My IRS Wishlist for 2021 Part 2 – the Economic Hardship Indicator

In recent weeks, the American Bar Association Section of Taxation wrote the IRS, recommending the IRS not exercise its refund offset authority under IRC § 6402 on 2020 individual income tax refunds with respect to three groups:  taxpayers claiming the Earned Income Tax Credit; taxpayers with income below 250% federal poverty level, and taxpayers who have pending offers in compromise.  Last week, the National Taxpayer Advocate released a blog advocating a similar approach.  Because both of these proposals seek to avoid creating economic hardship for taxpayers, I thought it would be a good idea to revisit a proposal I made years ago for the IRS to proactively identify taxpayers who are likely at risk of economic hardship and shield them from potentially devastating collection action.  This in turn has led to my next two wishes on my “IRS wish list”: 

  • That the IRS implement an “economic hardship indicator” that identifies taxpayer accounts with balances due where the taxpayer is at risk of economic hardship as defined by IRC § 6343(a)(1)(D), and use that indicator to trigger further inquiry into the taxpayer’s financial status before issuing levies or placing them into streamlined or other installment agreements; and
  • That the IRS utilize the algorithm underlying the economic hardship indicator (or other proxy such as percentage of federal poverty level) to identify taxpayer refunds where the offset of such refund for past tax liabilities would create economic hardship and proactively not offset those refunds.
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Proactively Using Data to Protect Taxpayer Rights

One of the things that has bothered me over the years is the IRS’s reluctance to use data to minimize taxpayer burden and protect taxpayer rights, despite its eagerness to use data to identify and address areas of noncompliance.  I first confronted this tendency in the first month of my tenure as the National Taxpayer Advocate, when the IRS was ready to implement the provisions of IRC § 6331(h) by offsetting 15% of the monthly social security benefit of any beneficiary who had a tax debt.  Despite years of working on the implementation strategy, the IRS apparently had not completed an analysis of the economic condition of Social Security beneficiaries – including the elderly and disabled – and thus had no plans to filter out taxpayers whose income was insufficient to pay their basic living expenses.  In a memo to Commissioner Rossotti in April, 2001, I outlined my concerns, and the Commissioner put a moratorium on the Federal Payment Levy Program (FPLP) with respect to social security benefits until those concerns could be addressed.  That led to the development of the Low Income Filter, a rudimentary tool which GAO criticized as both over- and under- inclusive.  That is, it allowed levies against many taxpayers who could not afford to pay and it excluded many taxpayers who had the ability to pay.  Based on this criticism, the IRS ceased using the filter.

This experience taught me, very early on, the importance of well-designed applied research studies for driving appropriate tax administration approaches.  Over the years, the research studies published in the National Taxpayer Advocate’s Annual Reports to Congress prompted many changes in IRS policy, simply because the data showed the way.  For example, with respect to the flawed Criminal Investigation Questionable Refund Program, TAS’s 2005 research study stopped it in its tracks and brought about major changes, including moving the program from CI and into W&I.  We revisited the FPLP Low Income Filter in the 2008 NTA Annual Report to Congress (vol. 2, beginning at page 48), showing that FPLP Social Security levies were being applied to taxpayers who could not pay their basic living expenses and therefore the levies must be released under IRC § 6343(a)(1)(D).  As a result of our study, the IRS asked TAS to identify a percentage of Federal Poverty Level (FPL) that could be used as a proxy for the algorithm we developed to identify taxpayers experiencing economic hardship as a result of the levy.  The IRS ultimately agreed to use 250% FPL as a proxy for economic hardship and to exclude taxpayers from the FPLP population.  This measure is known as the “Low Income Filter” or LIF.

The issue of using data to proactively identify taxpayers who are experiencing economic hardship has popped up time and time again – in the context of Private Debt Collection, streamlined installment agreements (IAs), and now, in the age of the coronavirus pandemic, refund offsets.  So it is helpful to review the proposal for an Economic Hardship Indicator and explore the research underlying it. 

The Economic Hardship Indicator

Section § 7122(d)(2)(A) requires the IRS to “develop and publish schedules of national and local allowances designed to provide that taxpayers entering into a compromise have an adequate means to provide for basic living expenses.”    The statute also requires the IRS to not use these schedules of allowances where “such use would result in the taxpayer not having adequate means to provide for basic living expenses.”  IRC § 7122(d)(2)(B). In these cases, the IRS should review the taxpayer’s circumstances on a case-by-case basis.  Treasury regulation 301.7122-1(c)(2)(i) further clarifies what the IRS must do:

A determination of doubt as to collectibility will include a determination of ability to pay. In determining ability to pay, the Secretary will permit taxpayers to retain sufficient funds to pay basic living expenses. The determination of the amount of such basic living expenses will be founded upon an evaluation of the individual facts and circumstances presented by the taxpayer’s case. To guide this determination, guidelines published by the Secretary on national and local living expense standards will be taken into account. [Emphasis added.]

The approach outlined in IRC § 7122(d)(2) and the related regulations gives effect to the taxpayer’s right to a fair and just tax system, which requires the IRS to recognize the taxpayer’s facts and circumstances in determining the ability to pay, and the right to privacy, which requires the IRS to take enforcement actions “no more intrusive than necessary.”  The Commissioner is required to ensure his employees adhere to these rights.  IRC § 7803(a)(3).

The IRS also applies these allowances in calculating the monthly payment for “non-streamlined” installment agreements, for currently not collectible status, and for determining economic hardship for purposes of releasing levies.  The Allowable Living Expenses, or ALEs, are based on data from the Bureau of Labor Statistics which reflect the actual spending based on family composition and income.  I have written elsewhere about the shortcomings of using BLS data for this purpose, and TAS research has clearly documented the harmful impact of the IRS’s application of ALEs here and here.  But for purposes of the Economic Hardship Indicator, it makes sense to accept the IRS’s ALE figures because they are what the IRS relies on and are very conservative, which should make it easier for the IRS to agree with this approach.  That is, the Economic Hardship Indicator algorithm adopts the very allowances and procedures the IRS lays out in its Internal Revenue Manual instructions to staff for determining ability to pay. 

TAS’s Economic Hardship algorithm essentially used the greater of total positive income from the taxpayer’s most recent tax return (or from a two-year old return if the most recent was not filed), or the total Information Return income reported for the most recent year.  In determining allowable expenses, the algorithm used family composition reported on the most recent tax return, and if no return was on file, it defaulted to a single person household.  The algorithm also took into consideration whether the taxpayer had assets.  The algorithm allowed ownership and operating expenses for one vehicle if a single or head of household return, and two vehicles for married-filing-jointly.  Finally, with respect to home expenses the algorithm used the local allowances based on the zip code shown on the return or income source used as a basis for the income calculation.

To the Injury of Many Taxpayers, the IRS No Longer Conducts Financial Analysis for Most Installment Agreements

With the IRS’s recent expansion of streamlined Installment Agreements (IAs) to seven year terms and liabilities over $25,000, it is clear the IRS wants to drive taxpayers into formulaic IAs rather than engage with them to learn their specific financial circumstances.  While streamlined IAs can be less burdensome for many taxpayers, and certainly minimize the use of IRS staff time, they also can extract payments from taxpayers who do not have the ability to pay.  The Economic Hardship Indicator maximizes the benefits of the streamlined IA while ensuring the IRS takes into consideration the taxpayer’s specific facts and circumstances where warranted by risk of economic hardship.

Over the years, TAS research has demonstrated that automated levies and streamlined installment agreements can harm taxpayers.   In addition to work with the FPLP Low Income Filter, the TAS research studies cited earlier found:

In Fiscal Year (FY) 2018,

  • streamlined IAs constituted 72% of all installment agreements;
  • 40% of those streamlined installment agreements were entered into by taxpayers whose income was below ALEs; and
  • 40% of streamlined IAs entered into by Private Collection Agencies were with taxpayers whose income was below ALEs; and
  • Streamlined IAs had high default rates – between 37% and 39%.

In the 2018 Annual Report to Congress, we proposed the IRS apply the algorithm TAS built and adopt the Economic Hardship Indicator (EHI) as a means to identify taxpayers who might experience economic hardship if the IRS levied upon their payroll or accounts, or placed them in a streamlined IA.  I clearly stated that the EHI was not a determination of economic hardship or currently not collectible status.  Rather, it could be used to program a pop-up screen for IRS phone assistors and collection employees to trigger a few additional questions about the taxpayer’s financial status before placing them in a streamlined IA or issuing a levy.  The EHI algorithm could trigger a similar pop-up where a taxpayer is applying for an online IA, prompting the taxpayer to provide a bit more financial information.  Moreover, the EHI could be a powerful tool applied during filing season to avoid refund offsets.  It would also improve the IRS’s case scoring and selection criteria, so it doesn’t waste resources pursuing uncollectible debts.  Thus, the EHI would serve as a trigger for when the IRS should conduct a case-by-case analysis of the taxpayer’s ability to pay basic living expenses, as outlined in 7122(d)(2)(A), the regulations thereunder, and the Taxpayer Bill of Rights.

Economic Hardship Algorithm and the Federal Poverty Level

As noted above, when TAS first tested its economic hardship algorithm in 2008 for Federal Payment Levies on Social Security recipients, the IRS resisted developing an algorithm, and instead proposed using a percentage of federal poverty level for purposes of the Low Income Filter.  Although I believe the correct approach is for the IRS to build an algorithm that adheres to the procedures used by IRS employees, 250 percent of federal poverty level is an effective proxy for economic hardship.  A chart from one of my last blogs as NTA makes this point:

Comparison of Ability to Pay by Indicated Percent of Federal Poverty Level (Computed on Adjusted Gross Income) to Ability to Pay as Determined by an Analysis of Total Positive Income to ALE

* Single = 1 vehicle allowance; married filing jointly = 2 vehicle allowances

As shown above, using 250% federal poverty level (FPL) as a proxy for the economic hardship algorithm excludes 85% of the taxpayers the algorithm (based on IRS procedures) finds cannot pay a tax debt.  And although 250% FPL also has the highest percentage – 3% — of taxpayers who the algorithm finds can afford to pay the debt, that is a small error rate for the significant taxpayer protection of avoiding profoundly damaging collection action.  And remember, all we are doing with the Economic Hardship Indicator is requiring the IRS to get more information from the taxpayer before it undertakes collection action that is very likely to result in the taxpayer being unable to pay basic living expenses.  (The rationale for using the EHI to bypass refund offsets is slightly different – unlike other collection actions which can be unwound (levy releases) or modified (IAs), the refund offset takes place within a very short window of processing time and cannot be reversed.  Thus, if there is a risk of economic hardship, as indicated by the EHI, the IRS should refrain from offset.)

It is baffling to me why, in the face of all this data (including yet another TAS research study from the 2020 Annual Report to Congress), the IRS refuses to adopt the EHI.  The IRS complains of not having sufficient resources to do collection work.  Well, failure to use the EHI not only harms taxpayers but also results in massive amounts of unnecessary work for those limited IRS collection resources, in the form of defaulted IAs, released levies under IRC § 6343(a)(1)(D) and return of levy proceeds, refund offset bypasses, and unproductive collection work, to name a few.  The time is long past for the IRS to “put taxpayers first” by adopting the EHI and proactively act to avoid harming taxpayers.  If it won’t do this in the midst of a pandemic, I really don’t know what it will take, other than legislative action.  And in fact, per IRC §§ 6343 and 7122, I would argue Congress has already legislated.

Calculating the Collection Statute of Limitations

I want to mention a problem with the collection statute of limitations (CSED) that my tax clinic recently encountered.  The response of the IRS to an inquiry about the CSED surprised me.  I have heard from some people at the IRS that there is a problem with CSED calculation within the IRS; however, I lack any certainty regarding that problem.

The calculation of the CSED has been quite difficult for some time.  Patrick Thomas wrote an excellent post on the issue almost six years ago.  We have given the issue insufficient attention.  The recent sending of notices with the wrong dates raises the issue of the CSED since some of the notices sent can impact the CSED and the IRS records now contain dates known to be wrong.  

This post is the story of one case but I fear it reflect broader problems.

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The tax clinic has a client who owes taxes for the years 2006-2009.  In looking at her transcripts, we calculated that the statute of limitations on collection (CSED) had run for three of the years but the transcripts still showed the periods as open.  I asked the student handling the case to call the practitioner line to obtain from the IRS the dates it calculated for the CSED.  I did not necessarily intend to rely on the date calculated by the IRS but did want to know and understand its calculation.

The person answering the phone told the student that the student should calculate the CSED based on the transcripts.  The person did not offer a CSED nor offer to assist in calculating the CSED.  I did not find that to be a helpful answer.  In fact, I found it shocking.  Perhaps it simply reflects the response of one employee who lacked training or who had other issues, but I expected the employee to easily retrieve and transmit this information. The IRS should have a calculation of the CSED on its system and should provide it upon request.  In my opinion it should provide it on the account transcript so that ascertaining the date calculated by the IRS would not necessitate a call.  I might or might not agree with the date provided by the IRS, but it should not hide the ball on this.

Because I still wanted to know why the IRS considered the CSED open for periods I thought had expired, we asked again a different way.  The clinic contacted the Local Taxpayer Advocate (LTA) and asked it to ask the IRS to provide us with the CSED for these years.  I try hard never to contact the Local Taxpayer Advocate.  Not because the LTA is unhelpful but because I think the LTA is overworked and that the clinic can resolve most problems without adding to the LTA’s burden.  The clinic receives a grant under IRC 7526 to assist low income taxpayers and calling the LTA to assist those taxpayers in anything but extraordinary cases seems like copping out on the purpose of the grant.  In the case of a disagreement regarding the CSED there is no easy way to contest a conflict in the calculation. 

It took a couple months to receive a response from the LTA.  The response confirmed the CSED had run for three of the years.  This matched our calculation.  More surprising and more disturbing, the advocate indicated that there was a “glitch” in the CSED system.  In addition to confirming for us the CSED, the LTA office also set out to have the taxes abated for the three periods for which the CSED had run but which still appeared open on the transcript.  My relieved client set out to pay the liability on the remaining period.

I did not receive a further description of the glitch other than that it existed.  I would be interested in any insight readers might provide on this and caution anyone with a CSED issue to carefully review the transcripts to make sure that the statute is still open.

If a glitch exists in the CSED calculation system at the IRS, that could cause it to continue to collect when it should not.  That would be a serious breach of taxpayer rights.  Few taxpayers are represented.  Almost no taxpayers and probably relative few practitioners can correctly calculate the CSED if actions such as installment agreements, collection due process, bankruptcy or other statute suspending actions occur.  We rely on the IRS to correctly calculate the statute and to abate the liability if the statute has run.

The pandemic has made it very difficult for the IRS to administer the many tasks under its writ.  It has performed many tasks well under adverse circumstances.  I know that the IRS does not intentionally want to make a mistake regarding the CSED.  The refusal of the IRS employee to answer the question about the CSED and the response from another IRS employee that there is a glitch in the calculation of the CSED raises significant concerns. 

In the most recent post regarding the sending of notices with wrong dates I initially included a couple paragraphs about the CSED issue discussed here, but those paragraphs were carved out for a later post, this one.  As occasionally happens with our hastily prepared posts, a sentence alluding to the CSED issue remained in the post which caused a reader, Ken Weil, to write me, as he and other readers occasionally do when I say something that doesn’t make sense or doesn’t fit in the context.  I wrote him back explaining the mistake and he responded with the following concerns about the CSED, and its close cousin the assessment statute of limitations (ASED), stemming from his bankruptcy and collection based practice:

The lack of CSED transparency has been an issue for years.  Fran Sheehy and I both asked Nina [Olson] in person at an ABA Tax section meeting to make this an issue.  I’m pretty sure we did this more than once.

Within the past year, the IRS has started posting ASEDs and CSEDs in at least one account entry, so that is a step in the right direction.

I find that I almost never agree with the IRS CSED calculation.  Most of the time the differences are not large, and I often attribute the difference to the uncertainty over installment-agreement-request tolling. …

So, yes, it is a problem.  And, no. I do not know how to deal with it.

I don’t know how to deal with it either.  I certainly don’t want to contact the LTA every time I have a concern.  The calculation can be difficult.  The IRS needs to get it right.

News from the Independent Office of Appeals

Thanks to Christine who invited me at the suggestion of Richard Furlong, Senior Stakeholder Liaison at the IRS Communications & Liaison office in Philadelphia, I had the opportunity to attend a presentation and listening session by the Executives in Appeals on January 26, 2021. The executives had a brief slide presentation but primarily gave the relatively small audience the opportunity to ask questions and make comments. It’s hard to know in these types of events what the long-term impact of the discussion will be, but I appreciated the opportunity to hear from Appeals on its current thinking and to have the ability to make comments. I will discuss a few of the topics that arose during the call but mostly riff on the thoughts the discussion triggered for me.

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Appeals Customer Service

One thing I learned from this presentation is that Appeals has a customer service phone line. Here is information about the line from the presentation:

If you submitted a request for Appeals consideration on your case, contact the IRS office that offered the Appeals request for an update on the status. If the IRS office states that your request was sent to the Office of Appeals and you have not received anything from Appeals after 60 days after the government has reopened, call Appeals Customer Service at 559-233-1267.

https://www.irs.gov/newsroom/february-2019-appeals-resumption-faqs

Question: is this Appeals Customer Service helpful in checking on status of an Appeals protest assigned to an Appeals Officer?

Since I did not know Appeals had such a number, I obviously could not answer the question. Christine observed to the gathered Appeals executives that she had called the number and not received a response. In response to her observation she was told that a response is only given if a case is assigned to an Appeals Officer and perhaps in her case the matter had not been assigned. This practice obviously limits the effectiveness of the customer service line.

Certainly exceptions exist but my experience with individual Appeals Officers both inside and outside the government is quite positive. An area of disappointment with Appeals involves finding the Appeals Officer assigned to a case. This disappointment is especially present in Tax Court cases. After the answer is filed, cases are referred by Chief Counsel’s office to Appeals unless the case previously went through Appeals. In most cases there is a long dead time between the referral and the time the Appeals Officer alerts you to their existence.

This long delay creates several problems. For Counsel and Appeals this long dead zone is what caused the Tax Court to reimpose the requirement of an answer in small tax cases back in 2006, since taxpayers resorted to calling the Tax Court for information about their cases due to an inability to hear from the IRS for months on end. For the system, I think, without empirical evidence, that the long delay is a causative factor in the high number of defaulted Tax Court petitions. Unrepresented individuals who have enough interest in their cases to take the effort to file a petition go into a lengthy dead zone before they have the opportunity to move forward on their case. I think this causes some to simply lose interest. For practitioners the long delay can make it hard to keep the client engaged. At an academic clinic it almost always means that the student who is invested in the case and prepares the petition will not still be working in the clinic when the Appeals Officer reaches out. This means that documents collected to present the case languish in our files and then someone must relearn the case when it is assigned to an AO. In many of our cases we have the material to quickly resolve the matter but cannot do so without someone to engage with on the other side.

I would prefer a system in which the AO, or someone in Appeals, was assigned almost immediately after the submission of whatever document triggers the visit to Appeals. This would allow early engagement for those pro se individuals or practitioners interested in engagement but would not necessarily require the AO to push those not actively coming forward to provide information until the AO was ready. It would also allow AOs who were able to engage early to alert the taxpayer or practitioner about documents or testimony needed at a point when the case was not getting close to aging in the AO’s inventory. AOs, like many government employees, have internal time frames for working cases. Exceeding those time frames can require the AO to engage in internal reporting necessary if a case when past an internally created time period. This, in turn, can cause the AO to push to close a case. The closer to the internal reporting deadline the AO starts working on the case, the less time the taxpayer has to gather information before the AO feels the internal pressure. I know that my desire for early assignment of the AO, or Settlement Officer, faces practical issues that the Appeals executives would have to overcome.

In Tax Court cases, the Chief Counsel assigned attorney is known relatively quickly because of the time period built in by the answer, even though after the answer the attorney may put the case on the shelf in order to work on other more pressing cases. However, at least the taxpayer or the practitioner knows who has the case. Could Appeals build an assignment model similar to that of Chief Counsel?  In small tax cases the practical person assigned may be a paralegal but you have someone with whom to engage to keep the case moving.

I like the idea of a customer service number and am glad that I finally learned that it exists. If, however, the information I would usually want from the number, viz., the identity of the person assigned to my case, is something that the number would not provide, maybe I am unlikely to use it even though I now know it exists.

Impact of COVID on Appeals Workload

Slide 6 of the slides used during the meeting shows a year by year comparison of the Appeals inventory for the year prior to COVID and for last year. A fairly dramatic reduction occurs in 2020. This is not shocking but does provide a stark example of the impact of COVID on this function. Also interesting is that the mix of work remains constant in the various categories of Appeals inventory. The list also shows the impact of the shift of work over the past two decades since RRA 98 to collection. In the almost 100-year history of Appeals the last couple decades have dramatically altered its workload from the first 75 years of its existence.

Revision of Form 12153 and Triage of Cases

It was only a glancing part of the discussion but the effort by Appeals to redesign Form 12153 did receive some mention. In December I had the opportunity with several other low income tax clinicians to engage with members of Appeals who were redesigning this form. Form 12153 is used by taxpayers to request a CDP hear. I think it is one of the easier forms for taxpayers to use but applaud Appeals for working to make it better. They put a lot of thought into their new design and were very polite about listening to my suggestions.

The redesign may signal a willingness to rethink how CDP cases move through Appeals. Generally, CDP cases get worked on a first in, first out basis. This can create problems for taxpayers and for the IRS. For taxpayers requesting a hearing based on a lien filing, a quick hearing would help since they want to remove the lien. In cases in which the taxpayer was pyramiding taxes of some type, a quick hearing is needed by the IRS. CDP cases come in many shapes and sizes. Getting a handle on which ones might benefit from early intervention could provide for a better system.

Conclusion

The Appeals executives indicated that they intended to repeat this presentation in other areas of the country. If you want to engage with Appeals leadership you might reach out to your local IRS stakeholder liaison to see if the opportunity is available to you.

Graev and the Early Withdrawal Exaction under IRC 72(t)Graev and the Early Withdrawal Exaction under IRC 72(t)

In Grajales v. Commissioner, 156 T.C. No. 3 (2021) the Tax Court determined that the 10% exaction imposed under IRC 72(t) that most people colloquially call a penalty is not a penalty for purposes of whether the IRS must obtain supervisory approval prior to its imposition.  The taxpayer in this precedential opinion involving $90.86 was represented by Frank Agostino who pioneered the use of IRC 6751(b)

The case pits the characterization of IRC 72(t) in Tax Court cases against its characterization in bankruptcy cases.  In many ways it presents the mirror image of IRC 6672 which goes under the name of trust fund recovery penalty and which the Tax Court treats as a penalty, but bankruptcy law treats as a tax.  These are not the only two code sections where the label as tax or penalty depends on the context and where that context has applications that can result in significant differences based on the label.

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The Tax Court has consistently treated IRC 72(t) as imposing a tax.  The issue has come up in several contexts prior to the challenge under IRC 6751(b).  The decision in Grajales continues the Tax Court’s consistent treatment of the provision.  The court notes:

In contexts apart from the application of section 6751(b)(1), this Court has held repeatedly that the section 72(t) exaction is a “tax” and not a “penalty”, “addition to tax”, or “additional amount”. See, e.g., Williams v. Commissioner, 151 T.C. 1, 4 (2018) (holding that the section 72(t) exaction is not a “penalty, addition to tax, or additional amount” within the meaning of section 7491(c) for purposes of placing the burden of production); El v. Commissioner, 144 T.C. 140, 148 (2015) (same); Dasent v. Commissioner, T.C. Memo. 2018-202, at *7 (same); Summers v. Commissioner, T.C. Memo. 2017-125, at *5 (same); Thompson v. Commissioner, T.C. Memo. 1996-266, 1996 WL 310359, at *7 (holding that the section 72(t) exaction is a “tax” rather than a “penalty” for purposes of the joint and several liability provision of section 6013(d)(3)); Ross v. Commissioner, T.C. Memo. 1995-599, 1995 WL 750120, at *6 (same).

With that history of the treatment of IRC 72(t) in Tax Court cases, the opinion provides no surprises, as it methodically works through the reasoning for finding that the provision should receive treatment as a tax.  Looking at the treatment of the provision in other contexts within the tax code, the Court finds consistency in the description of this provision:

First, section 72(t) calls the exaction that it imposes a “tax” and not a “penalty”, “addition to tax”, or “additional amount”. Second, several provisions in the Code expressly refer to the additional tax under section 72(t) using the unmodified term “tax”. See secs. 26(b)(2), 401(k)(8)(D), (m)(7)(A), 414(w)(1)(B), 877A(g)(6). Third, section 72(t) is in subtitle A, chapter 1 of the Code. Subtitle A bears the descriptive title “Income Taxes”, and chapter 1 bears the descriptive title “Normal Taxes and Surtaxes”. Chapter 1 provides for several income taxes, and additional income taxes are provided for elsewhere in subtitle A. By contrast, most penalties and additions to tax are in subtitle F, chapter 68 of the Code.

After establishing why the Court should treat 72(t) as a tax and therefore not impose on the IRS a requirement that it obtain supervisory approval prior to its imposition, the Court addresses the arguments presented by petitioner.

It first rejects petitioner’s argument that it should change its practice of following the label given to the liability in the tax code.  It then rejects petitioner’s argument that the Supreme Court’s decision in Nat’l Fed’n of Indep. Bus. v. Sebelius (NFIB), 567 U.S. 519 (2012) in which the Supreme Court recharacterized the label given to a liability imposed by the Affordable Care Act in order to determine that the Anti-Injunction Act did not bar it from making a decision.  Finally, it addressed the numerous bankruptcy court decision holding that 72(t) imposes a penalty for bankruptcy purposes.

The Tax Court does not reject the characterization of 72(t) as a penalty for bankruptcy purposes any more than it embraces the treatment of the TFRP as a tax.  Back in 1979 the Supreme Court first characterized the TFRP as a tax for purposes of bankruptcy.  The decision in United States v. Sotelo, 436 U.S. 268 (1978) held that for bankruptcy purposes TFRP was a tax which has significant implications in the payment of that liability through bankruptcy.  In Chadwick v. Commissioner, 154 T.C. No. 5 (2020), blogged here, the Tax Court determined that the IRS must follow the requirements of IRC 6751(b) in TFRP cases.

Not only is the decision in Grajales consistent with prior Tax Court decisions regarding 72(t), it is consistent with the way the Tax Court and the courts interpreting the bankruptcy laws have treated tax provisions labeled as tax or labeled as penalties.  The Tax Court consistently treats these cases as following their designations in the Tax Code.  Courts interpreting the same provisions for bankruptcy purposes have consistently looked behind the label on the provision to the effect or function of the provision and treated provisions labeled as tax as though they were penalties and vice versa where the circumstances supported a different label.

I am not troubled by the Tax Court following the form while courts interpreting the bankruptcy code follow function.  The systems serve different purposes.  As long as each applies the rules consistently in their realm, taxpayers and practitioners can adjust to the realities of the situation in which they find themselves.  The prior approval process required by 6751(b) lives in the tax code and applies to tax provisions labeled as penalties.  The tests developed in the bankruptcy code to treat certain provisions in a manner differently than the label they carry serves a different purpose. 

In Grajales the Tax Court addressed a provision most people call a penalty but Congress did not.  The opinion logically follows the path the Tax Court has followed in the path and it is a path that does not need to be changed.  At the same time the petitioner’s arguments here also logically pointed out the difference in treatment of tax provisions in other settings.  If we want consistency, it raises larger questions.

Can the IRS Ever Collect on Erroneous EIPs?

The IRS sent out a lot of EIPs this summer, and at a pretty quick clip. While there were certainly issues with people failing to receive the payments that should have (see posts on injured spouse issues here, domestic violence survivors here, and incarcerated individuals here), there were also undoubtedly people that received EIPs who shouldn’t have. The question this post sets out to answer is simply this: for those who shouldn’t have received an EIP what if anything can the IRS do to get the money back? No doubt taxpayers will want to know what to expect on these issues and will expect tax professionals to have a clear answer… you’ll have to read on to determine if there is one.

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If I were to survey the room, I’d bet most people have already made up their minds that there is an easy answer to the title question of this post: “No, the IRS cannot collect on erroneous EIP. Haven’t you read IRC § 6428(e)(1)? If you received too much EIP you just reduce the amount of credit on your 2020 return, but not below zero.”

My dear friends, I’m here to tell you that nothing in life is easy -least of all parsing the language of IRC § 6428. Further, I’m sorry to say, in my opinion IRC § 6428(e)(1) is actually irrelevant to the question of whether the IRS can collect on erroneous EIPs. Lastly, and again with sincere apologies, I regret to inform that if the EIP is a rebate (a big “if”) the IRS can collect on it through the deficiency procedures.

Gasps all around, I’m sure. Let me explain myself.

First off, it is critically important that we are clear what we’re talking about when we talk about EIPs. The term EIP (for our purposes) only refers to the “advanced” payments made in 2020 pursuant to IRC § 6428(f). The payments that people will be claiming on their 2020 returns are not “EIPs” but instead are Recovery Rebate Credits (“RRC”) under IRC § 6428(a). They are separate and distinct credits. Conceptually, you aren’t claiming the “remainder” of your EIP when you file your tax return: you are claiming an entirely different credit that is simply reduced by any EIP you received.

To me, that IRC § 6428 creates two separate credits (and not simply staggered payments of the “same” credit) is uncontroversial despite the unhelpful language on the IRS website. But because it is critical to my analysis I want to drive the point home. I also think it will help lay bare why the IRC § 6428(e)(1) provision has no relevancy to the IRS ability to collect on erroneous EIPs.

Two Credits, One Code Section

We can all agree (I hope) that eligibility for the EIP is based on your 2019 (or 18) information. IRC § 6428(f) makes that pretty explicit, and that is also how the IRS administered the payments. That is in part why people rushed to file 2019 tax returns.

Yet some analyze the EIP as if 2019/18 isn’t the determinant for eligibility, but rather some expedient way of delivering the EIP. In this mistaken conceptualization the IRS just administered a 2020 tax credit based on 2019/18 information because that’s all they had (2020 not being even half-way done when the CARES Act was passed). This mistaken view reads IRC § 6428(f) as paying out some sort of “tentative” credit that the taxpayer then has to reconcile on their 2020 tax return with the “true” credit, since 2020 is the information we really cared about all along. I believe this is why so many people read the “good news” in IRC § 6428(e)(1) to be that if we got too much “tentative” credit we don’t have to pay any back when we claim our “true” credit on the 2020 tax return.

But that’s not how the law is written, and not how the credits work. The EIP is a 2019/18 animal. That is the year it looks at. That is the year it applies to. Allow me to illustrate.

Imagine you weren’t making much money in 2019. Maybe most of the year you were in law school and only after passing the bar in September did you begin making big-law money. Your AGI for 2019 is only $65,000, but by March 2020 you are already way over the AGI threshold for IRC § 6428(a). Nevertheless, you get a full EIP of $1,200 in May 2020. Common wisdom says you “got too much” EIP and will need to reconcile on your 2020 return. You aren’t too worried though, because the reconciliation provision at IRC § 6428(e)(1) protects you from paying back this excess EIP. If not for IRC § 6428(e)(1) you’d be in a bind…

Ah, my dear friend, can’t you see that no reconciliation is even necessary? You received exactly the right amount of EIP (assuming your 2019/18 return was accurate… more on that later). You don’t need to do anything on your 2020 tax return, because the 2020 tax return is only for claiming a wholly different credit -the RCC. Note that the IRS worksheet for the RCC supports this: the moment you determine you are ineligible for the credit based on 2020 information, you stop and do nothing more. Your EIP simply doesn’t matter at that point. See IRS Form 1040 Instructions at page 59.

It might be instructive to compare this to another tax credit where reconciliation actually does occur: the “Premium Tax Credit” at IRC § 36B. Because health insurance premiums are incurred on a monthly basis, the Premium Tax Credit is paid “in advance” as each monthly payment is due. The Premium Tax Credit looks at only one year for eligibility determinations: the tax year you are receiving the payments. Obviously, you cannot know exactly what your AGI (or even filing status) will be at the beginning of 2020, so you provide an estimate and then “reconcile” with the year-end numbers. This is exactly what you would expect with a “tentative” credit that looks at the same tax year for eligibility and advance payments… and this is not at all what happens with IRC § 6428.

So we agree that the law student doesn’t owe any EIP back, not because of IRC § 6428(e)(1), but because you don’t owe money “back” when you get the right amount of it in the first place. But imagine the IRS screwed up and didn’t send this law student their EIP. Can they claim it on their 2020 return? Obviously not, because the 2020 return is (again) for a wholly separate credit (the RCC) that they are not eligible for. The RCC looks at 2020 for eligibility determinations whereas the EIP looks at 2019/18. IRC § 6428(e)(1) only functions to make sure you don’t double-up on the RCC credit if you received an EIP payment (the italicized words will matter more in a moment). The “not below zero” reduction language just makes sure that if your (correct) EIP payment is larger than your (correct) RRC credit you get the full value of the larger of the two.

The RCC is a 2020 tax credit and the EIP, to beat this dead horse, is not.

Great, so the EIP is a Different Credit: Why Does that Matter?

The RCC is a remarkably conventional refundable credit. The RCC can be offset -just like any other tax credit (see Les’ post here). It is subject to math error procedures for certain “math-like” mistakes -just like many other refundable credits listed at IRC § 6213(g)(2). And it is explicitly made part of the definition of a deficiency as a negative tax -just like other refundable credits (see IRC § 6211(b)(4)(A)). Oh, and just like most tax credits it is something you affirmatively claim on your return.

The EIP, on the other hand, is metaphysically a tax-chimera. I have spent many a sleepless night trying to pin down exactly what it is, because “what it is” will drive how or if it can be collected.

First off, it isn’t entirely clear that the EIP is a “refundable tax credit.” Yes, IRC § 6428(b) refers to the refundable credits portion of the Internal Revenue Code. But note that the language of IRC § 6428(b) refers to the credit “allowed by subsection (a).” It does not refer to the credit “allowed by subsection (f)” (the advanced credit) or more broadly the credit “allowed by this section.”

Things get more difficult. The RCC provision (IRC § 6428(a)) provides a “credit” against the tax of 2020. The EIP provision (IRC § 6428(f)) treats the taxpayer as if they made a “payment” against tax for 2019/18…

This tricky distinction between “credit” and “payment” could matter. A lot. It could be the determinant on if the EIP is a “rebate.” That distinction directly touches on the assessment and collection procedures the IRS will need to follow. I will go into it in more detail on a subsequent post. For now, let’s just pretend the EIP is a rebate and go into why that would matter.

Here’s the fun thing about rebates: erroneous ones can be collected through deficiency procedures. Don’t believe me? Look to the definition of “deficiency” for yourself -specifically IRC § 6211(a) and (b)(2). Have Kleenex handy for the tears that statutory language is sure to inspire. But the critical take-away is that you can have a tax return that doesn’t (necessarily) understate tax and still have a deficiency if the IRS were to issue a “rebate” they shouldn’t have. This could happen, for example, if the IRS give you an EITC that you never really claimed and weren’t actually entitled to. In fact, that is the exact example used by the IRM at 21.4.5.5.2(1) (10-01-2020). If the IRS noticed the mistake in time they could issue a notice of deficiency… the rest is well-trodden tax history.

No one claimed the EIP on their 2019/18 return, and yet some may well have received the EIP when they shouldn’t have based on mistakes from their 2019/18 returns. But if EIPs are rebates (again, a big “if”) made by the IRS, the recognition of these mistakes is exactly how they could be subject to the deficiency procedures and assessed like any other tax. And with exactly the same administrative collection options thereafter.

Uh oh…

But maybe it isn’t that bad. Recall, to begin with, the only people to worry would be those that had inaccurate 2019/18 returns resulting in EIPs they shouldn’t have received. If you were eligible based on 2019/18 information you have nothing to worry about. Also, as I will discuss in detail in another post, there are arguments that in some instances the erroneous EIP is not a “rebate” at all, which seriously limits the IRS collection options. Lastly, and importantly, there is the very real possibility that the IRS will simply make the decision not to go after EIPs at all as an administrative matter.

Those are all questions I’ll explore in my follow up post. For now, I’ll be content if only I have convinced you that the answer “the IRS cannot collect EIP because you just reduce it on your tax return” is 100% wrong. I’m afraid nothing in life is that simple.

ABA Tax Section Midyear Meeting This Week

The Tax Section of the ABA is holding its midyear meeting this week in a virtual format. It’s less expensive to register in this format and certainly less costly in time and money to attend. The program kicks off this afternoon with a New Attendee Orientation Reception at 4:00 p.m. and an opening plenary Tuesday at 10:30 a.m. EST, featuring Mark J. Mazur, Deputy Assistant Secretary, Tax Policy, US Department of the Treasury, and Janice Mays, Managing Director, Tax Policy Services at PwC US, exploring tax changes expected from the new administration and the new Congress.

The meeting has several panels addressing issues recently discussed in PT, which are detailed below. In addition, readers of this blog should find interesting the panels happening at the Administrative Practice, Individual & Family Taxation, Court Procedure & Practice, Tax Collection, Bankruptcy and Workouts Committee, and Teaching Tax Committees. There are too many excellent panels to highlight here. The full program is here, and the schedule at a glance is here.

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On Thursday morning January 28, the Pro Bono & Tax Clinics committee is presenting two sessions on the EIP, which we have covered extensively on PT. One of the panels includes Yaman Salahi who was part of the team of attorneys representing incarcerated individuals who won their case to receive the EIP in the fall of 2020.

EIP for Incarcerated Individuals. Panelists will provide lessons learned and an update on the latest from the Scholl et al. v. Mnuchin class action lawsuit ordering that the EIP be disbursed to incarcerated individuals. They will also discuss the process by which inmates may claim the payment, any systemic issues that have arisen since the court ordered that the payments be made, and the ways in which the pro bono and tax clinic community can be helpful.
Panelists: Yaman Salahi, Partner, Leiff Cabraser Heimann & Bernstein, San Francisco, CA; Amy Spivey, Visiting Assistant Professor & LITC Director, UC Hastings Law School, San Francisco, CA

Caleb Smith is a speaker on the second panel, which has a broader focus. Les recently blogged on key differences between the advance payment of the EIP and the recovery rebate credit here.

The National Taxpayer Advocate, EIP Issues and What to Expect in Filing Season. The National Taxpayer Advocate will provide a review of the 2020 Annual Report to Congress, and panelists will troubleshoot some of the most common problems likely to arise with EIPs during the filing season. Topics will include assisting those that the IRS thinks have received the EIP already but never actually did, misdirected deposits, or issues with joint bank accounts and domestic violence. Additionally, the panel will address questions concerning individuals that did receive payments but shouldn’t have and whether IRS can recoup such payments under either assessment/deficiency procedures, as erroneous refunds, or under general offset authority.
Moderator: Terri Morris, Attorney and Christine Brunswick Fellow at Community Tax Law Project, Richmond, VA
Panelists: Erin Collins, IRS National Taxpayer Advocate, Washington, D.C.; Dietra Grant, IRS Wage & Income, Atlanta GA; Nancy Rossner, Attorney Community Tax Law Project, Richmond, VA; Caleb Smith, Clinical Professor University of Minnesota Law School, Minneapolis, MN

If you enjoyed the blog post on premature assessments of Tax Court cases or the mailing of 12 million notices weeks or months after the dates on the notices (and its unfortunate recurrence), you could attend a panel on which Keith will participate, for the Tax Collection, Bankruptcy and Workouts Committee. 

The Impact of Late-Issued Collection Notices in Bankruptcy and Tax-Related District Court Litigation. After the expiration of the hiatus on collection and enforcement under the People First Initiative, the IRS mailed millions of notices with expired action and response dates. In addition, the inability of the IRS and the Tax Court to process mail during the COVID emergency caused the IRS to make premature assessments of some tax liabilities. The panelists will discuss the effect of misdated notices and premature assessments on the validity of assessments and the effect of these notices and assessments in bankruptcy and tax-related collection litigation commenced by the U.S. Department of Justice Tax Division.
Panelists: Janice Feldman, Volunteer Attorney at the Federal Tax Clinic, Harvard Law School, Jamaica Plain, MA; Professor Keith Fogg, Director of the Federal Tax Clinic, Harvard Law School, Jamaica Plain, MA; A. Lavar Taylor, Law Offices of A. Lavar Taylor, Santa Ana, CA

On Thursday afternoon, guest blogger Omeed Firouzi moderates a panel for the Diversity Committee which should be of interest to all tax lawyers.

Inequality, Race, & Tax: Systems, Laws, & Enforcement. The United States exhibits wider disparities of wealth than any other major developed nation. Over the past five decades, wealth has increasingly concentrated among the highest-income households. These households are disproportionately White and male. In 2018, three White men held aggregate wealth greater than the aggregate wealth of one-half of all Americans. The median White household has 41 times more wealth than the median Black household and 22 times more wealth than the median Latinx household. On average women earn less than men in all industries. At the intersection of race and gender, the gaps are even more shocking. Women of color are disproportionately poor, suffering poverty rates of 21.4% Black women, 18.7% Latinas, and 22.8% Native American women, as compared to 7% for White men. Moreover, education, work, marriage and other attributes that fall under the rubric of “personal responsibility” do not remedy these disparities. White heads of household without a high school education have on average more wealth than college educated Black heads of households. White households with a single white parent have more than twice the net worth of two parent Black households. White households with an unemployed head have a higher net worth than Black households with a head who is working full time. In short, something must be done to reverse these racist trends. Tax and spending systems are the most profound fiscal tools under the government’s control. Many aspects of United States tax systems worsen inequality, especially the racial wealth gap. Three nationally recognized expert panelists will provide a deep dive into institutional racism in tax systems. The panel will begin with a broad overview, focusing on racism in tax systems targeting Black and Latinx taxpayers. The focus will then narrow further, looking at the disparate impact of taxpayer audits on communities of color. Finally, panelists will suggest concrete strategies to start to remedy these wrongs.
Moderator: Omeed Firouzi, Staff Attorney, Philadelphia Legal Assistance
Panelists: Donnie Charleston, Director, Public Policy & Advocacy, E Pluribus Unum; Francine Lipman, William S. Boyd Professor of Law, University of Nevada, Las Vegas; Jackie Vimo, Economic Policy Justice Analyst, National Immigration Law Center

Finally, on Friday Les and Nina are participating in a session at the Individual & Family Taxation Committee meeting, which promises a fascinating and important discussion of how best to address tax underreporting by individuals.

Fresh Look at an Old Problem: Reducing the Tax Gap. The tax gap, or the difference between total taxes owed and taxes paid on time, is a longstanding problem. This panel highlights recent proposals to reduce the tax gap, with a focus on the underreporting tax gap associated with individuals.
Moderator: Leslie Book, Professor of Law, Villanova University Charles Widger School of Law, Villanova, PA
Panelists: Mark J. Mazur, who was recently returned to Treasury as Deputy Assistant Secretary, Tax Policy, (he was previously the Director at the Tax Policy Center, Urban Institute, Washington DC); Nina Olson, Executive Director of the Center for Taxpayer Rights, Washington DC; Charles O. Rossotti, Senior Advisor, Carlyle Group, Washington DC; Natasha Sarin, Assistant Professor of Law, University of Pennsylvania Law School & Assistant Professor of Finance at the Wharton School of the University of Pennsylvania, Philadelphia, PA

Some Quick Thoughts on a Key Difference Between the Advance Payment of an EIP and Claiming the 6428 and 6428A Credit on a 2020 Tax Return

We have previously discussed the mechanics of the advance credit, both in the original CARES legislation from last spring and also in the Tax Relief Act legislation from late last year.  For a really good primer on the mechanics of all of this, I recommend the recently retired sage of tax procedure, Carlton Smith So, How Will the “Recovery Rebate” Refunds Work This Time? Part 1 and Part 2.  In this post I will flag how things have changed a bit since Carl’s initial post, and also offer some brief observations on why the current status for individuals who are entitled to receive 6428/6428A credits when they file their 2020 tax returns puts people in a less favorable place than if they were fortunate enough to receive the advance payments.

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As background, individuals who receive an advance payment or payments that exceed the amount of their eligible credit (as later calculated on the 2020 return) will not have to repay any of the payment. If the amount of the 6428 and 6428A credit as determined on the 2020 return exceeds the amount of the advance payment, taxpayers are entitled to claim the difference as a refundable tax credit on their 2020 returns.

There is an uneasy relationship between tax procedure and refundable credits. Typically (and I am simplifying here quite a bit) a refundable credit is treated as a payment for a particular tax year, and a taxpayer will have an overpayment if the sum of their payments and credits exceeds their tax liability for that year. Just because a taxpayer has an overpayment does not necessarily mean a taxpayer gets a refund, however. Section 6402(a) allows (but does not require) the IRS to offset any overpayment of one tax against any other federal tax debt; Section 6402(c), (d), (e) and (f) require IRS (through Treasury) to offset or apply the balance of any overpayment to certain defined other debts, including past due child support, and state income taxes and covered employment compensation debt.

In an off-Code part of the law, the original CARES legislation trumped the offset rules. CARES did not distinguish between advance payments and amounts that would be claimed later on 2020 tax returns. Essentially CARES said that IRS could not exercise its discretion under Section 6402(a) to offset the economic impact payments and amounts later claimed on 2020 returns against past due federal taxes, and also overrode the mandatory offset rules in Sections 6402(d)-(f), but preserved the mandatory offset for past due child support.

Fast forward to December and the Tax Relief Act. 

Sec. 273(b) of the Tax Relief Act retroactively changes the off Internal Revenue Code provision  found in CARES Act Sec. 2201(d). What are the changes? As I mentioned above the original CARES Act provided that BOTH the advanced credit that the IRS distributed in the spring (the original EIP) and any amount of the 6428 credit that was later claimed on the 2020 return was exempt from the IRS applying to past due federal income taxes or to all mandatory offsets (e.g., state tax debt, debt to other federal agencies), except for child support.

First the good news. The TRA provided some additional protection for the second round of EIP’s by providing protection from all offsets, including for past due child support. It also protected the second round of advance payments form bank garnishment or levy by private creditors and debt collectors.

That is the good, at least from the taxpayer perspective. What about the bad? The TRA now provides that the recovery rebate credit a taxpayer claims on a 2020 tax return (under both 6428 and 6428A) loses the protection from discretionary and mandatory offsets under Section 6402. It will also be applied to any unpaid current 2020 tax liability, a necessary step to determine if a taxpayer has an overpayment in the first instance. There is also no protection from garnishment or levy if a taxpayer is lucky enough to get a 6428/6428A fueled refund. So in sum, what IRS refers to as the  “Recovery Rebate Credit” (the amount that is claimed on the 2020 return, rather than the Economic Impact Payments paid out in advance), is subject to ALL offsets, just like any other credit claimed on a tax return that generates an overpayment. 

Conclusion

Congress’ decision to place these benefits in the tax code and also to attempt to ensure that the IRS deliver them to the majority of people before filing a 2020 tax return (or in some instances even in the absence of a return), raises a lot of procedural issues. In this brief post, I did not attempt to exhaustively discuss those issues, but to highlight some differences between the 6428 and 6428A mechanics and typical refundable credits, like the EITC and the Additional Child Tax Credit. The post suggests that there are significant substantive differences between the advance payment mechanism and the typical way that individuals receive benefits by claiming a refundable tax credit on a tax return. This brief discussion may also be of relevance as Congress considers the possibility of using the tax system in additional ways to deliver regular benefits in advance of (or even in the absence of) filing a tax return. How and whether benefits are offset ( and whether the IRS will facilitate or publicize the ability to request a bypass of offsets when taxpayers are experiencing hardship, a topic of recent comments submitted by the ABA Tax Section), as well as what happens when there may be changing circumstances when it is time to reconcile, are issues that will have a material impact on the effectiveness of any program that is tethered to the tax code.

For another day, and another post, are issues relating to how taxpayers prove eligibility for claimed refundable credits, especially given that eligibility proof for a benefit embedded in the tax code typically means a correspondence audit. As Congress possibly looks to the tax system to play a bigger role, how the IRS administers these provisions looms even larger in the welfare of some of the population’s most vulnerable.

Contracts and the Court, Designated Orders November 16 – 21, 2020, Part I

Changes made during transition to the Tax Court’s new website prevent us from easily linking to the orders discussed in this post, but if you are interested in seeing an order you can search the case’s docket number on the Court’s website to find it.

Almost every area of law requires some knowledge of the tax code, especially contract law, and many of the orders designated during the week of November 16th demonstrate that. Summary judgment is not appropriate when a genuine dispute of a material fact exists, so can a genuine dispute exist when a case involves a legal writing, such as contract, deed, or agreement? The validity of the legal writing is not being questioned in any of these cases, but the Court reviews the legal writings to determine whether summary judgment is appropriate.

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Conservation Easement Deeds

The Court has been reviewing conservation easement deeds for perpetuity requirement violations for a while now and has been consistently granting summary judgment in favor of respondent. But the tides may be changing, in Docket No. 20849-17, St. Andrews Plantation, LLC v. CIR, the Court denies respondent’s summary judgment motion on this issue.

As we’ve seen and blogged about before, the deed in this case contains the “forbidden language” which fails to guarantee the donee its proportionate share of proceeds if the conservation easement is extinguished. This violates the perpetuity requirement and causes the donor organization to lose its charitable contribution deduction. For background information the posts here and here are most helpful.

So why isn’t this case another slam-dunk for respondent? According to the Court, “the deed in this case is different than the deeds in other cases,” because the “deeds in other cases contemplated future improvements that had obvious value.”

The language in the deed at issue in this case only permits maintenance of existing modest improvements, which consist entirely of a forest paths, gravel and other permeable-base roads, drainage ditches, and a metal entrance gate.

Unlike the more elaborate improvement possibilities in other cases (such as, natural gas wells, cell phone towers and additional structures) the options available in the deed in this case could not increase the fair market value of the subject property, or any increase would be de minimis. As a result, the improvements clause would not necessarily cause the donee organization to receive less than its proportionate share of proceeds in the event the property was sold following judicial extinguishment of the easement.

In Docket No. 14179-17, 901 South Broadway Limited Partnership, Standard Development, LLC v. CIR. The Court reviews the language of a deed for a façade easement and denies the IRS’s summary judgment motion while taking petitioner’s motion under consideration.

A façade easement it involves a different analysis for when it has a conservation purpose which is found in section 170(h)(4)(B) and requires that the building be listed in the National Register or be certified as having historic significance. Further section 170(h)(4)(C)(ii) requires non-National Register buildings to meet two additional requirements regarding preservation of the building’s exterior and “prohibits any change in the exterior of the building which is inconsistent with [its] historical character…”

Respondent argues that language in the deed related to the second additional requirement violates the perpetuity requirement. The deed requires the grantor to obtain prior express written approval from the grantee before it can make any changes to the building’s exterior, however, if the grantee fails respond to the request within 30 days the request is deemed approved (the “deemed approval provision”). Respondent argues that this means the grantor can make changes inconsistent with the building’s historical character if the grantee fails to respond.

But in a later section of the deed, the grantor is specifically prohibited from making any changes inconsistent the building’s historical character (the “prohibition provision”).

Both petitioner and respondent make arguments based on the deed’s construction, conflicting clauses, and the effect under California law, but the Court steps in to say none of that is necessary. The Court does not see any conflict between the deemed approval provision and the prohibition provision, because the prohibition provision limits both parties from permitting or making changes that are inconsistent with the building’s historical character so the grantee cannot be deemed to approve any request which it lacks the authority to approve.

Another order was designated in this case asking questions of respondent and setting a pre-trial conference for January 6, 2021. During the conference, IRS conveyed that they have abandoned the argument that the deed violates the perpetuity requirement argument, but they identified new issues under section 170(f) which the parties are working to resolve. 

Divorce and Separation Agreements

In Docket No. 13901-17, Redleaf v. CIR, the Court had to review the language in a divorce agreement to determine whether allocations made to petitioner were alimony or property settlements. Although the Court outlined the steps it must take when reviewing divorce agreements for characterization questions, the language in the agreement itself (referring to the allocations as “property settlement,” “division of assets,” “property division,” etc.) influenced the Court’s decision to grant summary judgment to petitioner.

In Docket No. 20452-18S, Valente v. CIR, the Court to review the terms of a separation agreement to determine whether payments made to petitioner were alimony or child support. In this case, an enrolled agent either didn’t understand, or didn’t follow, the separation agreement’s terms when he prepared petitioner’s tax return and treated a portion of what should have been alimony as child support because it produced a better result for her children’s college financial aid application. The Court determined there was nothing in the language of the separation agreement that would have allowed the alimony payments to be treated as child support payments and decided for respondent.

Contracts related to Research and Experimentation Credits

In Docket No. 7805-16, Meyer, Borgman & Johnson, Inc. v. CIR, the Court looks petitioner’s contracts to determine whether research was “funded” as defined in section 41(d)(4)(H). If the research was funded by petitioner’s clients, then petitioner is ineligible for the research credit.

The regulations instruct that “all agreements (not only research contracts) entered into between the taxpayers performing the research and other persons shall be considered in determine the extent to which research is funded,” and “amounts payable under any agreement that are contingent on the success of the research and thus considered to be paid for the product or result of the research are not treated as funding.”

The Court entertains many of petitioner’s arguments, but ultimately looks to the contracts and finds that none of them expressly make payments contingent on the success of petitioner’s research. Use of express terms have been identified as important in the case law that exists in this area. As a result, it finds there are no genuine issues of material fact and grants summary judgment to respondent.

The designated order in Consolidated Docket No. 27268-13, 27390-13, 27371-13, 27373-13, 27374-13, 27375-13, Tangle, et. al. v. CIR, also involved the research credit, but for the question of whether the qualified research tests were met and Section 41 exclusions avoided. Since it didn’t involve a contract, I don’t discuss it in detail.

Other Orders Not Discussed

There were three orders designated during the week of October 19-23, 2020:

Docket No. 2018-17L, Means v. CIR, petitioner’s case for very old tax years was dismissed after a lengthy history of non-compliance with Court orders.

Docket No. 25934-17, Tobin v. CIR, the Court grants IRS’s protective order requesting that they not be required to respond to petitioner’s request for admissions which perpetuate frivolous arguments.  

Docket No. 19697, Kalivas v. CIR, the Court denies petitioner’s motion for leave to file an amendment to petition because he failed to comply with the Court’s order, rules and more.