Summary Opinions for April 10th through 24th

Another slightly stale SumOp, but again full with lots of very interesting tax procedure nuggets.  This post is very heavy on the Chief Counsel Advice, much of which deals with statutes of limitations.

I also wanted to point out that you can read Keith’s acceptance speech for the Janet R. Spragens Pro Bono Award staring on page 8 of the ABA Tax Section NewsQuarterly found here.  We previously covered Keith’s honor here.

As our readers know, we at PT are big fans of tax clinics and the wonderful work the clinics do throughout the country.  Les has an article forthcoming in the Tax Lawyer on the benefits derived by students, taxpayers, and the entire tax system, which can be found here. Keith has previously written on the history of low income taxpayer clinics, and his article can be found here.

I also have to congratulate Keith on his temporary relocation over the next year.  The University of Harvard has decided to expand its array of clinics, and will be starting a low income taxpayer clinic.  Keith will be a visiting professor at Harvard for academic year 2015-2016 to set up the clinic.

And, the other tax procedure items:

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  • Last year, Les wrote about the Nacchio case involving the ex-Qwest CEO who was convicted of insider trading and directed to pay a substantial fine and forfeit the profits from the sale of his stock in the company.  Nacchio filed for a refund of tax he paid on those profits, claiming Section 1341 would allow him to treat it as if he never had the gain.  Janet Novak of Forbes on May 1st, had an update on the case found here.  The government has agreed to stipulate the facts of the case, allowing it to bypass a hearing that would have likely discussed in detail the NSA program Mr. Nacchio turned down on behalf of Qwest prior to his investigation.  Janet has a summary of the DOJ’s various arguments as to why it should win based on the law, and it is likely such an appeal is going to occur shortly.  Interestingly, on March 27th, the Service released CCA 201513003, which discusses the Service’s view as to the deductibility of the restitution as a business expense under Section 162.  The issue was whether payments in lieu of forfeiture from a deferred prosecution agreement were deductible.  The advice attached the response from the DOJ in Nacchio where it argued the same issue, although the response was not attached to the released document.  I had initially wondered if the CCA dealt with the Nacchio case, but it appears the Service has a couple cases on the issue.
  • The Northern District of California recently decided US v. McEligot, where the Court held that taxpayers did not have an absolute right to be present during a third party interview pursuant to a summons.  In McEligot, a taxpayer’s accountant refused to answer IRS questions without the taxpayer’s lawyer present. The Court found the accountant had no right to refuse because the Service would not allow the taxpayer or his representative to be involved in the interview.
  • In other CCA news, the Service has issued its position on the assessment period for the Section 6694 preparer penalty for filing a refund request based on an unreasonable position and how long the preparer would then have to request a refund of the penalty amount.  Section 6696(d) houses the statute, and there would be a three year assessment period following the alleged improper refund request.  The preparer would then have three years to seek a refund of the penalty once paid.
  • This is a depressing case.  In Gurule v. Comm’r, the Tax Court remanded a CDP case involving the sustaining of a proposed levy, and whether the Appeals Officer abused his discretion in rejecting an OIC submitted for doubt as to collectability and, in the alternative, rejected an installment agreement (the SNOD may not have been properly sent either).  The primary issue in the collection matters was whether or not the Officer properly considered the economic hardship faced by the family.  In the case, the wife and son had severe medical issues, resulting in high bills.  Wife had a neurological disease resulting in seizures and multiple brain surgeries, and son was in an accident resulting in brain injuries.  The husband had lost his job, and he was using his 401(k) to pay necessary living expenses.  The officer treated the 401(k) loan as a dissipated asset, in particular the loans taken after the taxpayers knew of the outstanding tax.  “Dissipated assets” can be included in in the reasonable collection potential, which is a policy decision to deter delinquent taxpayers from squandering assets when they have outstanding tax liabilities.  An asset, however, should not be considered dissipated if it was needed to provide for necessary living expenses (like medical bills required to keep someone alive).  The Court also directed Appeals to request petitioners to provide documents regarding the son’s death, and how that could impact their collection potential.  While the debate raged on between the Service and the taxpayer, the taxpayer took an additional loan against his 401(k) to pay for his son’s funeral, which the Service found inappropriate.  I really need to start trying to be more thankful for what I have.
  • Chief Counsel has issued legal advice regarding who is authorized to sign a power of attorney for a partnership or LLC.  The issue and conclusion are as follows:

a. Who is authorized to sign a POA appointing a representative for a partnership or limited liability company (LLC) being examined in a TEFRA partnership-level examination?

b. Who is authorized to sign a POA appointing a representative for a partnership or limited liability company for other purposes?

CONCLUSIONS:  A general partner or, in the case of an LLC, a member-manager, may sign a POA for purposes of a TEFRA partnership-level examination or for other tax purposes of the partnership. A POA can also be secured from a limited partner or LLC member for the purposes of securing partnership item information and disclosing partnership information to the POA. In the case of an LLC that has no member who is also a manager, the non-member managers may sign the POA for purposes of establishing that it would be appropriate and helpful to secure partnership item information including securing documents and discussing the information with the designated individual.

KPMG has some coverage and insight here.

  • More tolling content due to financial disability.  In very interesting Chief Counsel Advice, the Service has taken the position that Section 6511(h) does not extend the three year limitations period for net operating losses or capital loss carrybacks.  In the advice, the Service states that Section 6511(h) specifically is limited to the statutes under (a)(b) and (c).  The NOL and capital loss carrybacks are found under Section (d)(2), and therefore not extended by financial disability.

 

Tax Court Holds Benefits Exempt from Levy Are Part of a Taxpayer’s Ability to Pay

The Ligman Tax Court case from earlier this month is a CDP case involving an Installment Agreement (IA). In Ligman, the Tax Court sustained the proposed levy and declined to find that Appeals abused its discretion in rejecting the taxpayer’s IA. What interests me is the court’s discussion (or more precisely lack of discussion) regarding accepting the treatment of railroad benefits as income available for an IA even though the benefits are generally exempt from levy.

I will simplify the facts and briefly describe what I found interesting about the case.

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Taxpayer Walter Ligman owed an unspecified amount of tax from 2008. In a timely response to a notice of intent to levy, Ligman stated he disagreed with the levy and requested either an IA or OIC on the basis that “he was disabled, financially distressed, and receiving Railroad Retirement Board benefits(Railroad benefits) and that some of these benefits were exempt from levy.”

After some back and forth with the SO and the taxpayer’s representative, the taxpayer requested a partial pay installment agreement of $25 per month; the SO countered and said that Ligman’s monthly disposable income was $946 and calculated an installment agreement with a payment of $765 per month.

At the time of Appeals’ rejection of the IA, the railroad benefits were the only source of Ligman’s income.

The wide variance in the taxpayer’s and Appeals’ calculation on ability to pay turned on how to characterize the railroad benefits. The railroad benefits are generally exempt from levy, though subject to the 15% continuous levy under Section 6331(h). Ligman and his rep thus based the IA on excluding the benefits from his ability to pay calculation; Appeals said that while the benefits may be exempt from levy, they are available to Ligman absent showing offsetting expenses and should be part of the calculation as to what Ligman could afford monthly.

The Tax Court resolved this in favor of the IRS. Here is what the court said:

IRM pt. 5.15.1 (Oct. 2, 2012) instructs IRS collection personnel on how to analyze a taxpayer’s financial condition. It states that “[g]enerally all household income will be used to determine the taxpayer’s ability to pay.” Id. pt. 5.15.1.11. The IRM does not carve out any exceptions for levy-proof benefits. For example, it instructs that income consists of pensions, including Social Security benefits. Id. pt. 5.15.1.11(2)(e). Certain Social Security payments, like Railroad benefits, are subject to a maximum 15% levy under the Federal Payment Levy Program. See sec. 6331(h)(2)(B); see also IRM pt. 5.11.7.2.1.1(2)(e), (j) (Aug. 28, 2012).

Although the IRM does not specifically state that Railroad benefits are included in income, it does not specifically exempt them. The IRM specifically includes other analogous partial or fully levy-proof benefits in the income calculation, such as Social Security benefits. We find that the settlement officer did not act arbitrarily, capriciously, or without sound basis in fact or law by including petitioner’s Railroad benefits to analyze petitioner’s financial condition and calculate his monthly disposable income. (emphasis added).

Brief Analysis

I do not think the Tax Court’s conclusion as a policy matter is off the mark. Congress’ determination to exempt railroad benefits from levy does not equate necessarily to exempting those funds from use in a collection alternative. I have not researched the issue  but what strikes me as potentially troubling with the IRS and court’s approach is that whether railroad benefits are considered as part of available income is a legal conclusion. In this case, apart from an analogous IRM provision, there appears to be no guidance IRS or Treasury issues to help Appeals and taxpayers understand what should be part of the available pool of funds that enters into a collection alternative analysis. In the current landscape, ability to pay largely turns on IRM provisions. As taxpayer’s collection rights have increasingly become statutorily protected (including consideration of collection alternatives) leaving the ability to pay determination in less than precise IRM provisions strikes me as bad as a matter of policy and law. In effect, the IRM provisions especially if accepted on an abuse of discretion basis transform guidance to IRS personnel into legal conclusions. There is no opportunity for notice and comment. Moreover, absent CDP, many of the collection determinations are not even subject to limited judicial review.

Some may say so what, especially when the conclusion as in Ligman seems right. I am aware of cases in the Villanova Tax Clinic where settlement officers and managers insisted that a family member’s discretionary gifts that were used by the taxpayer for living expenses were properly part of that taxpayer’s ability to pay. The absence of authority discussing the contours of ability to pay makes it difficult for taxpayers to overcome Appeals when its decisions seem wrong. In fact,that absence backstopped by in many cases an absence of judicial review can lead to effectively unreviewable erroneous IRS determinations. That is not a recipe for good tax administration.

 

Trust Fund Recovery Penalty Collection Not Stopped by Installment Agreement of Corporation

In Kirkpatrick v. Commission the Tax Court addressed the case of an individual responsible officer.  His corporation, Accurate, failed to pay over employment taxes for several quarters.  It had a liability of almost a half million dollars.  Despite the size of the liability, the business negotiated an installment agreement (IA) with the IRS and, by negative implication in the description of the facts of the case, remained current on the IA throughout the period of the Tax Court case.  Mr. Kirkpatrick had a small liability for individual income taxes for 2010 and had also negotiated an IA on which, by negative implication, he also seemed current.  After the establishment of both IAs, the IRS assessed the trust fund recovery penalty (TFRP) against Mr. Kirkpatrick.  That assessment caused the IRS to declare his IA in default.  That led to the issuance of a notice of intent to levy which, in turn, led to a collection due process hearing in Appeals followed by a Tax Court petition when the determination letter upheld the proposed levy action.

The case presents the common situation of how to handle a responsible officer penalty liability while the corporation attempts to pay off the trust fund (and non-trust fund) employment tax debt.  A similar case, involving bankruptcy rather than IAs, made it to the Supreme Court almost a quarter century ago.  The underlying situations remain the same, although the IRS has changed its procedures regarding the assessment of the TFRP in the interim.  The Tax Court discusses the assessment aspect and offers the greatest potential for relief although not to Mr. Kirkpatrick on the facts presented by this case.

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Mr. Kirkpatrick wants two things from the IAs.  He wants his original IA back because the assessment of the TFRP did not result from bad tax behavior after the creation of his IA but merely the assessment of a liability from long ago actions.  I thought he had a good point but the settlement officer and, ultimately, the Court did not.  Second, he wanted the IRS to hold off collecting against him as long as Accurate remained in compliance with its IA.  This argument comes up repeatedly in responsible officer cases.  I think this argument also makes good sense; however, I understand how the IRS would not want to hold off collecting just because a corporation with a significant history of delinquency says it will make it all good.

On the second issue, the Supreme Court addressed a similar issue in the context of a Chapter 11 plan in the 1990 case of Energy Resources.  In that case the corporation sought plan language designating that the Chapter 11 payments would first apply to the trust fund portion of the outstanding employment tax liability.  The IRS objected arguing that the payment did not meet the criteria of voluntary payment necessary to allow a taxpayer to designate.  The Supreme Court, following the lead of the First Circuit, recast the argument as one focused on the power of the bankruptcy court and held that the bankruptcy court had the power to allow designation and approved the plan language.  This issue led to adoption of a position by the IRS that if the taxpayer did not seek to designate the payments in the bankruptcy plan the IRS would hold off on collecting from the individual responsible officer(s) as long as the corporation remained current on its plan obligations as well as its ongoing tax obligations. See IRM 5.17.10.9.5.2 (Aug. 1, 2010) (addressing designation of payments in Chapter 11 plans); IRM 1.2.14.1.3.8 (June, 9, 2003) (discussing application of payments in determining TFRP assessments and stating, “Absent statute considerations, assertion recommendations normally will be withheld in cases of approved and adhered to business installment agreements and bankruptcy payment plans.  To the extent necessary, information will be gathered to support a possible assessment in the event the agreement is defaulted.”).

Mr. Kirkpatrick sought the same type of deal in an IA and, in the end, did not get it.  I cannot say why the IRS will not give the same deal when the corporation pays through an IA rather than a Chapter 11 plan.  Here the IRS successfully argued that it did not need to forebear under the law or under the IRM.  Mr. Kirkpatrick may not have cited to the bankruptcy provisions of the IRM or the IRS, and the Court, may not have felt they were applicable.  Apparently, no similar provisions exist for IAs.  Perhaps they do not because the IRS has more control over the IA situation, although as discussed previously, not total control.

What Mr. Kirkpatrick did argue goes to the best strategy in these situations or at least one strategy that might have succeeded in his case.  He cited to IRM provisions that allow the IRS collection employee to forebear on assessment of the TFRP if the corporation is paying back the underlying taxes.  These provisions provide the path to keeping the IRS from collecting while the corporation pays but did not help Mr. Kirkpatrick because the IRS had already assessed the TFRP in his case.  To qualify for the postponement of assessment, the responsible officer must extend the statute of limitations on collection and the corporation must remain current.  Had he used these IRM provisions prior to the assessment, he not only could have avoided having the IRS seek to collect the TFRP from him but the IRS would not have terminated his IA for individual income taxes as it did.

Given that the IRS seems willing to forego making the assessment but not forego collection once it has assessed, the winning strategy in these cases seems clear.  Of course, not every corporation will have the resources to pay back the taxes it failed to pay originally.  In my experience, only a small number or corporations may have these resources.  Still, if you have such a corporation, follow the IRM provisions to hold off assessment.  If that does not work, keep in mind that bankruptcy might provide an alternate path to the desired result.

 

Appeals Fumbles CDP Case and Resulting Resolution Demonstrates Power of Installment Agreement

In an unpublished order on November 17, 2014, the Tax Court brought to an end the Collection Due Process (CDP) case of Jurata Antioco.  The order grants attorney’s fees of slightly over $40,000 and decides that the IRS “may not proceed with the collection . . . as described in the Notice of Determination . . . .”

The order entered on November 17 came as a response to the third visit of this case before the Tax Court. The first time this case came to the Tax Court Ms. Antioco represented herself.  She argued that the Settlement Officer in Appeals never asked her to submit a revised Form 433-A (Collection Information Statement) and that she would experience great economic hardship if she could not obtain an installment agreement.  Before the case went to trial, the IRS asked that the Court remand the case because the SO’s failure to request the updated Collection Information Statement created an abuse of discretion.  The Court granted the motion and remanded the case to Appeals.

On February 4, 2013, Judge Holmes issued a memorandum opinion on the case when it came back to him after the remand.  Because Appeals had not followed his instructions in remanding the case, Judge Holmes was not kind in his evaluation of the work of the SO who handled the remand.  In the order issued on November 17, 2014, Judge Holmes returns to his criticism of the handling of the case: “The Court has already detailed the poor conduct of the Commissioner and his agent . . . .  Suffice it to say that [the SO] behaved very badly.”

This post will focus on what happened after the remand and prior to the final order with particular emphasis on the issues raised by the installment agreement (IA) Ms. Antioco appears to have received following the remand.

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If you want precedent that details how not to handle a CDP case, read the February 4, 2013 memorandum opinion. Les has written before about CDP remands.  Rather than harp too much on the lessons the opinion offers to those handling a remand, I want to use this post to follow the case down a side alley, or two side alleys, it visited between the time of the remand hearing and the final order closing the CDP case.  Both the IRS and Ms. Antioco visited the district court with unsuccessful results.  I will focus on the IRS visit because it displays the unusual and little discussed power of the IA.

Suit for Damages for Wrongful Collection

Following the Tax Court’s decision on the remand, Ms. Antioco filed suit against the IRS for wrongful collection action under IRC 7433.  Picking up on the determinations made in Judge Holmes strongly worded opinion, she sought damages for the actions of the SO in reviewing her case on remand.  As we have blogged before, IRC 7433 cases present significant challenges to taxpayers seeking recovery.   The district court dismissed the suit largely on the ground that the SO’s actions did not constitute collection action.  It viewed the review provided by the SO in the CDP process as a review of collection action rather than collection action itself.  Because the SO stepped out of the ordinary mold of an Appeals employee and sought to initiate the filing of the notice of federal tax lien, I might have argued that doing so crossed over to collection action even though the IRS does not view filing the notice of federal tax lien as collection action for purposes of the innocent spouse provisions.  See What is Collection Action (Oct. 2, 2013).  Ms. Antioco focused on his abusive nature in the hearing and his failure to consider her arguments.  These types activities seem to fall outside collection action and into review.  The court made rather short work of her complaint.

Suit to Reduce Assessment to Judgment

Simultaneously, the IRS sued Ms. Antioco to reduce her liability to judgment. Suing to reduce an assessment to judgment gives the IRS the ability to collect from her long past the 10 year statute of limitations on collection and takes pressure off the need to deal with her property in the near future.

At the end of the opinion issued in the remanded case, Judge Holmes stated “We will therefore again remand the case to Appeals to consider Ms. Antioco’s proposed installment agreement, her financial information and whether special circumstances or economic hardship exists.” Ms. Antioco and the IRS entered into an installment agreement on June 13, 2013.  The terms of the installment agreement state, in relevant part:

An installment agreement was established with the taxpayer, the installment agreement will be reviewed in 3 years, but no later than June 20, 2016 at which time the taxpayer will attempt to borrow the funds to full pay her outstanding income taxes. If the taxpayer is unsuccessful in securing financing to pay her tax liability, a financial analysis will be conducted to determine a new payment amount and the installment agreement will continue.

 

As is generally required, Ms. Antioco will be expected to make full payment of the liability within the remaining statute of limitations or the statute plus five years.

Because the existence of an IA means Ms. Antioco would pay the tax without further collection effort by the IRS, the suit seems unnecessary – more about that later – unless you consider the high percentage of defaults on IAs.  See The Online Payment Agreement Program Benefits Taxpayers and the Internal Revenue Service, but More Could Be Done to Expand Its Use, TIGTA (Sept. 27, 2013) (providing that the default rate for streamlined individual installment agreements during the 2007-2012 tax years was an average of 18%).  For whatever reason (and Ms. Antioco offers a reason), the IRS appears unsatisfied with an IA as the appropriate or only collection resolution to the case.

History of Installment Agreement Provision

IAs have existed for a long time but until 1988 had no statutory basis. They simply existed as an administrative remedy created by the IRS to fill a need similar to the status of audit reconsideration today.  In 1988 Congress wanted to show that it could reign in the IRS and it passed legislation entitled the Taxpayer Bill of Rights (later known as TBOR I when Congress decided to franchise this moniker).  In TBOR I Congress codified IAs in IRC 6159.  Much of TBOR I consisted of codifying administrative practices because the IRS threw up these practices as fodder for legislation figuring that this type of legislation would have a minimal impact on tax administration.

With respect to IAs, the IRS only partially met its goal. Yes, the codification of IAs simply moved a practice from one solely covered by the Internal Revenue Manual to one now governed by the Internal Revenue Code, but codification brought new language and meant that the IRS could not change IAs to get some payment from the taxpayer even if the taxpayer could not full pay.  Prior to Section 6159 revenue officers would get taxpayers to pay $25 a month on a $50,000 liability if that was all the taxpayer could pay because getting something beat getting nothing and, as college development officers would tell you, getting a small amount over time can lead to a big pay day in the end.

So, with Section 6159 an IA should occur only when it leads to full payment. Creative revenue officers got taxpayers to extend the collection statute of limitations for 20, 30, or 50 years to give taxpayers time to full pay.  See Collection Statute Expiration Dates: The IRS Lacks a Plan to Resolve Taxpayer Accounts with Extensions Exceeding its Current Policy Limits, TAS (2013).  This abuse led Congress to change the ability of the IRS to obtain extensions on the statute of limitations on collection.  RRA 98, Pub. L. No. 105-206, § 3461(c)(2), 112 Stat. 685, 764 (1998).  This led to the passage of the partial pay installment agreement – another form of offer in compromise.  American Jobs Creation Act of 2004 (AJCA), Pub. L. No. 108-357, § 843(a) and (b), 118 Stat. 1600 (Oct. 22, 2004).  In short, codification of IAs has had, and continues to have, consequences on the IRS collection practices it did not foresee in 1988.  Queue the suit against Ms. Antioco to reduce the assessment to judgment.

Result of Suit

On July 14, 2014, the IRS filed suit against Ms. Antioco in the San Francisco Division of the Northern District of California. Suits to reduce to judgment are probably the simplest of all tax suits.  The three-page complaint basically says she has an outstanding assessment and under IRC 7401 and 7402  and the IRS seeks to reduce the assessment to judgment.  On July 30, 2014, Ms. Antioco filed a motion to dismiss the suit and a memorandum in support of her motion.  She argues that the suit must be dismissed because she has an IA in effect and “once an IA is in effect, the government is barred from taking any collection action, and this includes commencing a proceeding in court.”  The memorandum further alleges that the reason for the suit is to offset the attorney’s fees she expects to receive in the Tax Court case.  This allegation provides her explanation for the filing of the suit.

Section 6331(k)(2)(C) bars the IRS from issuing a levy “during the period that such an IA for payment of such unpaid tax is in effect.”  Section 6331 (k)(3)(A) provides that the IRS is barred from bringing a proceeding in court for collection while an IA is in effect.  The regulation at 26 C.F.R. 301.6331-4(b)(2) provides that “the IRS will not refer a case to the Department of Justice for commencement of a proceeding in court, against a person named in an IA or proposed IA, if levy to collect the liability is prohibited.”

The memorandum also cites a few cases in support of its position. The most significant of the cases cited is United States v. Hanks, 2014 U.S. App. Lexis 11649 (11th Cir. 2014), where the issue turned on the proper termination by the IRS of an IA.  The taxpayer had failed to comply with the terms of the IA but argued that the IRS did not properly terminate the IA before initiating the suit.  The court found the IRS did properly terminate the IA prior to bringing suit; however, the negative implication of the holding leads to the conclusion that, had the IRS not properly terminated the IA, the court would have dismissed the suit.

The IRS and Ms. Antioco filed a joint stipulation to dismiss the suit. The judge ordered the case dismissed on September 19, 2014.  Of course, neither the stipulation nor the order states that the IRS agreed that the suit violated the restrictions on referrals to the Department of Justice while a pending IA existed.  It certainly appears that the IA impacted the outcome.

The case points to the silent power of an IA. The IRS enters into many IAs in a very informal manner.  Frequently, they come into existence with no written document based on a phone call with someone at the Automated Collection Site (ACS).  As mentioned above, taxpayers frequently fail to fulfill their obligations under the IA but it takes some time before the IRS formally terminates the IA.  Because of the prohibitions on administrative and judicial collection, taxpayer’s may receive protection from collection for an extended period.   Among other benefits, this period of prohibition of collection activity can benefit a taxpayer seeking to pass the time frames for bankruptcy priority periods in order to obtain a discharge of the debt.

Conclusion

Going back to the case of Ms. Antioco, she sought an IA and the IRS fought it because of the amount of equity in her property. The IRS wants taxpayers with significant equity to sell or borrow against the property with equity rather than to enter an IA.  The IRS resisted IA before the CDP, after the CDP request, and after the remand of the CDP case.  The IRS only entered in the IA after the opinion in the second remand.  The Tax Court’s willingness to override the IRS on these facts suggests it may serve as a more favorable forum for those with equity seeking an IA or it may just demonstrate that poor case work in Appeals leads to unexpected results.  Having obtained the IA she sought throughout the CDP process, Ms. Antioco not only benefited from the ability to pay her liability over a long period of time – essentially a loan from the IRS when she could not get one from banks – but she got the protection an IA brings from most collection action with the filing of the notice of federal tax lien being the notable exception.