Recent Tax Court Case Highlights CDP Reach and Challenges With Collection Potential (and a little Graev too)

0 Flares Filament.io 0 Flares ×

I read with interest Gallagher v Commissioner, a memorandum opinion from earlier this month.  The case does not break new ground, but it highlights some interesting collection issues and also touches on the far-reaching Graev issue.

read more...

First the facts, somewhat simplified.  The taxpayer was the sole shareholder of a corporation whose line of business was home building and residential construction.

The business ran into hard times and was delinquent on six quarters of employment taxes from the years 2010 and 2011. IRS assessed about $800,000 in trust fund recovery penalties under Section 6672 on the sole shareholder after it determined he was a responsible person who willfully failed to pay IRS. IRS issued two notices of intent to levy including rights to a CDP hearing. The taxpayer timely requested a hearing, and the request stated that he sought a collection alternative.

After the taxpayer submitted the request for a CDP hearing the matter was assigned to a settlement officer (SO). There was some back and forth between the SO and the taxpayer, and the taxpayer submitted an offer in compromise based on doubt as to collectability for $56,000 to be paid over 24 months. After he submitted the offer, IRS sent a proposed assessment for additional TFRP for some quarters in the years 2012 and 2014.

The SO referred the offer to an offer specialist. Here is where things get sort of interesting (or at least why I think the case merits a post). The specialist initially determined that the taxpayer’s reasonable collection potential (RCP) was over $847,000. That meant that the specialist proposed to reject the offer, as in most cases an offer based on doubt as to collectability must at least equal a taxpayer’s RCP, a figure which generally reflects a taxpayer’s equity in assets and share of future household income.

Before rejecting the offer, the specialist allowed the taxpayer to respond to its computation of RCP. The taxpayer submitted additional financial information and disputed the specialist’s computation of the taxpayer’s equity in assets that he either owned or co-owned.  That information prompted the offer specialist to revise downward the RCP computation to about $231,000 after the specialist took into account the spouse’s interest in the assets that the taxpayer co-owned and also considered the impact of the spouse on his appropriate share of household income.

Following the specialist’s revised computations, the taxpayer submitted another offer, this time for about $105,000. Because it was still below the RCP (at least as the specialist saw it), she rejected the follow up offer, which led the IRS to issue a notice of determination sustaining the proposed levies and then to the taxpayer timely petitioning the Tax Court claiming that IRS abused it discretion in rejecting his offer and sustaining the proposed levies.

So what is so interesting about this? It is not unusual for taxpayers to run up assessments and to then disagree with offer reviewers on what is an appropriate offer and to differ on RCP. RCP calculations are on the surface pretty straightforward but in many cases, especially with nonliable spouses, illiquid assets and shared household expenses (as here) that calculation can be complex and lead to some differences in views.

In addition, the opinion’s framing of the limited role that Tax Court plays in CDP cases that are premised primarily on challenges to a collection alternative warrants some discussion. The opinion notes that the Tax Court’s function in these cases is not to “independently assess the reasonableness of the taxpayer’s proposed offer”; instead, it looks to see if the “decision to reject his offer was arbitrary, capricious, or without sound basis in fact or law.” That approach does not completely insulate the IRS review of the offer (or other alternative) from court scrutiny, and in these cases it generally means that the court will consider whether the IRS properly applied the IRM to the facts at hand. While that is limited and does not give the court the power to compel acceptance of a collection alternative, it does allow the court to ensure that the IRS’s rejection stems from a proper application of the IRM provisions in light of the facts that are in the record and can result in a remand if the court finds the IRS amiss in its approach (though I note as to whether the taxpayer can supplement the record at trial is an issue that has generated litigation and differing views between the Tax Court and some other circuits).

That led the court to directly address one of the main contentions that the taxpayer made, namely that the specialist grossly overstated his RCP due to what the taxpayer claimed was an error in assigning value to his share of an LLC that owned rental properties.  This triggers consideration of whether it is appropriate to assign a value for RCP purposes to an asset that may in fact also be used to produce income when the future income from that asset is also part of the RCP. The IRM addresses this potential double dipping issue but the Gallagher opinion sidesteps application of those provisions because the rental properties did not in fact produce income, and the offer specialist rejection of the offer, and thus the notice of determination sustaining the proposed levies, was not dependent on any income calculations stemming from the rental properties.

The other collection issue worth noting is a jurisdictional issue. During the time the taxpayer was negotiating with the offer specialist, IRS proposed to assess additional TFRP for quarters from different years that were not part of the notice of intent to levy and subsequent CDP request:

Those liabilities [the TFRP assessments from quarters that were not part of the CDP request] were not properly before the Appeals Office because the IRS had not yet sent petitioner a collection notice advising him of his hearing rights for those periods.  In any event, the IRS had not issued petitioner, at the time he filed his petition, a notice of determination for 2012 or 2014. We thus lack jurisdiction to consider them. [citations omitted]

Yet the taxpayer in amending his offer included those non CDP years in the offer. The Gallagher opinion in footnote 5 discusses the ability of the court to implicitly consider those non CDP years in the proceeding:

We do have jurisdiction to review an SO’s rejection of an OIC that encompasses liabilities for both CDP years and non-CDP years. See, e.g., Sullivan v. Commissioner, T.C. Memo. 2009-4. Indeed, that is precisely the situation here: the SO considered petitioner’s TFRP liabilities for 2012 and 2014, as well as his TFRP liabilities (exceeding $800,000) for the 2010 and 2011 CDP years, in evalu- ating his global OIC of $104,478. We clearly have jurisdiction to consider (and in the text we do consider) whether the SO abused his discretion in rejecting that offer. What we lack jurisdiction to do is to consider any challenge to petitioner’s underlying tax liabilities for the non-CDP years.

This is a subtle point and one that practitioners should note if in fact liabilities arise in periods subsequent to the original collection action that generated a collection notice and a consideration of a collection alternative in a CDP case. Practitioners should sweep in those other periods to the collection alternative within the CDP process; while those periods are not technically part of the Tax Court’s jurisdiction they implicitly creep in, especially in the context of an OIC which could have, if accepted, cleaned the slate.

The final issue worth noting is the opinion’s discussion of Graev and the Section 6751(b) issue. While acknowledging that it is not clear that the TFRP is a penalty for purposes of the Section 6751(b) supervisory approval rule, the opinion notes that in any event the procedures in this case satisfied that requirement, discussing and referring to the Tax Court’s Blackburn opinion that Caleb Smith discussed in his designated orders post earlier this month:

We found no need to decide that question because the record included a Form 4183 reflecting supervisory approval of the TFRPs in question. We determined that the Form 4183 was suffic- ient to enable the SO to verify that the requirements of section 6751(b)(1) had been met with respect to the TFRPs, assuming the IRS had to meet those requirements in the first place.

Here, respondent submitted a declaration that attached a Form 4183 showing that the TFRPs assessed against petitioner had been approved in writing by …. the [revenue officer’s] immediate supervisor…. In Blackburn, we held that an actual signature is not required; the form need only show that the TFRPs were approved by the RO’s supervisor. Accordingly, we find there to be a sufficient record of prior approval of the TFRPs in question.

Leslie Book About Leslie Book

Professor Book is a Professor of Law at the Villanova University Charles Widger School of Law.

Comments

  1. Norman Diamond says:

    “in these cases it generally means that the court will consider whether the IRS properly applied the IRM to the facts at hand”

    So the IRM gives rights to taxpayers in Tax Court but not in other courts?

    Suppose the IRS concedes an issue due to failure to comply with the IRM. Could the DOJ act on its own and appeal to a court where concession would be overturned and the IRM would be ignored?

    “proper application of the IRM provisions in light of the facts that are in the record and can result in a remand if the court finds the IRS amiss in its approach (though I note as to whether the taxpayer can supplement the record at trial is an issue that has generated litigation and differing views between the Tax Court and some other circuits)”

    If the US had due process, that wouldn’t be an issue. However, even in circuits where that is an issue, what happens when the IRS records that were reviewed by a settlement officer, which the IRS filed in a case, conflict with other IRS records — does the taxpayer have a right to rely on other IRS records in those circuits?

    TIGTA has reported several times about IRS employees being arrested for improper access to records. They can make a settlement officer see whatever records they want her to see, which might or might not have any relationship to reality.

  2. Great stuff, Professor Book. Studying your nitty gritty posts is like eating procedural-tax spinach.

Comment Policy: While we all have years of experience as practitioners and attorneys, and while Keith and Les have taught for many years, we think our work is better when we generate input from others. That is one of the reasons we solicit guest posts (and also because of the time it takes to write what we think are high quality posts). Involvement from others makes our site better. That is why we have kept our site open to comments.

If you want to make a public comment, you must identify yourself (using your first and last name) and register by including your email. If you do not, we will remove your comment. In a comment, if you disagree with or intend to criticize someone (such as the poster, another commenter, a party or counsel in a case), you must do so in a respectful manner. We reserve the right to delete comments. If your comment is obnoxious, mean-spirited or violates our sense of decency we will remove the comment. While you have the right to say what you want, you do not have the right to say what you want on our blog.

Speak Your Mind

*