Death and Taxes

On the substantive side of tax issues Congress is focusing on death and taxes as it studies and debates whether to eliminate the stepped up basis currently given to property upon the death of the owner.  This debate is not new.  When I was in law school in the mid-1970s taking a class in estate and gift taxes Congress was engaged in the same debate and decided to eliminate the stepped up basis in the middle of my semester.  The professor, a prominent local practitioner, deserved extra duty pay for trying to follow the twists and turns during the run up and passage of the repeal of the stepped up basis that semester.  Of course, the following year Congress repealed the repeal of the stepped up basis putting us back where we are today.  Because of my law school experience with this issue almost five decades ago and my personal experience as a beneficiary of the stepped up basis, I follow the debate with interest.

This blog focuses on procedure, however, and I wanted to bring to everyone’s attention to a death and taxes story playing out on the collection side of the house.  This story also has roots in the current pandemic and efforts for relief for those impacted by it.

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On April 30, 2021, the IRS issued SBSE-05-0421-0031 “Levy Actions Involving FEMA COVID-19 Funeral Assistance Funds.”  In this guidance the IRS instructs collection employees to release bank levies if the funds in the account include money received by the taxpayers as COVID-19 Funeral Assistance funds provided by the Federal Emergency management Agency (FEMA).

We have written before about tracing funds into a bank account and whether certain funds in a bank account that can be traced from sources on which the IRS could not levy at the time of payment should be protected from levy once placed in a bank account.  See the excellent post by Les on this subject here.  Generally, the IRS takes the position that money in a bank account is fair game for its levy no matter what source, protected from levy or not, generated the funds in the bank account.  In the case Les discusses in his post the 10th Circuit hinted that maybe veteran’s benefits exempted from levy in the list at IRC 6334(a)(10) could retain protection if properly traced.

Despite its normal view that funds going into a bank account become fair game, the kinder, gentler IRS carves out an exception here if the funds subject to the levy have arrived in order to pay the funeral expenses of a loved one.  It makes sense for the IRS to make this exception and avoid having to explain the taking of these funds but the decision raises again the issue of when the IRS should back away from funds in a bank account.

Backing away creates its own difficulties which drives the normal IRS position on this issue.  First, the IRS has no idea the source of the funds in a bank account and no realistic way to find out except from the taxpayer.  The notice contemplates that after a levy the taxpayer will tell the IRS that it has levied on the funeral funds.  That itself presents a couple of problems.  One concerns how many taxpayers will know that the IRS has created this exception.  The bank levy could easily be generated by an Automated Call Site (ACS) with little or no contact between the IRS and the taxpayer.  The taxpayer will learn from the bank, at some point, that the IRS has levied but is unlikely to be aware of this guidance and will only contact the IRS out of some sense of unfairness that it levied upon the funeral funds for a loved one, perhaps stopping the funeral.  That also raises the second problem of just getting through to the IRS to tell it about this issue even if you know about the policy.  Getting through is not easy and this will be a family in the midst of grieving.

Assuming the taxpayer knows about the policy or calls to complain generally and assuming the taxpayer gets through, then the IRS will request documentation to verify the funds came from FEMA, when they came, how much came, etc.  Once the taxpayer satisfies the verification procedure, the IRS will release the levy on the verified funds.

The IRS has created a similar but more taxpayer friendly procedure for accounts with PPP funds and Recovery Rebate stimulus payments requiring the IRS to check before making the levy.  As mentioned above, that can be difficult for the IRS.

The procedure for the FEMA funds tracks, in many ways, the procedure for levies where multiple parties own the bank account.  Following its narrow victory in United States v. National Bank of Commerce, 472 U.S. 713 (1985) a procedure developed providing bank notification of the owners and a 21 day opportunity for owners of the account to come in and show that the money in the account belonged to them rather than to the taxpayer who owed the tax causing the levy.  The taxpayer’s wife and mother jointly owned the account at issue in that case making for some interesting dinner table conversations.  The verification that the wife and mother would have provided to show the money belonged to one of them rather than the taxpayer would track the verification procedures developed for the FEMA payments.  The IRS and banks have used this system now for over 35 years and it seems to work.

What if all bank levies had a 21-day hold with the opportunity not only for co-owners to verify ownership but for the taxpayer to verify any funds that protected by IRC 6334 or by special designation such as the FEMA funds here? If such a system existed, taxpayers would not need to read SBSE memos to know when to raise their hand and they would have a process of talking to the IRS through the bank that might work better than trying to call a number where a low percentage of taxpayers get through.  Such a system would also eliminate the second hand taking of funds Congress sought to preserve for the taxpayer and would make it less necessary for taxpayers with outstanding liabilities to need to find alternatives to banking to preserve those special assets.

Unlicensed Chiropractor’s Retirement Account Not Exempt From Garnishment Even When Subject to Prior Child Support Order

US v Clark explores whether the government can use its restitution powers to seize assets in an individual’s retirement accounts. While not a tax case, its analysis is dependent on the meaning of Section 6334(a)(8) which exempts from IRS levy “salary, wages, or other income . . . necessary to comply” with child-support orders. 

The case involves Thomas Clark, who owes over a half million dollars in restitution stemming from Clark’s guilty plea from operating a chiropractic clinic that fraudulently billed insurance companies for services he performed without a license. 

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The Mandatory Victim Restitution Act (MVRA) allows the government to garnish a defendant’s property to satisfy a restitution order.  The restitution statute in Title 18 borrows exemptions from Section 6334, which provides that certain property is exempt from levy. 

The government sought to levy from assets in two of Clark’s retirement accounts. The Fifth Circuit has held that the MVRA generally permits the government to garnish assets held in a retirement account to satisfy a restitution order. The wrinkle was that Clark estimated that he owed approximately $1,000/month in child support. He argued that the property in his retirement accounts amounted to “other income” under 6334(a)(8) that was necessary for him to comply with his child support and thus exempt from garnishment.

The Fifth Circuit disagreed. In so doing it noted that the issue is somewhat complicated by the consequences of Clark withdrawing assets from the IRA; the withdrawal itself would trigger income tax consequences (unlike cash in a savings account). That suggests some support for Clark’s position.

Ultimately the court found for the government and relied on ejusdem generis, which provides that confronted with a list of specific terms that ends with a catchall phrase, courts should limit the catchall phrase to “things of the same general kind or class specifically mentioned.” (citing ANTONIN SCALIA & BRYAN A. GARNER, READING LAW: THE INTERPRETATION OF LEGAL TEXTS 199 (2012)). With that canon the court looked at 6334(a)(8) as a “textbook example” of ejusdem generis leading it to conclude that “we should read “salary, wages, and other income” as “salary, wages, and other [similar] income.” 

For further support the court discussed Woods v. Simpson, 46 F.3d 21, 24 (6th Cir. 1995), which held that an inheritance was not exempt under 6334(a)(8) as it was not in the same category as salary or wages. Instead “other income” is limited to “items received by individuals for services rendered, such as bonuses, tips, commissions, and fees.”  

Conclusion

Simply put the child support exemption relates to amounts received directly from a taxpayer’s labor. Once placed in an account, the protection disappears, and the government is free to use its collection powers. 

The Clark decision finds direct support in Section 6334(c), which “provides that no property or rights to property shall be exempt from levy other than the property specifically made exempt by [Section 6334(a)].” Even if an asset itself is generating income, or would trigger income inclusion, or is funded with income which itself would have been exempt from levy, the government is not restricted from levying the underlying property. 

In 2016 I discussed a related issue in Maehr v Koskinen; in that case the taxpayer/army veteran argued that the 6334(a)(10) protection against levy as applied to veterans service related disability benefits should extend to funds in an account that were solely comprised of those benefits. Shortly after my post Keith also discussed the reach of 6334(a)(10). My post flagged the issue in Maehr; a 2018 district court opinion at 121 AFTR 2d 2018-1198 and appellate opinion we did not discuss held that Section 6334(a)(10) did not protect funds that were already paid.  I note as well that Congress has shown itself capable of using tracing method to free assets from levy—it has done so in the second round of economic impact payments and also uses broader language (“payable to or received by…” ) to protect a minimum amount of compensation from levy in 6334(a)(9).

District Court Holds That Premature Withdrawal from Retirement Account Under Threat of Levy Subject to 10 Percent Additional Tax

In this post I will discuss Thompson v US, an opinion from the Northern District of California that explores the limits to an exception to the 10% penalty on early withdrawals from tax favored retirement plans when the distribution is used to pay an assessed federal tax liability on account of a levy.

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The facts of Thompson are straightforward. Facing a significant tax liability and “under imminent threat of levy and lien collection by Field Collections,” the Thompsons withdrew over a million dollars from a retirement account.  There are a number of exceptions to the additional 10% tax on levied on the gross distributions from a retirement plan. The most commonly known is the exception for distributions after an employee turns 59 1/2; another is found in Section 72(t)(2)(A)(vii), which provides that the 10% additional tax does not apply if the distribution is “on account of a levy under Section 6331.”

The Thompons paid the tax and filed a claim for refund, arguing that they were not subject to the early distribution additional tax under the Section 72(t)(2)(A)(vii) “on account of a levy” exception.

After IRS rejected the claim and the Thompsons sued for a refund in federal court, the government filed a motion to dismiss, arguing that the Thompsons’ withdrawal was voluntarily made and thus not “on account” of a levy and thus outside the exception in 72(t)(2)(A)(vii). The Thompsons in response did not deny that there was no actual levy, but instead argued that the government “took all the legally required steps to set in motion a levy, issuing Final Notices/Notices of Intent to Levy on December 12, 2012.” In addition, facing the threat of a Notice of Federal Tax Lien, which posed a “threat to Mr. Thompson’s business, his livelihood and his ability to generate funds sufficient to pay the balance of the liability over time,” meant that the withdrawal was not truly voluntary and and therefore should not be subject to the penalty.

For support, the Thompsons pointed to Murillo v Comm’r, where there was a distribution from a retirement plan that arose due to a forfeiture order and the Tax Court held that the taxpayer was not subject to the penalty, and to an earlier case, Laratonda v Comm’r, where the Tax Court, prior to the statutory exemption for levies now found in Section 72(t)(2)(A)(vii), found that a taxpayer whose funds from a retirement account were withdrawn pursuant to an IRS levy was not subject to the penalty.

The district court distinguished the Thompsons’ facts from the exception the Tax Court fashioned in Murillo and Laratonda:

Plaintiffs rely on the court’s emphasis on the involuntary nature of the withdrawals in Murillo and Laratonda in support of their assertion that they have stated a valid claim. Yet the limited facts alleged here are distinguishable from both Murillo and Laratonda in a crucial respect. Here, Plaintiffs’ retirement account was not, in fact, levied and the distribution was triggered not by any act of the IRS but by Plaintiffs’ own acts. In other words, Plaintiffs were actively involved in the distribution.

For good measure the district court noted that the legislative history to Section 72(t)(2)(A)(vii) explicitly referred to the exception as not applying to voluntary withdrawals to pay in the absence of an actual levy, as well as a 2009 Tax Court case, Willhite v Comm’r, which held that a taxpayer who had withdrawn funds from a retirement account following receipt of a notice of intent to levy was subject to the 10 % penalty.

Conclusion

In finding for the government and granting dismissal of the complaint, the district court did, however, throw a lifeline to the Thompsons. It noted that cases like Murillo suggest that there “may be circumstances other than a levy (for instance, a forfeiture) where a withdrawal is involuntary and therefore does not trigger the 10% penalty under § 72(t).” While noting that the Thompsons did not allege facts to support a plausible inference that the exception applies, it dismissed the complaint without prejudice, meaning that the Thompsons can file an amended complaint, which could include facts that would support such an inference.

In dismissing the complaint the district court held that it “need not decide at this juncture whether Plaintiffs might be able to state a claim based on allegations that the withdrawal was involuntary and coerced for reasons other than the fact that the IRS had set in motion a levy.”

I suspect that the Thompsons may have a difficult time navigating the narrow exception that Murillo supports. The issue of avoiding the 10% additional tax based on the levy exception is one Keith discussed most recently here, when he updated readers on Dang v Commissioner, involving a taxpayer who requested that IRS levy on his retirement account to ensure that the 10% tax did not apply. That post generated thoughtful comments, and Joe Schimmel suggested that perhaps IRS should draft a revenue procedure that allows the taxpayer to elect a levy on a retirement account. If the IRS listened to Joe that would have allowed the Thompsons to avoid what seems like a fairly punitive result of paying what amounts to an additional fairly harsh penalty for their tax troubles–admittedly of their own doing.

One other issue that the Thompons apparently did not raise is whether Section 72(t) is a penalty for purposes of Section 6751(b). As one might expect, another of our longtime readers and pioneer on this issue, Frank Agostino (joined by Malinda Sederquist) has weighed in on this in the latest issue of the Monthly Journal of Tax Controversy. Frank and Malinda point to analogous authority in the bankruptcy context, which has held that Section 72(t) is a penalty for purposes of determining priority status, and they recommend that taxpayers challenge the Section 72(t) 10% addition under Section 6751(b). Frank and Malinda do note that there is a summary non precedential Tax Court opinion holding that Section 72(t) is not a penalty for purposes of Section 6751(b) and they also acknowledge El v Commissioner, a 2015 opinion that held that Section 72(t) is not a penalty for purposes of Section 7491(c).

Whether this can be raised by the Thompsons in an amended complaint is unclear, as they would run into a likely variance challenge if they had not raised the 6751(b) issue in their original claim. I have no doubt, however, that Frank and friends and others will be pressing this issue.

 

 

 

Making an Offer in Compromise Does not Stop Seizure and Sale of Home

In United States v. Brabant-Scribner, No. 17-2825 (8th Cir. Aug. 17, 2018) the Eighth Circuit affirmed the decision of the district court allowing the sale of taxpayer’s home and affirmatively determining that an offer in compromise request filed by the taxpayer has no impact on the ability of the court to grant the request by the IRS to sell the home or on the IRS’ ability to sell the home once the court granted its approval. In reaching this conclusion the Eighth Circuit analyzes the exemptions to levy in IRC 6334 and the relief those provisions do and do not provide.

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Taxpayer owes the IRS over $500,000. The opinion does not discuss the actions by the taxpayer to pay or resolve her liability prior to the action by the IRS to sell her house. I imagine that the IRS considered her a “won’t pay” taxpayer. Before seeking to sell her home, the IRS had seized and sold her boat and levied on her bank accounts.

The 1998 Restructuring and Reform Act added IRC 6334(e)(1)(A) to require that prior to seizing a taxpayer’s principal residence the IRS must obtain the approval of a federal district court judge or magistrate in writing. Before the passage of this provision, the IRS could seize a taxpayer’s home with the same amount of prior approval needed to seize any other asset owned by the taxpayer. No approval was necessary to seize any asset of the taxpayer. Prior to 1998 collection due process did not exist. Prior to 1998 the 10 deadly sins did not exist one of which calls for the dismissal of an IRS employee who makes an inappropriate seizure. So, the landscape regarding seizures, and especially personal residence seizures, changed dramatically after 1998; however, the amount of litigation regarding seizure of personal residences is low and the Brabant-Scribner case offers a window on one aspect of this process.

As the IRS initiated the process of seizing her personal residence by obtaining the appropriate court approval, the taxpayer filed an offer in compromise. She filed an effective tax administration offer of $1.00, but the amount and sincerity of her offer do not really matter to the legal outcome of this case. The timing and the amount of the offer may have influenced the thinking of the judges and made them more inclined to dismiss her argument but her possibly bad faith effort to stop the approval and execution of the sale should not have affected the outcome here.

To convince the court to allow the sale of a personal residence, the IRS must show compliance with all legal and procedural requirements, show the debt remains unpaid and show that “no reasonable alternative” for collection of the debt exists. Taxpayer argued that her offer was a reasonable alternative; however, the court spends three paragraphs explaining that an offer does not matter in this situation. The relevant language in the applicable regulation is “reasonable alternative for collection of the taxpayer’s debt.” The court explains that the word “for” holds the key to the outcome.

“For” refers to an alternative to the sale of the personal residence such as an installment agreement or the offer of funds from another source to satisfy the debt. An offer in compromise is not an alternative for collection but an alternative “to” collection.

Having determined that the words of the regulation point toward a resolution other than an offer as providing the necessary alternative, the court looks at the remainder of the regulation for further support of its conclusion. It points to the provision in Treasury Regulation 301.6334-1(d)(2) which provides that the taxpayer has a right to object after the IRS makes its initial showing and “will be granted a hearing to rebut the Government’s prima facie case if the taxpayer … rais[es] a genuine issue of material fact demonstrating … other assets from which the liability can be satisfied.” This regulation, like the one providing an alternative “for” collection, looks not to relief from payment of the liability but a source for making payment. It does not provide the offer in compromise as a basis for relief. Based on this the court concludes that “nothing requires the district court to ensure that the IRS has fully considered a taxpayer’s compromise offer before approving a levy on a taxpayer’s home.”

Since the IRS properly made its case for seizing and selling the home and the taxpayer did not rebut that case, the Eighth Circuit affirms the decision of the district court to approve the sale. The decision provides clear guidance for district courts faced with the request by the IRS to seize and sell a personal residence. Personal residence seizures by the IRS remain rare at this point. Taxpayers faced with such a seizure, almost always taxpayers the IRS characterizes as “won’t pay” taxpayers, will find it difficult to stop the seizure and sale based on this decision. I do not think this decision will motivate the IRS to increase the number of personal residence seizures but it will make it a little easier to accomplish when it decides to go this route.

 

Follow up on TBOR and CDP

In an earlier post, I wrote about an order in the case of Dang v. Commissioner remanding a Collection Due Process (CDP) case back to Appeals. Taxpayer opposed the remand requested by the IRS arguing that the Tax Court should just grant the taxpayer’s request for relief without the need of a remand. In a recent order, it looks like the Appeals employee took little time after the remand to reach the conclusion proposed by the taxpayer although the matter is not quite finally settled.

At issue in this case was the taxpayer’s request that the IRS levy on his retirement account in order to satisfy the outstanding tax debt. The revenue officer refused to do so and the Appeals employee said that the CDP hearing did not provide such a remedy. The taxpayer requested that the IRS levy on the retirement account because he was not yet 59 and 1/2. If he pulled the money out of the retirement account as requested by the RO and the SO, he would have to pay tax on the money withdrawn and a 10% excise tax under IRC 72(t)(1). If the IRS levies on the retirement account, the 10% excise tax does not apply because of IRC 72(t)(2)(A)(vii).

Among other arguments, the taxpayer argued that requiring him to pull the money out violated the Taxpayer Bill of Rights since it would cause him to pay more than the correct amount of tax. Requiring him to pull out the money just seemed downright stupid and unfair which no doubt motivated the Chief Counsel attorney to request the remand at the outset of the case. The second time around, Appeals seems to get the concept. The case suggests that some training might be needed and maybe a change in the IRM to make it easier for ROs to levy on a retirement account when requested to do so by the taxpayer. Without such a request, ROs must seek high level approval to levy on a retirement account. Removing the layers of approval when the taxpayer seeks the levy would make it easier for ROs to acquiesce to such a request.

The approval levels provide a barrier that explains why the employees would not readily acquiesce in what seems like a reasonable request by the taxpayer and why their behavior was grounded in logic twisted by the approval levels. The approvals levels necessary to levy on retirement accounts were created to protect taxpayers. So, Mr. Dang’s problem in getting the IRS to levy finds its roots in a procedure designed by the IRS to help but when coupled with the elimination of the penalty offered by IRC 72(t)(2)(A)(vii) ends up hurting certain taxpayers. It’s good to see that the IRS was able to work though the problem in the remand.

Because the case appears on a path to agreement, we will not have the opportunity to see what the Tax Court would do with the TBOR argument made by the taxpayer and whether the use of TBOR in this context might provide a path to remedy.

Updates on Collection Issues

The IRS has recently updated several matters that impact taxpayers in collection. This post pulls together some of the newly available information.  The areas discussed in this post are the financial standards, the updated offer in compromise booklet, the impact of the new law on amounts exempt from levy and the impact of the new law on the time to file wrongful levy claims.

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Financial Standards

On March 26, 2018 the IRS issued new financial standards to be used in collection cases.  The new standards provide guidance to individuals seeking to prepare a collection information statement in order to convince the IRS to grant an offer in compromise, an installment agreement, to make a currently not collectible determination or to otherwise decide the appropriate course of action in a collection case.  The financial standards have their roots in information published by the Bureau of Labor Statistics.  Congress also makes them applicable in bankruptcy cases for certain purposes.

Offer in Compromise

On March 25, 2018, the IRS issued a new Offer in Compromise Booklet. The updated booklet contains the following changes:

Form 656, Section 6, Filing Requirements – “I have filed all required tax returns and have included a complete copy of any tax return filed within 60 days prior to this offer submission.”

This is also addressed in the opening Q&A section under “Other Important Facts”:

“Note: If you have filed your tax returns but you have not received a bill for at least one tax debt included on your offer, your offer and application fee may be returned and any initial payment sent with your offer will be applied to your tax debt. Include a complete copy of any tax return filed within 60 days prior to this offer submission.”

WHAT YOU NEED TO KNOW, Q&A Section, Bankruptcy, Open Audit or Innocent Spouse Claim – “If you currently have any open audit or outstanding innocent spouse claim, wait for those issues to be resolved before you submit an offer.”

PAYING FOR YOUR OFFER – There is better highlighting of the Low-Income Certification option, with emphasis that low income certification means no money need be sent with the offer.

Because the IRS will not work an offer if a taxpayer has not complied with tax laws by filing all necessary returns, many taxpayers file returns immediately prior to the filing of an offer in compromise. The IRS does not always process past due returns with haste because it puts more focus on processing the currently due returns.  The new requirement that a taxpayer attach returns filed within 60 days of the submission of the offer allows the IRS offer group to avoid rejecting cases for lack of filing compliance and to get a view of the liabilities the taxpayer owes in advance of the actual assessment.

The warning about waiting for the resolution of outstanding audits or claims should be considered in the context that an offer in compromise acts as a closing agreement resolving all matters concerning the years covered by the offer. A taxpayer cannot go back and seek a refund after obtaining an offer and the IRS cannot go back and seek an additional assessment.  It is important to resolve all issues for the years covered by the offer but many taxpayers do not appreciate the scope of the offer with respect to the years it covers.

Low income taxpayers continue to receive a benefit when applying for an offer because they do not have to pay a fee for the offer or remit a percentage of the offer. Almost all practitioners know this but many individuals filing offers pro se may not appreciate this benefit and the new booklet tries to make it clearer.

Each of the changes seem appropriate and helpful.

Exemption from Levy

The exemption from levy is tied to the personal exemption. The personal exemption went up last year and the IRS has published guidance on how that change impacts the amount of the exemption from levy in a wage levy situation.  This creates a windfall for individuals subject to a wage levy that Congress probably did not think about when it passed the law.  Of course, windfall may be the wrong term when talking about a provision that can bring a taxpayer to their knees.  Here is the IRS description of the way the wage levy provisions will now work:

Public Law Number 115‐97, TAX CUTS AND JOBS ACT OF 2017, signed by President Trump on December 22, 2017, temporarily increases the basic standard deduction applicable to the 2018 taxable year [IRC § 63(c)(2); Rev. Proc. 2016‐ 55] across all filing categories:

  • From $6,350 to $12,000 for single individuals and married individuals filing separate returns;
  • From $9,350 to $18,000 for heads of households; and
  • From $12,700 to $24,000 for married individuals filing a joint return and surviving spouses.

The Act also suspends personal exemption deductions. Both changes, the increase in the standard deduction and the suspension of the personal exemption, are effective for taxable years beginning after December 31, 2017, and before January 1, 2026. These two changes impact how a recipient of a levy will figure the amount of income exempt from levy. Prior to the change in the law, the amount that was exempt from levy was calculated by taking into consideration both the standard deduction and the total exemptions of the payee. With the elimination of personal and dependency exemptions, a new method for determining the amount of income exempt from levy was needed.

As part of the Tax Cuts and Jobs Act, Congress amended §6334 to provide that from January 1, 2018 through December 31, 2025 employers and other recipients of levies would exclude from levy $4,150 per dependent per year in addition to the amount excluded based upon the standard deduction for the filing status of the person subject to levy. The amount exempt from levy each pay period is calculated by dividing the total amount exempt from levy for the year by the number of pay periods. Publication 1494, Table for Figuring Amount Exempt from Levy on Wages, Salary, and Other Income has been updated. Changes are also being made to Forms 668-W(c), 668-W(c)(DO), 668-W (ICS) and Form 668-W, Notice of Levy on Wages, Salary, and Other Income, along with the instructions.  Due to the increase in the standard deduction amount, in most cases, the taxpayer will have more take-home pay that is exempt from levy.

Employers or others receiving levies will need to figure the amount of income exempt from levy. To do so the recipient  must determine what the payee’s filing status will be (The amount exempt from levy is based upon the standard deduction for that filing status); the frequency of payments, Daily (260), Weekly (52), Bi-Weekly (26), Bi-Monthly (24), Monthly (12); and lastly, the number of dependents that the payee will claim. In this example, the employer knows that the employee will claim the married filing joint standard deduction and has two dependents.

STEP 1: Determine the filing status of the payee.

STEP 2: Find the amount exempt from levy based upon how often taxpayer is paid:

Married Filing Jointly:

STEP 3: The taxpayer is entitled to exclude $4,150 per year per dependent. This chart shows the amount that can be excluded each pay period based upon pay frequency. The amount from far the right-hand column for the correct pay frequency will need to be multiplied by the number of dependents to arrive at the total amount exempt from levy that is attributable to the payee’s dependents.

Amount Exempt from Levy per Dependent:

Step 4:

Amount Exempt from levy from Bi-Weekly Pay:

Add the amount exempt per pay period based upon the payee’s filing status, plus the amount exempt per pay period per dependent to arrive at the total amount of take-home pay that is exempt from levy. A taxpayer that is married, files jointly, is paid $1,500 bi-weekly, and claims two dependents will receive $1,242.32 and will have $257.68 ($1,500-$1242.32) levied.

Wrongful Levy Claims

IRC § 6343(b) previously required taxpayers to make a wrongful levy claim within nine months of the taking of the property. For some people, this time frame was too short because they did not even learn about the taking during that time.  In response, Congress increased the amount of time taxpayers have to seek the return of property when they believe the IRS has wrongfully taken their property while trying to collect from a taxpayer.

Public Law 115-97, the Tax Cuts and Jobs Act extends the period for making an administrative claim to two years and if the taxpayer makes an administrative claim during that period the time to bring suit is extended for 12 months from the date of filing of the claim or for six months from the disallowance of the claim, whichever is shorter. The change applies to levies made after December 22, 2017, and to levies made prior to that date if the nine month period under the prior law had not yet expired.  The IRS issued IR-2018-126 to discuss the change and has revised Publication 4528 to reflect the change.

 

Lindsay Manor Reprise

Last year, we posted on the Tax Court’s decision in Lindsay Manor v. Commissioner, 148 T.C. 9 (2017). The taxpayer appealed the decision to the 10th Circuit, which has not only dismissed the appeal as moot but also vacated the Tax Court’s decision.

The Tax Court, in a precedential opinion, decided that a corporation could not avail itself of the hardship exception in IRC section 6343(a)(1)(D) holding, in support of Treas. Reg. 301.6343-1, that only individuals may avoid levy based on hardship.

On appeal, the government moved to dismiss the case as moot because Lindsay Manor no longer operated nursing home facilities. The 10th Circuit agreed because Lindsay Manor lacked a “personal stake in the outcome of the lawsuit.” The only issue on appeal was the applicability of IRC section 6343(a)(1)(D) to corporate taxpayers. Lindsay Manor had argued that it qualified for hardship relief only “because imposing the levy would leave it unable to ‘provide adequate care for its patients.’” Since Lindsay Manor no longer has patients this ground for relief does not exist anymore.

In dismissing for mootness, the 10th Circuit looked into the facts surrounding the nursing home Lindsay Manor operated. It turns out that another creditor had a receiver appointed six months before the Tax Court published its opinion. So, the case was moot before the Tax Court published its opinion. In the Tax Court, the IRS filed two motions for summary judgment. The second motion was filed on October 14, 2015 with the response from petitioner on October 28, 2015. The opinion was rendered on March 22, 2017 – about 17 months later. So, Lindsay Manor was operating the nursing home at the time of the last action by the parties prior to the issuance of the opinion. Obviously, neither the petitioner nor the IRS alerted the Tax Court to the change in circumstance.

I looked for a Tax Court Rule obligating the parties to notify the Court but could not find one.  I know that the IRS feels under an obligation to tell the Court when something happens that impacts jurisdiction and provides instructions to Chief Counsel attorneys for notification in the situation presented by this case, bankruptcy filings, etc. The IRS would not necessarily have known about the appointment of the receiver or at least not in a way that would naturally make its way to their Counsel. If petitioner’s counsel knew that his client had been replaced by a receiver, he probably should have notified the Tax Court although I could not file a Rule obliging him to do so.  If either party had notified the Court, I expect that the notification would have caused the Tax Court to not issue the opinion in the first place. Although the 10th Circuit talks below about what the Tax Court should have done, absent notification from one of the parties the Tax Court would have no reason to know of the change in circumstances. A quicker opinion might have averted the problem but this case was one of several with similar issues.  I find the criticism of the Tax Court on this point misplaced.  I was ready to place blame on petitioner’s counsel for not notifying the Court since he was the person most likely to know of the change in circumstances forming a basis for the vacatur but any criticism of petitioner’s counsel would require that they had notice of the receiver coupled with a duty to inform the Court.

The 10th Circuit stated:

“If an actual case or controversy ceases to exist during the course of tax court proceedings, the tax court must dismiss the case as moot.” Willson, 805 F.3d at 320. This case became moot when the court appointed the receiver. After that, Lindsay Manor no longer operated any nursing homes and consequently could not receive economic hardship relief. The Tax Court published its decision on March 23, 2017 – over six months after the receiver had been appointed and after the case had become moot. Rather than deciding the case’s merits, then, the Tax Court should have ‘dismiss[ed] the case as moot.’ Id. Vacatur is therefore appropriate.”

So, we have a sneak peek at what the Tax Court thinks about the regulation but the case itself no longer provides precedent for the position sustaining the regulation that economic hardship does not apply to corporations.

CP 504

I do not often write an introduction to my own blog post but am making an exception today. Today’s post is short and it is about a taxpayer right’s victory. I want to use the extra space to celebrate some other victories. Of course at PT we are excited about Villanova’s basketball victory for any of you who missed the game. Basketball is a unifying force at the school and a great source of pride. I miss going to the campus gym every morning and walking through the lobby which is a museum of their victories. Villanova had another great victory announcing the selection of Christine Speidel as its new tax clinic director. In addition to joining Villanova to run its tax clinic, Christine is joining procedurallytaxing as a member of our blogging team. She has written several guest posts over the years. Look for many posts by her in the future. As a law student she worked in the Consumer Law Clinic of the Legal Services Center where I now teach. She will bring a lot of new energy to the blog.

Another matter to celebrate is the annual publication of the low income taxpayer report. The report catalogs the work of these clinics and may be of interest to those of you with interest in the tax issues facing individuals. Volume 8 of recent journal article looks at the students who work in clinics and reports on how that work encourages (and discourages) future pro bono efforts of the students exposed to representation during school. Keith

On December 2, 2016, I wrote a strongly worded post about the inappropriate language in Letter CP 504. The CP 504 letter the IRS was sending at the time said that the if the taxpayer did not pay the tax listed on the form the IRS could levy on their property and listed a litany of types of property on which the IRS could levy. The problem with the letter was that the CP 504 letter does not give the IRS that right. The statements made in the letter were legally wrong and could have inappropriately led taxpayers to the wrong conclusion about the action the IRS could take to collect the unpaid assessment of taxes.

In addition to blogging the issue, I had discussions with the appropriate persons at the IRS explaining why I thought the letter was wrong and should be changed to eliminate the language stating that the IRS could levy on a taxpayer’s property. The IRS listened and it made a commitment that it would change the letter to make it accurate. The persons with whom I spoke indicated that the change would not occur until January 2018 – a period approximately one year after committing to the change. I knew that changing an important letter in the collection notice stream would take time and waited.

Recently, one of my clients received the new and improved CP 504 letter. The IRS made the promised changes and no longer tells taxpayers that it can levy on their property in the manner stated in the prior version of this letter. You can see a redacted version of the new letter here. You can find a copy of the prior letter in the earlier post if you want to compare the letters and note the changes.

The IRS deserves credit for changing the letter and appropriately responding to criticism. The collection notice stream is an important part of the collection process. Getting the language in the letters sent during that stream to be accurate as well as persuasive is an important part of the collection function at the IRS.