Rolling the Beds and Wheelchairs to the Curb – Applying the Hardship Provision of IRC 6343 to Corporations

Starting in March the Tax Court has issued several Collection Due Process opinions involving nursing homes: Lindsay Manor Nursing Home, Inc. v. Commissioner, 148 T.C. No. 9 (March 23, 2017); Lindsay Manor Nursing Home, Inc. v. Commissioner, T.C. Memo. 2017-50 (March 23, 2017); Crescent Manor, Inc. v. Commissioner, T.C. Memo. 2017-94 (May 31, 2017); Sulphur Manor, Inc. v. Commissioner, T.C. Memo. 2017-95 (May 31, 2017); Silvercrest Manor Nursing Home, Inc. v. Commissioner, T.C. Memo. 2017-96 (May 31, 2017); Hennessey Manor Nursing Home, Inc. v. Commissioner, T.C. Memo. 2017-97 (May 31, 2017); Seminole Nursing Home, Inc. v. Commissioner, T.C. Memo. 2017-102 (June 5, 2017). For good measure, there was a 10th Circuit case during this same span – United States v. Hodges, 684 Fed. Appx. 722 (10th Cir. April 10, 2017).  When I worked for Chief Counsel it was my opinion that the worst types of collection cases to encounter were the cases involving nursing homes that were not paying their employment taxes.  Even though the IRS could potential seize the assets of the business or levy on the Medicare or other stream of funds, taking these types of actions would shut down the nursing home leaving a number of relatively helpless people homeless.  Closing down a nursing home had very little upside except for stopping an entity from pyramiding taxes.  So, seeing several of these cases in a short span made me wonder if something had changed at the IRS.  Nothing I read about these cases makes me think that a magic solution has occurred.  I would like to know the IRS strategy for these cases because closing down these businesses without a plan would seem unwise.

The first case decided, Lindsay Manor Nursing Home, breaks new ground by addressing the issue of hardship in IRC 6343.  As discussed below, the Court upholds the interpretation of hardship in the applicable regulation finding that a corporation cannot suffer economic hardship and so cannot use the prospect of economic hardship as a basis for arguing that the IRS cannot levy on corporate assets no matter how dire the corporation’s financial situation.  This important decision has a domino effect on the outcome of the CDP cases of the related nursing homes.

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In defending these cases in the CDP process, taxpayer’s attorney made a couple of arguments that failed.  I want to focus on those arguments even though in the back of my mind I am still wondering what will happen now that the nursing homes have lost their CDP cases.  The first argument concerns the hardship exception to levy and the second argument, which I have difficulty understanding, concerns the meaning of prior involvement.

The nursing homes in the recent decisions all operated as corporations.  They argued that the levy action proposed by the IRS in its Notice of Intent to Levy would create havoc and financial ruin for these corporations.  The petitioner in Lindsay Manor attacked Treas. Reg. 301.6343-1(b)(4)(i) which limits hardship to individual taxpayers.  Petitioner argued that the regulation should be declared invalid because it is inconsistent with IRC 6343(a)(1)(D).  The statute does not specify that it applies only to individual taxpayers.  Petitioner argued that the term “taxpayer” in section 6343 is a defined term in IRC 7701(a)(14) and the definition is broad including corporate taxpayers.  This is a logical, statute based argument that seems to be made here for the first time.  Even though the taxpayer ultimately loses, the argument was certainly worth making.

The Court responds to the argument by finding that it must look at the term in the context used included other instances of use of the term in IRC 6343, the meaning of the phrase “economic hardship” in IRC 6343(a)(1)(D) , and the grammatical structure of the statute.  The Court finds that the term taxpayer was used seven times in IRC 6343.  Twice its meaning clearly related to individuals and five times the meaning could have related to individuals or corporations.  So, the Court continues its search for the meaning of the term in this context.

The Court finds that the term “economic hardship” appears nowhere in the IRC.  Although the IRS argued that the answer lay in the use of this term the Court does not find the answer here and moves on with its inquiry.

The Court finds that the statute is “simply silent or ambiguous with respect to the meaning of taxpayer; the relationship between ‘hardship’ and a taxpayer’s ‘financial condition,’ and whether congress intended to require prospective relief.”  So, the Court looked at the legislative history.  In 1988, in the Taxpayer Bill of Rights I, Congress added (1)(E) which talks about necessary living expenses – something clearly related to individuals.  However, other aspects of legislative history left the Court uncertain of the applicability to individuals only.  Since the statute is unclear, the Court moved to Step 2 of the Chevron analysis to determine if the regulation is a permissible interpretation of the statute.

The Court finds that the interpretation of the statute chosen by the regulation is permissible because 1) the statute might be interpreted in a manner argued by either party; 2) choosing to apply hardship only to individuals is not inconsistent with IRC 6343(a)(1)(D); and 3) the regulation provides greater relief than the statute and does not limit the statute.

In addition to the argument concerning the meaning of hardship, petitioner also argued that the Settlement Officer had prior involvement in its case and this involvement barred her from making the determination.  Petitioner did not argue that the Settlement Officer had worked on a matter involving it prior to her assignment to this CDP case but rather that “she reviewed petitioner’s documents before the CDP hearing.”  Wow.  Petitioner’s hardship argument presented an innovative and thoughtful attack on the regulation.  This argument, at least as described by the Court, makes no sense to me and undercuts the validity of the first argument because it makes no sense.  Petitioner seems to argue that in a CDP hearing, which will almost always occur by phone, the call should take place and then the petitioner should sit silently by the phone while the Settlement Officer for the first time cracks open the file and begins to look at the documents in the case.  Depending on the size of the case, the silent portion of the CDP hearing could last quite a long time.  The Court took only four paragraphs to describe and resolve this argument.  This may have been three paragraphs too many.

As a result of the determination that the regulation validly interpreted the statute and that the Settlement Officer had the requisite impartiality, the Court denies the summary judgment motion filed by petitioner.  This opinion only addressed petitioner’s motion.

On the same day it ruled on petitioner’s motion for summary judgment, the Tax Court issued a second opinion in the case at T.C. Memo 2017-50, ruling on the motion for summary judgment filed by the IRS.  In this opinion, the court grants the IRS request for summary judgment.  The Court points out the long history of non-compliance by the taxpayer including many breached installment agreements.  Because another installment agreement was the collection alternative sought by the taxpayer and because of the failure of prior installment agreements coupled with nothing suggesting a new agreement would succeed, the Court found that the Settlement Officer did not abuse her discretion in denying an installment agreement as an alternative to levy.  The Settlement Officer determined that the taxpayer could satisfy the outstanding liability by liquidating or borrowing against its accounts receivable.  Another factor that tipped the scales against the taxpayer in the decision concerned the taxpayer’s current state of non-compliance.  As with almost any employment tax liability case where the taxpayer cannot keep current while seeking relief from levy, the Court finds this fact an important one in denying relief.

The other cases in the group followed the same script as the TC Memo opinion in Lindsay Manor even though they come out over a period of time following the release of that opinion.  All grant the motion for summary judgment requested by the IRS.  Although the IRS won these cases, the ability to potentially close these nursing homes by levying on their accounts receivable puts the IRS in a tough spot.  It does not want to condone pyramiding of employment taxes but it also does not want to negatively impact the lives of many vulnerable senior citizens.

An appeal has been filed with the 10th Circuit in Lindsay Manor.  Here is the docket sheet in the appeal:

05/23/2017 — [10469270] TAX CASE DOCKETED. DATE RECEIVED: 05/23/2017. DOCKETING STATEMENT DUE 06/06/2017 FOR LINDSAY MANOR NURSING HOME, INC.. NOTICE OF APPEARANCE DUE ON 06/06/2017 FOR COMMISSIONER OF INTERNAL REVENUE AND LINDSAY MANOR NURSING HOME, INC. TAX COURT RECORD DUE 07/03/2017 FOR ROBERT R. DITROLIO, CLERK OF COURT. [17-9002] [ENTERED: 05/23/2017 12:31 PM]

05/24/2017 — [10469509] TAX COURT RECORD FILED. NUMBER OF VOLUMES FILED: 6. [17-9002] TC [ENTERED: 05/24/2017 09:13 AM]

05/24/2017 — [10469551] MINUTE ORDER FILED – APPELLANT’S BRIEF DUE ON 07/03/2017 FOR LINDSAY MANOR NURSING HOME, INC. (TEXT ONLY – NO ATTACHMENT) [17-9002] [ENTERED: 05/24/2017 10:09 AM]

05/25/2017 — [10470153] NOTICE OF APPEARANCE FILED BY MS. KATHLEEN E. LYON FOR CIR. CERT. OF INTERESTED PARTIES: Y (ALREADY LISTED). SERVED ON 05/25/2017. MANNER OF SERVICE: EMAIL [17-9002] [ENTERED: 05/25/2017 01:55 PM]

05/25/2017 — [10470135] NOTICE OF APPEARANCE SUBMITTED BY KATHLEEN E. LYON (LEAD COUNSEL) FOR APPELLEE CIR FOR COURT REVIEW. CERTIFICATE OF INTERESTED PARTIES: YES. SERVED ON 05/25/2017. MANNER OF SERVICE: EMAIL. [17-9002]–[EDITED 05/25/2017 BY KLP TO DELETE THE ATTACHMENT; ENTRY FILED.] KEL [ENTERED: 05/25/2017 01:06 PM]

06/05/2017 — [10472178] NOTICE OF APPEARANCE FILED BY MR. DAVID JOSEPH LOOBY FOR LINDSAY MANOR NURSING HOME, INC. CERT. OF INTERESTED PARTIES: N. SERVED ON 06/05/2017. MANNER OF SERVICE: EMAIL. [17-9002] [ENTERED: 06/05/2017 11:36 AM]

06/05/2017 — [10472180] DOCKETING STATEMENT FILED BY LINDSAY MANOR NURSING HOME, INC.. SERVED ON 06/05/2017. MANNER OF SERVICE: EMAIL. [17-9002] DJL [ENTERED: 06/05/2017 11:40 AM]

06/05/2017 — [10472174] NOTICE OF APPEARANCE SUBMITTED BY DAVID J. LOOBY FOR APPELLANT LINDSAY MANOR NURSING HOME, INC. FOR COURT REVIEW. CERTIFICATE OF INTERESTED PARTIES: NO. SERVED ON 06/05/2017. MANNER OF SERVICE: EMAIL. [17-9002]–[EDITED 06/05/2017 BY KLP TO DELETE THE ATTACHMENT; ENTRY FILED.] DJL [ENTERED: 06/05/2017 11:25 AM]

 

IRS Takes Pugnacious Attitude toward Mr. Mayweather

On July 5, 2017, well-known boxer Floyd Mayweather filed a Tax Court petition seeking Collection Due Process (CDP) relief.  Mr. Mayweather’s petition uses the Tax Court’s form petition and parts of the petition are handwritten.  My clinic uses the form petition but most of our cases do not involve $22 million.  The use of the petition for a case of this dollar amount shows the ability of the form to serve taxpayers at all ends of the income spectrum.  The form gets the job done and wastes little energy.

The petition attaches the determination from Appeals as the instructions provide.  The determination offers a couple of interesting side notes to discuss.  First, the notice of determination sent to a taxpayer, like a statutory notice of deficiency, contains the Social Security Number of the petitioner.  Petitioners receive instruction from the Tax Court in the form package to redact the SSN.  The Court will get the SSN on the special form it has devised for that purpose and putting the SSN on that form keeps the number from the public eye.  Leaving it on the determination letter without redacting it opens the petitioner up to things that happen when the SSN gets in the wrong hands.  We try to be diligent in the clinic to find and redact the social security information of the taxpayer on every page of the notice we attach.  Programs exists that will allow you to perform the redaction in a cleaner form than might be available if you just use a marker.  Don’t miss this important step in filing a petition.

In addition to the redaction issue which is present in every case, the CDP notice of determination contains the misleading guidance on when to file the Tax Court petition that we have discussed previously.  Carl Smith has carefully tracked Tax Court orders over the past two years.  Because of his work, we know of seven cases in which the language in the CDP notice of determination has caused taxpayers to petition on the 31st day which has caused them to be dismissed for lack of jurisdiction.  With Carl’s help, the Harvard clinic is litigating some of these cases and arguing that the notice has misled the petitioner in to filing late.  We have blogged about this before.  Look carefully at the wording in the second paragraph.  The IRS should change this wording and avoid misleading taxpayers into losing their Tax Court opportunity.

Enough diversions, let’s talk about Mr. Mayweather’s little $22 million dollar problem.

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Maybe you and I wish we earned enough to have a $22 million tax problem.  It’s hard to imagine.  We know the amount because the IRS filed a notice of federal tax lien (NFTL).  The NFTL provides an exception to the normal rules regarding disclosure of a taxpayer’s information.  In order for the IRS to protect and secure its interest in a delinquent taxpayer’s property, Congress authorized the IRS to make the liability public.  When the IRS does file a NFTL against a celebrity, the news media usually picks it up and the celebrity is held up to a mild form of public shaming or at least notoriety.  Several news outlets, here, here, here, and here together with many others did the honors in covering the NFTL filed against Mr. Mayweather.

In 2015, Mr. Mayweather made a lot of money in a fight.  When a foreign fighter gets paid in the United States, 30% is paid to the IRS.  When a US citizen fights, the fighter gets the entire purse with no withholding so it is up to the fighter to make the appropriate estimated payments.  I presume that insufficient estimated payments were made on the $100 million paid to Mr. Mayweather for his fight in 2015, but I do not know that for certain.  I am told that a fighter earns the money in one of these fights as soon as the opening bell rings and that the money is frequently paid on the night of the fight.  The payments to Mr. Mayweather go to a corporation that he controls which would then distribute money to him.  I am also told that someone from the IRS attends these major fights in an effort to ensure that the IRS gets its take from the purse.  The fact that Mr. Mayweather does not seek to contest the liability in the CDP context suggests that he agrees with the amount.  Now, the question is how will he pay the tax and what will the IRS do about it if he does not.

I assume without knowing that some breakdown in communication between Mr. Mayweather and the IRS may have occurred before the IRS sent the notice of intent to levy.  It is also possibly based on their respective positions taken in the CDP case that what I am calling a breakdown was an offer from Mr. Mayweather to fully pay the liability with a short term installment agreement following certain liquidity events with the IRS rejecting that proposal and demanding immediate payment by liquidating assets or borrowing money.  The notice of determination speaks only about sustaining the levy action and not about the NFTL.  The newspaper stories would only know the amount of the liability because of the filing of a NFTL.  I cannot tell why the NFTL was not a part of the CDP case.

With the focus on levy, the parties each took their respective corners in the CDP hearing.  From the IRS corner came a pronunciation that Mr. Mayweather had sufficient income and equity in assets to fully satisfy the liability.  From the Mayweather corner came the position that although he did have enough assets to satisfy the liability, it did not make financial sense to liquidate or borrow on those assets when he would soon have a liquidity event and was about to have another fight with a proposed payday that would more than satisfy the outstanding liability.  The proposed purse for Mr. Mayweather from the upcoming fight is purported to be between $100 and $200 million.  Mr. Mayweather offered to fully pay the liability with a short term installment agreement.  Without knowing more, it’s hard for me to argue with the logic of a short delay in these circumstances.

In pre-CDP days, the IRS would simply have issued a levy on the fight promoter or whoever makes payment of the purse to the fighters after a fight.  I doubt the Revenue Officer in pre-CDP days would have exhausted too much effort trying to persuade Mr. Mayweather to liquidate his assets because the RO could tie up the purse and doing so would solve the problem in the easiest, most efficient manner.  Because the timing of the CDP notice and the upcoming fight allow Mr. Mayweather to keep the IRS from levying on the purse unless it can show jeopardy, the statute gives him the upper hand while the CDP matter awaits final disposition.  By filing a relatively simple form (Form 12153) followed by the filing of the Tax Court petition (using the simple form provided by the Court), Mr. Mayweather wins this fight for the low cost of $60 and some attorney’s fees.

Unless the IRS wants to find that jeopardy exists, its hands are tied.  The championship fight will occur even before the answer is due in the Tax Court CDP case.  The Settlement Officer must have known this yet did not want to enter into an agreement allowing for a short term installment agreement.  Now, Mr. Mayweather can make the installment payments he proposed while the CDP case is pending in Tax Court without having to pay the fee for an installment agreement.  The savings in the installment agreement fee will more than make up for the $60 fee he paid to file his petition.  I would like to know what the SO thought would happen with the issuance of this notice of determination.  The taxpayer couched his request as a short term installment agreement.  It sounds similar to a forbearance request because it essentially requests the IRS to wait to a date certain for full payment.  A short term installment agreement or a forbearance request provides a type of resolution where the taxpayer has the ability to full pay upon the occurrence of an event sometime in the near future.  The IRS gains little by forcing a taxpayer to sell or lien assets when a big payday is coming up.  There may be more than meets the eye here but agreeing to take the taxes through a short term installment agreement seems in everyone’s interest.

Although the filing of the CDP petition essentially allows Mr. Mayweather to win this fight over the timing of the payment and structure the payment in a manner convenient to him, the IRS does not lose here if it gets the $22 million.  I hope the purse is large enough to fully pay the 2015 liability and the tax on the new winnings.  I wish Mr. Mayweather well in his upcoming fight with a person other than the tax man.  If his tax issues cause him to want to assist others at a different end of the income spectrum in their fights with the tax man, I know a clinic willing to accept a share of the purse and put it to use providing representation.

 

 

Tenth Circuit Raises Possible Defense to IRS Levying Bank Account with Veteran’s Disability Payments

Thanks to celebrity shills such as Alan Thicke even non-tax experts know the reach of IRS’ collection powers. That power extends to allow it to levy on a taxpayer’s property unless that property is subject to a specific exemption in Section 6334(a). Included in that exemption list are things like workers’ compensation and unemployment benefits. Veterans’ disability payments are also on that list.

Last week’s 10th Circuit’s Maehr v Koskinen involved an IRS levy on a bank account that had received the taxpayer’s VA disability deposits. Maehr had challenged the IRS assessment and intention to levy on some of his assets. Maehr appears to be a serial tax protestor, and the order dispenses with the frivolous arguments quickly though not the issue of the levy on the bank account that held his VA payments.

That issue requires a bit more context and analysis. Maehr had an account at Wells Fargo that received his VA disability payments. Under Section 6334(a)(10), IRS is precluded from directly levying on certain armed force connected disability benefits. Maehr argued that Section 6334(a)(10) should protect the assets in the bank account since the funds were comprised of VA disability benefits that are exempt from levy.

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The government raised two arguments against Maehr’s challenge to that levy:

(1) the IRS did not place a direct levy on any exempt VA disability payments; and (2) even if the IRS is improperly levying exempt disability payments, the only remedy available to the taxpayer would be full payment of the assessment of his tax liability followed by a suit for refund in district court.

The arguments are closely related. The second of the arguments relates to the Anti-Injunction Act (AIA), which, is codified at Section 7421 and provides that “no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person, whether or not such person is the person against whom such tax was assessed.” In other words, taxpayers unhappy with IRS enforced collection actions are generally unable to get a court to enjoin the IRS from going forward with its collection powers, including levy. We have discussed the AIA on numerous occasions, as courts in the past few years have been poking holes in that restriction. Even before some of the recent exceptions, then Chief Justice Warren in the Williams Packing case crafted a two-pronged common law exception to the AIA: 1) that under no circumstances could the Government ultimately prevail and 2) that equity jurisdiction otherwise exists. Courts have generally looked at that last part of Williams Packing as requiring the taxpayer to prove irreparable injury stemming from the IRS’s proposed collection action.

Taxpayers subject to collection action for excise and employment taxes that were outside the deficiency procedures have often faced the AIA’s reach when IRS sought to collect even while a refund proceeding was in the works. In a 1977 case called Marvel v US the 10th Circuit used the AIA to dispense with a taxpayer trying to challenge the IRS’s levying of business’s assets during a district court refund suit following a partial payment of employment taxes. In Maehr, the 10th Circuit distinguished Marvel on the facts, noting that Maehr also had a cause of action in addition to injunction (I assume a wrongful collection claim as well).

Despite the distinction, the 10th Circuit addressed the broader AIA issue and found that Maehr satisfied the Williams Packing narrow exception allowing the suit to continue:

If the IRS had placed a direct levy on Appellant’s VA disability benefits, we have little doubt that Appellant would have been able to satisfy the Williams Packing test and obtain injunctive relief. We see no possibility of the government prevailing on the merits in such a case, and a disabled veteran will likely be able to show that he will suffer irreparable injury if the government is not enjoined from illegally levying the VA benefits on which he relies for his maintenance and survival. See Comm’r v. Shapiro, 424 U.S. 614, 627 (1976)…

What about the government’s argument that the IRS was not directly going after the VA disability benefits, since the funds were sitting in a bank account? The Tenth Circuit briefly addressed that:

However, here the government has not directly levied Appellant’s VA benefits, and it suggests that it may do indirectly what it may not do directly—that it may wait until exempt VA disability benefits have been directly deposited into Appellant’s bank account and then promptly obtain them through a levy on all funds in the bank account, despite their previously exempt status. The government cites no authority to support this argument, and the few cases we have found adopting such a rule, see, e.g., Calhoun v. United States, 61 F.3d 918 (Fed. Cir. 1995) (unpublished table decision); United States v. Coker, 9 F. Supp. 3d 1300, 1301–02 (S.D. Ala. 2014); Hughes v. IRS, 62 F. Supp. 2d 796, 800–01 (E.D.N.Y. 1999), have not considered whether this result is consistent with the Supreme Court’s opinion in Porter Aetna Casualty & Surety Co., 370 U.S. 159 (1962), or with 38 U.S.C. § 5301’s prohibition against the levy of veterans’ benefit payments either before or after receipt by a beneficiary.

I was not familiar with either the Porter case or 38 U.S.C. § 5301, and this opinion nudged me to look at both. Porter v Aetna Casualty involves a private creditor and not the IRS but it held that VA disability benefits paid to an incompetent veteran and deposited in a federal savings and loan association were exempted from attachment by 38 U.S.C. § 3101(a) [now codified at 38 USC 5301(a)(1)]. That statute provides that payments administered by the VA “shall be exempt from taxation, shall be exempt from the claim of creditors, and shall not be liable to attachment, levy, or seizure by or under any legal or equitable process whatever, either before or after receipt by the beneficiary. The preceding sentence shall not apply to claims of the United States arising under such laws nor shall the exemption therein contained as to taxation extend to any property purchased in part or wholly out of such payments.” (emphasis added).

So Title 38 has its own protection of VA disability benefits that goes beyond the Internal Revenue Code. As I said, Porter did not involve an IRS levy (instead it involved a private creditor) but it did directly consider the reach of the Title 38 protection when the disability benefits were held after payment. The savings and loan rules at issue in Porter treated the depositor as a shareholder, requiring a 30-day demand before the S&L shareholder could reach the proceeds. Porter considered whether the deposit of the VA disability payments in a savings and loan essentially constituted after-acquired property that was no longer protected by Title 38. Porter discusses the earlier case of Lawrence v. Shaw, 300 U. S. 245 (1937), where the Court held that “bank credits derived from veterans’ benefits were within the exemption, the test being whether, as so deposited, the benefits remained subject to demand and use as the needs of the veteran for support and maintenance required.” On the other hand, the Court had held in a prior case that a veteran’s purchase of bonds with the VA proceeds removed the protection of the statute and those bonds constituted an after-acquired investment.

Porter resolved the issue as to whether the S&L account was more like the bank deposit case or the after-acquired investment:

Since legislation of this type should be liberally construed… to protect funds granted by the Congress for the maintenance and support of the beneficiaries thereof… we feel that deposits such as are involved here should remain inviolate. The Congress, we believe, intended that veterans in the safekeeping of their benefits should be able to utilize those normal modes adopted by the community for that purpose — provided the benefit funds, regardless of the technicalities of title and other formalities, are readily available as needed for support and maintenance, actually retain the qualities of moneys, and have not been converted into permanent investments.

Back to Maehr and the IRS’s Collection Powers

The Tenth Circuit remanded the case back to the District Court to consider whether the reach of Porter and whether the “IRS has improperly levied exempt VA disability benefits by placing a levy on all funds in the bank account where Appellant’s disability benefits are deposited.” It left open the question of remedy, expressing “no opinion on the ultimate resolution of this claim or on the unresolved questions regarding the availability of the types of relief Appellant has sought or may seek in an amended Complaint.”

This is an interesting opinion and raises a possible defense to collection on a certain kind of asset, i.e., a bank account that holds veteran’s disability payments. It seems that IRS at the district court should emphasize Section 6334(c), which provides that “[n]otwithstanding any other law of the United States (including section 207 of the Social Security Act), no property or rights to property shall be exempt from levy other than the property specifically made exempt by subsection (a).” Likewise the regulations under Section 6334 provide that “no other property or rights to property are exempt from levy except the property specifically exempted by section 6334(a).”

IRS has a longstanding position that once the funds move from the excepted payor to the taxpayer, the funds lose their exemption. The Porter case and Maehr’s unearthing it suggest a possible barrier to the vast collection powers that IRS generally has when there is a bank account that has solely as the source of its deposits disability payments the IRS would be unable to reach directly. Given the explicit language in Section 6334(c) and IRS’s longstanding view that the exempted property loses its character when the funds reach the taxpayer I would expect a vigorous challenge to extending Porter to include protection from the reach of an IRS levy. In addition, even if that protection were extended, there could be some interesting second order questions. Query for example  the tracing problems if the account has other funds beyond the disability payments or if the IRS were to show that the taxpayer had other funds that he used to meet his necessities beyond the disability payments.

Collecting Partnership Debt from General Partners

The 9th Circuit recently sustained the district court which sustained the bankruptcy court in the case of Pitts v. United States.  The taxpayer sought a determination that the taxes claimed against her in the bankruptcy proceeding were discharged.  The courts determined that the taxes were not discharged, rejecting various arguments that she presented.  The case breaks no new legal ground but serves to highlight how the IRS collects from general partners.  If you have this issue, you might look at IRM Part 5, specifically 5.1.21, 5.17.7, and 5.19.14.

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Ms. Pitts was the general partner of DIR Waterproofing. DIR failed to pay its employment taxes including both trust fund and non-trust fund portions. The IRS would typically make some effort to collect from the partnership and then seek to collect from the partners. The opinion does not describe the efforts made here, but the IRS did issue a notice of federal tax (NFTL) against Ms. Pitts. In these situations the IRS does not go through a separate assessment process for Ms. Pitts but uses the assessment made against the partnership in order to pursue collection against her. The NFTL would reference the partnership debt although it would make clear that the lien is against her. Because the debt arose through the partnership, she argued that it was a state law debt and the IRS was limited to collect as a state law creditor. The 9th Circuit made three separate explanations of why her arguments failed.

First, the court pointed out that under IRC 6321 Ms. Pitts was a person liable to pay any tax and, as such a person, a lien arises under federal law which attaches to all of her property and rights to property once the IRS makes demand for payment and payment is not made. This is federal law and not state law creating the lien. The court cited several cases in support of its position.

Next, the court found that the IRS can use all of its administrative enforcement tools because she is secondarily liable on this debt. The court cited to a Supreme Court decision, United States v. Galletti, 541 U.S. 114 (2004) that may have caused Ms. Pitts to make the arguments she made here but which should also have suggested to her that these arguments would likely fail. In Galletti, similarly situated taxpayers to Ms. Pitts went into bankruptcy where the IRS filed a proof of claim based on the assessment against the partnership in which they were general partners. The Gallettis argued that no debt existed against them because the IRS had not made an assessment against them (and the statute of limitations on assessment of the partnership debt had run by the time of the bankruptcy.) In that case, the bankruptcy court, the district court, and the 9th Circuit agreed with the Gallettis. These opinions relied upon the definition of ‘taxpayer’ in IRC 7701 and looked to the separate nature of the partners as taxpayers from the partnership. The IRS pushed the case to the Supreme Court, which held that the IRS did not need to make a separate assessment because the Gallettis were liable under state law as general partners of the partnership.

Writing for a unanimous Court, Justice Thomas said:

“Under a proper understanding of the function and nature of an assessment, it is clear that it is the tax that is assessed, not the taxpayer. See §6501(a) (“the amount of any tax … shall be assessed”); §6502(a) (“[w]here the assessment of any tax”). And in United States v. Updike, 281 U. S. 489 (1930), the Court, interpreting a predecessor to §6502, held that the limitations period resulting from a proper assessment governs “the extent of time for the enforcement of the tax liability,” id., at 495. In other words, the Court held that the statute of limitations attached to the debt as a whole. The basis of the liability in Updike was a tax imposed on the corporation, and the Court held that the same limitations period applied in a suit to collect the tax from the corporation as in a suit to collect the tax from the derivatively liable transferee. Id., at 494-496. See also United States v. Wright, 57 F. 3d 561, 563 (CA7 1995) (holding that, based on Updike‘s principle of “all-for-one, one-for-all,” the statute of limitations governs the debt as a whole).

Once a tax has been properly assessed, nothing in the Code requires the IRS to duplicate its efforts by separately assessing the same tax against individuals or entities who are not the actual taxpayers but are, by reason of state law, liable for payment of the taxpayer’s debt. The consequences of the assessment–in this case the extension of the statute of limitations for collection of the debt–attach to the tax debt without reference to the special circumstances of the secondarily liable parties.”

Ms. Pitts wants the courts to recognize that the assessment only applies to her because of the operation of state law and since it is the operation of state law causing her to become liable she wants the debt treated as state law debt and not tax debt with the exceptions to discharge applicable to tax debts. The 9th Circuit, perhaps still remembering the Galletti outcome, does not allow her to split hairs in this manner. State law plays an important role in creating the liability but her liability is for a federal tax debt.

The 9th Circuit rejects her argument that state law creates the statute of limitations. It also rejects her argument that the continuation by the IRS of its efforts to collect this debt violates the discharge injunction. I did not go back and read the earlier opinions to see the age of the debt. The trust fund portion of the partnership’s unpaid employment taxes will always be excepted from discharge because B.C. 507(a)(1)(C) will always make this a priority debt in bankruptcy and that will always make it excepted from discharge under B.C. 523(a)(1)(A). The non-trust fund portion of the partnership employment tax debt should become dischargeable for bankruptcy petitions filed more than three years after the employment tax return due date, assuming it timely filed the returns. The court engages in no analysis of this issue making me think that she is not entitled to a discharge of the non-trust fund portion; however, depending on the timing of the debt and the bankruptcy petition, this portion of her debt could potentially be discharged in her bankruptcy just as in the bankruptcy of the partnership itself.

This case demonstrates how the IRS will proceed to collect from a general partner. It simply uses the assessment against the partnership to open the full range of administrative collection tools given to it under the Code. The effort by Ms. Pitts to use the Galletti opinion to argue that the operation of state law which lets the IRS go after the general partners without a separate assessment should also limit the IRS in its ability to collect. The 9th Circuit rejects that limitation on the power of the IRS in this situation and, I think, its decision is correct. The issue brings up in another context the interplay between state law which creates certain rights and obligations and the federal tax collection law which builds upon the state created rights and obligations.

Summary Opinions — For the last time.

This could be our last Summary Opinions.  Moving forward, similar posts and content will be found in the grab bags.  This SumOp covers items from March that weren’t otherwise written about.  There are a few bankruptcy holdings of note, an interesting mitigation case, an interesting carryback Flora issue, and a handful of other important items.

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  • Near and dear to our heart, the IRS has issued regulations and additional guidance regarding litigation cost awards under Section 7430, including information regarding awards to pro bono representatives. The Journal of Accountancy has a summary found here.
  • The Bankruptcy Court for the Southern District of Florida in In Re Robles has dismissed a taxpayer/debtor’s request to have the Court determine his post-petition tax obligations, as authorized under 11 USC 505, finding it lacked jurisdiction because the IRS had already conceded the claim was untimely, and, even if not the case, the estate was insolvent, and no payment would pass to the IRS. Just a delay tactic?  Maybe not.  There is significant procedural history to this case, and this 505 motion was left undecided for considerable time as there was some question about whether post-petition years would generate losses that could be carried back against tax debts, which would generate more money for creditors.  This became moot, so the Court stated it lacked jurisdiction; however, the taxpayer still wanted the determination to show tax losses, which he could then carryforward to future years (“establishing those losses will further his ‘fresh start’”).  The Court held that since the tax losses did not impact the estate it no longer a “matter arising under title 11, or [was] a matter arising in or related to a case under title 11”, which are required under the statutes.
  • The Tax Court in Best v. Comm’r has imposed $20,000 in excess litigation costs on an attorney representing clients in a CDP case. The Court, highlighting the difference in various courts regarding the level of conduct needed, held the attorney was “unreasonable and vexations” and multiplied the proceedings.  Because the appeal in this case could have gone to the Ninth Circuit or the DC Circuit, it looked to the more stringent “bad faith” requirements of the Ninth Circuit.  The predominate issue with the attorney Donald MacPherson’s conduct appears to have been the raising of stated frivolous positions repeatedly, which the Court found to be in bad faith.
  • And, Donald MacPherson calls himself the “Courtroom Commando”, and he is apparently willing to go to battle with the IRS, even when his position may not be great…and the Service and courts have told him his position was frivolous. Great tenacity, but also expensive.  In May v. Commissioner, the Tax Court sanctioned him another seven grand.
  • The Northern District of Ohio granted the government’s motion for summary judgement in WRK Rarities, LLC v. United States, where a successor entity to the taxpayer attempted to argue a wrongful levy under Section 7426 for the predecessor’s tax obligation. The Court found the successor was completely the alter ego of the predecessor, and therefore levy was appropriate, and dismissal on summary judgement was proper.
  • I’m not sure there is too much of importance in Costello v. Comm’r, but it is a mitigation case. Those don’t come up all that frequently.  The mitigation provisions are found in Sections 1311 to 1314 and allow relief from the statute of limitations on assessment (for the Service) and on refunds (for taxpayers) in certain specific situations defined in the Code.  This is a confusing area, made more confusing by case law that isn’t exactly uniformly applied.  The new chapter 5 of SaltzBook will have some heavily revised content in this area, and I should have a longer post soon touching on mitigation and demutualization in the near future.  In Costello, the IRS sought to assess tax in a closed year where refunds had been issued to a trustee and a beneficiary on the same income, resulting in no income tax being paid.  Section 1312(5) allows mitigation in this situation dealing with a trust and beneficiary.  There were two interesting aspects of this case, including whether the parties were sufficiently still related parties where the trust was subsequently wound down, and whether amending a return in response to an IRS audit was the taxpayer taking a position.
  • The First Circuit has joined all other Circuits in holding “that the taxpayer must comply with an IRS summons for documents he or she is required to keep under the [Bank Secrecy Act], where the IRS is investigating civilly the failure to pay taxes and the matter has not been referred for criminal prosecution,” and not allowing the taxpayer for invoking the Fifth Amendment. See US v. Chen. I can’t recall how many Circuit Courts have reviewed this matter, but it is at least five or six now.
  • The District Court for the District of Minnesota in McBrady v. United States has determined it lacks jurisdiction to review a refund claim for taxpayers who failed to timely file a refund request, and also had an interesting Flora holding regarding a credit carryback. The IRS never received the refund claim for 2009, which the taxpayer’s accountant and employee both testified was timely sent, but there was not USPS postmark or other proof of timely mailing, so Section 7502 requirements were not met.  Following an audit, income was shifted from 2009 to other years, including 2008.  This resulted in an outstanding liability that was not paid at the time the suit was filed, but the ’09 refund also generated credits that the taxpayer elected to apply to 2008.  The taxpayers also sought a refund for 2008, arguing the full payment of the ’09 tax that created the ’08 credit should be viewed as “full payment”, which they compared to the extended deadline for refunds when credits are carried back.  The Court did not find this persuasive, and stated full payment of the assessed amount of the ’08 tax was needed for the Court to have jurisdiction over the refund suite under Flora.  Sorry, couldn’t find a free link.
  • The IRS lost a motion for summary judgement regarding prior opportunity to dispute employment taxes related to a worker reclassification that occurred in prior proceeding. The case is called Hampton Software Development, LLC v. Commissioner, which is an interesting name for the entity because the LLC operated an apartment complex.  The IRS argued that during a preassessment conference determining the worker classification the taxpayer had the opportunity to dispute the liability, and was not now entitled to CDP review of the same.  The Court stated the conference was not the opportunity, as the worker classification determination notice is what would have triggered the right under Section 6330(c)(2)(B), and such notice was not received by the taxpayer (there was a material question about whether the taxpayer was dodging the notice, but that was a fact question to be resolved later).  The Hochman, Salkin blog has a good write up of this case, which can be found here.
  • The IRS has issued additional regulations under Section 6103 allowing disclosure of return information to the Census Bureau. This was requested so the Census could attempt to create more cost-efficient methods of conducting the census.  I don’t trust the “Census”.  Too much information, and it sounds really ominous.  That is definitely the group in Big Brother that will start rounding up undesirables, and now they have my mortgage info.
  • The Service has issued Chief Counsel Notice 2016-007, which provides internal guidance on how the results of TEFRA unified partnership audit and litigation procedures should be applied in CDP Tax Court cases. The notice provides a fair amount of guidance, and worth a review if you work in this area.
  • More bankruptcy. The US Bankruptcy Court for the Eastern District of Virginia has held that exemption rights under section 522 of the BR Code supersede the IRS offset rights under section 533 of the BR Code and Section 6402.  In In Re Copley, the Court directed the IRS to issue a refund to the estate after the IRS offset the refund with prepetition tax liabilities.  The setoff was not found to violate the automatic stay, but the court found the IRS could not continue to hold funds that the taxpayer has already indicated it was applying an exemption to in the proceeding.   There is a split among courts regarding the preservation of this setoff right for the IRS.  Keith wrote about the offset program generally and the TIGTA’s recent critical report of the same last week, which can be found here.

 

 

Attorney Liable for Failure to Honor Levy and 50% Penalty

The case of United States v. Huckaby provides a good example of what not to do when representing a client with a large federal tax obligation.  I think Mr. Huckaby is lucky this post concerns his civil and not his criminal tax problems.  I have written before  about the failure to honor levy in the context of a bank and about the 50% penalty for failure to honor a levy. Here the taxpayer’s attorney manages to bring upon himself the personal liability of his client as well as an additional 50% for good measure.

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Mr. Huckaby represented Action Construction Inc. and its principal, Gregory Hunt. The corporation had a client that went into bankruptcy and did not pay the fee on a construction project.  That caused Action to go into bankruptcy because it could not meet its obligations without the payment it expected to receive for its work.  Mr. Huckaby probably assisted Action in its pre-bankruptcy planning and may also have given advice to Mr. Hunt about the impact of the bankruptcy on him. These situations can present difficult issues for an attorney representing both parties as frequently happens in small businesses.  For an article discussion some of the issue see here.  During the period of financial distress as it struggled to survive while waiting for payment, Action did not pay its employment taxes.  At some point Action brought suit against the party for whom it was engaged in a construction project.  The opinion states that “Hunt alleges that, by February 23, 2011, when Hunt received a settlement check for the Minden lawsuit made out to Action in the amount of $83,069.61, the assets of Action had already been disbursed to settle creditors’ claims in the course of those bankruptcy proceedings and Action no longer continued to exist.  Hunt asked his attorney, Huckaby, what to do with the check received at this stage and Huckaby suggested the check be deposited into Huckaby’s client trust account.”

I did not go and look at Action’s bankruptcy case. If it was a Chapter 7, a trustee would have existed and that trustee would like to know about the existence of this asset of the estate.  If the bankruptcy case proceeded as a liquidating Chapter 11 with Hunt acting as the fiduciary of the estate, then Mr. Hunt had a duty to the creditors to alert them to this additional asset of the estate.  The bankruptcy court would have reopened the case to allow distribution of this asset.  The opinion turns on the failure to honor a levy and does not make further mention of the bankruptcy case; however, I think a bankruptcy issue lurks here.  The claim held by the IRS in the bankruptcy case may have had the highest priority of the remaining debts making the result the same inside or outside of bankruptcy.  If creditors of Action existed with a higher priority than the IRS, those creditors would like to have the chance to have their claims satisfied with these proceeds.  The opinion discusses one other claimant who had a UCC security interest but it was unclear whether this creditor would have defeated the IRS had the funds gone into the bankruptcy estate.

The next action described in the opinion seems the most bizarre. “On June 6, 2011, several months after making that deposit, Huckaby called Michael Franck, a revenue officer for the IRS and informed Franck of the payment.”  Given what Mr. Huckaby did before and after that call, I cannot understand why he made the call.  At the time of the call the revenue officer probably had what he considered an uncollectible account.  Upon receiving the call, the revenue officer dutifully and reflexively demanded payment of these funds to satisfy the outstanding employment tax obligation of Action.  Mr. Huckaby waives fresh meat in front of the revenue officer and then pulls it back.  If you intend to not pay the IRS with funds sitting in a bank account the IRS does not know about, I question why you would call the IRS and bring its attention to the account.  The actions on the part of the IRS that occurred thereafter were extremely predictable and they were the correct actions.

Having told the IRS about the account, Mr. Huckaby then receives directions from his client to move the money to a different trust account but also one for which Mr. Huckaby serves as trustee. He complies with the request.  Meanwhile, the revenue officer sends Mr. Huckaby notices of levy which he fails to pay.  I am not going to describe all of the things that Mr. Huckaby did and did not do but the opinion indicates he paid about $20,000 to the IRS on Mr. Hunt’s trust fund recovery penalty liabilities, $7,500 to himself as legal fees and $53,500 to Mr. Hunt for him to “start over.”  This left the outstanding tax liability at over $35,000.  For some reason the IRS did not think that the opportunity for Mr. Hunt to start over should come ahead of the outstanding tax liabilities of Action  it sought to collect through its levy so it brought suit against Mr. Huckaby for failure to honor levy.

The Court points out that defenses to a valid levy notice are very limited extending only to situations where the levied party does not possess the money or the property has already been subject to prior execution or attachment. On the facts presented here the Court granted summary judgment finding Mr. Huckaby liable for the unpaid taxes as well as the 50% penalty under Section 6332(d).  In addition to seeking a judgment against Mr. Huckaby, the IRS also sought to hold Mr. Hunt liable for fraudulently transferring the funds.  The Court found that while Mr. Huckaby’s repeated and unequivocal efforts to move the funds to avoid paying the IRS were both fraudulent and made with actual intent to hinder the collection of the taxes, it could not reach the same conclusion with respect to Mr. Hunt at the summary judgment stage of the proceeding.  So, Mr. Hunt’s personal liability on this count must wait for a trial even though Mr. Huckaby is liable for fraudulent transfer.  On the final count of conversion, the Court found that Mr. Huckaby’s actions constituted conversion as a matter of law and also that Mr. Hunt was liable for conversion since no matter what his intent or knowledge of the transfers was, his action resulted in a conversion of the IRS interest in the settlement funds.

What do findings like this cause a state bar or the IRS Office of Professional Responsibility to do? Even though Mr. Huckaby did not get charged with any criminal action, he may be exposed on professional responsibility grounds.  He may end up not only owing the IRS a sizable amount but also having to answer questions from the bar overseers.

 

New Format of Notice of Intent to Levy Fails to Provide Sufficient Notice

Today we welcome back guest blogger E. Martin Davidoff. Last month Marty’s post addressed the offer in compromise Form 656.  Today, he examines the notice of intent to levy form.  The way the IRS writes its forms can have a significant impact on the outcome achieved.  I wrote last fall about changes to the letters in the collection notice stream where the letters sought to bring in revenue.  Early in the life of the blog I wrote about the disconnect between the form used for the collection information statement for offers in compromise (Form 433-A(OIC)) and the Fresh Start provisions that had been adopted about 15 months earlier.  The quality of a form can make a huge different in the outcome of the matter for which the form, or form letter, is created. 

 A well written dunning notice can bring in a lot more money than a poorly written one.  Shortly after RRA 98 I drafted the first notice of intent to levy that sought to combine in one letter the statutory requirements of 6331, the basis for the traditional notice of intent to levy prior to that time, and the new requirements of the 6330 brought about by the advent of collection due process.  I remember the IRS executive overseeing the project impress upon me the importance of the way the letter was written because of its revenue impact.  The letter can also impact how many people exercise their CDP rights.  Marty questions whether the notice of intent to levy letter provides enough notice to those who may want to pursue their CDP rights.  Keith 

Section 6330 provides that “No levy may be made…unless the Secretary has notified such person in writing of their right to a hearing under this section before such levy is made.” 

            Until recently, such notice was usually accomplished by sending Letter 1058.  On LT 1058, one’s right to a hearing and the urgency of the notice was made very clear.  The first two lines of the notice read, in all caps and larger font:

FINAL NOTICE

NOTICE OF INTENT TO LEVY AND NOTICE OF YOUR RIGHT TO A HEARING

PLEASE RESPOND IMMEDIATELY

Lately, however, the IRS has been moving towards LT11 Sample.  The change is shocking.  Although the notice makes it clear that there is an intent to levy along the following lines:

Notice of intent to levy

Intent to seize your property or rights to property

Amount due immediately:  $XX,XXX.XX

the right to a hearing is not disclosed until the middle of the second page, where in a much smaller font, the IRS states:

Right to request a Collection Due Process hearing

A paragraph explaining the process follows in the normal small font.

The question should come into play is the revised notice, the LT-11 sufficient notice under the Internal Revenue Code?  I suspect it is as many required notices are often buried in publications addressing a myriad of rights.  However, the change in the design of the notice appears clear to me that the IRS is intentionally downplaying Taxpayer’s right to a hearing.  And, I, even as a seasoned tax professional did not at first realize that the LT-11 was the new Letter 1058 until pointed out by my para-legal who is paid to review all the notices with a fine-toothed comb.

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It is clear that the IRS now views the form LT11 as a substitute for the Letter 1058 as both are listed as essentially the same notice on the FAQ section of the IRS website:  https://www.irs.gov/Individuals/LT-11-(Letter-1058)-Frequently-Asked-Questions-(FAQs) .  Interestingly, the FAQs for the LT11 (Letter 1058) does not mention at all the right to a Collection Due Process (“CDP”) hearing.  It merely states “you have the right to appeal” and provides no specific timeline for such appeal.  There is also a separate write-up on Understanding your LT11 Notice: https://www.irs.gov/Individuals/Understanding-your-LT11-Notice which does clearly mention that one may wish to appeal the proposed levy action.

Section 6330 provides what the notice must contain and how it is to be delivered.  However, it does not state the manner in which the information must be displayed within the notice.  And, although the notice is technically legal, I believe it is immoral.  It also appears to violate four of the recently adopted Taxpayer Bill of Rights, at least in spirit.

The Right to be Informed provides that taxpayers “are entitled to clear explanations of the law and IRS procedures in all tax forms, instructions, publications, notices and correspondence”.  In my mind, burying one’s right to a hearing on the 2nd page of a notice is not “clear”.

The Right to Quality Service provides that taxpayers should “receive clear and understandable communications from the IRS”.  I submit that the new design of form LT11 is not clear as to what a taxpayer must do to protect his or her rights.  The second page of the LT11 may never be read as the Taxpayer is likely to panic from the threats made on the first page.

Similar analyses can be made to The Right to Challenge the IRS’s Position and Be Heard and the Right to Appeal an IRS Decision in an Independent Forum.

The Letter 1058 has changed over the years.  For example, the 2002 version had a section entitled WHAT YOU SHOULD DO.   That section of the 2002 Letter 1058 made it clear that there were multiple responses that could be made within 30 days to prevent a levy, and the Appeal through the Collection Due Process hearing was one of those possible responses.  The Letter 1058 of 2002 did this by stating that the levy may happen “Unless you take one of these actions:” and then went on to list alternatives including the CDP process.   The Letter 1058 that I observed being used in 2015 has a revision date of October, 2008.  And even though it does clearly list the option of the CDP hearing on page 1, it does not make it clear on page 1 of the notice that such request alone, without either paying or entering into a payment arrangement (the other alternatives), will prevent the levy action.   However, such is made clear on page 2 under the section What We Are Going To Do.  The LT-11 sets forth one’s right to the CDP hearing on page 2 of the notice and has no information whatsoever regarding appeal rights on page 1.

It should be noted that the 2002 version of the Letter 1058 included the following language:

“Even if you request a hearing, please note that we can still file a Notice of Federal Tax Lien at any time to protect the government’s interest.” 

This had been a very helpful disclosure that is not currently contained in either the 2008 version of the Letter 1058 being used currently nor is such disclosure being made in the LT-11.   Many taxpayers have the misconception that their filing of an appeal to a Notice of Intent to Levy enables them to have a hearing prior to a Lien Filing.   That is why the 2002 language of the Letter 1058 on liens was so helpful and should be reinstated.

Call to Action:

When a form misses the mark it provides an opportunity to call on the IRS to eliminate or revise it.  Perhaps the form LT-11 provides such an opportunity.  The appropriate notice of one’s right to a hearing as prominently displayed as the Letter 1058 is an important notice that implicates taxpayer rights and the responsibility of the IRS to inform them of those rights.

 

Public Policy Cases Accepted by the Taxpayer Advocate Service

The duties of the National Taxpayer Advocate (NTA) are set out in IRC 7803(c). Section 7803 describes the duties not only of the NTA but also of the Commissioner, the Chief Counsel and the Treasury Inspector General for Tax Administration.  The code section merits reading because of the roadmap it provides to various parts of the IRS organization.  Included among the duties assigned to the NTA is the duty to “develop guidance to be distributed to all Internal Revenue Service officers and employees outlining the criteria for referral of taxpayer inquiries to local offices of taxpayer advocates…”

In this post I will address the newly listed policy criteria for getting a case into the local Taxpayer Advocate Service (TAS) office. Before doing that, however, a look at the traditional criteria sets the scene.  A detailed analysis of the factors for acceptance into TAS and the role of case advocates can be found in the National Taxpayer Advocate’s 2015 annual report.

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The two most common criteria for TAS referral are hardship and repeated failure of the IRS to respond to a taxpayer inquiry. These two criteria, however, only serve as general principles.  The actual criteria exist in the Internal Revenue Manual (IRM) 13.1.7.2.  TAS breaks the criteria into four categories and describes them in slightly different terms from me.  The first category involves cases creating an economic burden (hardship) and allows local TAS offices to accept cases meeting one of four listed economic burden criteria: (1) the taxpayer is experiencing economic harm or is about to suffer economic harm; (2) the taxpayer is facing an immediate threat of adverse action; (3) the taxpayer will incur significant costs if relief is not granted; and (4) the taxpayer will suffer irreparable injury or long-term adverse impact if relief is not granted.

As with any of the TAS criteria discussed here, a taxpayer who can demonstrate to TAS that their case fits into one of the enumerated criteria will have their case accepted by the local taxpayer advocate office and assigned to a case advocate. Having their case assigned to a single advocate can create a significant benefit for many taxpayers whose cases would otherwise end up with a rotating pool of IRS employees at the Automated Call Sites or Correspondence Exam.  Except for the fact that the case advocates may have too many cases to effectively handle them all, the single point of contact with a person inside the IRS working to resolve your problem offers a great advantage in trying to work through the maze of the federal tax system.

In addition to the four criteria under the economic burden label, TAS provides three criteria for accepting cases under system burden. In general, these cases involve a failure in the IRS system to operate as intended.  The three criteria under this label are: (1) the taxpayer has experienced a delay of more than 30 days to resolve a tax account problem; (2) the taxpayer has not received a response or resolution to the problem or inquiry by the date promised; and (3) a system or procedure has either failed to operate as intended or failed to resolve the taxpayer’s problem or dispute within the IRS. Of course, as the IRS becomes more dysfunctional due to the funding cuts, more cases meet the system burden criteria which means even more work for TAS which means it too has become somewhat dysfunctional because the case advocates there have too much work to do. The failure to properly staff the IRS creates a vicious cycle in this regard.

The eighth criteria for getting a case accepted by TAS goes under the name “best interest of the taxpayer” and seeks to ensure that taxpayers will receive equitable treatment and that their rights as taxpayers receive respect and protection. The IRM describes this criteria as one where the “manner in which the tax laws are being administered raises considerations of equity, or has impaired or will impair the taxpayer’s rights.”  Of course, this criterion fits like a glove with the new Taxpayer Bill of Rights and offers the prospect of TAS assistance where the taxpayer can demonstrate that some facet of TBOR has failed in application to their situation. This criterion makes it worthwhile to learn and apply TBOR to every case where you want to seek TAS assistance.

The final basis for getting a case accepted by TAS is public policy. The first eight criteria are essentially static but this last basis changes periodically based on problems that the NTA identifies. On November 2, 2015, the NTA issued TAS-13-1115-007 providing interim guidance on cases TAS will accept based on public policy. The guidance lists three circumstances: (1) organizations where IRS automatically revoked their tax-exempt status because the organization did not file an annual return or notice for three consecutive years; (2) cases involving any tax account-related issue referred to TAS from a Congressional office; and (3) cases involving an IRS levy on any Thrift Savings Plan (TSP) as part of the pilot program in IRS ACS units. I suspect soon the NTA will issue guidance including any case in which a private debt collection company seeks to collect from a taxpayer. She issued such guidance the last time private debt collectors were loosed on taxpayers. It will be interesting to see if private debt collectors are allowed to collect on debts arising from the Affordable Care Act that would otherwise rely essentially on notices and offset.

Of the public policy bases for TAS relief, I want to focus levies issued to TSP. TSP is the 401(k) type plan available to federal employees.  This issue only affects current or former federal employees because only these individuals will have such an account.  On December 7, 2015, Chief Counsel Notice 2016-001 issued and superseded Chief Counsel Notice 2013-007. These notices provide guidance concerning how the IRS will levy on TSP accounts.  Because of an interpretation of the enabling legislation, the IRS has taken the position that it can levy on these accounts to reach funds which the employee could not reach.  Ordinarily, a levy on a retirement account only reaches the amount of funds available to the owner of the retirement account at the time of the levy.  So, the interpretation with respect to TSP accounts represents a significant departure from the IRS ability to reach funds from any other type of retirement account and has gained the attention of the NTA.

On January 14, 2013, Congress amended 5 U.S.C. § 8437(e)(3) to provide that moneys due and payable from TSP were subject to a Federal tax levy under I.R.C. § 6331. The provision specifically provides that:

“Moneys  due or payable from the Thrift Savings Fund to any individual and, in the case of an individual who is an employee or Member (or former employee or Member), the balance in the account of the employee or Member (or former employee or Member) shall be subject to legal process for the enforcement of the individual’s legal obligations to provide child support or make alimony payments as provided in section 459 of the Social Security Act (42 U.S.C. 659), the enforcement of an order for restitution under section 3663A of title 18, forfeiture under section 8432(g)(5) of this title, or an obligation of the Executive Director to make a payment to another person under section 8467 of this title, and shall be subject to a Federal tax levy under section 6331 of the Internal Revenue Code of 1986. For the purposes of this paragraph, an amount contributed for the benefit of an individual under section 8432(c)(1) (including any earnings attributable thereto) shall not be considered part of the balance in such individual’s account unless such amount is nonforfeitable, as determined under applicable provisions of section 8432(g).”

On September 10, 2014, the Federal Retirement Thrift Investment Board published final regulations to implement the statute detailing the procedures for complying with federal tax levies on TSP accounts. The regulations allow the IRS to reach the TSP and may go beyond the grant in the statute.  In her 2015 annual report the National Taxpayer Advocate identifies levies on retirement accounts as #11 in her most serious problems.  The write up regarding this problem does not specifically discuss special problems with the levy on the Thrift Savings Plan but provides useful information for anyone interested in the general issue of the ability of the IRS to levy on retirement accounts and the policies that the IRS applies in making decisions to levy on these accounts. Watch for comments from the NTA on this issue because its location on this list signals that it will receive criticism from the NTA in her annual reports and elsewhere due to the perceived unfairness to federal employees.

If you have an issue that raises policy issues for a group of taxpayers, you can bring this to the attention of the NTA in hopes that it will make the policy list and open the doors to TAS assistance.  TAS assistance does not mean that someone whose TSP is levied will get their money back but it does mean that the IRS actions on the account will receive significant scrutiny from the TAS caseworkers who may see procedural irregularities practitioners might find difficult to spot.

 

 

 

 

 

 

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