Filing Form 1040 did not Extend Statute for Filing Form 945

Last year I wrote about the case of Quezada v. IRS. In the aspect of the case decided last summer, the bankruptcy court refused to grant summary judgment to the IRS regarding the statute of limitations for the taxpayer to file Form 945. The taxpayer argued that his Form 1040 provided the IRS with the information necessary and started the statute of limitations. The taxpayer needed the Form 1040 to serve as a surrogate Form 945 in order to discharge the liabilities it should have reported on Form 945. Now, the court has ruled on the issue and found for the IRS in Adv. Proc. No. 16-01101 (Bankr. W.D. Tex. 2018). The court provides a thoughtful analysis for its decision.

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Mr. Quezada operates a masonry company that builds projects for general contractors. He hires subcontractors to perform some of the work and provided to the subcontractors Forms 1099. The problem occurred because the Forms 1099 contained missing or incorrect TINs of the subcontractors. A missing or inaccurate TIN prevents the IRS from effectively using the Form 1099 to check on the reporting by the subcontractor. So, the IRS sent Mr. Quezada a notice in September 2006 that the 1099s had missing or inaccurate information and that if he did not correct the situation he had to start backup withholding. The IRS sent the same notice in 2007 and twice in 2009.

In 2008 the IRS began examining Mr. Quezada regarding his backup withholding liability for the subcontractors. This ultimately led to the recommendation of an assessment of $600,000 plus penalties of over $300,000. He eventually filed bankruptcy in which the IRS filed a claim for over $1.2 million. He brought an action to determine dischargeability arguing that the IRS waited too long to make its assessment. Mr. Quezada argued that his timely filed Forms 1040 and 1099 started the running of the statute of limitations on assessment while the IRS countered that he had an obligation to file Form 945 and his failure to file that form meant the statute never began running.

When a business pays an independent contractor, it must deduct backup withholding if the independent contractor fails to provide its TIN or if the IRS notifies the business that the TIN is incorrect. In addition to the backup withholding, the business must also file Form 945. Mr. Quezada argued that he had all of the TINs in a notebook but did not provide a record to the court and he had previously signed a sworn statement that he “did not obtain Social Security numbers (SSN) OR Taxpayer identification numbers (TIN) from all of [his] subcontractors.” The failure of proof in the trial coupled with the admission against interest caused the court to find that he had an obligation to file Forms 945.

Having found he had a duty to file the Forms 945, the court then looked at whether his failure to do so could somehow be excused. In Commissioner v. Lane-Wells, 321 U.S. 219 (1944) the Supreme Court analyzed whether a taxpayer who had filed a Form 1120 satisfied the requirement for filing a Form 1120H for holding companies. It found that Lane-Wells did not meet its statutory requirement for filing a return with respect to the holding company liability. The bankruptcy court found that Mr. Quezada, like Lane-Wells, had a separate liability requiring him to file two returns and preventing him from relying on the Form 1040 to satisfy his backup withholding liability.

The court also addressed his argument that he provided sufficient data to meet the Beard test. Beard v. Commissioner, 82 T.C. 766 (1984), aff’d 793 F.2d 139 (6th Cir. 1986) establishes the well-recognized test for what constitutes a return. Even though the bankruptcy court found that he had a responsibility to file the Form 945 return, if he could convince the court that his submissions on the Form 1040 essentially provided the information needed for the Form 945 he could meet the filing requirement. Beard has four tests: 1) sufficient data to calculate the tax liability; 2) document must purport to be a return; 3) honest and reasonable attempt to satisfy the tax law requirements; and 4) execution of the return under penalties of perjury.

The court found that he failed the second and fourth tests. He argued that missing TINs are “not relevant to his tax liability.” The court rejected this argument pointing out that the IRS needs to have the TINs in order for the Form 1099 to have meaning. The data provided did not meet the needs of the IRS and could not be considered sufficient. With respect to the third test the court explained that the IRS told him on several occasions of his failure and need to correct. His failure to correct over an extended period of time negates any argument that he acted in good faith and reasonably attempted to satisfy his tax law requirements.

This type of case provides a horrible result for a taxpayer such as Mr. Quezada if the subcontractors actually paid their taxes. Earlier this year we blogged about a case involving the misclassification of workers. We also posted a response from the National Taxpayer Advocate to our blog post. The situation faced by Mr. Quezada has similarities with the misclassification cases. The goal of backup withholding is ensuring that the third parties report their income to the IRS. If Mr. Quezada could show that his independent contractors actually reported their taxes, there should be some way to relieve him of at least a part of his liability. By failing to follow the rules, he causes the IRS to expend a fair amount of effort and for that he should be penalized. At the same time it seems he should have a path to reduce this crushing liability if he can prove that his independent contractors reported and paid the proper amount of tax. Maybe they did not pay and maybe, even if they did, he could not prove it but it seems a shame he does not have a chance to show that his failure did not result in loss to the IRS.

 

NTA Highlights Errors in IRS Calculation of Collection Statute of Limitations

We blogged previously on the problem of properly computing the collection statute of limitations here, here, here, here and here. Calculating the statute of limitations on collection has become quite difficult. The National Taxpayer Advocate (NTA) has just blogged on the subject making it clear not only that relying on the IRS calculation of the collection statute of limitations (CSED) might be unwise but highlighting again the difficulties in this area.

The NTA identifies five situations in which a computer glitch at the IRS causes the IRS to improperly calculate the CSED. Not surprisingly, the problems center on cases in which the taxpayer has entered an installment agreement (IA). When IAs start, end, restart, etc. can create problems in determining which can translate into problems in calculating the impact of an installment agreement on the collection statute of limitations.

The NTA identifies five situations with problems:

  • Multiple pending IAs with only one corresponding rejected IA determination;
  • One pending IA and one approved IA where 52 or more weeks have passed;
  • Multiple pending IAs with one approved IA, where 26 or more weeks have passed;
  • On pending IA with one rejected IA, at least 52 weeks later; and
  • One pending IA, with no other action on the IA request for at least 52 weeks.

The IRS agreed to review the cases in situation 3) above. The NTA cites to an unpublished report in which the IRS finds that 83% of the CSEDs on its system incorrectly identified the last date to collect. Then the NTA says that she believes the number of wrong CSEDs in the group is higher than stated in the unpublished report. By this point you should have a high level of discomfort with what the IRS may tell you about the CSED.

The NTA seeks to have the IRS audit all five of the identified areas of problem and to notify all impacted taxpayers. These taxpayers may have had money collection from them after the expiration of the statute of limitations. Most of the remainder of the post explains the remedies available to those who have wrongly overpaid their taxes. While understanding the remedies available certainly carries importance, my main take away from the post concerns the extremely high error rate in the group of identified cases and how that reinforces my general concern about the ability of the IRS to correctly calculate the CSED.

Paresky– A Mirror Image of Pfizer

Today we welcome back Bob Probasco. Bob directs the Low-Income Taxpayer Clinic at Texas A&M University School of Law in Fort Worth. In this post Bob discusses the Paresky case in the Court of Federal Claims and follows up on issues he discussed in his post last month on the Pfizer case and the difficult issues arising from suits for overpayment interest. For good measure this terrific post sweeps in Bernie Madoff, equitable tolling and the possibility of some refund suits with no statutes of limitation.  Les

 I wrote a blog post recently on a jurisdictional issue in the Pfizer case, concerning claims for overpayment interest.  The district court for the Southern District of New York denied the government’s first motion to dismiss (based on lack of jurisdiction) but granted its second motion to dismiss (based on expiration of the statute of limitations).  Pfizer appealed and we’re still waiting to hear from the Second Circuit.

In the meantime, the Court of Federal Claims issued its decision on August 15th in the case Paresky v. United States, docket no. 17-1725, another suit for overpayment interest that involved essentially a mirror image of the jurisdiction issue in Pfizer. It also had some other interesting procedural twists and turns.

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Background

Here’s a recap of what the CFC called “[t]wo different, divergent, and conflicting jurisdictional paths . . . proffered by the parties.”  The first jurisdictional path is that set forth in 28 U.S.C. § 1346(a)(1)– district courts and the CFC have concurrent jurisdiction over

Any civil action against the United States for the recovery of any internal-revenue tax alleged to have been erroneously or illegally assessed or collected, or any penalty claimed to have been collected without authority or any sum alleged to have been excessive or in any manner wrongfully collected under the internal-revenue laws.

Let’s call this “tax refund jurisdiction,” because that is its primary use – although Pfizer argued about whether that is the only use.

The second jurisdictional path is “Tucker Act jurisdiction” – 28 U.S.C. § 1346(a)(2)for district courts and 28 U.S.C. § 1491(a)(1) for the CFC – which authorizes suits for

any claim against the United States . . . founded either upon the Constitution, or any Act of Congress or any regulation of an executive department, or upon any express or implied contract with the United States, or for liquidated or unliquidated damages in cases not sounding in tort.

What about statutes of limitation?  There is a general six-year statute of limitations for actions in federal courts – 28 U.S.C. § 2401 or 2501, for district courts and the CFC respectively. The Code also sets forth a statute of limitations.  Specifically, Section 7422 of the Code requires a refund claim be filed first for any suit

for the recovery of any internal revenue tax alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessive or in any manner wrongfully collected.

And Section 6532 precludes a suit under Section 7422 begun more than 2 years after the IRS mails a notice of disallowance of the claim.

One might infer a link between the jurisdictional grant itself, for “tax refunds” or under the Tucker Act, and the corresponding statute of limitations.  That is, suits brought under the “tax refund” jurisdictional grant would be subject, based on similar language, to Code sections 7422 and 6532. Suits brought under the Tucker Act, however, would be subject to the general six-year statute of limitations for the district courts and the CFC.  However, the plaintiffs in both of these cases argued for a disconnect – either “tax refund” jurisdiction + the general six-year statute of limitations, or Tucker Act jurisdiction + the Code’s refund suit statute of limitations.  And there is actually a footnote in E.W. Scripps Co. v. United States, 420 F.3d 589 (6th Cir. 2005) stating that the similarity of the language in Section 7422 and 28 U.S.C. § 1346(a)(1) doesn’t necessarily mean they are interpreted the same way.

 (Some cases have applied both statutes of limitations to tax refund suits, so the statute of limitations doesn’t remain open indefinitely when the IRS doesn’t issue a notice of disallowance of the claim.  See, e.g., Wagenet v. United States, 104 A.F.T.R.2d (RIA) 2009-7804 (C.D. Cal.). The Court of Claims, on the other hand, held that the six-year statute of limitations doesn’t apply to tax refund suits and allowed a refund suit filed 2 years after the notice of disallowance, which wasn’t issued until 28 years after the original refund claim.  Detroit Trust v. United States, 131 Ct. Cl. 223 (1955).  The IRS agrees with the latter position.  Chief Counsel Notice 2012-012.  But we’re wandering far afield from the issues in Pfizer and Paresky.)

Pfizer– recap

Pfizer brought its suit in district court under tax refund jurisdiction.  Its issue revolved around whether a taxpayer is entitled to overpayment interest when: (a) the IRS issued a refund within 45 days of the claim (when overpayment interest is not required under the exception in Section 6611(e)), (b) the check was not received, and (c) a replacement check was issued more than 45 days after the refund claim.  Pfizer wanted to rely on a favorable Second Circuit precedent on this issue, so it wanted to file in the SDNY rather than the CFC, but Tucker Act jurisdiction for district courts is limited to claims for $10,000 or less.  Thus, Pfizer filed its suit asserting tax refund jurisdiction.

Because Pfizer filed its suit late under the Section 6532 statute of limitations, it argued that its “tax refund suit” was subject instead to the general six-year statute of limitations.  The SDNY agreed that suits for overpayment interest qualified for tax refund jurisdiction, following Scripps.  So the taxpayer won on the government’s first motion to dismiss. But the court concluded tax refund jurisdiction carries with it the Section 6532 statute of limitations.  So the taxpayer lost on the government’s second motion to dismiss.  On appeal, Pfizer continues to argue for tax refund jurisdiction + Tucker Act statute of limitations.

Enter the Pareskys

The Pareskys had a different problem.  They filed their suit in the CFC as a Tucker Act claim.  But in their case, the two-year statute of limitations in Section 6532 was still open although the six-year statute of limitations for Tucker Act claims was not.  Two years is less than six years, but the two different limitation periods began running at different times.  So the Pareskys argued that a Tucker Act claim was nevertheless subject to the statute of limitations for tax refund suits.  Again, they argued for one jurisdictional grant coupled with a statute of limitations apparently applicable to a different jurisdictional grant. As with Pfizer, but in reverse.

The Pareskys’ problems traced back to investments with Bernie Madoff.  They reported substantial income for 2005 through 2007 that turned out to be fictitious.  On their tax return for 2008, they claimed a net operating loss from the Ponzi scheme. Revenue Procedure 2009-20 provides an optional safe harbor method of treating losses from investments in fraudulent schemes. That method precludes double-dipping: taxpayers claim the entire loss in the year the fraud was discovered but cannot file amended returns to exclude the fictitious income (never received) that was reported in taxable years before the discovery year.

The Pareskys did not follow the optional Revenue Procedure method.  Instead, in October 2009, they filed amended returns on Forms 1040X for years 2005 – 2007, to exclude the fictitious income reported in those years. The claimed a loss on their 2008 tax return, when they discovered the fraud.  In December 2009, they filed Form 1045s, claiming tentative carryback refunds under Section 6411for years 2003 – 2007, by carrying back the net operating loss from 2008. But the net operating loss was reduced by the amount of the fictitious income for 2005 – 2007, so there was still no double-dipping.  The overpayment interest claim involves solely the tentative carryback refunds, not the refunds associated with the amended returns on Forms 1040X.

The refunds claimed on Forms 1045 for tentative carrybacks, totaling almost $10 million, were issued in April and May of 2010, just a few months after the Pareskys filed the Forms 1045 in December 2009.  The government paid no interest on those refunds, even though it issued the refunds more than 45 days after it received the Forms 1045, because it argued the applications were not in processible form when originally submitted.  The Pareskys, of course, disagreed.

The IRS examination of the Pareskys’ tax liabilities for 2003 through 2008, trigged by the amended returns, also included the refunds sought on the Forms 1045 as well as the Pareskys’ claim for overpayment interest on the Form 1045 refunds.  The examination continued until October 2011, during which time the parties agreed to an extension of the limitations period. In October 2011, the IRS began preparing a report to the Joint Committee on Taxation (JCT), required under Section 6405 for large refunds.  (Section 6405(a) prohibits the IRS from issuing such large refunds until 30 days after the IRS submits the report to JCT, but that restriction does not apply to refunds made under Section 6411.  Section 6411 provides for only a “limited examination” of the tentative carryback applications before issuing the refund.)  The IRS submitted the report to JCT on January 25, 2013, stating that the refunds sought on the Forms 1045 had been approved.

The Pareskys filed a protest with the IRS on June 6, 2014, concerning the resolution of the examination. Appeals determined, on September 4, 2014, that no overpayment interest was due on the Form 1045 refunds because the refunds were issued within 45 days after the applications were submitted in processible form.  That determination letter instructed the Pareskys to file a formal claim on Form 843 by September 12, 2014, which they did.  The claim was denied on September 24, 2015, and the Pareskys filed their complaint in the CFC on September 15, 2017.

Was it timely? 

The government argued that, under the Tucker Act, the claim accrued in May 2010 and the plaintiffs did not file suit within the six-year statute of limitations.  The plaintiffs asserted three alternative arguments.  First, they argued that the tax refund statute of limitations, rather than the six-year period applicable to Tucker Act claims, applied and began running when their claim was denied on September 24, 2015. Second, they argued that if the six-year limitations period applied, their claim didn’t accrue until the report to JCT on January 25, 2013.  Finally, they argued that under the “accrual suspension rule” the claim doesn’t accrue until the plaintiff is aware of the claim.  The court rejected all three arguments.

The Sixth Circuit in Scripps and the SDNY in the Pfizercase agreed that taxpayers could bring a suit for overpayment interest under the “tax refund jurisdiction” provision.  But the CFC didn’t buy that argument.  There were too many precedents in that court, the Federal Circuit, or the Court of Claims to the contrary.  The Federal Circuit might decide to overrule those, but the CFC would not.

The court also rejected the argument that the suit was filed within the six-year limitations period. The claim accrued when the underlying tax refunds were “scheduled.”  There was an evidentiary dispute regarding when the refunds had been scheduled; the Pareskys therefore argued that the date of the report to JCT was the earliest moment when it was certainthat the refunds had been allowed.  But the government pointed out that the report to JCT has nothing to do with the date a tentative carryback refund is allowed, and the court found the government’s evidence sufficient to establish that the refunds were scheduled in early 2010.

The accrual suspension rule didn’t save the Pareskys either.  The IRS may not have explicitly disclosed to the taxpayers the date that the refunds were scheduled, but they received the refunds and knew they did not include overpayment interest.  Those were the relevant facts that established their claim and the IRS did not conceal those.

Equitable tolling or estoppel?

In both Pfizer and Paresky, the IRS sent the taxpayers a letter stating a different statute of limitations than the court determined applied to their respective situations.  Appeals sent Pfizer a letter stating that the six-year statute of limitations applied, presumably because the claim involved overpayment interest, without addressing the impact of which jurisdictional grant Pfizer would rely on.  The Pareskys received the determination by Appeals concerning their protest and also a denial of their subsequent refund claim, both of which stated the Section 6532 statute of limitations, without addressing potential different treatment for claims involving overpayment interest.

That misinformation certainly seems to provide a potential factual predicate for equitable tolling or estoppel of filing deadlines, but many courts have been resistant to that.  Carl Smith and Keith Fogg are continuing their quest to overcome that resistance including by filing an amicus brief in Pfizer, which I am shamelessly paraphrasing for the following summary.

In brief, statutory deadlines that are “jurisdictional” cannot be waived or extended for equitable reasons.  Unfortunately, as the Supreme Court observed in 2004, courts have been careless in applying that label.  “Clarity would be facilitated if courts and litigants used the label ‘jurisdictional’ not for claim-processing rules, but only for prescriptions delineating the classes of cases (subject-matter jurisdiction) and the persons (personal jurisdiction) falling within a court’s adjudicatory authority.”  Kontrick v. Ryan, 540 U.S. 443, 455 (2004).  The Supreme Court has also held that time periods in which to act are almost never jurisdictional, unless Congress makes a “clear statement” to that effect.  In particular, if the filing deadline and the jurisdictional grant are not part of the same provision, that likely indicates that the time bar is non-jurisdictional. United States v. Wong, 135 S. Ct. 1625 (2015).

Carl and Keith are arguing in Pfizer that Section 6532’s statute of limitations is not jurisdictional and is subject to estoppel under the standard set forth in recent Supreme Court decisions.  The Supreme Court has never ruled on whether the Section 6532(a) deadline is jurisdictional or subject to estoppel or equitable tolling.  However, before the recent Supreme Court decisions, the Second Circuit applied estoppel to prevent the government from arguing that the filing deadline barred the court from hearing the case.  Miller v. United States, 500 F.2d 1007 (2nd Cir. 1974).  Although some other circuits had disagreed, the Second Circuit could rely on that precedent to estop the government in the Pfizer case.

Theoretically, the same result should apply to the six-year filing deadline in 28 U.S.C. § 2501. Alas, this argument would not work for the taxpayers in the Pareskycase.  The Supreme Court has not ruled on Section 6532’s deadline but it has ruled on 28 U.S.C. § 2501, and concluded that it was jurisdictional and therefore not subject to equitable tolling or estoppel. John R. Sand & Gravel Co. v. United States, 552 U.S. 130 (2008). However, that was more a matter of stare decisisbecause the Court had called the deadline jurisdictional in a number of opinions over decades.  In the Wongcase, the Court held that the FTCA filing deadline in 28 U.S.C. 2401(b) was non-jurisdictional and subject to equitable tolling, while observing that the John R. Sand & Gravel Co.did not follow the Court’s current thinking because of those precedents.

So – hopefully Carl and Keith will persuade the Second Circuit in Pfizer, as well as other courts in other cases.  The National Taxpayer Advocate also proposed, in her most recent annual report to Congress, a legislative fix by amending the Code to provide that judicial filing deadlines are non-jurisdictional.  We wish them well!

Where do we go from here?

The Court of Federal Claims agreed to transfer the case, at the plaintiffs’ request and over the government’s objections, so the Pareskys are headed to the Southern District of Florida. They hope to persuade the SDF that a suit for overpayment interest fits within “tax refund jurisdiction” and the suit therefore would be timely under the tax refund statute of limitations in Section 6532.  There is a split between the Federal Circuit and the Sixth Circuit – add the Second Circuit if it affirms the District Court in the Pfizer case.  Neither party cited precedents from the Eleventh Circuit, so it’s at least possible that the SDF will follow Scrippsand find it has jurisdiction.

Meanwhile, Pfizer is still waiting for a ruling by the Second Circuit.  Paresky offers arguments for both sides in PfizerParesky held that the six-year statute of limitations applies (good for Pfizer) but that tax refund jurisdiction is not available (bad for Pfizer).  Pfizer has requested, if the Second Circuit affirms the SDNY, that it also transfer the case to the CFC.  It seems that court would clearly have jurisdiction under the Tucker Act, and Pfizer met the six-year statute of limitations, so the CFC apparently would hear the merits of the case.  The favorable Doolin precedent in the Second Circuit wouldn’t carry as much weight in the CFC but Pfizer might still prevail on the merits.

The government stated in its brief that it may or may not oppose transfer, depending on whythe Second Circuit (hypothetically) rules against Pfizer.  If the Second Circuit rules that “tax refund jurisdiction” does not apply to suits for overpayment interest, the government would not oppose transfer.  But if the Second Circuit agrees that “tax refund jurisdiction” applies to the case and rules against Pfizer only on the basis that Pfizer did not file its suit within two years of the notice of disallowance, the government asked that transfer be denied.

When Does an Offer in Compromise Extend the Statute of Limitations on Collection?

United States v. Kenny, No. 1:16-cv-02149 (N.D. Ohio June 6, 2018) involves a spectacularly non-compliant taxpayer against whom the IRS seeks both the reduction of assessments to judgment and an injunction. The court grants both. Mr. Kenny’s defense relied upon the statute of limitation on collection and the failure of his three OICs to extend it. The issue arises regularly because of the handling of OICs by the offer groups in Brookhaven and Memphis.

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Mr. Kenny failed to pay taxes voluntarily for about 25 years. He receives income as an independent contractor or a business owner and not as a wage earner. The court described in some detail his failure to voluntarily comply with his tax obligations and his expenditures which included almost $5,000 in monthly rent, almost $2,000 each month in meals and gas, extensive travel, payment of his son’s student loans and his daughter’s tuition. As with almost any case of this type, the described behavior would appear to have the facts needed in order to pursue prosecution under IRC 7201 for evasion of payment; however, for reasons not explained in the opinion, the government seeks other remedies against Mr. Kenny.

In addition to obtaining a judgment against him for the outstanding balance of the taxes, the IRS also sought an injunction to “to comply with his on-going tax obligations.” In addition to the almost $1.5 million in income taxes he also owes about $10,000 in trust fund recovery penalty. I have seen injunction cases to keep taxpayers from pyramiding trust fund taxes, but his case appears to be an injunction directed at complying with the income tax laws.

The court starts out stating that it generally disfavors injunctions “that do no more than require on-going compliance with the law.” The court goes on, however, to state that the unique facts here support the use of injunction as a tool to promote compliance. It cites to five factors developed by the 6th Circuit for determining whether to issue an injunction:

  • The gravity of the offence
  • Extent of participation
  • Scienter
  • Recurrent nature of offense
  • Likelihood that his business activities will involve him in some offense again

The court spends a long paragraph explaining how Mr. Kenny fits into all of the categories set out by its circuit. The paragraph ends with the notation that the IRS withdrew the request for the appointment of a receiver to handle the business affairs of Mr. Kenny. The appointment of a receiver is a remedy even more extraordinary than an injunction.

Statute of Limitations

Mr. Kenny’s defense to the effort to obtain a judgment against him focuses on the statute of limitations and the impact on the statute on the three offer in compromise (OIC) requests that he filed with the IRS. Essentially, he argues that the IRS rejected the OICs as non-processable returning them without consideration. Further, he argues that because each of the offers were returned as non-processable his submission of the OICs would not extend the statute of limitations on collection and that the IRS needs the extra time it argues results from his submission of the OICs in order for the suit against him reducing the liability to judgment to be considered timely. The applicable IRM provision (IRM 5.8.7.2) provides “An offer can be returned as either a “not processable return” or a “processable return”. It is important to note the distinction because when there is a not processable return the collection statute is not suspended…”  The court does not provide the detail needed to reveal exactly what happened when Mr. Kenny submitted his OIC requests; however, it appears that the IRS rejected the OICs at some time after the processability point thereby triggering the statute of limitations extension needed by the IRS.

The issue of when the IRS rejects an OIC has significance not always noted when the OIC gets returned to the taxpayer. Just as a taxpayer should not submit an OIC without thinking about the statute of limitations implications, a taxpayer should carefully note the basis for the IRS returning an OIC without acceptance. Many things can cause the IRS to return an OIC as non-processable and a detailed description of the circumstances that cause the IRS to determine an offer is non-processable as well as the process for making the determination can be found in IRM 5.8.2. The Centralized OIC units make the determination as stated in IRM 5.8.7.2.1 which provides:

Not Processable Returns

  1. An offer is determined to be not processable if any of the “Not Processable” criteria listed in IRM 5.8.2.3.1, Determining Processability, is present. This decision is the sole responsibility of the Centralized OIC (COIC) sites located in the Brookhaven and Memphis Campus.

About a dozen years ago several taxpayers litigated the processability issue with respect to the bankruptcy criteria. These taxpayers argued that making bankruptcy a processability criteria disadvantaged them in an inappropriate manner. After a couple of victories at the bankruptcy level (See In re Holmes, 298 B.R. 477 (Bankr. M.D. Ga. 2003); In re Chapman, 1999 Bankr. LEXIS 1091 (Bankr. S.D. W. Va. 1999)), the tide turned on this issue and the IRS prevailed (See In re Shope, 347 B.R. 270 (Bankr. S.D. Ohio 2006); In re Uzialko, 339 B.R. 579 (Bankr. E.D. Pa. 2006). I mention the cases for those who might have interest in attacking the processability criteria to show that such an attack would prove difficult because of the discretion IRC 7122 gives to the IRS in making the OIC determination.

A sure sign that the IRS is returning an OIC as non-processable is that the IRS does not give a taxpayer appeal rights when it rejects an OIC. Those who regularly submit offers know that getting a call from the OIC unit relatively quickly after submitting an OIC where the person at the offer unit says “if I do not receive X within 10 days I am going to return your offer as non-processable” happens fairly regularly.

It appears from IRS activity on Mr. Kenny’s OIC submissions several months after the initial submission that the IRS did consider the OICs on their merits before rejecting them; however, the type of rejection may not always be clear. In a recent post complaining about the telephone number provided by the offer unit, I spoke about a processability rejection (an incorrect one) because the assessment occurred as a result of a restitution order and when it does the IRS has no ability to administratively compromise the liability. Unfortunately, the Kenny case offers little guidance on when the return of an OIC results from a non-processable submission verses an unacceptable one on the merits of the offer because Mr. Kenny did not provide much evidence. Despite the absence of clear guidance, the Kenny case serves as a reminder that submitting an offer suspends the statute of limitations on collection and submitting multiple offers can suspend it for quite some time if the submitted offers make it past the processability stage. For taxpayers seeking to defend collection suits on the basis of the statute of limitations keeping careful track of these submissions and the basis for denial of the OIC requests becomes important in deciding if a procedural defense to the suit is available.

 

 

 

 

 

 

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

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

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

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

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

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

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

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

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

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

Weiss: A Case for the Dogs?

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

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

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

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

Extended Statute of Limitations for Unreported Income Does not Apply to Gross Income for Failure to Report Foreign Financial Assets before Enactment of IRC 6038D

In a precedential opinion, the Tax Court in RAFIZADEH v. Commissioner, 150 T.C. No. 1 (2018) held that the petitioner’s failure to report income from foreign financial assets did not hold open the statute of limitations on assessment. Because the IRS took more than three years after the timely filing of his returns for the years at issue before it issued the notice of deficiency, the statute expired prior to the notice. The taxpayer won a complete victory. The case is narrow in its holding and the tax years to which it applies have now run, but the victory is certainly important for this taxpayer and perhaps for others whose foreign income was discovered through the use of summons after the ordinary statute of limitations had expired.

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Petitioner timely filed his 2006 through 2009 returns. It seems rare to state someone timely filed their returns in this blog even though timely filing is the norm for the vast majority of taxpayers. The timely filing of the returns proves important for petitioner here. On the timely filed returns petitioner did not report income earned on a foreign account that he owned. That unreported income forms the bases of the notice of deficiency that the IRS ultimately sent.

Over the past 15 or more years, the IRS has used John Doe summonses to obtain information about U.S. taxpayers with accounts overseas. It issued such a summons at some point and obtained information on November 16, 2010. The receipt of information from a John Doe summons is a starting point and not an ending point. Once the information is received, it can take the IRS quite some time to process that information and match it with specific taxpayers. In this case it took four years from the receipt of the John Doe information until the issuance of a notice of deficiency to petitioner on December 8, 2014, with respect to the tax years 2006-2009. In the notice the IRS asserted accuracy related penalties but did not assert the fraud penalty.

Had it asserted the fraud penalty, and had it succeeded in proving fraud in the failure to report the income from the foreign based assets, the statute of limitations would have remained open based on the fraud exception, which creates an unlimited time period within which the IRS can assess. Instead, the IRS argued that the statute was held open by the six year statute of limitations found in IRC 6501(e)(1)(A)(ii) which applies in situations in which the taxpayer omits “specified foreign financial assets” required to be reported by IRC 6038D.

The issuance of the John Doe summons suspended the running of the statute of limitations pursuant to 7609(e)(2)(A), but because of its resolution in 2010, that suspension was insufficient to keep the statute open until the issuance of the notice of deficiency. In order to keep the statute open until the notice of deficiency was issued, the IRS needed the special provision related to foreign assets which was not enacted until March 18, 2010. I assume from the lack of discussion that the amount of the omitted income was insufficient to trigger the six year statute of limitations based on a 25% omission of gross income. The liabilities in the notice, which range from $10,934 to $1,619, suggest that the amount of omitted income was not huge.

Section 6038D is effective for taxable years beginning after March 18, 2010 which was the date of its enactment. Section 6501(e)(1)(A)(ii) applies to returns filed after March 18, 2010, and also to “returns filed on or before …[March 18, 2010] if the period specified in section 6501 of the Internal Revenue Code of 1986 (determined without such regard to such amendments) for assessment of such taxes has not expired as of such date.”

Petitioner argues that the effective date of section 6038D precludes the application of the six year statute of limitations. Specifically, petitioner argues that the phrase in section 6501(e)(1)(A)(ii) which states “assets with respect to which information is required to be reported under section 6038D at the time the income was omitted” requires that the extension only apply to years after the effective date of 6038D. Since petitioner did not have a requirement under section 6038D to report these assets for the tax years 2006-2009, he could not have trigger the six year period under the complimentary statute.

The Tax Court agrees with the petitioner, stating “we must give effect to all of the words in the key phrase before us – ‘assets with respect to which information is required to be reported under section 6038D.’” The Court finds that even though the effective date of section 6038D was not imported by the cross-reference to section 6038D, the most natural reading of the phrase is that the six year statute only applies if a section 6038D reporting requirement exists.

The IRS also argued that the reporting requirement in section 6501(c)(8) shows that Congress did not link the statute extension in section 6501(e)(1)(A)(ii) to the failure to satisfy section 6038D, but the Tax Court does not buy this argument finding instead that the failure to report under section 6501(c)(8) has its own limitations period. The Court points out that it addressed a similar statute of limitations issue involving cross referencing in the case of Blak Invs. v. Commissioner, 133 T.C. 431 (2009). In that case, the issue was section 6707A and the limitation period in section 6501(c)(10). The Court finds the decision in Blak instructive. In section 6501(c)(10), Congress used the phrase “for any taxable year” but in section 6501(e)(1)(A)(ii) the language does not broaden to “any” taxable year. The statute in Blak also involved a preexisting obligation to report information whereas in this case petitioner had no preexisting duty to report the information now required by IRC 6038D.

The case is precedential because it decides a matter not previously addressed by the Court. The issue is unlikely to arise in the future now that we are seven years into the reporting requirements of section 6038D. The statutory analysis used to reach the conclusion in the case may be useful to others seeking to attack a statute of limitation extension. Congress has demonstrated a willingness in recent years to create an extended statute for new reporting requirements. To the extent you are faced with a similar situation, the RAFIZADEH case provides a possible path to victory.

 

 

Tolling the Statute of Limitations on Collection

I have written before about the ability of a Collection Due Process (CDP) request to toll the statute of limitations on collection and hold it open for the IRS to bring a suit to foreclose or to reduce the assessment to judgment. In the Holmes case, it was the request itself that held open the statute of limitations with some discussion of the failure of the IRS to timely act upon the request. The court there found that the request held open the statute of limitations even though the IRS did not act on the request within its ordinary time period.

In the case of United States v. Giaimo, No. 16-2479 (8th Cir. 4-17-2017), a similar issue arises, but here the concern is Tax Court petition she filed following the receipt of a CDP determination. The issue arises in a lien foreclosure case with the taxpayer arguing, similar to the taxpayer in Holmes, that the IRS did not bring the suit within the 10-year period of the collection statute of limitations. In order for the IRS to win, it had to show that Ms. Giaimo timely brought a CDP suit which tolled the statute of limitations on collection. She argued that she never intended to bring the suit and that the Tax Court petition was untimely filed. The 8th Circuit finds otherwise in an opinion that determines her CDP petition kept open the statute of limitations on collection.

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How do you not realize that you are bringing a suit? Maybe a better way to frame the question in this case would be how do you make it clear why you brought a suit? The facts make it clear that Ms. Giaimo filed a Tax Court petition after receiving a notice of determination. She argues that her suit did not extend the statute of limitations on collection. The 8th Circuit, affirming the lower court, holds that it did.

Ms. Giaimo received a CDP lien notice and a CDP levy notice in 2005 with respect to her income taxes for 1992-1994. The assessment of the liabilities for these years was delayed by a bankruptcy and did not occur until 1999. The levy notice arrived first, in February 2005, which is normal and the lien notice arrived in April of 2005. She sent the IRS Form 12153, seeking to assert her right to a CDP hearing. The form was timely only with respect to the lien notice. The IRS treated the CDP hearing with respect to the levy as an equivalent hearing. At the conclusion of her discussions with Appeals, it decided that she should not receive the relief she wanted. Appeals issued a notice of determination with respect to the CDP lien notice, but a decision letter with respect to the levy because it treated that hearing as an equivalent hearing. She timely petitioned the Tax Court based on the notice of determination and eventually the Tax Court granted summary judgment to the IRS in 2007. The effect of requesting the CDP hearing with respect to the lien notice is to suspend the statute of limitations on collection from the time of the request until the conclusion of the Tax Court case – approximately two years.

Flash forward to 2011 and the IRS initiates a suit to enforce its lien and foreclose upon certain real property. Ms. Giaimo argues that the statute of limitations on collection expired in 2009, ten years after assessment, while the IRS argues that the statute of limitations on collection expires two years later because of the CDP hearing and Tax Court petition. To avoid the problem of having the statute suspended as a result of the Tax Court case, Ms. Giaimo argues that she brought the Tax Court case to contest the levy and not to contest the lien. The 8th Circuit suggests that her argument arises because of the interplay of IRC 6320 (the CDP lien statute) and 6330 (the CDP levy statute). If you look at the two statutes, you find that they do not mirror each other but rather 6320 borrows from 6330. Many of the CDP provisions reside in 6330, and 6320 basically says to go look at 6330 and follow the directions there. Picking up on the differences in the statutes, Ms. Giaimo argues that her Tax Court suit was based on the levy. Since it did not involve a challenge to the notice of federal tax lien, the statute of limitations on collection was not tolled by the Tax Court case.

The 8th Circuit does not buy what she was selling. It looks at the two statutes, it looks at her Tax Court petition, and it determines that the petition sought to challenge the only thing it could challenge – the CDP lien determination. Her Tax Court petition did reference the tax levy, but the 8th Circuit finds that “regardless of what other issues Giaimo impermissibly might have attempted to raise in her Tax Court appeal, she placed a challenge to the lien before the Tax Court….”

Additionally, she argued that her Tax Court petition was untimely. The IRS argued that the fact of the Tax Court jurisdiction is res judicata because of the decision in the case and cannot be collaterally attacked. The 8th Circuit does not accept this argument but looks at the case. It finds that the “presumption of regularity applies to a long-closed proceeding.” It says that Ms. Giaimo has a heavy burden to show that jurisdiction did not exist. Here, she signed the petition four days before the deadline, the Tax Court deemed the petition timely, she failed to challenge jurisdiction while the case was pending, she did not appeal the decision and she failed to collaterally attack the decision for many years. The court found that she did not carry her heavy burden.

She argued that the Tax Court entered her petition on its docket on the third day after the deadline for filing the petition. The 8th Circuit points to the mailbox rule to swat away this argument. She also argued that the IRS had the burden to come up with her envelope to show the timely mailing. The 8th Circuit finds that the IRS does not have such a burden in a case in which she raises the issue many years after the event.

There is nothing remarkable about the decision. Her arguments were somewhat unique. She argues on the opposite side of the argument most petitioners make, because she is trying to undo something that she set in motion. The case points again to a downside in bringing a CDP case without a plan. When a taxpayer makes a CDP request and files a CDP petition, their only plan at the time might be to delay the collection of the liability. If that is the plan, the request and the petition will work, but it comes with a price. She pays the same price as the petitioners in the Holmes case, which is that she keeps open the statute of limitations for the IRS to bring suit. In another recent post, Mr. Mayweather filed a CDP petition to delay collection but with a plan to use that time to collect his fight purse and pay off the liability. Filing the CDP request and petition can have many beneficial aspects but it has consequences, and thinking about those consequences before initiating the proceeding matters.

 

 

Tax Free Reorg and Statute of Limitations: When is a Document a Return?

The New Capital Fire v Commissioner case from earlier this month is another in the many cases involving statutes of limitation on assessment. The case involves an old issue;  whether a document constitutes a return for purposes of starting the clock ticking on the statute of limitations on assessment.

In this case, the twist was that one taxpayer (Old Capital Fire)  was merged out of existence in a transaction that was intended to qualify as a tax free reorg under 368(a)(1)(F) (an F reorg) Following the merger, the surviving corporation (New Capital Fire) filed a corporate tax return, and with that return it included a pro forma Form 1120 that it included with its corporate tax return. That pro forma 1120 included the information pertaining to Old Capital Fire’s operations in its last short year.

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Generally speaking, when there is an F reorg, as the opinion discusses, the regs under Section 381 require that “the part of the tax year before the reorganization and the part after constitute a single tax year, and the resulting corporation must file a single full-year return.”

The problem here was apparently IRS argued that there was no valid F reorg. IRS came in 9 years or so after New Capital Fire filed its return and sought to assess a tax relating to the return that it believed Old Capital was required to separately file. If no return was filed, under Section 6501(c)(3) IRS would have an unlimited time to assess additional tax.

The issue that the Tax Court considered was whether the pro forma 1120 that New Capital included with its return was a return for purposes of starting the SOL on assessment for the tax stemming from the supposedly blown reorg.

There is plenty of old law on whether a document filed with the Service counts as a return. In 1984 the Tax Court put together the story in the oft-cited Beard v Commissioner, where it identified the following test:

(1) the document must contain sufficient data to calculate tax liability;

(2) the document must purport to be a return;

(3) there must be an honest and reasonable attempt to satisfy the requirements of the tax law; and

(4) the taxpayer must have executed the document under penalties of perjury.

Most of the New Capital Fire opinion centered on the third requirement, the need to have an “honest and reasonable attempt” satisfy the tax law. The IRS argued that the New Capital return was purposefully misleading. While it was not clear (to me anyway) what led the IRS to label it as such, the opinion noted that the New Capital return had a clear statement regarding the position that Old Capital was merged into New Capital and that the pro forma return reported “income, deductions, and credits that were included in the notice of deficiency at issue in this case.”

The opinion notes that many opinions have liberally applied the third Beard element, with a flunking only if the court found that the pro forma 1120 and the 1120 that disclosed the merger was “false or fraudulent with intent to evade tax as it pertains to Old Capital.” The Tax Court observed that the IRS came up short, as “New Capital’s 2002 return contained sufficient information to calculate Old Capital’s tax liability.”

As the opinion notes, citing cases like Zellerbach Paper v Helvering and Germantown Trust v Commissioner, perfect accuracy is not necessary. Even if New Capital whiffed and there was a separate obligation to file a different return relating to Old Capital’s short year, that mistake did not change the fact that IRS had what it needed to assess any additional tax within the normal time frame.

With that, the court concluded that IRS did in fact receive a return from Old Capital and IRS was out of luck (and time) to assess any additional tax that may have stemmed from Old Capital Fire’s merger.