In 2017, the Tax Court issued rulings in several cases regarding the application of IRC 6343(a)(1) to entities. The lead case was Lindsay Manor Nursing Home, Inc. v. Commissioner, 148 T.C. No. 9 (2017). I blogged about the group of cases here in a post with a catchy tag line about rolling the wheelchairs and beds to the curb. Lindsay Manor appealed the decision. I wrote about the outcome of that appeal which basically vacated the decision because Lindsay Manor was in receivership at the time of the Tax Court’s decision.
Now, another nursing home in the same group of cases, Seminole Nursing Home, Inc., has made its way to the 10th Circuit after being told in the Tax Court that it did not qualify for hardship. The 10th Circuit decision upholds the decision of the Tax Court and the validity of the Treas. Reg. 301.6343-1(b)(4)(i). I don’t know if the nursing home has been keeping itself open in the four years since the Tax Court decision, but now it must either succeed in getting the Supreme Court to hear the case, pay the outstanding tax, work out some form of payment agreement or, potentially, watch the IRS shut it down.
This case came to the Tax Court as a Collection Due Process case. IRS Appeals rejected Seminole’s offer of an installment agreement prior to the Tax Court case, stating:
Seminole had sufficient assets to pay its tax debt in full; and (2) it was ineligible for an installment agreement because it had not made all its required federal tax deposits for 2014. The Office also rejected Seminole’s economic-hardship argument, explaining that Treasury Regulation § 301.6343-1(b)(4) limits economic-hardship relief to individual taxpayers. And it determined that “[i]n balancing the least intrusive method of collection with the need to efficiently administer the tax laws and the collection of revenue, . . . the balance favors issuance of the levy, and is no more intrusive than necessary.”
The 10th Circuit engaged in a Chevron analysis to determine if the regulation appropriately interpreted the statute. Seminole argued that the Code provides an unambiguous answer at step one, citing to IRC 7701(a)(14) for support that entities are persons under the IRC. That section defines person to include “an individual, a trust, estate, partnership, association, company or corporation.” Seminole also pointed out that IRC 6343(a)(1)(D) makes no distinction between individual and corporate taxpayers.
While the language of the definitional provision in IRC 7701 appears favorable to Seminole’s argument, the 10th Circuit notes that the preface to the definitions says they apply “[w]hen used in this title, where not otherwise distinctly expressed or manifestly incompatible with the intent thereof.” It finds that the use of the word taxpayer elsewhere in the Code makes clear the word can be limited to individuals. It says that corporations can experience economic hardship, citing an earlier case in which it made such a holding, but looking at the exemptions to levy in IRC 6343, it finds they all essentially apply to individuals and not to entities.
The court finds it important that Seminole did not attempt to show what economic hardship for entities would look like. It also noted that no one commenting on the regulation suggested the result for which Seminole argues. Looking at the situation as a whole, it decides that the statute does not compel a result, leaving the Treasury free to apply its expertise in writing a regulation.
Seminole did not make the argument about disqualification of the Settlement Officer for looking at the file before the hearing that was made in the companion case of Lindsay Manor, but it did make a second argument using the reversal of the Lindsay Manor case as a basis for arguing the underlying Tax Court decision in its case lost its foundation upon the vacating of the Tax Court’s decision in Lindsay Manor for mootness. The 10th Circuit says, however, that it did not vacate Lindsay Manor on the merits but only because of mootness at the time of the Tax Court’s ruling. It finds that the adoption of the reasoning of Lindsay Manor to the facts of Seminole did not create an abuse of discretion.
The Seminole case fills the hole created by the mootness of Lindsay Manor. While the outcome does not provide a surprise, this is a major victory for the IRS regarding the interpretation of the statute. This doesn’t mean there will not be further challenges in other circuits. The decision does, however, provide the kind of support that will greatly assist the IRS should those challenges arise.
Limiting economic hardship to individuals seems consistent with the statutory scheme of the levy provisions. Because of the hardship that closing down a nursing home could create for the individuals living there, nursing home cases provide one of the best litigating vehicles for challenging the limits created by the regulation. Still, the hardship is directly the hardship of the entity and not of the individuals who reside at the facility. The situation becomes very sympathetic if the economic hardship experienced by the entity results from government delays. Other cases have addressed the imposition of the trust fund recovery penalty upon nursing home operators who could not make the necessary tax payments because of significant delays in Medicare payments. If the cause of the hardship is another part of the government, courts should look for ways to mitigate the taxpayer’s problem even where the taxpayer is an entity but limiting the concept of hardship to individuals generally seems appropriate. It’s hard to say the 10th Circuit was wrong in upholding the regulation as a reasonable interpretation of the statute.