ request and should be considered by Appeals….
  4. A remand for a supplemental hearing is appropriate when it will be helpful or productive…. A remand would be helpful and productive because resolution of this issue would preserve the parties and the Court’s time and resources.”

Petitioners objected to the motion, arguing that it was unnecessary to remand the case and that the Tax Court should simply order the IRS to levy on his retirement account. In the brief filed in support of their objection, petitioners made several arguments and requested “sanctions for violating the Taxpayer Bill of Rights, unnecessarily delaying the resolution of this matter, and needlessly increasing the cost of litigation.” They stated “by refusing to levy on Petitioners’ IRA but insisting upon a voluntary withdrawal from that same IRA, RO Neville rendered meaningless the taxpayer relief enacted by Congress.” They cited to several violations of TBOR, including the right to a fair and just tax system and the right to pay no more than the correct amount of tax.

In remanding the case, the Court gave the IRS a very short time frame to hold the remand hearing and render its opinion regarding taxpayer’s request. Short time frames are a regular feature of CDP cases for taxpayers but not very often for the IRS. It will be interesting to watch this case not only for the substance of the argument that the IRS should levy upon the IRA but also for the role that TBOR might play in the ultimate resolution of the case.

In the panel discussion at the judicial conference, we not only discussed this case but discussed the case of Winthrop Towers previously blogged here, the Harris case  we blogged here and the case of Facebook previously blogged here. It is interesting that in the government brief in opposition to the relief requested by Facebook that it took time to distinguish the Winthrop Tower’s case.

As more and more litigants begin to focus on TBOR, it will be interesting to see how the rights enshrined in legislation in 2015 will impact outcomes of cases (and outcomes of administrative action.) National Taxpayer Advocate Nina Olson, who participated on the panel at the judicial conference said that she did not know how this might turn out but she was watching anxiously. She also said that quotes attributed to her in the government’s brief in opposition quoted her discussing the administrative publication of TBOR and not the legislative enactment. She indicated that by putting it into the Code, Congress changed the impact of TBOR in ways that we do not yet know.

Conclusion

In addition to the CDP and TBOR issues brought to light by this case, the case also raises the issue of levy on retirement accounts. The IRS requires that front line employees get approval two levels up in order to levy on retirement accounts. That approval process generally inures to the benefit of holders of those accounts but serves as a disadvantage to someone like Mr. Dang who wants the IRS to make the levy on his retirement account while the revenue officer does not want to go through the trouble. It seems like there should be a relatively easy path to levy upon a retirement account when it is made at the taxpayer’s request. It is also troubling that those with retirement accounts have their assets more protected from IRS collection action than poorer clients whose only retirement is social security and from whom the IRS can take 15% with no extra approval.

 

ARE ALLEGED ALTER EGOS, SUCCESSORS IN INTEREST AND/OR TRANSFEREES ENTITLED TO THEIR OWN COLLECTION DUE PROCESS RIGHTS UNDER SECTIONS 6320 AND 6330? PART 2

Today, guest blogger Lavar Taylor continues his discussion of the interplay of the laws regarding third parties liable for a tax debt and the ability of those third parties to obtain CDP rights. If you have not had the chance to read his initial post on this topic, you might want to take time to read that one before digging into this one. These posts not only explore the ability of these third parties to obtain CDP rights but help anyone not familiar with the various ways that the IRS can seek payment of a taxpayer’s liability to gain a better understanding of the collection process. Keith

In Part 1 of this series of blog posts, I explained how the relevant statutes and regulations, together with the rationale of the Court deciding Pitts v. United States in favor of the IRS, support the conclusion that persons/entities who are alleged by the IRS to be the alter ego, successor in interest, and/or transferee of the party who incurred the tax liability (“original taxpayer”) are entitled to their own independent Collection Due Process (“CDP”) rights under §§ 6320 and 6330 of the Code. In the present blog post, I explain why I believe that the IRS is speaking out of both sides of its mouth when it denies alleged alter egos, successors in interest, and transferees their own independent CDP rights under §§ 6320 and 6330.

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The IRS, in the current version of the Internal Revenue Manual (“IRM”), instructs revenue officers to treat partners in a general partnership which incurred unpaid federal taxes as “persons liable for the tax” for purposes of administratively enforcing the partnership’s unpaid tax liability. Per the IRM, these general partners are to be given CDP Lien and Levy notices under sections 6320 and 6330, in addition to the CDP Lien and Levy notices provided to the taxpayer partnership. Thus, IRM section 5.19.8.4.2(5)(08-05-2016), titled CDP Hearing Requests, provides in section (5) as follows:

If the tax liability involves a partnership, a request for a CDP hearing under IRC 6330 would cover all partners in the partnership. Under IRC 6320, the partnership and partners listed on the NFTL receive the CDP hearing notice. A partner with authority to represent the partnership could request a hearing for the partnership or a partner listed on the NFTL could request a CDP hearing as an individual partner.

Similarly, IRM 8.22.5.3.1.4(4) (03-29-2012), titled Determining Timeliness-Levy, provides that “[f]or partnerships, Collection may issue separate notices to individual partners as well as the partnership entity.” IRM Section 8.22.6.5 (03-29-2012), titled Partnership Liability, states as follows:

1. Under state law, general partners in partnerships are liable for taxes assessed against the partnership. In United States v. Galletti, 541 U.S. 114 (2004), the Supreme Court held the Service’s assessment against a partnership serves to make the general partner liable for the tax. While the Supreme Court did not address administrative collection, Galletti is consistent with the Service’s long-standing legal position that it can enforce a tax lien and take administrative levy action against a general partner based on the assessment and notice and demand directed to the partnership. See Chief Counsel Notice 2005-003 at http://www.irs.gov/pub/irs-ccdm/cc-2005-003.pdf .

2. A partner’s individual CDP hearing request:

— DOES NOT affect Collection’s ability to collect from the partnership or other individual partners’ assets

— DOES affect Collection’s ability to collect from that partner’s individual assets.

Chief Counsel Notice 2005-003 explains in detail the rationale for the IRS’s position that the IRS may pursue administrative collection action against general partners personally for taxes incurred by and assessed against the partnership itself. Essentially, the IRS takes the position that it may take advantage of state law to pursue collection of a tax liability against someone other the person who incurred the tax liability. That concept is not a new one – it is the bedrock of the Supreme Court’s decision in Commissioner v. Stern, 357 U.S. 39 (1958), which deals with the assertion of transferee liability under what is now section 6901 of the Code. In the case of a general partner of a general partnership, the IRS is using the relevant state’s version of the Uniform Partnership Act, which provides that general partners are personally liable for partnership debts.

Why is the IRS speaking out of both sides of its mouth when it grants partners in general partnerships their own CDP rights under §§ 6320 and 6330 with respect to taxes incurred by the partnership but denies those same CDP rights to alleged alter egos, successors in interest and transferees of the original taxpayer? Simply put, the IRS, in seeking to hold third parties liable as the alleged alter ego, successor in interest, and/or transferee of the original taxpayer, is invoking state law to hold a third party liable for the taxes of the original taxpayer.

Conceptually, there is no difference between the IRS invoking state law to hold a general partner of a general partnership liable for the partnership’s tax liability and the IRS invoking state law in an effort to hold someone other than the original taxpayer liable for that tax liability as an alleged alter ego, successor in interest, and/or transferee of the original taxpayer. While determining whether a person or entity is a partner of a general partnership is normally a simpler task than determining whether a person or entity is an alter ego, successor in interest, or transferee of the original taxpayer, both types of determinations involve the application of state law to a given set of facts to determine whether a third party can be held liable for taxes owed by the original taxpayer.

It is clear that state law governs the question of whether a third party can be held liable as an alter ego, successor in interest, and/or transferee of the original taxpayer for taxes assessed against the original taxpayer. See, e.g., Commissioner v. Stern, 357 U.S. 39 (1958) (transferee), Wolfe v. United States, 798 F.2d 1241, (9th Cir. 1986) (alter ego), TFT Galveston Portfolio, Ltd. v. Comm’r, 144 T.C. 96 (2015) (successor in interest), see also Fourth Inv. LP v. United States, 720 F.3d 1058 (9th Cir. 2013) (nominee). It seems to me that, if the IRS’s assertion of liability under state law to enforce a general partnership’s tax liability against a general partner of that partnership is sufficient to trigger CDP rights for the general partner, the IRS’s assertion of liability under state law to enforce a taxpayer’s tax liability against a third party as an alleged alter ego, successor in interest, or transferee should also be sufficient to trigger CDP rights for the alleged alter ego, successor in interest, or transferee.

In the Tax Court cases which we recently settled, the IRS argued that it was not being inconsistent in denying our client (which was an alleged alter ego/successor in interest of the original taxpayer) its own independent CDP rights while allowing those same rights to partners of general partnerships that incur tax liabilities. The IRS argued as follows:

The alter ego doctrine is used in federal tax cases to collect the liability of a taxpayer from a separate corporate entity that is operating to impair the government’s ability to satisfy the taxpayer’s legitimate tax liability. See Oxford Capital Corp. v. United States, 211 F.3d 280, 284 (5th Cir. 2000); Valley Fin. V. United States, 629 F.2d 162, 172 (D.C. Cir. 1980). Once respondent has determined that an entity is an alter ego, that entity’s assets may be levied upon for the debtor of the taxpayer because the law does not recognize the taxpayer and the alter ego entity as each having independent existence for purposes of debt collection. See Oxford Capital Corp., 211 F.3d at 284; see also United States v. Scherping, 187 F.3d 796, 801-02 (8th Cir, 1999).

There are two significant problems with the IRS’s argument (aside from the fact that the IRS’s argument fails to address successor in interest liability). First, there is both federal and California case law which makes clear that an entity is considered a valid, separate entity even when that entity is liable for a third party’s debt under the alter ego doctrine. In Wolfe v. United States, 798 F.2d 1241 (9th Cir. 1986), the Ninth Circuit upheld the application of the alter ego doctrine under Montana law against the shareholder of a corporate taxpayer. In doing so, the Ninth Circuit stated as follows:

Indeed, despite Wolfe’s contentions, it is not necessarily inconsistent to view a corporation as viable for the purpose of assessing a corporation tax, while disregarding it for the purpose of satisfying that assessment. Only those corporations that were established with no valid purpose are considered sham corporations, and thus not entitled to separate taxable status. See Moline Properties v. Commissioner, 319 U.S. 436, 439, 87 L. Ed. 1499, 63 S. Ct. 1132 (1943). A corporation could have a valid business purpose (giving it separate tax status), and at the same time be so dominated by its owner that it could be disregarded under the alter ego doctrine. Cf. National Carbide Corp. v. Commissioner, 336 U.S. 422, 431-434 & n. 13, 93 L. Ed. 779, 69 S. Ct. 726 (1949) (finding insignificant, for the purpose of determining whether a subsidiary corporation is entitled to separate taxable status, the fact that the owner retains direction of the subsidiary’s affairs, provides all of its assets, taxes all its profits, and exercises complete domination and control over its business). This view has been adopted by the Fifth Circuit. See Harris v. United States, 764 F.2d 1126, 1128 (5th Cir. 1985) whether or not [the corporation] was a separate taxable entity is not the same question as whether it was an alter ego for the purpose of piercing the corporate veil”).

Thus, Wolfe, and the cases cited in the Wolfe opinion, make clear that a corporation can be a valid, separate entity from the original taxpayer for purposes of the CDP procedures, even if the IRS is seeking to hold a corporation liable under the alter ego doctrine for the taxes owed by the original taxpayer.

Similarly, California law, upon which the IRS was relying in the now-settled cases we were handling in Tax Court, makes clear that a third party entity which is held liable as the “alter ego” of the original obligor remains a valid, independent entity for purposes of California law. In Mesler v. Bragg Management Co., 39 Cal. 3d 290 (1985), the California Supreme Court made this point very clear while holding that a parent corporation could be sued as the alleged alter ego of its subsidiary, even though the plaintiff had previously reached a settlement agreement with the subsidiary. The Court stated in relevant part as follows:

[W]hen a court disregards the corporate entity, it does not dissolve the corporation. “It is often said that the court will disregard the ‘fiction’ of the corporate entity, or will ‘pierce the corporate veil.’ Some writers have criticized this statement, contending that the corporate entity is not a fiction, and that the doctrine merely limits the exercise of the corporate privilege to prevent its abuse.” (6 Witkin, op. cit. supra, §5, at p. 4317; see, e.g., Comment, supra, 13 Cal. L.Rev. at p. 237.)

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The essence of the alter ego doctrine is that justice be done. “What the formula comes down to, once shorn of verbiage about control, instrumentality, agency, and corporate entity, is that liability is imposed to reach an equitable result.” (Latty, Subsidiaries and Affiliated Corporations (1936) p. 191.) Thus the corporate form will be disregarded only in narrowly defined circumstances and only when the ends of justice so require.

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It is not that a corporation will be held liable for the acts of another corporation because there is really only one corporation. Rather, it is that under certain circumstances a hole will be drilled in the wall of limited liability erected by the corporate form; for all purposes other than that for which the hole was drilled, the wall still stands. 39 Cal. 3d at 300-301.

To the extent that state law is relevant in this context, California law supports the conclusion that an alleged alter ego is a separate entity which is entitled to its own independent CPD rights. (For taxpayers located outside of California, and outside of the Ninth Circuit, the relevant case law will obviously be different.)

The second problem with the IRS’s argument is that the two cases which it cited both pre-date the CDP procedures, which took effect in January of 1999, following the enactment of RRA 1998 in July, 1998. The resolution of the question of whether an alleged alter ego, successor in interest, or transferee of the original taxpayer is entitled their own independent CDP rights will likely depend on the statutory interpretation of the CDP provisions, §§ 6320 and 6330. There are no cases which address this issue. And as is explained in Part 1 of this series of blog posts, the question of how to interpret §§ 6320 and 6330 is likely to be influenced by looking to §§ 6321 and 6331.

Notably, § 6331 refers to the need to provide a “notice and demand” before levy action may be pursued. This is a reference to “notice and demand” as set forth in IRC § 6303(a), which requires the IRS to provide “notice to each person liable for the unpaid tax, stating the amount and demanding payment thereof.” This notice must be sent to the person’s “last known address” within 60 days of the date on which the tax is assessed. Id. Failure to give a valid notice and demand renders void any levy action by the IRS and requires the IRS to refund all monies collected by levy. See Martinez v. United States, 669 F.2d 568 (9th Cir. 1981) (IRS was required to return all funds received by levy where IRS failed to give taxpayer a valid notice and demand under § 6303(a) prior to issuing levies). Failure to give a proper notice and demand also prevents the IRS from taking future administrative enforcement actions such as filing lien notices and issuing levies. See United States v. Coson, 286 F.2d 453 (9th Cir. 1963) (failure to send proper notice and demand to putative partner of a general partnership rendered tax lien void), United States v. Chila, 871 F.2d 1015 (11th Cir. 1989), cert. denied, 493 U.S. 975 (1989) (failure of the IRS to send a valid notice and demand to the taxpayer precludes the IRS from taking administrative collection action with respect to the unpaid taxes but does not prevent a suit to reduce the assessment to judgment), Blackston v. United States, 778 F.Supp. 244 (D. Md. 1991) (Marvin Garbis, J.).

There is a further requirement that the IRS send a notice of intent to levy under IRC § 6331(d) at least 30 days before the IRS levies “upon the salary or wages or property of any person with respect to any unpaid tax.” This requirement, largely forgotten since the enactment of section 6330, has never been repealed. Its primary significance now is that the sending of this notice triggers an increase in the accrual rate of the failure to pay penalty under IRC §§ 6651(a)(2) and (a) (3). See IRC § 6651(d)(1).

The language of §§ 6303(a) and 6331(d) is similar to the language used in §§ 6320 and 6330. Yet we know that the IRS does not send a “notice and demand” for payment under § 6303(a) within 60 days of the date of assessment to alleged alter egos, successors in interest, or transferees who have not been separately assessed that tax liability. Similarly, we know that the IRS does not send § 6331(d) notices to alleged alter egos, successors in interest, or transferees prior to issuing levies against the property of alleged alter egos, successors in interest, or transferees. How is it that the IRS is able to take administrative collection action against alleged alter egos, successors in interest, and/or transferees without complying with §§ 6303(a) and 6331(d)?

The answer to that apparent conundrum may surprise you. While it is possible to argue that the IRS may take administrative collection action against alleged alter egos, successors in interest, and/or transferees who have not been separately assessed a tax liability without complying with the requirements of §§ 6303(a) and 6331(d), it is far from clear that this argument carries the day. There are other arguments, some of which, in my view, have not been properly articulated in recent years. Perhaps Pitts was incorrectly decided, and the IRS is not entitled to take administrative collection action against alleged alter egos, successors in interest, or transferees at all. That topic will be explored in greater detail in Part 3 of this series.

 

 

 

Are Alleged Alter Egos, Successors In Interest and/or Transferees Entitled to their Own CDP Rights?

Today, we welcome back guest blogger A. Lavar Taylor for what is the first in a series of posts.  Lavar’s practice is based in Southern California; however, he handles tax cases across the country.  His latest challenge involves representing individuals in CDP cases who are not the taxpayer. If successful, his latest venture will open up CDP to a group of individuals currently barred from using that procedure. Keith

Introduction

This blog post is the first in a short series of blog posts addressing the question of whether the IRS has been violating the Collection Due Process (“CDP”) procedures since they became effective in January of 1999 by refusing to extend CPD rights to alleged alter egos, successors in interest and/or transferees of the person/entity who/which incurred the tax, i.e., the original “taxpayer,” where no separate assessment has been made against the alleged alter ego, successor in interest and/or transferee.   The IRS would have the public, including tax professionals, believe that the answer to this question is “no,” that these persons are not entitled to their own CDP rights independent of the CDP rights of the original “taxpayer.” This blog post, along with several succeeding blog posts, will explain why the IRS may be wrong on this point.  These posts will also examine the potential procedural obstacles to the Tax Court rendering an opinion on the question of whether alleged alter egos, successors in interest and transferees are entitled to their own independent CDP rights.

These posts will also examine the argument that the IRS is not permitted to take administrative collection action against any of these “secondarily liable” persons at all, absent a separate assessment against them. This argument seems radical, even “protester-like,” on the surface. But if it turns out that these “secondarily liable” persons are not entitled to their own independent CDP rights, this argument is not at all far-fetched.

Why do I have an interest in these topics? Our office recently settled several cases pending in the Tax Court in which we had raised these issues. The Tax Court would have had the opportunity to address the question of whether an alleged alter ego/successor in interest is entitled to its own separate CDP rights under §§ 6320 and 6330, plus various related jurisdictional issues, had these cases not recently settled. Because those cases are now settled, the Tax Court cases are moot.

Because the question of whether alleged alter egos, successors in interest and transferees are entitled to their own independent CDP rights is an important, recurring issue, I am sharing with the tax procedure community the arguments that we made in our now-resolved cases, so that this issue can be raised by other taxpayers and can hopefully resolved by the Tax Court in another case. I use the term “hopefully” purposely. As this series of blog posts will demonstrate, it is an open question whether the Tax Court can acquire jurisdiction to decide the question of whether alleged alter egos, successors in interest and/or transferees are entitled to their own independent CDP rights.

The questions of a) whether the Tax Court can acquire jurisdiction to decide this issue and b) how alleged alter egos, successors in interest and/or transferees can maximize the chances of the Tax Court acquiring jurisdiction will be addressed in future blog posts.   In this blog post, I discuss the relevant statutes and regulations, along with a key case, which the government won, which strongly supports the conclusion that alleged alter egos, successors in interest and/or transferees are entitled to their own independent CDP rights.

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The Statutes

Section 6320 states that any “person described in section 6321” of the Code is entitled to CDP rights under §6320. Section 6320(a)(1). The “person” who is described in §6321 is “any person liable to pay any tax”. Thus, §6320 should apply if there is a “person, ” a tax is owed, and the “person” is “liable” for that tax. Section 7701(a)(1) defines the term “person” very broadly.

The language of §6330 appears to be broader than the language of §6320 in its application. It seemingly requires the IRS to follow the levy CDP procedures not just where the IRS intends to levy on property owned by the person who is liable for the unpaid taxes in question but also where the IRS wants to levy on property that is owned by a person other than the person who is liable for the unpaid taxes in question on which the IRS has a valid lien. Section 6330(a)(1) states that “[n]o levy may be made on any property or right to property of any person unless the Secretary has notified such person in writing of their right to a hearing under this section before such levy is made.”

Section 6331(a) of the Code permits the IRS to levy on “all [non-exempt] property and rights to property” of the “person liable to pay any tax” and on any property on which the IRS has a lien under Chapter 64 (which consists of §§6301 through 6344 of the Code). The ability of the IRS under§ 6331(a) to levy on property on which it has a tax lien, even if the property is not owned by the person who is liable for the unpaid tax liability, seemingly reinforces the notion that §6330 gives CDP rights to all “persons” who own property on which there is a tax lien, even if those persons are not personally liable for the unpaid taxes.

The Regulations

Ah, but what the Code seemingly gives, the regulations clearly tax away. Treasury Regulation §301.6330-1(a) provides in relevant part:

(3)Questions and answers. The questions and answers illustrate the provisions of this paragraph (a) as follows:

Q-A1. Who is the person to be notified under section 6330?

A-A1. Under section 6330(a)(1), a pre-levy or post-levy CDP Notice is required to be given only to the person whose property or right to property is intended to be levied upon, or, in the case of a levy made on a state tax refund or a jeopardy levy, the person whose property or right to property was levied upon. The person described in section 6330(a)(1) is the same person described in section 6331(a) – i.e., the person liable to pay the tax due after notice and demand who refuses or neglects to pay (referred to here as the taxpayer). A pre-levy or post-levy CDP Notice therefore will be given only to the taxpayer.

Q-A2. Will the IRS give notification to a known nominee of, a person holding property of, or a person who holds property subject to a lien with respect to, the taxpayer of the IRS’ intention to issue a levy?

A-A2. No. Such a person is not the person described in section 6331(a)(1), but such persons have other remedies. See A-B5 of paragraph (b)(2) of this section.

What the IRS has done in its regulations is to say that the term “any person” does not really mean any person, but instead means “any person liable for the tax under §6331(a).” While it seems to me that the language of the regulation is inconsistent with the statute on this point,  I will leave that discussion and that fight for another day.   It is not necessary for courts to strike down this regulation to reach the conclusion that alleged alter egos, successors in interest and/or transferees are entitled to their own independent CDP rights under §6330, although striking down this regulation would make it much simpler to reach that conclusion. Striking down the regulation, however, would have no effect on the question of whether alleged alter egos, successors in interest and/or transferees have CDP rights under §6320.

What do the regulations under section 6320 have to say? Here is the relevant portion of Treasury Regulation § 301.6320-1:

(a)Notification –

* * *

Q-A1. Who is the person entitled to notice under section 6320?

A-A1. Under section 6320(a)(1), notification of the filing of a NFTL on or after January 19, 1999, is required to be given only to the person described in section 6321 who is named on the NFTL that is filed. The person described in section 6321 is the person liable to pay the tax due after notice and demand who refuses or neglects to pay the tax due (hereinafter, referred to as the taxpayer). * * *

(b) Entitlement to a CDP Hearing

(2) * * *

Q-B5. Is a nominee of, or a person holding property of, the taxpayer entitled to a CDP hearing or an equivalent hearing?

A-B5. No. Such person is not the person described in section 6321 and is, therefore, not entitled to a CDP hearing or an equivalent hearing (as discussed in paragraph (i) of this section). * * *

These regulations track the language of § 6320, more so than the regulations issued under § 6330 track the actual language of that section.

So what lessons are to be drawn from the regulations as to what “persons” are entitled to CDP rights under §§6320 and 6330? The most important lesson is that, per the regulations, in order for a person to be entitled to CDP rights, they must be a “person liable for the tax” under § 6320 or a “person liable to pay any tax” under § 6331(a).

The Case of Pitts v. United States

With that lesson in mind, I now discuss the important case of Pitts v. United States, 515 B.R. 317 (C.D. Cal. 2014), aff’d, 668 Fed. Appx. 774, 2016 U.S. App. LEXIS 16287, 118 A.F.T.R.2d (RIA) 5644, 2016-2 U.S. Tax Cas. (CCH) P503992016 (9th Cir. 2016)(unpublished opinion), a case which Keith blogged about here.

Importantly, Pitts was a government victory.   The unfortunate fact that the Ninth Circuit buried its conclusion in an unpublished opinion does not lessen the importance of the case. (Note: I filed an amicus curiae brief with the Ninth Circuit in Pitts. My argument in that amicus brief will be discussed in detail in one of the later blog posts on this topic.)

In Pitts, a general partnership incurred unpaid employment taxes. Pitts was a general partner in the partnership. The IRS filed a notice of federal tax lien against Pitts, in her capacity as a general partner, without making a separate assessment against Pitts. Pitts later filed a chapter 7 bankruptcy petition. After obtaining a discharge, Pitts filed an adversary proceeding against the IRS, seeking, inter alia, to invalidate the tax liens evidenced by the notices of federal tax lien filed against her for the taxes incurred by the partnership.  The Bankruptcy Court upheld the validity of the liens, and Pitts appealed to the District Court.

The District Court, in a published opinion, affirmed the holding of the Bankruptcy Court. The District Court acknowledged that the case presented the question of whether the IRS could pursue administrative action against a general partner of a general partnership to collect taxes incurred by the partnership, a question left open by the Supreme Court in United States v. Galletti, 541 U.S. 114 (2004). (Note: I am very familiar with Galletti, because I was co-counsel for Galletti in the Supreme Court and authored almost all of the merits brief filed by Galletti.)

Pitts argued, unsuccessfully, that the IRS could not pursue administrative collection action against her to collect the employment taxes owed by the partnership without making a separate assessment against her under section 6672. She cited to the Supreme Court’s holding in Galletti that a general partner of a general partnership that incurs unpaid employment taxes is not the “employer” who incurs the tax and thus is not “primarily liable” for the partnership’s tax liability, even though the Supreme Court also held that Galletti was “secondarily liable” for those taxes by operation of state (California) law, which allowed the IRS to file a claim against Galletti in bankruptcy.

The District Court, in ruling for the government, characterized the government’s arguments as follows:

But the Government argues that contrary to Pitts’s argument, once the IRS assesses a tax against a general partnership, it need not separately assess the general partners in order to make them liable. The Government contends that since Pitts is liable for DIR’s debts under California law, the tax assessment against DIR for its unpaid employment-tax withholdings suffices to create a tax debt owed by Pitts to the IRS. The IRS further asserts that it did not have to proceed against Pitts under § 6672 but rather could separately pursue her under state law.

The District Court then went on to address the question of whether the IRS can pursue administrative enforcement remedies to collect against Pitts. The Court stated as follows:

But for the IRS to properly record a tax lien as provided under § 6321, Pitts must only be “any person liable to pay any tax”—not necessarily the primarily liable “taxpayer” as Congress has defined that term in § 7701(a)(14) (defining “taxpayer” as “any person subject to any internal revenue tax”). The determination whether Pitts is a “taxpayer” does not establish the IRS’s ability to record a statutory lien under § 6321. Rather, the existence of her federal tax liability for “any tax”—regardless of how that liability arises—is the defining criterion of the tax lien’s validity. As the Court established above, Pitts is in fact liable under federal law for DIR’s unpaid employment-tax withholdings.

This District Court thus held that Pitts was a “person liable to pay any tax” for purposes of section 6321, even though Pitts’ liability for the tax was grounded on state law (California’s version of the Uniform Partnership Act), not based on federal law, such as section 6672.

The Ninth Circuit affirmed the holding of the District Court, albeit in a cowardly manner, via an unpublished opinion. The Court stated:

First, pursuant to the plain language of 26 U.S.C. § 6321, Pitts is a “person liable to pay any tax,” and a lien in favor of the government arises by operation of federal law. See In re Crockett, 150 F.Supp. 352, 354 (N.D. Cal. 1957) (California partner was liable for debts of partnership under state law; accordingly, partner was liable for entire amount of partnership’s employment taxes, and was “person liable to pay” under § 6321’s identically worded predecessor); see also Bresson v. C.I.R., 213 F.3d 1173, 1178 (9th Cir. 2000) (where the IRS relied on state law to establish an individual’s liability, “the government’s underlying right to collect money in this case clearly derives from the operation of federal law (i.e., the Internal Revenue Code)”).

Second, the United States may utilize administrative enforcement procedures to collect the debt from Pitts, because she is secondarily liable for DIR’s assessed debt. See United States v. Galletti, 541 U.S. 114, 122, 124 S. Ct. 1548, 158 L. Ed. 2d 279 (2004) (“After the amount of liability has been established and recorded, the IRS can employ administrative enforcement methods to collect the tax”). The United States is not obligated to make a second assessment against Pitts individually, because the consequences of its assessment attach to the assessed debt “without reference to the special circumstances of the secondarily liable parties.” Id. at 123.

So there you have it. A person who is “secondarily liable” for a tax liability under state law is a “person liable to pay any tax” under §6321. Presumably that person is also “any person liable to pay any tax” for purposes of § 6331.

It would seem to follow that, if a person who is “secondarily liable” for a tax liability under state law is subject to administrative collection action under §§6321 and 6331, such person is also entitled to the protections of the CDP procedures. That topic will be explored in greater detail in the next blog post.

 

Fourth Circuit Declines to Rule on Whether CDP Filing Period is Jurisdictional, but Holds Against Taxpayer, Since It Says Facts Do Not Justify Equitable Tolling

We welcome back frequent guest blogger Carl Smith who discusses the most recent circuit court opinion regarding the jurisdictional nature of the time frames for filing a petition in Tax Court. The Fourth Circuit takes a different tack but reaches the same result as prior cases. Keith 

A few days ago, I did a post on the Ninth Circuit opinion in Duggan v. Commissioner, 2018 U.S. App. LEXIS 886 (9th Cir. 1/12/18). In Duggan, a pro se taxpayer mailed a Collection Due Process (CDP) petition to the Tax Court one day late, relying on language in the notice of determination that stated that the 30-day period to file a petition did not start until the day after the notice of determination. He read this to mean that he had 31 days to file after the date of the notice of determination. Keith and I filed an amicus brief in Duggan arguing that (1) the filing deadline in section 6330(d)(1) is not jurisdictional, (2) the deadline is subject to equitable tolling, and (3) in light of the fact that 7 other pro se taxpayers over the last 2 ½ years read the notice the same way, the IRS misled the taxpayer into filing a day late – justifying equitable tolling on these facts to make the filing timely. In Duggan, the Ninth Circuit did not have to reach the second or third arguments, since it held that the language of section 6330(d)(1) made its filing deadline jurisdictional under a “clear statement” exception to the Supreme Court’s usual rule (since 2004) that filing deadlines are no longer jurisdictional. Thus, the Ninth Circuit affirmed the Tax Court’s dismissal of the case for lack of jurisdiction – a dismissal that had originally been done in an unpublished order.

Keith and I represented a formerly-pro se taxpayer in the Fourth Circuit who had a case on all fours with Duggan, Cunningham v. Commissioner. In another unpublished Tax Court order, she also had her CDP petition dismissed for lack of jurisdiction as untimely. Like the Ninth Circuit, the Fourth Circuit had no precedent on whether the CDP filing deadline is jurisdictional or subject to equitable tolling. Only days after the Ninth Circuit’s published opinion in Duggan, the Fourth Circuit, on January 18, 2018, issued an unpublished opinion in Cunningham affirming the Tax Court. But, the Fourth Circuit avoided the tricky issues of whether the filing deadline is jurisdictional or whether it might be subject to equitable tolling in an appropriate case. Instead, the Fourth Circuit held that Ms. Cunningham has misread a clear notice of determination and that her mere error was not a fact sufficient to sustain a holding of equitable tolling, even assuming (without deciding) that the filing deadline might be nonjurisdictional and might be subject to equitable tolling in an appropriate case.

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The opinions in Duggan and Cunningham do not mention the significant number of pro se taxpayers who have recently read the notice of determination filing period language differently, although the Cunningham opinion acknowledges that “other taxpayers” (number unspecified) have read the language like Ms. Cunningham.

The key passage in the Cunningham opinion states:

We have said that equitable tolling is appropriate “in those rare instances where—due to circumstances external to the party’s own conduct—it would be unconscionable to enforce the limitation period against the party and gross injustice would result.” Whiteside v. United States, 775 F.3d 180, 184 (4th Cir. 2014) (en banc) (internal quotation marks omitted).

We find these considerations to be wholly absent here. There is no suggestion of extraordinary circumstances that prevented Cunningham from timely filing her appeal, nor of circumstances external to her own conduct. Cunningham simply points to the language in the IRS’s letter, which she claims is misleading and tricked her and other taxpayers into filing late. But we see nothing misleading about it.

The letter informed Cunningham that she had “a 30-day period beginning the day after the date of this letter” to file an appeal. J.A. 5. We think the only reasonable reading of that language requires counting the day after the date of the letter (here, May 17) as “day one,” the following day (May 18) as “day two,” and so on up to “day thirty”—June 15. Cunningham claims she understood the language in the IRS letter to essentially count May 17 as “day zero,” and onward from there, resulting in a cutoff date one day later than the true deadline. Such a method of counting is certainly contrary to the practice set forth in Rule 25(a) of the Tax Court Rules of Practice and Procedure. See United States v. Sosa, 364 F.3d 507, 512 (4th Cir. 2004) (“[I]gnorance of the law is not a basis for equitable tolling.”). We think it is also contrary to the plain language of the IRS letter and to principles of common sense.2

__________________________________________________________________________________________________________

2Cunningham also points out (correctly) that the language in the letter is not identical to the language in the statute. But it need not be, and Cunningham fails to explain why the difference in wording matters. In our view, the language of the letter and the language of the statute are two commonsense ways of expressing the same message.

 

After the Duggan opinion was issued, the DOJ filed a FRAP 28(j) letter in the Fourth Circuit to alert the latter court to the ruling of the former. But, pointedly, the Fourth Circuit in Cunningham does not mention Duggan, even for contrast.

Since there is no Circuit split between Duggan and Cunningham (just different reasoning for affirming the Tax Court’s dismissals), it is almost certain that the Supreme Court would never grant cert. to review either of these opinions. Thus, no cert. petitions will be filed.

Keith and I want to thank Harvard Law student Amy Feinberg, who did the oral argument in Cunningham before the Fourth Circuit on December 5, 2017.

Keith and I also represent in the Fourth Circuit another formerly-pro se taxpayer who filed her Tax Court petition late. In the case of Nauflett v. Commissioner, Fourth Circuit Docket No. 17-1986, however, the notice of determination was issued under the innocent spouse provisions, and the language governing her filing deadline is contained in section 6015(e)(1)(A). In Ms. Nauflett’s case, there is a better argument for equitable tolling because (1) notes of a TAS employee clearly show that, prior to the last date to file (a date also not shown on the innocent spouse notice of determination), that TAS employee told Ms. Nauflett the wrong last date to file, on which she relied, and (2) Ms. Nauflett alleges by affidavit that the IRS CCISO employee who actually issued the notice of determination also told Ms. Nauflett (over the telephone) the identical wrong last date to file. The Tax Court, in an unpublished order, dismissed Ms. Nauflett’s petition for lack of jurisdiction as untimely. We are arguing in the case that, under recent Supreme Court case law, the innocent spouse filing period is not jurisdictional and is subject to equitable tolling, and the facts in her case justify equitable tolling. It may be harder for the Fourth Circuit to avoid issuing a ruling in Nauflett on whether or not the filing period is jurisdictional or subject, theoretically, to equitable tolling in the right case. Nauflett is fully briefed. It is not yet clear whether or when oral argument will be scheduled in the case.

Nauflett will no doubt be another uphill battle for Keith and me, however, since last year, two Circuits, in two other cases where we represented the taxpayers, held that the filing deadline in section 6015(e)(1)(A) is jurisdictional under current Supreme Court case law. Rubel v. Commissioner, 856 F.3d 301 (3d Cir. 2017); Matuszak v. Commissioner, 862 F.3d 192 (2d Cir. 2017).

Despite recent setbacks in court, I do not consider Keith and my litigation of the nature of tax suit filing deadlines under current Supreme Court case law to be a waste of time. Clearly, although we have not (yet) convinced any Circuit court to find the innocent spouse or CDP Tax Court petition filing deadline not to be jurisdictional, we have highlighted problems in those areas that have led Nina Olson to propose two legislative fixes.

Further, there is a much better case under current Supreme Court case law for finding district court filing deadlines under section 6532 nonjurisdictional and subject to equitable exceptions like tolling or estoppel. As an amicus in Volpicelli v. Commissioner, 777 F.3d 1042 (9th Cir. 2015), I helped persuade the Ninth Circuit to hold that the period in section 6532(c) in which to file a district court wrongful levy suit is nonjurisdictional and subject to equitable tolling. And, if the court reaches the issue, Keith and I hope, as amicus, to help persuade the Second Circuit to hold that the 2-year period in section 6532(a) in which to file a district court refund suit is nonjurisdictional and subject to estoppel. In both section 6532 instances, by contrast to sections 6015(e)(1)(A) and 6330(d)(1), the sentence containing the filing deadline does not also contain the word “jurisdiction”, and the jurisdictional grants to hear such suits are far away (in 28 U.S.C. section 1346) – key factors under current Supreme Court case law demonstrating that filing deadlines are not jurisdictional. As I noted in my post on Duggan, the jurisdictional and estoppel issues under section 6532(a) are among the issues presented in Pfizer v. United States, Second Circuit Docket No. 17-2307, where oral argument is scheduled for February 13.

 

The Idea of Equitable Tolling in Collection Due Process Request is Gaining Traction

Today we welcome guest blogger Samantha Galvin from the University of Denver. Professor Galvin is one of the four writers of our feature on designated orders published by the Tax Court. During the week she was “on” for the designated orders, the Court issued an which deserved its own post, and she took on that task. In the cases discussed below, the Tax Court reverses course and mitigates a somewhat harsh result that can occur when a taxpayer sends the CDP request to the wrong place within the IRS. The IRS has taken the position that if the taxpayer sends the CDP request to the wrong office, the taxpayer loses their right to a CDP hearing if the request does not find its way to the proper office within the 30 day time period allowed for making such a request. This rule has tripped up a number of pro se and represented taxpayers and becomes even harder to meet when the IRS gives wrong information. One issue raised by the cases Professor Galvin writes about today is whether these decisions represent a crack in the door regarding equitable tolling. Keith 

In the last couple of months, two designated orders have come out that suggest an unstated, equitable tolling exception may exist when it comes to collection due process (CDP) hearings requested pursuant to sections 6330 and 6320(a). The two most recent designated orders are Tarig Gabr v. C.I.R., Docket No: 24991-15 L (order here) and Taylor v. C.I.R., Docket No: 3043-17 L (order here). This issue has previously been covered in PT posts by Carl Smith most recently here and here.

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Typically, a taxpayer, or his or her representative, must request a collection due process hearing to the appropriate IRS office within 30 days from receiving either a “Final Notice of Intent to Levy” (LT 11) or a “Notice of Intent to File a Lien and Your Right to Request a Hearing” (Letter 3172).

The designated orders involve taxpayers who sent CDP requests within the 30-day period, but to the wrong IRS offices. The requests were not received by the correct offices until after the 30-day deadline. As a result, the IRS denied the taxpayers a right to a CDP hearing and instead granted them an equivalent hearing. If a request is not timely as to the 30-day deadline, but sent within one year a taxpayer is entitled to an equivalent hearing. An equivalent hearing provides a forum with IRS Appeals similar to a CDP hearing, however, it does not provide the same protection from collection or allow for judicial review.

The IRS and Tax Court’s position has generally been that the 30-day deadline is jurisdictional, which means it cannot be subject to equitable tolling. If it is instead a claim-processing rule, then there is an argument to be made that equitable tolling may apply in some cases.

The door to make this argument was opened by the Supreme Court in the context of veterans’ affairs related claims. In Irwin v. Department of Veteran’s Affairs, 498 U.S. 89 (1990), the Supreme Court held that a rebuttable presumption of equitable tolling should apply to suits against the United States, unless Congress clearly intends otherwise.

As to the question of whether the 30-day deadline is jurisdictional, in Henderson v. Shineski, 131 S. Ct. 1197 (2011), the Supreme Court urged courts to discontinue using the word “jurisdiction” for claim-processing rules, stating that the conditions that accompany the jurisdiction label should be reserved for rules that govern a court’s adjudicatory capacity such as subject-matter or personal jurisdiction. The Supreme Court acknowledged that it must look to Congress’ intent for a clear indication that a deadline is intended to carry harsh jurisdictional consequences before deciding whether equitable tolling should apply.

There have not been any Tax Court cases that decide whether equitable tolling should apply to collection due process requests, but in the recent designated orders the Tax Court rejects respondent’s argument that the Court lacks jurisdiction when a collection due process hearing request is filed within 30 days but sent to the wrong IRS office. According to respondent, this contradicts sections 7502 and 7503 which are used to determine timeliness only if a request is properly transmitted pursuant to Treas. Reg. sections 1.301.6320-1(c)(2) Q&A C-6 and Q&A C-4. In other words, respondent argues timeliness is only met when a request is sent within 30 days to the office where the request is required to be filed.

In Gabr, the taxpayer’s representative allegedly received erroneous instructions from an IRS employee and faxed the CDP request to the wrong office. In determining whether to grant or deny respondent’s motion to dismiss for lack of jurisdiction, the Tax Court acknowledged guidance from the Internal Revenue Manual section 5.9.8.4.2(8) that provides that if a taxpayer receives erroneous instructions from an IRS employee resulting in the request being sent to the wrong office then the postmark date for when the request was sent to the wrong office is used to determine timeliness.

In Taylor, however, there were no erroneous instructions given, rather the representative sent the request to a local office, instead of the office listed on the notice. Respondent relies on cases dealing with tax return filing and the assessment statute, bankruptcy, and foreclosure and lien withdrawal to argue that the CDP request cannot be equitably tolled. Respondent also relies on Gafford v. Commissioner, T.C. Memo 16-40, citing Andre v. Commissioner, 127 T.C. 68 (2006), where the Court held that requiring taxpayers to follow claim-processing rules creates procedural consistency in effectively and efficiently processing such requests. But Andre is distinguishable from Gabr and Taylor, because Andre dealt with a request that was sent to an incorrect address prematurely, prior to the issuance of an LT 11 or Letter 3172.

In Taylor, the Tax Court was not convinced by any of respondents’ arguments since it denied respondent’s motion to dismiss for lack of jurisdiction and stated that respondent did not demonstrate sufficient prejudice to enforce strict compliance with the Treasury Regulations on the matter.

Does this mean these cases will result in decisions that can be relied upon to argue that the 30-day deadline can be equitably tolled for CDP requests in certain circumstances? So far, no. In Gabr, respondent conceded the case so the final decision issued by the Court did not speak on the issue. We will have to wait and see what happens in Taylor, but at the very least these designated orders suggest the Court is open to entertaining the argument.

WARNING: In Guralnik v. Commissioner, 146 T.C. 230, 235-238 (2016), the Tax Court held, en banc, that the different 30-day period in section 6330(d)(1) to file a Tax Court petition after a CDP notice of determination is issued is jurisdictional and not subject to equitable tolling under current Supreme Court case law. But the sentence containing the 30-day period in section 6330(d)(1) explicitly contains the word “jurisdiction”, while the 30-day periods in subsections (a)(3)(B) of section 6320 and 6330 do not. Keith and Carl Smith are in the midst of litigating whether the Tax Court’s position in Guralnik is correct in both Cunningham v. Commissioner, Fourth Circuit Docket No. 17-1433, and Duggan v. Commissioner, Ninth Circuit Docket No. 15-73819 (both cases where taxpayers mailed off their petitions a day late, but argue that they were misled by the language of the notice of determination that appeared to give them 31 days to file courting from the day of the notice of determination). Oral argument happened in Cunningham on December 5, and you can hear the argument here. (Harvard Federal Tax Clinic student Amy Feinberg argued the case for Ms. Cunningham.) Whichever way the Cunningham case comes out, it is clear that the judges there were giving Keith’s and Carl’s argument a serious hearing and not dismissing it lightly. The Duggan case was submitted without oral argument on December 7.

 

Army Veteran Seeking to Avoid Levy Loses Battle

In the week in which we remember the veterans who have served our country, it seems an appropriate time to post a case involving intersection of service in the military and taxation of the financial benefits of military service.  For those more interested in this topic, there is a chapter entitled Assisting Military Clients in the ABA Tax Section publication “Effectively Representing Your Client before the IRS” and the chapter on military issues is available as a standalone section of the book. The 7th Edition of that book will be coming out with the next couple of months.

In a Collection Due Process (CDP) case a taxpayer can raise certain defenses and cannot raise certain other defenses. The case of Bruce v. Commissioner, T.C. Memo 2017-172 involves a veteran who seeks to stop the IRS from levying on his pension. In some ways it seems that the CDP issues concerning merits litigation gets caught up in a case that partially implicates the exemption from levy under 6334(a)(10). We have spilled a lot of ink discussing merits litigation in CDP cases but with the exception of a post on a bank levy which seemed to hit a Veteran Disability Payment we have spent little time talking about levy exemptions.

At the Legal Services Center of Harvard within which the Harvard Tax Clinic is located, there is also a veteran’s clinic. As a result of that and a grant we receive from a veteran’s organization enabling us to represent any veteran needing assistance, the Harvard Tax Clinic sees a fair number of veterans needing tax assistance. While most of the issues we see with veterans do not turn on some of the special tax provisions related to that group, some of the issues are impacted by special provisions for veterans. In the Bruce case, he seeks to cloak his income with the protective coating of a non-taxable disability military pension. He loses but the effort is worth a look.  There is a link between the non-taxable nature of a military pension and the exemption from levy.

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Mr. Bruce is a disabled Army veteran who retired on January 31, 2000 at the rank of chief warrant officer 3. The Department of the Army classified his retirement as regular but the “Department of Veterans Affairs subsequently assigned him an overall 80% disability rating retroactive to February 1, 2000 and individual unemployability resulting in a disability compensation at a 100% rate retroactive to December 19, 2002.”

Mr. Bruce argues that because of the retroactive determination, his retirement “should have been classified by the [Army] as a disability retirement.” He asked the Army to reclassify his retirement and it denied his request. He brought suit against the Army based on the denial and his case was dismissed. H appealed to the 11th Circuit which sustained the dismissal. He indicated to the Tax Court that he planned to go to the Supreme Court. Perhaps some of these actions have prevented him from focusing on his tax obligations and perhaps some of these actions made him take tax positions in anticipation of a different outcome.

Mr. Bruce alleged that the Army should have granted him a disability retirement rather than a regular retirement, citing as evidence the VA rating.  I am told that a veteran can seek to have his record corrected in order to switch from a regular retirement to a disability retirement through an application to the relevant Board for Correction of Military (or Naval) Records (which are the same Boards that handle some discharge upgrades). If the Board did grant him relief, it could potentially do so retroactively, I believe, which could affect tax liability.  It is unclear to me if his request to the Army to reclassify his retirement is the same type of request I describe in this paragraph.  If it is, perhaps his only path to having the retirement reclassified at this time is through a successful petition to the Supreme Court.

Because the Army did not reclassify his pension, it gets reported to the IRS as taxable. In 2011 he also received Social Security payments.  Based on the formula for taxing Social Security payments and his taxable pension payments, a fractional part of his Social Security payment amount was classified as taxable. In that year he received a gross distribution on his military pension of $28,822 which was entirely classified as taxable but he only had $20 of withhold. He did not file a 2011 return.

Back in 2011 the IRS would send taxpayers substitute returns when they did not file and the IRS has third party information indicating a taxable return. Of course, we know that today, Mr. Bruce might not receive anything from the IRS. As is typical in substitute for return cases, the IRS sent Mr. Bruce correspondence in which it calculated his 2011 liability based on the information available to it, waited for him to respond and when he did not it sent a notice of deficiency. Since he did not file a Tax Court petition, the IRS assessed the liability and began sending him collection notices culminating in the CDP notice giving him a right to talk to Appeals about the proposed levy action the IRS intended to take on the almost $6,000 he owed in taxes, penalties and interest for 2011.

Mr. Bruce, now alert to the imminent danger, timely filed a CDP request stating that he did not have the funds to pay the balance and that it was his position that the pension was not-taxable.  He argued that the non-taxable nature of the pension payments mooted the collection case by eliminating the basis for the assessment. In addition to 2011, he had many other unfiled returns which Appeals sought before it wanted to talk to him about his levy problem. Appeals also told him a merits discussion was off the table because he had the chance to go to Tax Court regarding his 2011 liability when the IRS sent the notice of deficiency and he chose not avail himself of that opportunity. Eventually, Appeals issued a notice of determination denying Mr. Bruce relief from the levy.  He timely filed a Tax Court petition and the IRS filed a motion for summary judgment.

The Court goes through a pretty standard analysis of his failure to petition the Tax Court upon receipt of the notice of deficiency and how that precludes Mr. Bruce from challenging the merits of his tax liability at this time. I totally agree with the analysis and the outcome denying him a merits determination in his CDP case.

I was left wondering, however, about how his pension fits into levy side of the equation. I wondered what would have happened if Mr. Bruce had raised IRC 6334(a)(10) as a defense to levy against his pension during the CDP case. If he had done so it should not have changed the outcome of the case which would have allowed the IRS to levy because a CDP case is not an exemption from levy case. Even if his pension is exempt from levy, the IRS could still propose levy action, which is not a proposal against specific funds or income streams, and the Court would have, on these facts, sustained the determination. It is still possible, however, that depending on the nature of his pension it might restrict the funds upon which the IRS can levy. Does the taxable nature of the pension as it stands today waiting for his Supreme Court challenge automatically mean that the pension does not qualify for the levy exemption?

In order to resolve my questions about Mr. Bruce’s pension on the levy, I consulted with someone more expert than me and received the following advice about his situation as it interplays with military pensions.

In Mr. Bruce’s situation, the pension would not be exempt from levy under 6334(a)(10) because his pension results from his time of service in the military and not his disability and this will never change no matter what happens at the Veteran’s Administration. The situation is not, however, entirely straightforward and this is probably what has confused Mr. Bruce. To achieve the result that he seeks he needed to have gone through a disability review by the Army before he retired or seek a retroactive review from the Army separate and apart from the review received from the VA. Because the review was done by the VA after retirement, he falls into a different scheme and his “regular” military pension remains taxable and subject to levy for the rest of his life. He does, however, receive other benefits that are not taxable and that are exempt from levy.

If a service member receives disability payments from the VA, his “regular” military retirement pay is reduced by the amount of his VA disability compensation (referred to as an “offset”). This happens if the service member’s disability rating falls between 10% and 49%. This offset portion of the ‘regular” pension would not be taxed under those circumstances but the other portion would still be taxed and still be subject to levy.

If a retired service member receives a “regular” pension from Defense Finance Accounting Service (DFAS) as well as disability pay from the VA at a disability rating of 50% or higher, the disability payment is added to his military retirement pay. This is called “Concurrent Retirement and Disability Pay (CRDP). This CRDP is exempt from levy under 6334(d)(10).

Examples:

Retired service member “A” receives monthly retirement pension of $1,000, and has no disability rating. The entire $1,000 is taxable.

Retired service member “B” receives monthly retirement pension of $1,000, but has a disability rating of 30%. His disability compensation through the VA is $100. The DFAS pays him $1,000, but only $900 of it is taxable; $100 is not taxable.

Retired service member “C” receives monthly retirement pension of $1,000, but has a disability rating of 75%.  His disability compensation through the VA is $100.  The DFAS pays him $1,000, and the VA pays him $100.  He receives $1,100, of which $100 is not taxable.

From the available information it would appear that Mr. Bruce receives CRDP because his disability rating greater than 50%.

It also appears that Mr. Bruce would receive the Individual Unemployability benefit, which allows the VA to pay certain veterans at the 100-percent disability rate even though their service-connected disabilities are not rated as 100-percent disabling. Veterans may be eligible for this rating increase if they are either unemployed or unable to maintain substantially gainful employment as a result of their service-connected disability. It is meant to compensate veterans unable to work because of service-connected disability or disabilities that do not meet the VA rating requirements for a total evaluation at the 100-percent rate.

Conclusion

So, Mr. Bruce’s regular military pension is now in the IRS crosshairs. The IRS may take 15 percent of it through the Federal Payment Levy Program as discussed in a recent post and it may take 15 percent of his Social Security pension.   Because his income level causes the IRS filters to stay away from the Social Security payments but those filters do not apply to his military pension even if he is low income, in his situation the IRS may only take from his “regular” military pension but not his Social Security Pension.

The CRDP payments and the Individual Unemployability benefit increase the funds available to veterans in a way that makes them a little different from Social Security recipients and other persons for whom the IRS has applied income filters. The complexity of military benefits may be what caused the IRS not to make an initial decision to apply its filters to these payments.  I have waded into deep water on the military pension issues and others more expert than me may be posting comments that will shed further light on this situation.