Designated Orders: 8/21 – 8/25/2017

PT returns from a long holiday weekend as Professor Patrick Thomas discusses some recent Tax Court designated orders. Les

Substantively, last week was fairly light. In this post, we discuss an order in a declaratory judgment action regarding an ESOP revocation and a CDP summary judgment motion. Judge Jacobs also issued three orders, which we won’t discuss further.

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Additionally, Judge Panuthos, in his first designated order of this series, discusses a recalcitrant petitioner (apparently, a Texas radiologist) whose representative, without clear reason, rejected an IA of $10,000 per month—notwithstanding that the petitioner’s current net income totaled nearly $45,000 per month. In related news, I appear to have chosen the wrong profession.

Avoid Sloppy Stipulations – Adverse Consequences in a Declaratory Judgment Proceeding

Dkt. # 15988-11R, Renka, Inc. v. C.I.R. (Order Here)

This is not Renka’s first appearance on this blog (see Stephen’s prior post here, order here). Renka initially filed a petition for a declaratory judgment in 2011 regarding the Service’ revocation of its ESOP’s tax-exempt status, which resulted from events occurring in 1998 and 1999.

The current dispute before Judge Holmes involved the administrative record. In cases involving qualified retirement plans (of which ESOPs are but a subset), a few different standards apply. If a declaratory judgment action involves an initial or continuing qualification of the plan under section 401(a), Tax Court Rule 217(a) ordinarily constrains the court to consider only evidence in the Service’s administrative record. However, as Judge Holmes notes, a revocation of tax-exempt status, as occurred in Renka, allows a broader consideration of evidence. Stepnowski v. C.I.R., 124 T.C. 198, 205-7 (2005).

But in Renka, the parties stipulated to the administrative record, and so when Renka attempted to introduce evidence outside the record, the Service objected. While Renka complained that they didn’t specifically state that the stipulated records constituted the entire administrative record, Judge Holmes wasn’t having it. Indeed, Tax Court Rule 217(b) requires the parties to file the entire administrative record—which, the parties purportedly did.

Where justice requires, the court may use its equitable authority to allow evidence not ordinarily contemplated by the Rules. Such a rule includes Rule 91(e), which treats stipulations as conclusive admissions. Renka’s equitable argument is, unfortunately, fairly weak; it merely argues that the documents it proposes to introduce fall under the definition of “administrative record” under Rule 210(b)(12). But they don’t even do that—the documents related to an “entirely different ESOP”, which was not at issue in this declaratory judgment action.

In the end, Judge Holmes keeps the evidence out. Take-away point here: while parties are required to stipulate under Rule 91(a) (and indeed, sanctions exist for failing to do so under Rule 91(f)), they must craft and qualify their stipulations carefully. Otherwise, important evidence could remain outside the case, as here.

CDP Challenge – Prior Opportunities and Endless Installment Agreements

Dkt. # 11046-16L, Helms v. C.I.R. (Order Here)

Here’s a typical pro se CDP case with a few twists. The petitioner owed tax on 2007 and 2008, though had also owed on prior years that were not part of this case. After filing his tax returns late, the petitioner began a Chapter 13 bankruptcy in 2012. The Service filed proofs of claim for both the 2007 and 2008 years; 2008 was undergoing an audit, so the liability wasn’t fixed at the time. Ultimately, the bankruptcy plan was dismissed for failure to make payments, and the Service resumed collection action (the liabilities were not dischargeable in bankruptcy).

Three years after the bankruptcy’s dismissal, the Service issued a Notice of Intent to Levy and the Petitioner requested a CDP hearing. In the Appeals hearing, the Petitioner more or less explained that he wanted both an accounting of the liability and to settle the liability. The Service requested a Form 433-A and other delinquent returns, which he did submit.

Instead of an Offer in Compromise, the Service offered an Installment Agreement of approximately $2,000 per month; after the Petitioner submitted additional expenses, the Service lowered the amount to about $800 per month. But after that, the Petitioner didn’t respond, the Service issued a Notice of Determination, and the Petitioner timely filed a Petition.

The Service filed for summary judgment and, while the Petitioner didn’t formally respond, he did serve the Service with a response, which they incorporated into their reply. The Court incorporated these arguments as those raised by the Petitioner, which the Court interpreted as arguments (1) challenging the liability and (2) challenging the Installment Agreement because the Petitioner believed it would last “indefinitely.”

Judge Gustafson held that the Petitioner wasn’t eligible to challenge the liability because he already had a prior opportunity during his Chapter 13 bankruptcy proceeding to dispute the liability, but chose not to do so. Though unmentioned by Judge Gustafson, the Petitioner may have also had an opportunity to dispute the 2008 liability, since it arose from an examination. Regardless, the bankruptcy proceeding, once the Service filed its proofs of claim, provided this prior opportunity. See IRM 8.22.8.3(8)(4).

Finally, Judge Gustafson held that the Service had committed no abuse of discretion in proceeding with the levy. Even though Petitioner potentially had valid concerns regarding an indefinite Installment Agreement, he did not raise that issue with Appeals, and so forfeited that argument in the Tax Court. The Service really didn’t have another choice but to issue the Notice of Determination, failing communication from the taxpayer (here, the taxpayer was silent for 3 weeks). Moreover, Installment Agreements ordinarily last only until the liability is satisfied, the taxpayer defaults on the plan, or the statute of limitations on assessment expires.

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.

 

 

Loading Installment Agreements — Comments

Occasionally, we write a post that seems to touch a nerve with our readers, and today’s post by Keith, Loading Installment Agreements, was one such post.  It has been heavily viewed, and there has already been numerous comments.  Many of the comments echo Keith’s thoughts in the post, and I have recreated the current comments below.  We would suggest that readers who enjoyed the post also review the comments, as they provide additional context and practitioner suggestions.  As there may be additional comments after this is posted, you can find all the comments to Keith’s post here, or by clicking on the “Comments” link below the title of the original post.

Here are the comments as of 2:30PM EST on August 23rd.

  1. This is widespread. It happens to me and fellow practitioners I talk to all the time. I usually advise clients to make direct pay payments and then I follow up 3 months after I send in the installment agreement with direct withdrawal information. If it still isn’t auto-processed, I call in and the person in collections or priority practitioner will usually enter it in herself. This has increased the cost to clients since I usually need to call in 2-3 times on a file instead of just once.

  2. How many keystrokes does it take to “load” (what a heavy word) an instalment agreement? Routing number, account number, SSN, tax periods — I just paid a credit card bill over the phone, using an automated keypad system, and it took maybe three minutes.

    IRS remains one of the best tax collection agencies of the 1960s.

  3. I have had several instances where IRS employees warned me about how long it may take for the installment agreement direct debits to kick in, and some advised my clients to begin voluntarily paying the monthly installment amounts until they saw a direct debit. I have followed that advice.

  4. I give clients multiple vouchers for a specific year and desired $$ amount, and instructions to write Apply to 1040 tax for 201x per Rev Proc 2002-26, copy it and the check and mail it certified mail return receipt requested.
    The check gets cashed and applied, thus reducing the interest when the installment agreement actually kicks in.

  5. Your client could be anyone of mine. In my experience Offers in Compromise, Installment Payment plans, Lien Releases, CP2900 responses, Entity Selection, anything that goes into centralized processing takes an inordinate amount of time and that time is increasing. You are right to point out the financial costs to all parties. However, the poor performance by the Service is discouraging to practitioners who really want their clients to get back on the tax rolls, comply with federal and state law, and leave the anxiety and stress behind. I have had several clients revert to “off the radar, cash only” lives when encountering delays and/or nonsensical communications from the Service. I don’t fault individual employees at the IRS. Congress needs to fund a major overhaul of computer systems and recruitment of additional staff. Amen.

  6. Installment Agreements have been so bad for so long that I typically advise clients, like Steve, to mail in a monthly payment with instructions to apply it to the unpaid tax.

    In most cases the tax, interest and penalty are paid prior to when the IA, that they would have had to pay for, would have taken effect.

    Less is better.

Loading Installment Agreements

I wrote a couple of months ago about my travails in trying to assist a “friends and family members” client to obtain an installment agreement.  The process took five separate phone calls culminating in a very pleasant call in May with someone in Collection who accepted the installment agreement.  We set up an automated withdrawal from their bank account on the 16th of each month and he told me that the first one would occur on July 16.  I thought that July 16 seemed a little far out since it was only May at the time but did not complain.

I returned from vacation in early August and called my client to see how the first withdrawal went.  I was informed that there was no withdrawal and no communication of any kind from the IRS.  I thought this odd but as I mentioned in the prior post I do not set up many installment agreements.  To find out if it was odd, I contacted someone I knew at the IRS.  I learned that the failure to withdraw the installment agreement amount from my client on the first date set for such a withdrawal happens to others as well because the IRS is behind in loading the installment agreements into its system.  I have now learned that the IRS did not withdraw the money for the installment agreement in August either.  This seems bad for the IRS, a little troubling from the client’s perspective, and worth writing about to a group that probably encounters this more than me.  Unrelated to the story here but connected to the general issue of installment agreements the IRS has recently proposed a new fee schedule for installment agreements.  Like a lot of businesses, the IRS schedule rewards parties that create the installment agreement online without requiring human intervention and they reward parties who allow automatic withdrawals from their bank each month.

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The root problem here belongs to the clients because they failed to file returns for several years.  People who do that put a lot of pressure on the system.  They get charged some hefty penalties to compensate the system for their behavior and to financially incentivize them to change their habits, but we know that many, many people do not timely file and that causes a fair amount of work for the IRS.  These clients started having four years of past due returns prepared last fall and finished them just before the filing season began in full swing.  The returns were filed about the time the first rush of 2015 filings occurred.

I waited until March to call the IRS to give it time to process their returns, and learned on my first call that it had not processed two of those returns.  I am confident that they were properly mailed and mark the failure to process the returns as the first of several system failures here by the IRS.  The situation here, and others I have observed, made me wonder if late filed returns should go somewhere different than current year returns in order to avoid confusion.  Maybe that’s too much trouble but processing returns from multiple years during the filing season must create some difficulties for the IRS.  Here, it lost two of four returns which caused delays in the IRS getting payment since I could not enter into the installment agreement until the returns were processed.  Of course, the clients could have started sending in payments while waiting for the installment agreement but also, of course, they did not.

The second and third of my calls last Spring failed because the IRS had not processed all of the returns and the collection officials with whom I spoke did not want to set up an installment agreement until everything was assessed and in their system.  The clients were motivated by me and others last fall to get their taxes in order.  They did it and they were motivated to pay (not quite motivated enough to send in payments without an agreement) and now they are just a couple of months short of one year  from the time they started the process without reaching the finish line of having the installment agreement kick in.  I see their motivation to follow through to solve the problem waning.  I feel like it would be much better if the process of the IRS entering into and starting the installment agreement had begun in March or April instead of sometime in the future.

As I mentioned above, my contact at the IRS indicated that the failure of the IRS to take the money from my clients’ account for the first month (and the second month) happens to others as well.  The IRS wants taxpayers to have installment agreements that provide for withdrawals from their bank accounts; however, it is very slow in loading those installment agreements into its system.  The IRS also does not inform taxpayers that it will miss the deadline for loading the installment agreement and will not take their money.  This leaves taxpayers someone anxious because they fear they may have done something wrong and that the IRS will take the more serious collection action it was threatening that led to the creation of the IA in the first place.  The failure to take the money also leaves the taxpayers somewhat less motivated to keep making sure the money is there to be taken in future months and leaves the IRS without revenue it could have had very easily if it had taken the time to load the installment agreement into the system.

I have not seen a Treasury Inspector General (TIGTA) or Government Accountability Office (GAO) report on this and do not know how widespread the issue is or if it is the result of understaffing, bad staffing allocation, or other factors.  I only know that it was much harder to enter into this installment agreement than I expected and now I am shocked that the IRS is not bothering to gather up the money sitting there for it.  Of course, the clients will pay slightly more interest and penalties because of this delay.  It also pushes back the point at which they can seek lien withdrawal.  Mostly, it just seems like a really bad business plan not to load the installment agreements as quickly as possible and get the money that taxpayers have set aside to pay their taxes at a point at which they are motivated to do so.  Many installment agreements will fall by the wayside as life events overtake the ability of some taxpayers to follow through with payments for several years but the payments at the beginning of the installment agreement would seem like the most likely ones to be there and those are the ones the IRS is not bothering to pick up.

 

 

 

Trying to Give Money to the IRS

I am the only lawyer in my family. From the moment I was accepted to law school I began to accumulate friends and family clients who were convinced that I knew off of the top of my head the answers to any and all legal questions and problems they had.  The accumulation of friends and family clients has not abated in the over 40 years since I started law school.  On rare occasion a friends and family client will actually have a problem I might possibly be competent to resolve.  I am involved in one such case now and am beginning to question my competence.

This friends and family client suffered in the recession like many of my regular low income clients. It is interesting to me how many clients I continue to have whose root problems with the IRS can trace directly to the recession.  In this case the friends and family client had a side business dependent on discretionary spending of relatively wealthy individuals.  Even the relatively wealthy were impacted by the recession which meant his business went south in a hurry which meant he needed money to cover the expenses which meant he did not make his estimated tax payments from his day job because he needed that money which caused him to not file his returns which landed him eventually in a big hole with the IRS.  This friends and family client makes a fair amount of money placing this family well outside my normal low income client experience.  I pointed them to a return preparer who could get them current.  They already had some problems based on returns they did file early in the lifespan of the recession.  With the assistance of the preparer, all back returns were prepared and filed and now an installment agreement needed to be set up.

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I thought setting up an installment agreement would be within my competency level. So far, that has proven not to be the case.  About six weeks after the filing of the four back returns bringing this client into compliance, I called the IRS.  The amount owed exceeded $100,000 and the clients had few assets of value but an income stream that produced a reasonable collection potential (RCP) of over $10,000 per month.  My first call to the IRS began well with a wait time in early March of less than five minutes.  The IRS employee was pleasant but firm that there were two missing returns.  I was not involved in mailing the returns to the IRS so I am unsure whether they traveled together in one envelope or in four separate ones.  Somehow two of the four returns did not make it into the returns processing system.  So, I contacted my clients and had them reexecute the two missing returns, send them in separate envelopes and try the filing process again.

I then waited another four weeks. I did not want to wait too long because the first two returns were now assessed and the collection process underway.  In my second phone call, I again reached the IRS quickly and I reached the most helpful of the IRS employees I have encountered on this case.  He said that one of the returns had processed but the other had not so he could not enter into an installment agreement with me yet.  I questioned him about the amount that would be necessary to set up an installment agreement under the general facts of the case.  He told me about a program the IRS had under which it would accept an installment agreement from my clients if they could pay within six years.  He placed the account in suspense for 60 days and told me to call back in a few weeks after the last return had time to process.

On my third call in an effort to pay the IRS, I again reached the IRS employee quickly. After we went through the obligatory five minute Q&A session to identify me and my clients, this employee began to take the asset and income information that could lead to an installment agreement.  I began to get my hopes up that I might finally close the deal and get the IRS to take their money; however, she had some questions about their expenses that I had not anticipated and could not answer.  Since the answers to these questions would only change the amount of their monthly RCP from one high number to another high number and since I was prepared to offer an installment agreement that would pay off the liability in less than six years, I questioned the employee concerning the need for this information.  If the IRS had a program to accept an installment agreement that would pay off the liability within six years, and if it were convinced there were no assets to liquidate to satisfy the liability (the clients had already sold their house and paid down most of the originally assessed debt through that closing), why did it need details that would only result in changing the amount of their monthly income available to pay an installment agreement when I was offering to enter into an installment agreement to satisfy the liability more quickly than their guidance permitted?  I did not receive a satisfactory answer to that question but ended the conversation and went to the clients to get the additional information.

On Friday the 13th of May (I should have known better), I placed my fourth call to the IRS to try to give them money.  This time I had to wait 25 minutes to get through.  I was not expecting that amount of wait time because it had gone so quickly in the prior three calls but I had plenty to do while waiting.  When the IRS employee answered the phone and I shook off the lobotomy that the IRS music had performed on my brain, we went through the obligatory five minute Q&A session at the end of which he said that he could not handle this case and that he needed to transfer me to someone in collection.  I thought I was in collection because I had pressed the number for ACS but I then waited another couple of minutes before another person answered the phone.  This person gave their name and ID# in the quick fashion that many IRS employees do when they first answer the phone.  I was writing down the name and number as I do when I am speaking to someone on these calls.  Before I said anything the person stated, “I have had no answer and am terminating this call.”  And she did.  She had no answer because she had asked no question.  I started speaking as soon as she said she had not heard an answer but it was too late.  She had already hung up.  Another half hour of my life semi wasted.  Add it to the list.

Almost immediately another call came in which I needed to take so the hang up may have been fortunate. If the IRS employee behaves that way perhaps that was not the employee I wanted to deal with anyway.  I can think of several glass half full reasons why the termination of the call after 6:00 PM on a Friday afternoon was not the worst thing to happen to me but it was frustrating.  So, I will call again one day when I am free to work on my friends and family case and try once more to give the IRS money.  Who knew it would be so hard to give them money.  Most of my clients have little money and my calls involve trying not to give them money.  I understand when the IRS is not so responsive to my requests to give them less than is owed.  When I am trying to full pay, I did not think I would be so incompetent in sealing the deal.

Summary Opinions — Catch Up Part 1

Playing a little catch up here, and covering some items from the beginning of the year.  I got a little held up working on a new chapter for SaltzBook, and a supplement update for the same.  Both are now behind us, and below is a summary of a few key tax procedure items that we didn’t otherwise cover in January.  Another edition of SumOp will follow shortly with some other items from February and March.

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  • In CCA 201603031, Counsel suggests various procedures for the future IRS policy and calculations for the penalty for intentional failure to file electronically.  The advice acknowledges there is no current guidance…I wrote this will staring at my paper 1040 sitting right next to my computer.  Seems silly to do it in pencil, and then fill it into the computer so I can file electronically.
  • This item is actually from March.  Agostino and Associates published its March newsletter.  As our readers know, I am a huge fan of this monthly publication.  Great content on reducing discharge of indebtedness income and taxation.  Also an interesting looking item on representing real estate investors, which I haven’t had a chance to read yet, but I suspect is very good.
  • The IRS has issued a memo regarding its decision to apply the church audit restrictions found under Section 7611 (relating to exemption and UBI issues) to employment tax issues with churches also.
  • Panama Papers are all the rage, but I know most of you are much more interested in Iggy Azalea’s cheating problems (tax and beau).  Her Laker fiancé was recorded by his teammate bragging about stepping out and she had a sizable tax lien slapped against her for failure to pay.  She has threatened to separate said significant other from reproductive parts of his body, but it appears she has approached the tax debt with a slightly more level head, agreeing to an installment agreement.
  • I’m a rebel, clearly without a cause.  I often wear mismatched socks, rarely take vitamins, and always exceed the speed limit by about 6 MPH.  But, professionally, much of my life is about helping people follow the rules.  In Gemperle v. Comm’r, the taxpayers followed the difficult part of the conservation easement rules, and obtained a valid appraisal of the value, but failed to follow the simple rule of including it with his return.  Section 170(h)(4)(B)(iii) is fairly clear in stating the qualified appraisal of the qualified property interest must be included with the return for the year in question.  And, the taxpayers failed to bring the appraiser to the hearing as a witness, allowing the IRS to argue that the taxpayer could not put the appraisal into evidence because there was no ability to cross examine.  In the end, the deduction was disallowed, and the gross valuation misstatement penalty was imposed under Section 6662(h) of 40%.  The Section 6662(a) penalty also applied, but cannot be stacked on top of the 40% penalty pursuant to Reg. 1.6662-2(c).  The Court found that there was no reasonable cause because the taxpayer failed to include the appraisal on the return, so, although relying on an expert, the failure to include the same showed to the Court a lack of good faith.  Yikes! Know the rules and follow them. It is understandable that someone could get tripped up in this area, as other areas, such as gift tax returns, have different rules, where a summary is sufficient (but perhaps not recommended).
  • The Shockleys are fighting hard against the transferee liability from their corporation.  Last year we discussed their case relating to the two prong state and federal tests  required for transferee liability under Section 6901.  In January, the Shockleys had another loss, this time with the Tax Court concluding they were still liable even though the notice of transferee liability was incorrectly titled and had other flaws.  Overall, the Court found that it met and exceed the notice requirements and the taxpayer was not harmed.
  • The Tax Court, in Endeavor Partners Fund, LLC v. Commissioner, rejected a partnership’s motion for injunction to prevent the IRS from taking administrative action against its tax partner.  The partnership argued that allowing the IRS to investigate the tax matters partner for items related to the Tax Court case (where he was not a party) would “interfere with [the Tax] Court’s jurisdiction” because the Service could be making decisions on matters the Court was considering.  The Court was not troubled by this claim, and held it lacked jurisdiction over the matters raised against the tax matters partner, and, further, the partnership’s request did not fall within an exception to the Anti-Injunction Act.
  • Wow, a financial disability case where the taxpayer didn’t lose (yet).  Check out this 2013 post by Keith (one of our first), dealing with the IRS’s win streak with financial disability claims.  Under Section 6511(h), a taxpayer can possibly toll the statute of limitations on refunds with a showing of financial disability.  From the case, “the law defines “financially disabled” as when an “individual is unable to manage his financial affairs by reason of a medically determinable physical or mental impairment … which has lasted or can be expected to last for a continuous period of not less than 12 months,” and provides that “[a]n individual shall not be considered to have such an impairment unless proof of the existence thereof is furnished in such form and manner as the Secretary may require.””  I’ve had some success with these cases in the past, but I also had my ducks in a row, and compelling facts.  So, not something the IRS would want to argue before a judge.  The Service gets to pick and choose what goes up, which is why it wins.  In LeJeune v. United States, the District Court for the District of Minnesota did not grant the government’s motion for summary judgement, and directed further briefing and hearing on whether the taxpayer’s met their administrative requirements.
  • Another initial taxpayer victory, which could result in an eventual loss, but this time dealing with TFRP under Section 6672.  In Hudak v. United States, the District Court for the District of Maryland dismissed the IRS’s motion for summary Judgement, finding that a jury could determine that a CFO (here Mr. Mules) was not a responsible person with the ability to pay.  The CFO admitted he knew the company wasn’t complying with its employment tax obligations, and knew other creditors were being paid.  He alleged, however, that he lacked the ability (as CFO) to make the required payments…seems like an uphill battle.  He could win though, as the contention is that the owner/CEO/President (Mr. Hudak) made those decisions, had that authority, and misled the CFO to believe the payments were made.  Neither side will likely be able to put much past the Court in this matter, as Judge Marvin Garbis is presiding (he who authored various books on tax, including Cases and Materials on Tax Procedure and Tax Fraud and Federal Tax Litigation).

 

Series of Errors With Installment Agreement and Collection Actions Leads to Taxpayer Victory on Collection Statute of Limitation

With CDP, taxpayers have a limited avenue to make the IRS face consequences for errors it makes in the assessment and collection process. In RRA 98 Congress amended Section 6502(a) and limited the circumstances when taxpayers can extend the 10-year statute of limitations (SOL) on collections. Grauer v Commissioner illustrates how taxpayers can walk away from an agreed and assessed liability when the IRS is sloppy and fails to demonstrate that a taxpayer has validly extended the statute of limitations on collections in light of Section 6502(a).

The mistakes led in Grauer to the taxpayer escaping from a 2000 assessment of over $57,000 in taxes, penalties and interest. Because this case is so fact-specific, below I repeat many of the opinion’s findings, with some paraphrasing and omitted references to the record.

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Facts

  1. On April 6, 2000, petitioner Grauer filed his 1998 Federal income tax return. He reported $103,495 of taxable income, a $40,637 tax liability, and a $38,577 balance due.
  2. IRS, on May 8, 2000, assessed a $57,698 tax liability against petitioner.
  3. IRS’s account transcript relating to 1998 indicates that on July 13, 2001, it received a signed return receipt relating to a notice of intent to levy.
  4. On October 2, 2001, the parties executed Form 900, Tax Collection Waiver, on which the 10-year period of limitation for collection was extended until “May 8, 20015” (emphasis added).
  5. IRS’s account transcript relating to 1998 further indicates that on October 3, 2001, petitioner Grauer entered into an installment agreement;
  6. On February 20, 2006, the installment agreement was terminated;
  7. From 2006 to 2012 respondent issued petitioner balance due notices; and
  8. IRS, on February 11, 2013, issued petitioner a notice of intent to levy relating to 1998.

The Key Mistakes in the Case

IRS transcript shows an earlier CDP notice from a notice of intent to levy though IRS says transcript is wrong

The opinion notes that in 2001 the transcript indicated Grauer received a notice of intent to levy. Why is that important? The right to a CDP hearing  only attaches to the first notice of intent to levy. IRS told the court that its transcript on that point was wrong. The court agreed, or at least in the absence of direct evidence to the contrary, felt that the issue was unclear enough to allow the case to proceed (that is a jurisdictional issue that the IRS could not waive):

[N]o direct evidence of such a notice was produced by either party…we agree with respondent that his account transcript is inaccurate and that we have jurisdiction

Grauer claimed he did not enter into an installment agreement; this time IRS said transcript was right

Grauer said he did not enter into an installment agreement. The IRS said that he did, this time using the transcript to back its assertion. This was a key point, as in amending 6502(a) Congress limited situations to when taxpayers can extend the SOL on collection only in cases of installment agreements or levy releases after the 10-year period expires. The court here concluded that in making his affirmative defense Grauer made a prima facie case that the 2013 notice of intent to levy was issued beyond the 10-year period from assessment. At that point the IRS had the burden of producing an exception to the 10-year period, and that is where the IRS came up short because it failed to produce the installment agreement itself:

Respondent produced a waiver relating to 1998, on which the parties extended the 10-year period of limitation for collection. He did not, however, produce an installment agreement that was entered into in connection with the waiver. See sec. 6502(a)(2)(A). In fact, respondent’s only evidence that such an agreement exists is an account transcript that he concedes is inaccurate and an indecipherable and unconvincingly explained collection of numerical codes. Accordingly, we find that an installment agreement was not agreed to in connection with the waiver, and the 10-year period of limitation for collection has expired. (emphasis added).

Parting Thoughts

While the IRS was able to serve up an extension (albeit sloppily drafted with an end date in 20015), the absence of the installment agreement itself in conjunction with IRS both disavowing and relying on transcripts was what gave the taxpayer the win. While some of the IRS abuses of the late 20th century that led to RRA 98 were more theater than substance, there were many problems surrounding the IRS practice of squeezing extensions out of taxpayers entering into installment agreements. Moreover, since then, there appears to be less than careful practice when it comes to documenting entering or terminating those agreements. To that end, Keith has a good discussion of installment agreements, including the history that led to 6502(a) and often times informality at IRS when it comes to them in a post discussing the Antioco case a couple of years ago. If Grauer is representative of IRS practice, practitioners who work with taxpayers beyond the normal 10-year period on collection should be careful to put the IRS to the test to establish that it has dotted its I’s and crossed its T’s, especially when it comes to extensions surrounding installment agreements.

What about the importance of the court not allowing the IRS to rely on the transcripts? Normally, the IRS transcript serves as a business record.  That is critical because the event here occurred almost two decades ago and the IRS will have great difficulty keeping paper documents of the transaction for that long.

Because the other aspects of this business record contained errors, the transcript here did not receive the deference that the Tax Court and other courts normally give to the IRS transcript as a business record.  From the IRS’s perspective, it is problematic if it cannot rely on transcripts in court.  Maybe this is an isolated incident but the IRS should treat this as a wake up call.  The IRS must maintain high quality in its transcripts or it will start losing cases like this in a wholesale manner.

 

A Pro Se King Royally Wins Interest Abatement on Employment Taxes

 

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

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

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

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Jurisdiction

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

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

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

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

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

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

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