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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

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