Designated Orders: 11/27/17 to 12/1/2017

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Today we welcome back regular designated order blogger William Schmidt who writes about last week’s designated orders. As usual, some of the orders present interesting situations and some seem rather routine making us wonder why the court designated them. Keith

This week there were five orders. This post will not discuss an order for Petitioner to respond to the Respondent’s motion for summary judgment (Order Here). The discussion today starts with an unfortunate situation for a taxpayer receiving the premium tax credit who experiences a large income recognition event during the tax year which knocks them out of the income range for qualification for the credit. The second cases discussed involves the uncertainty created by a bankruptcy discharge and the taxpayer’s desire for a more definite statement concerning what she has received. The discussed of these two orders is followed by a comparison of two orders involving summary judgment in the CDP context. These cases do not present surprising results.


Affordable Care Act Overpayment Results in Liability

Docket # 14362-16, Juanita P. Morgan v. C.I.R. (Order Here).

This is a bench opinion, authorized under IRC section 7459(b). Tax Court practice is to read a bench opinion into the record, wait to receive the printed transcript weeks later, then issue an order serving the written copies of the transcripts to the parties.

Ms. Morgan received a notice that she did not have the minimum required health insurance for the Affordable Care Act. When she signed up for health insurance, she was eligible for an advance premium assistance credit (based on her household income) of $770 per month to be applied to her monthly health insurance premium. The credit was applied to the premiums from April 2014 to December 2014, totaling $6,930 for the year.

In order to help family members with financial assistance, Ms. Morgan took a withdrawal without penalty from a retirement account. The gross distributions totaled $36,408. When filing her tax return, Ms. Morgan reported adjusted gross income of $49,282. Because of the retirement account withdrawal, Ms. Morgan’s income exceeded the premium assistance credit eligibility threshold. Eventually, the IRS issued a Notice of Deficiency for the disallowed $6,930 credit and Ms. Morgan filed a timely petition with the Tax Court.

As Ms. Morgan’s household income was in excess of the threshold regarding the credit, she was not entitled to the credit she received. While the Tax Court stated sympathy for her situation, she was still liable for the $6,930 deficiency.

Takeaway: The statute is clear that income exceeding 400 percent of the federal poverty line is not eligible for the premium assistance credit eligibility threshold, meaning excess tax credit payments are treated as a tax increase, resulting in a tax liability equal to the original credit amount paid. Withdrawing funds from an IRA is one of several ways that low income taxpayers can fall into a trap when they have a large taxable event. Other ways include a lump sum distribution of social security benefits typical when someone obtains disability status after a two or three year delay in obtaining the award, cancellation of indebtedness income, or a judgment in a consumer lawsuit or other suit not stemming from personal injuries or compensation for lost property. Were Congress to amend the system to improve it, consideration of providing some type of income averaging for these situations where a lump sum taxable event that relates to events essentially beyond the taxpayer’s control could save individuals in this situation from owing a tax liability that many times is beyond their control.

Yes, Virginia, Tax Liability May Be Discharged in Bankruptcy Court

Docket # 3719-16, Marjorie E. Davis, Petitioner, and Lee A. Davis, Intervenor v. C.I.R. (Order of Dismissal Here).

Ms. Davis filed a petition with the Tax Court to review the IRS denial of innocent spouse relief for her regarding tax years 2001 and 2003-2010. The IRS filed a motion to dismiss on grounds of mootness.

Ms. Davis’s liability for the years at issue was previously discharged in the United States Bankruptcy Court for the Western District of North Carolina. Respondent asserts that the tax years have been adjusted to show that no tax, interest or penalties are due.

Petitioner and Intervenor did not object to the granting of the motion. However, Petitioner was unwilling to sign a decision document that did not expressly grant relief pursuant to IRC section 6015, innocent spouse relief. The Court granted the IRS motion. One problem for petitioners such as Ms. Davis stems from the way a bankruptcy discharge operates. It combines a written order granting the discharge which says nothing specific about exactly what the order accomplishes with the operation of law. Many individuals, and Ms. Davis seems to fit this characterization, want a discharge order that lists every debt discharged as a result of the order. Since the bankruptcy court does not provide such a document, they lack a statement that provides them with the comfort they seek. In bringing this Tax Court action requesting innocent spouse relief, at least she achieves a higher level of comfort because the Tax Court dismisses her case based on the impact of the bankruptcy discharge. Because she refused the sign the decision document, one suspects that she has still not reached her comfort level with the impact of the discharge. It is hard to know if the problem here is her fear of the unknown or her bankruptcy lawyer’s inability to properly explain the operation of law.

Takeaway: For those who don’t believe in Santa Claus or the ability to deal with tax liability in bankruptcy, we want you to know that at least one of those is real. While this blog post will not delve into the mechanics of the requirements for discharging tax liability in bankruptcy court, a bankruptcy discharge can relieve a taxpayer of many tax liabilities providing the individual with a nice seasonal present. 

Non-Compliance Leads to IRS Summary Judgments

Docket # 7428-17 L, Leslie D. Rasmussen v. C.I.R. (Order and Decision Here).

Ms. Rasmussen did not file her 2011 or 2012 tax returns. The IRS filed substitute returns and issued notices of deficiency to her. The IRS issued notices of intent to seize her assets on the liabilities for the two years, which aggregated close to $50,000. She timely submitted Form 12153, Request for a Collection Due Process or Equivalent Hearing, selecting the box for “I Cannot Pay Balance” and stating, “A levy would cause a severe financial hardship and the taxpayer would like to preserve her rights to tax court.”

The IRS settlement officer scheduled a telephone conference and submitted requests for a completed Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, with supporting documentation for income, assets and expenses within 14 days and proof of estimated tax payments paid for the prior year to be provided within 21 days.

Petitioner’s representative during the telephone conference inquired about a streamlined installment agreement and was informed it would be $669 per month with Petitioner making 2016 estimated tax payments. No documents were provided by the deadlines. The representative’s follow-up message stated that he had not received documents or talked to the Petitioner.

In her Tax Court petition, Ms. Rasmussen states her disagreement with the Notice of Determination issued: “Because I failed to submit documentation because of family matters. There wasn’t enough information to base decision on. Also, once I figure taxes for 2016, I anticipate a refund on loss of farming.”

The Court concluded that Petitioner did not provide the required documents, there was no issue of material fact, and granted the IRS motion for summary judgment.

Docket # 22154-16SL, Brenda Ann Dixon v. C.I.R. (Order and Decision Here).

Ms. Dixon received an IRS notice of intent to levy for tax years 2010, 2011, and 2013. She timely requested an appeal. With that, she requested an offer in compromise and stated her 2011 tax liability should be reduced since she filed an original tax return to replace the substitute return the IRS filed as her 2011 tax return. She did not dispute the 2010 and 2013 tax liabilities.

The appeals officer scheduled a telephone hearing and requested Ms. Dixon submit a completed Form 433-A within 14 days of the letter, a signed 2014 tax return within 21 days, and a completed Form 656, Offer in Compromise (with fees) within 14 days. The 2014 tax return was past due by more than one year. They held the telephone hearing but Ms. Dixon did not supply the requested documents. The Settlement Officer sustained the imposition of the levy.

In her Tax Court petition, Ms. Dixon states she “believe[s] that a fair determination could not be made within a telephone conversation,” and that she “want[s] to comply with tax requirements and [she has] fallen behind due to keeping up with [her] health and work.” She also stated that “[r]espondent has abused her discretion by not giving any weight to Petitioner’s illness and disability in the case.”

The Court’s findings include that taxpayers are not entitled to in-person hearings and that there was no abuse of discretion regarding Ms. Dixon’s illness and disability. The Court also found that Ms. Dixon did not provide the required documents, there was no issue of material fact, and granted the IRS motion for summary judgment.

Takeaway: The pattern here follows numerous other CDP cases. It is unclear why the Court included these cases as designated orders. Petitioners that have not provided requested documents to the IRS will not make it very far in the Tax Court. Prior to filing a CDP request or immediately thereafter, taxpayers need to become compliant by providing requested documents or filing tax returns. Otherwise, the Tax Court will grant summary judgment for the IRS absent some failure by the IRS in the verification process.


William Schmidt About William Schmidt

William Schmidt joined Kansas Legal Services in 2016 to manage cases for the Kansas Low Income Taxpayer Clinic and became Clinic Director January 2017. Previously, he worked on pro bono tax cases for the 3 Kansas City metro area Low Income Taxpayer Clinics. He records and edits a tax podcast called Tax Justice Warriors and is now an adjunct professor for Washburn University School of Law.

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