Another 6511(h) case Fails to Reach the Promised Land

One of the first posts I wrote addressed the issue of the extended period of time to file a refund claim allowed by IRC 6511(h). In that post I mentioned the long losing streak endured by taxpayers in published opinions. Last year it appeared that the case of Stauffer v. United States may have turned things around. I blogged about it here, here and here. In the Stauffer case the court refused to agree with the IRS regarding the need to obtain an opinion regarding the taxpayer’s capacity from a specific group of medical professionals mention in Rev. Proc. 99-21 which fails to include some of the most relevant medical professionals among those qualified to issue an opinion. The post earlier this year regarding the ABA’s comments regarding Rev. Proc. 99-21 provides some background on the procedures developed by the IRS.

Unfortunately for the estate of Stauffer, the IRS backed up after its loss regarding who may opine regarding financial disability and made a different argument. In the second version of the case to go forward to opinion, the IRS argues that Mr. Stauffer fails to qualify for the extended period available for taxpayers with financial disability because he gave a durable power of attorney to his son. The court finds that the son had the authority mentioned in the statute to assist Mr. Stauffer on financial matters and that authority causes the statute of limitations for filing a claim for refund to run prior to the actual filing in this case.

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As with the original opinion, this case went first to the magistrate judge. The magistrate judge determined that the statute of limitations ran because Mr. Stauffer’s son had the power to handle his financial affairs during much of the period between the due date of the return and the filing of the 2006 return claiming a refund of over $100,000. The district court upheld the decision of the magistrate judge but did so based on different reasons. At issue in this aspect of the case is the nature of the authorization provided by decedent to his son and what is required of someone with a durable power of attorney. See a prior post on the issue of authority.

In this case decedent gave to his son a durable power of attorney in 2005. The durable power of attorney stated that the POA could be withdrawn upon a written statement by decedent. It appears clear that the decedent did not provide to his son a written withdrawal of the POA although the decedent did write down that he intended to withdraw the POA. The decedent, however, did not deliver the written intention. The son did tell his sister that he was no longer acting as his father’s durable POA.

The court concludes that in 2005 the father had the capacity to execute the durable POA. It further concluded that the applicable law regarding the enforceability of the durable POA is the law of Pennsylvania and not federal common law. In holding that Pennsylvania law applies here, the court cited to Bova v. United States, 80 Fed. Cl. 449 (2008).

The court next looked at the issue of authority. It found that the durable POA gave the son the authorization to act on behalf of his father in financial matters for purposes of IRC 6511(h). The court acknowledged that the IRS does not define “authorized.” It looked at Black’s Law Dictionary which describes it as “[t]he official right or permission to act, esp. to act legally on another’s behalf….” The estate argued that authorized must be read in this context as requiring that the agent knew of the matter that requires action or it creates an absurd result. The court rejected this argument citing to Brockamp v. United States, 519 U.S. 347 (1997). It refers to the concerns of Congress that it not create a large equitable remedy that would engulf the tax refund system. Therefore, interpreting “authority” according to its plain meaning even when it produces an inequitable result follows the intention of the statute.

Here, the son had the authority to file the father’s return and that it all that the statute requires. It does not require that the son knew the returns needed to be filed.

Next the court looked at the facts to determine whether the father had revoked the POA. It finds that he did not applying Pennsylvania law. To be effective, revocation of a POA requires “actual notice” from the principal to the agent. The document itself required a written notification in order to revoke the POA. Since there was no actual notice as required by Pennsylvania law or written notification as required by the POA, the POA was not revoked and remained in effect from its creation. Because it remained in effect, the statutory language keeps the estate from asserting financial disability.

The result here shows how strictly the statute is interpreted. In the first opinion, the court looked at the Rev. Proc. and not the statute. The statute does not require a specific type of medical degree in order to opine regarding the taxpayer’s disability. This second opinion does not undercut the value of the first for those who seek to argue that strict compliance with the revenue procedure is not a prerequisite to relief. Nonetheless, in the issue of authority where the statute makes reference to the requirement, the court felt less ability to deviate from a strict interpretation of the statutory language.

Here, the facts showed a breech between the father and the son. They also showed that the financial actions taken by the son on behalf of the father during the father’s life were actions permitted by a narrow POA and not the durable POA. Nonetheless, the court declined to follow the estate to a legal place that would allow it to recover over $100,000 paid to the IRS by someone who lacked full capacity. IRC 6511(h) provides a statutory and not equitable remedy to parties seeking to hold open the refund statute of limitations. The Staffer case reminds us that refunds in financial disability case go to those with tight facts that meet the narrow requirement of the statute and necessarily not to those whose situation might cry out for relief.

 

Private Debt Collection – Since When Does Cash Positive Equal Success?

Today we welcome back guest blogger Mandi Matlock. Mandi is Of Counsel to the National Consumer Law Center. With a significant background in consumer law combined with tax controversy practice experience, Mandi brings us the consumer advocate’s perspective on the Private Collection Agency debate. As you will read, Mandi is not a fan of having private debt collectors collect federal taxes. Keith has written before how he is also not a fan of this practice. For more background, you can read our earlier posts on this topic here, here, and here, as well as a recent Quartz article quoting Mandi. Christine

If you’ve been keeping up with recent news coverage of the IRS’s private debt collection (PDC) program, you might be under the misapprehension that things are going swimmingly. The IRS released its latest quarterly report card last month evaluating the PDC program, showing $51 million in net revenue. In response, Sen. Charles Grassley (R-IA), the program’s most vocal Congressional proponent, asserted that the program “continues to prove its value.”

He is joined in this sentiment by, well, no one really, unless you count the Partnership for Tax Compliance, the debt collection industry trade group formed just to promote this program. According to the industry group, it is “crystal clear” the PDC program is “very profitable.”

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Even Sen. Charles Schumer (D-NY), a key supporter of the legislation that forced the IRS to try to resurrect the twice-failed program, kept quiet about its value to taxpayers when the report card came out. To the extent he commented at all on the updated data, he characterized it as a boon to New Yorkers, stating that it was “all about” debt collection agency jobs for his constituents. (Yes, one of the four private collection agencies participating in the PDC program is headquartered in New York. Two of the remaining three are headquartered in Grassley’s backyard.)

Meanwhile, the National Treasury Employee’s Union President acerbically commented, “It took a year-and-a-half and millions of taxpayer dollars, but [the PDC program] has finally brought in more money than it cost.” The National Taxpayer Advocate has studied and written extensively about the PDC program in many of her annual reports to Congress. Her focus has primarily been on what she considers to be the significant burden the IRS’s operation of the program places on low-income and vulnerable taxpayers. Senator Warren and others in Congress have expressed similar concerns.

And, of course, there was that bombshell TIGTA report two months ago that thoroughly savaged the PDC program. In its report, TIGTA concluded that while the program is minimally cash-positive, it generally harms taxpayers and jeopardizes tax compliance. The IRS rejected all but one of TIGTA’s recommendations to improve the program.

Setting aside for just a moment the prodigious valid concerns about harms to taxpayers and to tax collection generally, did much change in the program’s profitability between the TIGTA report and the recent report card?

The best, honest spin I could find was this: The PDC program is slightly more minimally cash positive. Here are the indisputable facts:

  • Private collection agencies are collecting an average of 1.7% of assigned receivables (up a whopping 0.3% since the previous report card). Compare this with the debt collection industry standard of 9.9%.
  • The return on investment for collection by the IRS is 21 to 1 (according to fiscal year 2017 Treasury data). Meaning, IRS collected $21 for every $1 spent on its collection program. Current return on investment in the PDC program? 2.64 to 1. And the 2.64 figure is artificially high because the IRS has thus far not tracked and shared the estimated opportunity costs involved, as it did in previous iterations of the PDC program. (“Opportunity costs” would be the dollars the IRS could have collected if resources had not been diverted to operate the PDC program.)
  • Grassley’s presser lauds $14.5 million in collections that the IRS retains. But that only adds about one third of one percent to the IRS’s enforcement budget.

The PDC program makes no financial sense. None. Well, except for maybe to the PCAs – who are happily hoovering up cash from the public fisc and out of the pockets of low-income and vulnerable taxpayers. Add to this the potential for hardball collection tactics, a system that relies on PCAs to self-report debt collection abuses (!), the reduced collection alternatives available to taxpayers contacted by PCAs, and so much more that is wrong with the PDC program.

When will lawmakers fairly weigh the real harms against the illusory benefits of this program? In its current form the PDC program makes sense for PCAs, and no one else. Unless we start to see some hard scrutiny of the real numbers, taxpayers shouldn’t expect change soon.

Exonerees and TAPS

On giving Tuesday we write to offer you two ways to give back to the community in the tax area. The first opportunity is by taking a pro bono case to assist individuals who were wrongfully incarcerated. After release from wrongful incarceration, many of these individuals lived in states that paid the exoneree for the damage caused by the wrongful incarceration. At the time of payment, the money received was taxable income. Congress changed the law and retroactively excluded these funds from taxation in 139F. It has also opened up the refund statute to allow these individuals to get back the money paid before the law change; however, the open refund statute is about to close. We wrote about this two years ago seeking volunteers and readers of PT generously donated their time to assist the individuals who had been identified. More individuals have now been identified and another push is needed to assist them. Please read Kelley Miller’s letter below and respond to her if you are able to assist. 

In addition to the opportunity to assist by working on a case, we also write to ask that you assist by donating money to TAPS. This fund, created by the ABA Tax Section, provides money for fellowships to new lawyers to work in low income taxpayer clinics and other similar settings to assist low income taxpayers. In particular, it seeks to create projects that would serve as models to assist these individuals. At PT we have a regular portal through which you can give to TAPS (look on the side of the blog.) Today, we bring you a letter from one of our loyal readers who caused his firm to give to TAPS. We ask that you consider using the portal to have your firm do the same or to give individually. Keith

Helping Exonerees

Hello, Friends:

Two years ago at this time, we were working round the clock with Jon Eldan of After Innocence in San Francisco to file refund claims under Section 139F by December 18, 2016.  I am really proud of the results achieved to date for our extraordinary, pro bono exoneree clients, and am so grateful for all of the assistance that Keith and his students at Harvard have provided to this effort as well over the past two years.  This work has resulted in our doing additional tax-related, pro bono work for exonerees beyond the Section 139F claims.  We have worked closely with Jon Eldan and the Innocence Project Network over the past two years as the only group of tax practitioners working to assist Exonerees.  It has been incredibly important and significant work for us.

As you all know, the extender bill (which we provided much education on in terms of the normative refund statute) that was passed back in February gave us an additional two years from the original claim filing date.  Since that time, Jon and myself and a team of summer associates and volunteer attorneys from Reed Smith have worked to locate almost 300 remaining possible Section 139F refund claimants, including, many military exonerees (these individuals are those left from our search two years ago, where we worked to locate hundreds of other possible Section 139F refund claimants).  As a result of working to locate these individuals, preliminary review of each’s facts and circumstances, Jon informed me today of 12 potential pro bono refund cases to review and assist with by the deadline of December 17, 2018.

I am writing to ask for your help in either you or your firm assisting us in taking on one or more of these cases.

Many thanks to you all. Happy to answer any questions and I welcome your thoughts about this work.

Best,

Kelley C. Miller
Direct 215.851.8855 – Mobile 215.704.3046 – Fax 215.851.1420
kmiller@reedsmith.com

 

Helping Low Income Taxpayers Through TAPS

I have been a tax controversy lawyer since 1977.  I spent about 10 years with the Office of Chief Counsel, IRS, and have been in private practice since 1986.  Procedurally Taxing has become a staple of my daily reading.  If Procedurally Taxing charged a fee for access, we would pay thousands of dollars per year for access just as we pay for other tax publications.  I inquired about how to make a contribution towards Procedurally Taxing, and was advised to make a donation to the ABA Tax Assistance Public Service Fund (“TAPS”), which provides long-term funding for tax-related public service programs for underserved taxpayers.  I was able to convince my firm to make annual donations to TAPS.  An added perk is the TAPS donor sticker attached to your name tag at ABA Tax Section meetings.

As a result of reading Procedurally Taxing every day, I have come to appreciate that low income taxpayer clinics frequently litigate important tax controversy issues that otherwise would not be litigated because the dollar amounts at issue are very small or the chances of success at the appellate level are low or, frequently, both.  This is another important reason every tax lawyer should support TAPS.

If you too read Procedurally Taxing every day, I encourage you to step-up and convince your firm to make annual donations to TAPS.  If you are a tax controversy attorney and you do not read Procedurally Taxing every day, you should, unless you are a government attorney, in which case it is fine if you want to remain in the dark about cutting edge tax controversy issues.

Bob

Robert. R Rubin ●  Attorney ●  BOUTIN  JONES INC. ●  555 Capitol Mall, Suite 1500  ●  Sacramento, CA 95814

District Court Equitably Tolls 2-Year Deadline to File Refund Suit

Frequent guest blogger Carl Smith discusses an important recent decision holding that the time to file a refund suit is not a jurisdictional time frame. In the case discussed by Carl, the facts allowed the taxpayer to successfully argue for an extended time period within which to file based on equitable tolling. Keith

PT readers know that Keith and I – through the Harvard clinic – have been arguing in a lot of cases that judicial filing deadlines in the tax area are no longer jurisdictional and are subject to equitable tolling under recent non-tax Supreme Court case law limiting the use of the term “jurisdictional” and expanding the use of equitable tolling. So far, we have lost on Tax Court innocent spouse and Collection Due Process filing deadlines; appellate cases on Tax Court deficiency and whistleblower awards jurisdiction deadlines are pending.

But, while I was still running a tax clinic at Cardozo School of Law, as an amicus, I helped persuade the Ninth Circuit to hold that the then-9-month filing deadline at section 6532(c) to bring a district court wrongful levy suit is not jurisdictional and is subject to equitable tolling. Volpicelli v. United States, 777 F.3d 1042 (9th Cir. 2015). Relying both on the recent Supreme Court non-tax case law and Volpicelli, a district court has just held that the 2-year deadline at section 6532(a) to bring a district court or Court of Federal Claims tax refund suit is not jurisdictional and is subject to equitable tolling. Wagner v. United States, E.D. Wash. Docket No. 2:18-CV-76 (Nov. 16, 2018).

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In Wagner, a couple filed a 2012 joint income tax return showing an overpayment of $1,364,363 and asked that $500,000 of the overpayment be refunded and the rest be applied as a credit to 2013 estimated taxes. I quote the remainder of the brief facts from the opinion:

In November, 2014, the IRS sent a letter disallowing some of the refund. . . .

Specifically, the IRS indicated it was allowing only $839,999 of the claim, and disallowing the remainder because “we are unable able to verify the total amount of your withholding based on information provided by the Social Security Administration.” Id. The amount of the disallowed claim was $524,364.

Plaintiffs replied by letter on December 5, 2014, indicating they were requesting a formal Appeal to the findings and also requesting an oral hearing. . . . They also provided additional information regarding the requested refund.

Nothing happened until May, 2016 when the IRS sent another letter, this time stating it was disallowing the entire $1,364,363 refund claim. . . .Specifically, the letter stated:

This letter is your notice that we’ve partially disallowed your claim for credit for the period shown above. We allowed only $.00 of the claim.  Id. 

The letter also indicated that Plaintiffs were now going to owe interest and penalties. Although it did not explicitly say so in the letter, the determination of the $.00 allowance of the claim meant the IRS was also disallowing $839,999 of the refund claim that it has previously allowed as indicated in the November, 2014 letter. Because of this, Plaintiffs were now being assessed an outstanding liability of $859,557.84. As a result, the IRS took $335,871 from the 2014 refund and applied it to the 2012 tax liability since this amount had come from Plaintiffs’ request to forward the remainder of the 2012 refund claim to the next year’s tax bill.

In early 2018, the taxpayers filed suit seeking a refund of $839,999 – i.e., only part of the original overpayment shown on the return. The DOJ moved to dismiss the suit for lack of jurisdiction as untimely, arguing that the 2-year period in section 6532(a) to bring such a suit commenced when the IRS sent its first letter in November 2014.

The district court ruled in the alternative. It held that the filing deadline for the refund suit commenced in May 2016, when the second IRS letter was issued. In the alternative, because of the confusing nature of the IRS correspondence, if the filing deadline actually started in November 2014, the filing deadline was tolled because of “equitable considerations” generated by this confusing correspondence, “including the fact that Plaintiffs were informed that $839,999 of the requested refund claim was not going to be allowed less than 6 months before the statute of limitations expired . . . .”

Before applying the alternative holding of equitable tolling, the court examined whether the filing deadline was jurisdictional under recent non-tax Supreme Court case law summarized in United States v. Wong, 135 S. Ct. 1625 (2015) (finding the filing deadlines for Federal Court Claims Act suits in 28 U.S.C. § 2401(b) nonjurisdictional and subject to equitable tolling). In Wong, the Court held that filing deadlines are normally nonjurisdictional claims processing rules. Congress could, though, make such deadlines jurisdictional through a “clear statement” in the statute, but “Congress must do something special, beyond setting an exception-free deadline, to tag a statute of limitations as jurisdictional and so prohibit a court from tolling it.” Id. at 1632.

The district court in Wagner also looked to Volpicelli – a Ninth Circuit opinion holding the then-9-month filing deadline in section 6532(c) to bring a district court wrongful levy suit nonjurisdictional and subject to equitable tolling. We blogged on Volpicelli numerous times in 2015: here, here, here, and here. Volpicelli had been decided a few months before Wong. The DOJ had asked for reconsideration of Volpicelli by the Ninth Circuit en banc, since Volpicelli disagreed with holdings of at least one other Circuit that were made prior to the 2004 change in the Supreme Court’s jurisprudence on jurisdiction. When the Ninth Circuit declined to hear the Volpicelli case en banc, and the Supreme Court shortly thereafter issued its opinion in Wong, apparently the Solicitor General lost interest in appealing Volpicelli to the Supreme Court, since it is hard to imagine the SG winning Volpicelli after losing Wong (where the statutory language appeared even more mandatory). In all the subsequent cases that Keith and I have been litigating, though, the DOJ always states that it still disagrees with Volpicelli.

The district court in Wagner concluded that Congress had done nothing special in section 6532(a) to make it jurisdictional and not subject to the usual presumption that filing deadlines are subject to equitable tolling. The district court wrote:

First, Congress’ separation of the filing deadline in § 6532(a) from the waiver of sovereign immunity found in 28 U.S.C. § 1346(a)(1), as well as the placement of § 6532 in the Tax Code under subtitle of the Internal Revenue Code labeled “Procedure and Administration, is a strong indication that the time bar is not jurisdictional. Second, [unlike section 6511 discussed in United States v. Brockamp, 519 U.S. 347 (1997),] the time limitation is purely procedural and has no substantive impact on the amount of recovery. It speaks only to a claim’s timeliness and not to a court’s power. Third, the recovery of a wrongfully withheld refund is akin to the traditional common law torts of conversion. Fourth, the deadline set forth in § 6532(a) is not cast in jurisdictional terms and the language/text used does not have any jurisdictional significance. Finally, the text does not define a federal court’s jurisdiction over tort claims generally, does not address its authority to hear untimely suits, or in any way limit its usual equitable powers.

Observations 

Although the DOJ will be hopping mad about the Wagner ruling, the DOJ will not be able to appeal it to the Ninth Circuit until the district court determines the amount, if any, of the appropriate refund. So, stay tuned.

The holding in Wagner is entirely predictable, since an earlier district court in the Ninth Circuit had stated that, in light of Volpicelli, “it remains an open question” whether the filing deadline in section 6532(a) is subject to equitable tolling in an appropriate case”. Hessler v. United States, 2016 U.S. Dist. LEXIS 1210 (E.D. Cal. 2016). Accord Drake v. United States, 2011 U.S. Dist. LEXIS 22563 (D. AZ. 2011) (doubting but not deciding whether the filing deadline in § 6532(a) is still jurisdictional in light of recent Supreme Court case law)

Whether the section 6532(a) filing deadline is jurisdictional or subject to estoppel are two of the issues that are currently being litigated in the Second Circuit in Pfizer v. United States, Docket No. 17-2307. Oral argument was had in Pfizer on February 13, 2018, and an opinion could come out any day – though the court has alternative ways of deciding the case that might avoid addressing these issues. The Harvard clinic submitted an amicus brief in Pfizer arguing that the section 6532(a) filing deadline is not jurisdictional under recent non-tax Supreme Court case law. Our brief parallels the reasoning of the Wagner court. Here’s a link to our amicus brief. We have discussed Pfizer and its various issues in posts here, here, here, and here.

As we noted in our Pfizer brief, some Circuits have previously held the filing deadline in section 6532(a) to be jurisdictional. But they did so at a time before the Supreme Court in 2004 narrowed the use of the word “jurisdictional” generally to exclude filing deadlines and other “claims processing” rules. Compare Kaffenberger v. United States, 314 F.3d 944, 950-951 (8th Cir. 2003) (deadline jurisdictional); Marcinkowsky v. United States, 206 F.3d 1419, 1421-1422 (Fed. Cir. 2000) (same); RHI Holdings, Inc. v. United States, 142 F.3d 1459 (Fed. Cir. 1998) (same); with Miller v. United States, 500 F.2d 1007 (2d Cir. 1974) (deadline subject to estoppel). The Wagner opinion did not mention any of the pre-2004 Circuit court precedent, but decided the issue purely based on the recent Supreme Court case law that Volpicelli applied to section 6532(c) in 2015. Indeed, I think Wagner is the first opinion of any court to grapple, beyond speculation, with the impact of the recent Supreme Court case law on the nature of the section 6532(a) deadline. Certainly, no court of appeals has yet done so. Maybe the Second Circuit in Pfizer will be the first?

 

Designated Orders: The Nonresponsive Petitioner (10/29/18 to 11/2/18)

This week’s post on designated orders is written by William Schmidt of the Kansas Legal Aid Society. Similar to the statistical post on designated order provided by Patrick Thomas a few weeks ago, William uses a slow week in designated orders to provide us with a reflective post on one of the root causes of trouble in Tax Court and with the tax system generally. Keith

The week of October 29 to November 2, 2018 had a total of three designated orders. To begin, the first order, here, is a short order regarding a joint filing of a stipulation of settled issues.

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Short Take: Docket No. 21940-15 L, James L. McCarthy v. C.I.R.

The second order, here, discusses ownership of real estate by a trust that IRS Appeals determined has been acting as the petitioner’s nominee. The petitioner has submitted both an offer in compromise and a partial payment installment agreement. Since Appeals determined the petitioner is connected with the trust, it becomes a factual issue regarding the real estate in question being an asset of the trust (affecting petitioner’s assets to determine his collection alternatives listed above). The IRS stance is that the property in question could be used to satisfy petitioner’s liability. The parties are to submit their memoranda regarding their arguments concerning the ownership of the property and petitioner’s ability to enjoy its benefits or treat it as his own during the ownership period by November 14.

The Nonresponsive Petitioner and Related Issues

Docket No. 18347-17 L, Kazuhiro Kono v. C.I.R., available here.

This case does not offer much for analysis. The petitioner did not submit requested documents to the IRS, did not respond to a second request, did not file a response to the IRS motion for summary judgment, and did not appear at the Tax Court docket. As a result, the Tax Court granted the IRS motion for summary judgment based on petitioner’s overall lack of responsiveness.

Since there is not much to focus on this week, I am going to take a detour and focus the rest of the blog post on an examination of the responsiveness of taxpayers during the Tax Court process. I am working on a presentation with some of the others who post here on designated orders so I have been doing some big picture thinking about Tax Court and designated orders.

  1. Types of Clients

In practice, I get to meet several types of clients. There are four categories I can think of who inherently have issues in dealing with IRS bureaucracy:

  • Low Income Taxpayers – The inability to afford higher education may be the beginning of barriers to understanding tax issues for some low income taxpayers. Another is the inability to take time to communicate with the IRS. Taxpayers often cannot take off work in order to have time to wait on the phone in order to deal with tax issues, especially if they are on a tight budget. The lack of funding for the IRS has increased wait times in order to talk with a customer service person on the phone, which leads to dissatisfaction and quitting attempts to deal with the IRS.
  • Disabled – There can be many categories here, whether physical or mental disabilities. If a taxpayer does not have the energy, ability or capacity to deal with tax issues, that person might be confused by the tax system or give up because it takes too much to handle.
  • Elderly – Again, this group may be declining in health or mental ability and lack the energy, ability or capacity to deal with tax issues.
  • English as a Second Language – I am using this category to cover all those who have difficulty with English, whether they are immigrants to the United States or not. Those who do not speak the language or understand American culture have that additional barrier to add to issues with understanding tax terminology or dealing with the IRS.

One client of mine has a case regarding financial disability (see past Procedurally Taxing postings here and here). She had paranoia and a nervous breakdown that prevented her from signing her 2012 tax refund before the 3-year deadline expired. I have had to be extra patient to work with her to fill out paperwork and get medical support regarding her disability. I am trying to prove that her medical issue should allow her an exception to the 3-year deadline.

Another client is a Spanish speaker who was audited for claiming her grandchildren as dependents and including other child-related benefits. After providing rounds of documents to the IRS, she was tired and got to the point where she did not want to gather more documents for me to provide to the IRS. I am glad to say that we have been successful in convincing the IRS to allow her to claim those dependents, but they wanted me to speak with my client about substantiating her future claims correctly.

  1. Nonresponsiveness

In surveying several of the past designated order postings, I looked for patterns of nonresponsive petitioners. Some of the broadest patterns are the lack of providing documents and ignorance of procedures.

Often, the IRS requests that a client fill out a Form 433-A or submit unfiled tax returns. For disorganized clients, that is an uphill battle, discussed more in the next section. Additionally, filing tax returns (especially in the off-season) may be a cost that taxpayers are unable to overcome.

For the unrepresented taxpayers, it does seem like they have a do-it-yourself mentality. Unfortunately, that means their courage leads them into areas for which they are not prepared. These taxpayers venture into areas of court or tax procedure they are ignorant of and it often leads to their detriment when the Tax Court finally grants the IRS motion for summary judgment.

To begin, there are some basics of court procedure that non-attorneys should realize they need to follow. They should show up in court for all hearings on their cases. If their case is scheduled for a calendar call, trial or any other special hearing, pro se petitioners should realize they need to show up. Participation in any legal hearing does not guarantee success, but it generally improves the judge’s opinion in the favor of those who appear unless the person is obnoxious.

Something else that should be obvious to unrepresented taxpayers is that they need to respond to court filings, especially the judge’s orders telling them to do so. By not responding to a judge’s orders, unrepresented taxpayers especially hurt their own cases.   It should be obvious to a taxpayer in Tax Court that doing something is often better than doing nothing.

One key piece a taxpayer should also realize is just what arguments are at issue. Collection Due Process (CDP) cases in Tax Court are one of the areas where taxpayers have problems. A CDP case in Tax Court concerns how the IRS treated the taxpayer. Were proper procedures followed? Did the taxpayer get his or her due process in treatment of the tax issue? A CDP hearing is not the place for the taxpayer to argue the merits of the tax at issue. Most likely, that ship has already boarded, sailed away, and docked at its port destination. Even though that is the case, there are still Tax Court petitioners trying to argue the merits of the tax at issue when they should be making arguments concerning due process.

This scratches the surface regarding complicated areas of court procedure. When it comes to hearsay or other trial arguments, taxpayers should be thinking about finding representation instead of making arguments without assistance.

The other area where taxpayers need to respond is regarding tax procedure. Ignorance of taxes will not serve people well in Tax Court. In looking at claims from child-related tax benefits to rental expenses, the common denominator is that the IRS requires substantiation for those claims.

I find it becomes necessary to be the middleman between my clients and IRS departments such as IRS Appeals or counsel. While my clients may have documentation regarding claims on their tax returns, I have found I need to translate communications from the IRS to the client and vice versa. It has also been necessary to organize documents so the IRS can review what the client has set aside. The IRS certainly does not like it when a taxpayer dumps unorganized documents in their lap as proof against the IRS audit. I went through the Tax Court process assisting a client who had boxes of documents. A current client has a suitcase of tax paperwork that needs to be organized for the IRS.

I think it is bizarre that taxpayers try to tackle areas of court and tax procedure when they are ignorant in those areas. I can understand that they want to save money, but they often ignore IRS notices about the LITC program. Several of them qualify for free assistance, but they choose to take on the IRS without any assistance at all. Why they do this makes no sense to me – they should at least call up the nearest LITC office to see what they have to say.

  1. Potential Solutions

A colleague (SueZanne Bishop) and I presented on “Gaining Independence Through Organized Financial Records” at the 2017 Kansas Conference on Poverty. While we did not have statistical data, we did have experiential learning to provide regarding the difficulties in working with clients to gather their financial data in areas of tax, family law, bankruptcy, estate planning and other areas of law. We spoke about the issues with handing an extensive form to clients to fill out regarding their assets, income, expenses or other financial data (such as IRS Form 433-A or forms used to expedite court filing). I also brought up how there may be additional steps involved in filling out a form, such as how the insolvency worksheet in IRS Publication 4681 needs financial information based on the date of a debt’s cancellation and not current financial information.

Some solutions we provided were giving clients more manageable chunks to a client (perhaps one page at a time) or regular meetings for each part of the form. I often talk through Form 433-F with clients rather than have them fill it out alone when I need that information in order to help them qualify based on their financial hardships for Currently Not Collectible status.

The theory behind our presentation was that helping clients to get organized now may give them assistance with greater problems in the future. Knowledge and the ability to budget would add to their skill sets. Organized data would reduce attentional strain (not dividing their focus between their finances and their children, for example). Adding this accomplishment might empower them to deal with the next problem and the next.

Often I think of how clients at legal aid organizations, LITCs, and other assistance programs would have difficulty dealing with their issues without the help we provide.

I do not know if the petitioner above, Mr. Kono, had any of the issues I mentioned. I wanted to provide alternative theories (not excuses) for why petitioners axre not as responsive as the IRS or the Tax Court would prefer. I know the IRS and the Tax Court try to educate taxpayers about the existence of the LITC program and I am dismayed why more do not ask for help. I also salute all pro bono volunteers who assist before and during Tax Court calendar calls.

Takeaway: I do not mean for this to be a blatant plug for the LITC and pro bono programs, but there is something to be said for those of us who act as the intermediaries between taxpayers and the IRS. The lack of IRS funding that in turn prevents quality customer service is but one of the barriers that taxpayers deal with so I wanted to provide another side of the story for the nonresponsive petitioners in these Tax Court cases. Potentially there is more to a petitioner’s story than laziness on why they did not do more in these cases.

 

 

When is a Case Settled? When a Taxpayer Sends a Check (No) And When a Taxpayer Sends a Letter Reflecting Agreement With US Attorney (Yes)

Disputes with the IRS often involve negotiations and correspondence regarding settlement. Two recent cases involving unrepresented taxpayers demonstrate that at times the taxpayers may not fully understand the consequences of corresponding with the government. In many instances courts will turn to contract principles to examine whether the correspondence can demonstrate that the parties have a binding settlement agreement.

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In Longino v Commissioner a taxpayer sent a check and cover letter to the IRS essentially saying that if IRS cashed the check it agreed with him that he owed no additional money to the IRS. IRS cashed the check but also sought to collect on an assessment that stemmed from a case that the taxpayer lost in Tax Court. In this post I will explain how the taxpayer’s unilateral actions did not constitute a settlement, even when the IRS cashed the check.

In this case, Mr. Longino filed two tax returns for 2006, a 1040 and an amended return on October 17, 2007, a few days after filing the original return. IRS processed the returns separately. The amended return requested a refund of approximately $1,396, which the IRS sent to Mr. Longino, who cashed the check. IRS also examined Mr. Longino’s original 2006 tax return and proposed a deficiency of about $39,000, as well as an accuracy-related penalty.

Years later, in 2013, after Longino had filed a petition challenging the proposed deficiency but prior to the Tax Court rendering a decision, IRS also sent a letter to Mr. Longino informing him that he was not entitled to the $1,396 refund he claimed on the 1040X. Mr. Longino responded with a letter and included a check to the IRS for the $1,396. The letter also asked the IRS to “confirm…that we are now concluded on this tax return issue and we won’t have any more issues with IRS on that year.”  He asked the IRS to return the check to him uncashed if the IRS disagreed with him.

IRS ignored the letter, assessed the tax (it can do so when there is a Tax Court petition filed under Section 6213(b)(4)), and cashed the check. The deficiency case proceeded to trial. Mr. Longino lost. IRS attempted to collect on the unpaid assessed deficiency and filed a notice of federal tax lien. Longino filed a CDP request claiming that his letter and the IRS cashing of the $1396 check meant that he no longer had a liability for 2006. He argued that the cashing of the check in light of his letter demonstrated that the matter was resolved. He raised no other issues in the CDP request. Appeals disagreed and Mr. Longino petitioned the Tax Court again, essentially asking that the collection action was unwarranted because there was no liability.

The Tax Court disagreed, noting that he tried his deficiency case in Tax Court and lost; while there may be settlement of a Tax Court case through offer and acceptance, that was not present here. In addition, notwithstanding his letter to the IRS, and the IRS’s cashing of the check, the Tax Court held that there was no settlement as a result of his unilateral correspondence with the IRS Service Center:

Nor did petitioner reach a settlement with the IRS employee with whom he exchanged correspondence in May 2013. That correspondence occurred after we had issued our opinion in his deficiency case but before we entered our decision. The IRS service center employee with whom he corresponded did not offer to settle any tax liability. The IRS simply sent him a bill for $1,396, and he paid that bill.

The opinion cites a line of cases that establishes that submission of a check to the IRS and IRS cashing of the check is not enough to show that there was assent to the offer to settle the matter.

For good measure, the opinion notes that even if the IRS employee who reviewed the letter and authorized cashing the check were attempting to settle the case on behalf of the IRS, that employee lacked the authority to do so.

Taxpayers in Bauer Do Not Want Correspondence to Be Treated as a Settlement

The Longino case is to be contrasted with the Bauer case  out of the district court in Arizona, also decided last month. In this case the taxpayers owed over $800,000 to the IRS, and the government brought a collection suit. Federal liens attached to the property of the husband and wife; the main property was a principal residence owned by the husband but which the wife had some interest in due to her funding some of the renovations on the house.

The US attorney assigned to the case and the taxpayers themselves spoke directly after the government filed its complaint. They began settlement negotiations and the US attorney sent a letter with a proposed deal essentially requiring the Bauers to get a $250,000 home equity loan and pay that money to the government within 6 months. In exchange the government would withdraw its order of foreclosure and foreclosure claim and subordinate its liens. In addition, the letter set forth the understanding that after the payment of the $250,000 the parties would be free to negotiate the payment of the balance that was owed.

The US attorney asked the Bauers to review the letter, sign the letter and return it to him. By the terms of the letter, the letter stated that it was not an offer or acceptance of an offer; instead, by signing the letter and returning it to the government it would constitute an offer from the taxpayers, which the government would then “consider and act on the settlement offer once it has received [their] signature making the offer.”

The letter also spelled out that the Bauers did not have to agree to return the letter but if they did not do so the government would pursue summary judgment.The Bauers returned the letter and also forwarded a copy of the letter to the US attorney with the subject matter of the email noted as “agreement.”

Unfortunately for the Bauers they had a change of heart and shortly after sought to renege on the deal. In part, it appeared that they were unable to secure a $250,000 loan, and were only able to get a commitment for about half of that.  The Bauers sent an email saying they were not honoring the deal. The US filed a motion seeking to enforce what it claimed was a binding agreement.

The court agreed with the US and issued an order granting the motion to enforce. In doing so, the court reviewed settlement principles and held that the parties had entered into a binding contract.  In response to the motion the Bauers argued that they were coerced into entering into the agreement and the agreement was predicated on the government’s misrepresentations about the loan (namely that the Bauers could secure the financing). As to the US attorney’s views about the viability of the loan, the court stated that under contract principles a recipient of another party’s opinion  “is not justified in relying on the other party’s assertion of opinion because the recipient has as good a basis for forming his own opinion”). Further, the court noted that the Bauers should have independently investigated the possibility of getting financing before signing the letter:

Rather than taking Mr. Stevko’s advice as a guarantee that they would be able to secure adequate financing on the home, Defendants could have used their own knowledge about the market value of their home and looked into that question for themselves. They did not inquire about loans with banks until after making the offer to the United States and did not seek to withdraw from the agreement once they discovered they could not secure more than $126,000 from such a loan.

As to the claim that they were coerced, the opinion notes that the US attorney’s statement that if the Bauers did not enter into the agreement the government would pursue summary judgment did not in itself amount to coercion. Contract principles are clear that a party’s threat of civil process does not amount to duress unless that is done in bad faith. There was nothing to suggest bad faith in this case.

Conclusion

Taxpayers when interacting with the IRS or the government may be uncertain of the impact of what they are doing. Unilateral actions such as a notation on a check and cover letter may be sufficient to designate a payment for some purposes but are not enough to settle a case.  A signed letter reflecting an agreement that the taxpayer and the government attorney negotiated is quite different and the government can seek a court order that will require the taxpayers to abide by the terms of a settled case.

 

 

The Intersection of Foreclosure and Innocent Spouse

In United States v. Charles LeBeau, No. 3:17-cv-01046 (S.D. Cal. Oct. 16, 2018) the district court stayed a foreclosure action brought by the IRS to allow the taxpayer’s wife to pursue her innocent spouse claim. Because the innocent spouse claim has a ways to go from a procedural perspective, it may be some time before the foreclosure case starts back up. The case provides an interesting look at the intersection of foreclosure and innocent spouse and deserves some discussion.

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Victoria and Charles LeBeau were married at some point prior to 1980. They remain married though they are now legally separated. While the separation is legal, they continue to reside in the same house in La Jolla, California. For anyone not familiar with La Jolla, it generally has very nice houses near the ocean just north of San Diego. I will leave it to Bob Kamman to fill in the rest of the story on the value and location of the house. I am sure that Bob will find some interesting facts here that the opinion does not contain and that I am not tracking down. Keep a lookout in the comment section.

They bought the house in 1980 as joint tenants; however, they deeded the house to Victoria for no consideration in 1987. In 1988 Victoria transferred the property back to both of them for no consideration. Five days later they executed a deed of trust in favor of Security Allied Services to secure a loan of just over $300,000. In August of 1989, the couple transferred the property solely to Victoria again for no consideration. Charles created an entity known as Casa de Erin, LLC which the court describes as the alter ego/nominee of Charles and/or Victoria and in 2003 Victoria transferred the property to Casa de Erin for no consideration. In 2006 Casa de Erin rescinded the deed and transferred the property back to Victoria for no consideration and she remains the property’s nominal owner. The court notes that “upon information and belief, Charles LeBeau has continued to reside at the Property and has retained all the benefits and burdens of ownership.”

The IRS has already reduced its assessments to judgment and this case seeks to foreclose its lien on the property.

Given the recitation of facts in this case, I would not place a high value on Victoria’s chances of achieving innocent spouse status. If she was actively engaged in all of these transfers, innocence is not the word that comes to mind. In fact, the IRS denied her request for relief for many years though it did apparently grant her partial, but significant ($193,272) relief for 1995. She filed a petition with the Tax Court seeking review of the denial of relief on June 22, 2018. Charles has intervened in her Tax Court case presumably to argue that she should not be relieved of liability. (This is one of those cases where it might be really interesting to follow the pleadings if it did not require a trip to DC to the clerk’s office and 50 cents per page.) She asks that the district court stay the foreclosure of what I am presuming is a very nice place where they live and engage in deed swapping at a prodigious pace.

In the discussion section of the opinion the court first says that “the district court has no jurisdiction to decide an innocent spouse claim” citing to United States v. Boynton, 2007 WL 737725 (S.D. Cal. 2007) and Andrews v. United States, 69 F.Supp. 2d 972 (N.D. Ohio 1999). I do not necessarily agree with the court on this issue as discussed in the post in the Chandler case; however, the DOJ Trial Section attorney would have had difficulty arguing the opposite side of that issue.

The court next notes that it has broad discretion to stay proceedings noting that it must consider:

  • the possible damage which may result from the granting of a stay, (2) the hardship or inequity which a party may suffer in being required to go forward, and (3) the orderly course of justice measured in terms of the simplifying or complicating of issues, proof, and questions of law which could be expected to result from a stay.

The defendants made the following arguments in support of a stay:

On the third factor, Defendants seek a stay pending resolution of the issues of “fraudulent transfers” and “nominee theory of ownership” now before the U.S. Tax Court arguing that Court lacks jurisdiction to consider these issues and a stay would avoid inconsistent rulings. On the second factor, they argue that a stay would cause hardship by being required to pursue litigation in two different courts. Lastly, on the first factor, Defendants content that a stay would not prejudice the government.

The court cites the Supreme Court’s decision in United States v. Rodgers, 461 U.S. 677 (1983) regarding its discretion to foreclose a federal tax lien on taxpayer’s property. We have discussed Rodgers before here in a case blogged by Les with some similarities to the LeBeau’s situation. After discussing the general Rodgers factors a court should weigh in deciding whether to permit foreclosure, the district court here cites to two prior cases in which someone claiming innocent spouse status sought to use that status as a basis for postponing foreclosure based on the Rodgers’ factors. In the first case, United States v. Battersby, 390 F. Supp. 2d 865 (N.D. Ohio 2005) the court did stay the action while in the second case, United States v. McGrew, 2014 WL 7877053 (C.D. Cal. 2014), aff’d, 669 Fed. App’x 831 (9th Cir. 2016) the court concluded Rodgers was inapplicable stating that “innocent spouse protection does not entitle [non-liable spouse] to prevent foreclosure on the Government’s tax liens.”

A third case exists out of South Carolina, which the LeBeau court does not mention, in which Carl Smith and Joe DiRizzo sought to assist the wife in her effort to stop foreclosure and seek innocent spouse relief, United States v. Dew. The IRS brought a foreclosure proceeding to sell some jointly owned property for liabilities of both Mr. and Mrs. Dew.  Late during the proceeding, Mrs. Dew filed a Form 8857, which had not yet been ruled on by the IRS.  The DOJ first asked the district court to ignore this belated filing.  And the court essentially did so in 2015 U.S. Dist. LEXIS 112979 (D. S.C. 2015), where it wrote in footnote 1:

The Court notes that Mrs. Dew filed objections asserting an “innocent spouse” defense pursuant to 26 U.S.C. § 6015(f). Even assuming such a claim can properly be raised for the first time in the objections, the innocent spouse defense cannot be considered by this Court because it lies within the exclusive jurisdiction of the tax court. See Jones v. C.I.R., 642 F.3d 459, 461 (4th Cir. 2011) (noting that § 6015(f) authorizes the “Secretary of the Treasury” to grant an innocent spouse relief; see also United States v. Elman, No. 10 CV 6369, 2012 U.S. Dist. LEXIS 173026, 2012 WL 6055782, at *4 (N.D. Ill. Dec. 6, 2012) (stating that “exclusive jurisdiction over [the defendant’s] innocent spouse defense under § 6015(f) lies with the Tax Court.”).

The Dews filed an appeal to the 4th Circuit arguing that the collection suit could not go forward.  Section 6015(e)(1)(B)(i) provides:

Except as otherwise provided in section 6851 or 6861 [26 USCS § 6851 or 6861], no levy or proceeding in court shall be made, begun, or prosecuted against the individual making an election under subsection (b) or (c) or requesting equitable relief under subsection (f) for collection of any assessment to which such election or request relates until the close of the 90-day period referred to in subparagraph (A)(ii), or, if a petition has been filed with the Tax Court, until the decision of the Tax Court has become final.

Mrs. Dew filed a response with the District Court arguing that 6015(e)(1)(B) was mandatory and asked, therefore, that foreclosure be stayed.  In response to this filing, the government finally agreed that it could not pursue collection against her for the taxes subject to the Form 8857, but still asked the court to foreclose and sell the property to satisfy Mr. Dew’s tax debts and Mrs. Dew’s tax debts that were not covered by the Form 8857.  See attached response. The court went ahead with the sale and instructed the distribution of proceeds in accordance with the government’s revised listing (excluding the Form 8857 liabilities). See the final revised order confirming the sale here.  The 4th Cir. then decided the appeal and held against the Dews.  670 Fed. Appx. 170 (4th Cir. 2016).  The entire text of the 4th Cir. opinion is as follows:

James and Veronica Dew (Appellants) appeal the district court’s order and judgment granting the United States’ motion for summary judgment in the United States’ action seeking to reduce to judgment Appellants’ federal income tax liabilities, and to foreclose the federal tax liens securing those liabilities on Appellants’ jointly owned real property. We have reviewed the record and have considered the parties’ arguments and discern no reversible error. Accordingly, we grant James Dew’s application to proceed in forma pauperis and affirm the district court’s amended judgment. United States v. Dew, No. 4:14-cv-00166-TLW (D.S.C. May 19, 2016). We dispense with oral argument because the facts [**2]  and legal contentions are adequately presented in the materials before this court and argument would not aid the decisional process.

In the Lebeau’s case the district court determined that the foreclosure case should be stayed against the LeBeaus until the end of the innocent spouse case. I do not find this result satisfying. Even if the Tax Court finds Victoria innocent, the IRS can still foreclose on the house and sell it subject to her interest. The decision would be much more satisfying if the court had explained why the Rodgers factors might weigh against allowing foreclosure to go forward. Was there something special about Victoria’s need for the house or even Charles’ need? I am assuming that they are not young at this point since they bought the house almost 40 years ago. Absent something special, I would allow the sale to go forward and hold her half in escrow. Since the innocent spouse determination does not prevent the sale, it does not seem that, by itself, it should hold up the sale.

It is possible that I am also someone jaundiced about her innocence given all of the transfers of the property recounted by the court but I recognize that there could be facts that would support a finding of innocent spouse status not brought out in this opinion. The significant delay that the court has provided here does prejudice the IRS unless one assumes that the property will continue to go up in value and that delay will ultimately benefit the IRS in that fashion.

 

Bankruptcy Court Declines to Exclude Retirement Plan from Estate

Congratulations to Keith Fogg on his new grandchild, Samuel! And now, back to tax procedure. Christine  

The case of In re Xiao, No. 13-51186 (Bankr. D. Conn 2018) presents the unusual situation of a bankruptcy court analyzing whether the pension plan of debtor’s corporation met the qualifications required by the Internal Revenue Code for such a plan. Here, it was not the IRS attacking the validity of the pension plan, though it might have if it had noticed. Rather, the bankruptcy trustee brought the action seeking a determination that the plan did not qualify in order to bring the money in the pension plan into the bankruptcy estate. Because the plan held over $400,000 in assets, it provided a rich target for creditors of the estate. Of course, the trustee also has a financial incentive to bring assets into the estate since the more assets the estate contains the larger the fee received by the trustee. Regardless of the financial incentive, bringing the asset into the estate for use to pay the unsecured creditors also fulfills the trustee’s obligation to the estate.

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As a general rule B.C. 541(c)(2) excludes a debtor’s pension plan from the bankruptcy estate. The Supreme Court confirmed this reading of the statute a quarter of a century ago in Patterson v. Shumate, 504 U.S. 753 (1992). The exclusion from the bankruptcy estate does not cover everything labeled as a pension plan. Excluded plans must meet certain criteria. Even if not excluded by BC 541(c)(2), funds could be exempted from the estate under B.C. 522. Few cases exist in which trustees have successfully attacked a plan to bring its assets into the bankruptcy estate. The trustee’s success in this case demonstrates the possibilities of such an action and also the perils to someone who fails to follow all of the necessary formalities for maintaining a proper plan. Even if you believe that the IRS has so few people looking at these plans that the chances of an IRS audit remain slim, the Xiao case shows another way in which failure to properly maintain a pension plan can create problems.

The court here spends several pages recounting the inappropriate manner in which the pension plan of debtor’s corporation was established and administered. The details of the administration of this plan suggested many lapses in following the necessary formalities to properly maintain a plan. The trustee hired an expert to examine plan activity and to testify concerning plan failures. In effect, the expert hired by the trustee acted like a revenue agent performing an audit of the plan. He explained in great detail the plan’s failures. The trustee charges the estate for the cost of the expert and the cost of the litigation attacking the plan. In essence, the plan assets will pay for the cost of the attack. The debtor’s creditors do not mind because even though these costs reduce the funds available from the plan, the trustee still brings into the estate money not otherwise available. The loser here is the debtor who sees his entire pension plan used to fund the attack on the plan and to pay creditors who would not otherwise have had the opportunity to get paid from this asset.

Debtor also hired an expert who testified about the plan in order to prove it was appropriately administered. Debtor himself testified on this point as well. The court did not find the debtor credible and did not find his expert persuasive.

After a detailed examination of the plan, the court found that it did not operate in a manner that allowed the debtor to exclude or exempt this asset. The concluding paragraph of the opinion provides the best overview of the court’s reasoning:

…the Plan failures at issue in this case do not merely constitute technical defaults, but instead are operational failures that ‘are substantial violations of the core qualification requirements for a retirement’ plan as set forth in the IRC Section 401(a)(2). … it appears that LXEng [debtor’s corporation] operated the Plan in order to solely benefit Mr. Xiao and his then spouse, Ms. Chen. According to the Treasury Regulations, a plan cannot act as a subterfuge for the distribution of profits to the owners of the employer. 26 C.F.R 1.401-1(b)(3). It appears to have been so here.

The opinion does not explain how the trustee came to the conclusion that the debtor’s plan did not meet muster. Because I have seen few of these cases over the years, I do not think that many trustees key in on this issue and perhaps the taxpayer’s failure to follow plan formalities represents a rare aberration. I suspect that there may be a number of plans of small businesses with problems that could be attacked by a trustee if the business owner seeks bankruptcy relief and tries to shelter assets in a pension plan. The former employees of the business that this plan did not properly cover could have had claims against the bankruptcy estate. Such employees may have provided the trustee a roadmap to unlocking the assets in the plan. While I am just speculating that one of the employees the plan sought to stiff provided critical information about the inadequacies of the plan, this serves as yet another reminder why employers should keep employees happy and not overtly antagonize them.

The court stresses that it tests qualification of the plan as of the date of the filing of the bankruptcy petition. For any small business where the owner is headed for bankruptcy, the Xiao case should serve as a significant wake-up call regarding the proper administration of a pension plan. The debtor here loses an asset that the creditors could not have reached had the plan been properly administered. Conversely, the case also serves as a reminder to attorneys for creditors that they should pay attention to pension plans in the case of small businesses to look for improper administration of the plan as a way to pull the asset into the bankruptcy estate that might otherwise have few assets for the unsecured creditors. Hiring an expert to do the analysis of the plan and pursuing the litigation to get information about the plan serve as barriers where the plan assets are not significant and information about plan administration does not suggest problems worth pursuing.