Husband Who Paid Wife’s Taxes Finds it’s Not Easy to Sue For a Tax Refund

We welcome back guest blogger Marilyn Ames who writes today about a case in which a third party pays the tax – perhaps under duress – and seeks to recover the payment.  As he finds out the path to recovery is not simple. Keith

One of my professors in law school was fond of explaining unusual results in court opinions with the statement that bad facts make bad law.  The Court of Appeals for the Federal Circuit illustrated this principle in the recent case of Roman v. United States, which if not totally bad law is possibly unnecessary and at the least is undeveloped in terms of its application within the structure of the tax system. 

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When Mr. Roman and his wife, Iris Espinosa, divorced in 2009, the property settlement they entered resulted in Mr. Roman receiving the family home in exchange for a payment of $150,000 to his former spouse.  The agreement was later amended to provide that Mr. Roman would pay any taxes Ms. Espinosa would owe for the sale of her share of the residence to him.  Ms. Espinosa filed her return for 2010, reporting the $150,000 as income but apparently not claiming it as being excluded under the provisions of IRC Section 121. An assessment was made in the amount of $50,002.04 in taxes and penalties, and according to the Court of Appeals, Ms. Espinosa received a “notice of intent to take possession of her property, including the previously shared home.” Presumably this was the usual notice and demand issued after an assessment, but the opinion does not make that clear.

Mr. Roman and Ms. Espinosa then met with an IRS employee, who indicated that that the IRS had not “placed a lien” on his home but Mr. Roman would have to pay the outstanding tax liability to avoid his residence being levied. Mr. Roman claims he believed he had no realistic alternative but to pay a tax he felt he did not owe, but claimed he was also told he could appeal the assessment once the tax was fully paid. Mr. Roman made a large initial payment and then paid the remainder of the tax over a period of time, beginning at some unspecified date and completing the payments on March 8, 2017.

Almost three years later, on January 13, 2020, Mr. Roman filed a refund suit in the Court of Federal Claims, asserting that the income tax was not owed as the amount should have been excluded from Ms. Espinosa’s gross income pursuant to Section 121(a), asserting he had standing to contest Ms. Espinosa’s tax liability in a refund suit under 28 USC § 1346(a)(1), and to claim monetary damages under the implied contract clause of 28 USC §1491(a)(1), also known as the Tucker Act. The Court of Federal Claims held it had jurisdiction as to Mr. Roman’s third-party tax refund claim, finding that Mr. Roman was a taxpayer for purposes of a refund suit. (There is no discussion in the opinion as to whether a refund claim was actually filed, whether the suit in the Court of Federal Claims was timely, or how much of the amount paid could be recovered under the look back rules of IRC Section 6511(b)). The government appealed.

The Court of Appeals reversed on the question of refund suit jurisdiction, holding that the Supreme Court decision in United States v. Williams was inapplicable to make Mr. Roman a taxpayer for purposes of 28 USC § 1346(a)(1), as the holding that a third party could be a taxpayer when the third party had no other remedy had been limited when Congress added a remedy to the Internal Revenue Code to address the situation in Williams. But apparently then feeling some sympathy for Mr. Roman’s situation, the Court of Appeals held that the Court of Federal Claims had jurisdiction to address Mr. Roman’s complaint under the provisions of 28 USC § 1491(a), the Tucker Act.

The Tucker Act gives the Court of Federal Claims jurisdiction to hear a suit and to enter a judgment for damages against the United States or one of its agencies for an action based on the Constitution, any statute, any regulation of an agency, or on an express or implied contract with the United States.   Citing prior authority, the Court of Appeals held that the Tucker Act gives the Court of Federal Claims jurisdiction to hear a suit brought by a party to recover a tax for which he is not liable if the tax was paid under duress, as the duress creates an “implied in fact” contract.  The Court of Appeals then held that duress requires: (1) involuntary acceptance with (2) no alternative and (3) coercive acts by the government,  and the question of duress is fact-specific to the case. Because Mr. Roman alleged that he was told by the IRS employee that he had to pay, the employee suggested no alternative, and the IRS had threatened to levy his home, the Court of Appeals held that the allegations were sufficient to support the claim of an implied contract, giving the Court of Federal Claims jurisdiction to hear the suit.

Much is left unanswered by the Court of Appeals’ opinion.  Because the Court of Federal Claims decided based on Mr. Roman’s claim that he was a taxpayer and could bring a refund suit, we don’t know if the Court of Federal Claims or the Court of Appeals was briefed on whether Mr. Roman actually had no other alternative.  Section 7426(a)(1)  permits a third party to bring a wrongful levy action if a levy has been made on the third party’s property.  A simple search on Westlaw finds numerous cases with holdings that Mr. Roman could have brought such an action, although a suit filed in 2020 would have been untimely.  Does the Court of Appeals’ holding imply that an employee in the Internal Revenue Service must suggest every possible way in which the third party can avoid payment to avoid a claim of duress?  Did the Court of Appeals reach the conclusion that Mr. Roman had an implied contract claim because the time for bringing suit under Section 7426(a) had expired?  And when did the statute of limitations for the implied contract claim begin to run – was it when Mr. Roman made the first payment,  or when he made the last, or on some other date?

Granted, Mr. Roman deserves sympathy for having paid tax that was probably not owed, but the solution reached by the Court of Appeals for the Federal Circuit is not one that can be applied by the United States or by taxpayers, and seems destined to create further rounds of litigation.

Debts Owed by Insolvent Taxpayers to the IRS

As we have mentioned on many occasions, Les suggested that we start this blog because of the work we do to update the treatise “IRS Practice and Procedure.”  At the moment Marilyn Ames, my former colleague in IRS Chief Counsel and occasional guest blogger, and I are updating and rewriting Chapter 16 of the treatise dealing with the priority of IRS debtor over other creditors.  In updating the chapter Marilyn found several important cases in the area of the priority of IRS debt for insolvent debtors which we have not written about on the blog.  In this post she discusses several of these cases as well as the general background of the insolvency procedures.  For those of you who use the treatise or who may consider using it in the future, look for major changes to Chapter 16, including major changes to the bankruptcy section, in the next several months.  Keith

Lurking in Title 31 of the United States Code is an unpleasant surprise for all creditors whose debtor also owes a debt to the United States.  This provision, located at 31 USC § 3713 and known as the Federal Priority Statute, has been in force without material change since 1797, and was held to be constitutional in 1805 in United States v. Fisher, 6 US 358 (1805). This statute provides that when a person indebted to the United States is insolvent and some action occurs such as the debtor making a voluntary assignment of his property that threatens the government’s ability to collect its debt, or when a deceased debtor dies and the property of the estate is insufficient to pay all the debts of the debtor, the claim of the United States is to be paid first. Section 3713 does not create a lien; the government’s priority is created solely by the statute. The only statutory exception in Section 3713 was added when the Bankruptcy Code was passed to provide that Section 3713 does not apply in a bankruptcy case brought under Title 11.

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To create an incentive for the United States to receive its priority payment, the fiduciary holding the property of the person or administering the debtor’s estate can be held personally liable if the claim of the United States cannot be paid in full after the fiduciary pays any other debt over which the United States’ claim has priority, provided the fiduciary knew about the debt to the United States when the payment to a lesser creditor was made.

When the claim owed to the United States originates within the Internal Revenue Code, Section 3713 is not as easily applied as appears on its face. Congress later provided protection to third parties, including creditors, against the vast reach of the federal tax lien that arises when a tax debt has been assessed and remains unpaid when it passed the Federal Tax Lien Act of 1966, codified in Section 6324.  In Section 6324 of the Internal Revenue Code, Congress listed various parties who should be given a priority position against a tax debt. So, when the stars align and both the United States and a private creditor claim priority to a debtor’s limited assets under these competing statutes, who should be paid first? In United States v. Romani, 523 US 517 (1998), the Supreme Court addressed this and held that Section 6324 represented Congress’s judgment as to when a federal lien for unpaid taxes is not valid against certain third parties, and that Section 3713 should yield to this later Congressional act when there is not enough money to pay both the United States and the third party.

The courts have also created judicial exceptions that limit the reach of the Federal Priority Act.  The costs of administering the estate of the debtor may be paid before a tax claim, including such expenses as court costs and reasonable compensation for the fiduciary and other professionals such as attorneys. Funeral expenses and spousal allowances have also been allowed before the government’s claim. However, in United States v. McNicol, 118 AFTR2d 2015-5150, 829 F3d 77 (1st Cir. 2016), the court held that the fiduciary must be able to show that the property transferred was used to pay these expenses.

So what is a fiduciary to do when it is unclear who the debtor’s limited funds should go to? One popular remedy is to file an interpleader action, joining all possible adverse claimants to the funds, and allow the court to sort out the priorities. This procedure is illustrated in the case of Karen Field, Trustee of Deshon Revocable Trust v. United States, 129 AFTR2d 2022-1007 (ED Ca. 2022), in which the court determined who had priority to the funds and in what order the claims should be paid – or remain unpaid. In this case, the decedent had embezzled funds, taxes were owed on the embezzled money to both the federal and state governments, and the victims of the embezzlement wanted to be repaid. The Department of Justice Tax Division has a directive that when the tax claim and the claim of the victims of embezzlement arise from the same transaction and the funds at issue can be traced to the victims’ property the victims should be paid before the tax claim. Despite this directive, the court applied Section 3713 and gave the tax claim priority, holding that the directive in question is merely internal agency policy, and not a source of enforceable legal rights for the victims.  The procedural aspects of an interpleader action are also illustrated in Findling v. United States, 121 AFTR2d 2018-1450 (ED Mich. 2018).

In another case involving government policy, the court took a contrary position in Estate of Graham v. Wells Fargo Bank, 2022 WL 2300940 (Cal. App. 3 Dist. 2022), when the executor of an estate asked the trial court to determine the order in which the proceeds from sale of a piece of estate property should be distributed.  The executor requested that the federal taxes be paid first pursuant to Section 3713, but the court held that the federal taxes did not take priority over a purchase money security interest with respect to the property in question. Although Section 6324 says nothing about purchase money security interests, the Service announced in Rev. Rul. 68-57, 1968-1 CB 553 (1968) that a perfected security would be given priority over a federal tax lien with respect to the property the loan was used to acquire. Accordingly, the claim of the bank advancing the money for purchase of the property should be paid before the federal tax liability.

The potential danger to a fiduciary in not paying a tax claim entitled to priority is illustrated in the recent case of Estate of Lee v. Comm’r of Internal Revenue, 2022 WL 3594523 (3rd Cir. 2022), a CDP case in which 3713 played a pivotal role.  The estate taxes owed by the petitioner in this case had been miscalculated, resulting in a deficiency, and the estate requested that the Internal Revenue Service accept an offer-in-compromise as the estate assets had been distributed to the beneficiaries, including over $640,000 paid out after the notice of deficiency was issued.  The Service rejected the offer made, taking the position that the reasonable collection probability was greater than the amount offered.  The Tax Court agreed that the IRS did not abuse its discretion in rejecting the OIC, and the Third Circuit agreed, pointing out that the government could seek to collect from the fiduciary, who had distributed assets after learning of the tax claim and so could be held personally liable.

For a statute that clearly states that the United States should be paid first, and that a fiduciary who fails to do so may need to pay the claim from the fiduciary’s funds, Section 3713 is not as clear as a mere reading would make it seem.  Given the holding in Estate of Romani, the judicially created exceptions for administrative expenses, and the question of whether a government policy directive waiving the right to payment first applies – or doesn’t – any professional even dealing tangentially with insolvent debtors or estates should be familiar with the existence of Section 3713 and its implications on when the United States should be paid before other creditors.

Holding Transferees Liable Without a Transferee Assessment

We welcome back guest blogger Marilyn Ames my former colleague at Chief Counsel, IRS and my current colleague in updating the Saltzman and Book treatise, “IRS Practice and Procedure.”  You can find a detailed discussion of transferee issues in the treatise.  Keith

In yet another case involving an intermediary transaction tax shelter, the Eleventh Circuit Court of Appeals reaches back to a 1933 Supreme Court case to show how broad the government’s powers to reach transferees of a taxpayer’s assets are.  In United States v. Henco Holding Corp., 127 AFTR2d 2021-362, 2021 WL 165324 (11th Cir. 2021), the shareholders of a corporation arranged a transaction in which a third-party purchaser received the assets of a corporation, an intermediary received a fee for participating in the transaction, the shareholders received the net cash from the asset sale, and the government was left with an empty bag when the corporate taxpayer could not pay the capital gains tax on the sale, which occurred in 1997.  The Internal Revenue Service audited the return of the corporate taxpayer, Henco Holding Corporation, and after several extensions of the statute of limitations, issued a notice of deficiency to Henco in 2007 with respect to the sale transaction in an amount over $56 million. Henco defaulted on the notice of deficiency, but requested a collection due process hearing when the IRS began collection procedures. When the collection activity was sustained by Appeals and a notice of determination was issued, Henco then filed a petition with the Tax Court challenging both the collection action and the underlying tax liability. The Tax Court sustained both the assessments and the IRS collection action.


With Henco having no assets from which to pay, the IRS eventually filed suit against Henco to reduce the tax claim to judgment and against the shareholders as transferees. Henco, having formally dissolved in 2012, did not appear and a default judgment was entered against it by the district court for the amount of its unpaid tax, penalties and interest in 2019. A judgment on a tax claim extends the statute of limitations on collection pretty much indefinitely, see post here, giving the government further time to hunt for a way to collect on its tax debt. (This is how the United States was able to try to collect from Al Capone decades after his death.) In this case, the hunt extended to the shareholders who received the proceeds from the sale of the assets, as the suit filed by the United States sought to recover the debt from those assets based on the Georgia fraudulent conveyance statute in effect at the time of the transaction.

The shareholders moved to dismiss the complaint against them, arguing that the Georgia statute of limitations for a fraudulent conveyance suit was only four years, a period that had run long before the suit was filed (given that the essentially defunct Henco spent years dragging out the audit and collection due process cases). The defendants also argued that the only way to recover from a transfer to them was through the use of IRC § 6901, the transferee liability statute, and the statute of limitations on assessment under Section 6901 had also run. The district court agreed that the suit against the shareholders should be dismissed, holding that an assessment had to be made against the transferee in order to collect from the transferee, and that Congress did not intend for the period in which an assessment could be made by a transferee to extend ten years or more.

With the United States once again holding an empty bag, it appealed to the Eleventh Circuit. The Appeals Court easily resolved the issue of the state statute of limitations binding the United States, noting that it has long been held that the federal government does not become subject to a state statute of limitations when it is acting in its governmental capacity and asserting a claim under its rights as the federal government. Turning to the main issue in the case – whether an assessment against the shareholder/defendants was necessary in order to proceed against them, the Eleventh Circuit relied on the Supreme Court case of Leighton v. United States, 289 US 506 (1933) to reject the shareholders’ position. In Leighton, the Supreme Court discussed the predecessor to Section 6901, Section 280 of the Revenue Act of 1926, and noted that prior to the enactment of the predecessor to Section 280, the United States could proceed in an equity proceeding against transferees to recover from assets transferred by the taxpayer. Addressing the question of whether Congress had made Section 280 an exclusive remedy for recovery, requiring an assessment under the transferee procedures of Section 280, the Supreme Court noted that while the meaning of Section 280 was not without uncertainty, “the right of the United States to proceed against transferees by suit since the act of 1926 has been definitely recognized.” The Leighton court concluded that an assessment under Section 280 was not necessary to collect from transferees.

In Henco, the Eleventh Circuit reached the same conclusion, stating that the language of Section 6901 was nearly identical to the provisions of Section 280 of the Revenue Act of 1926. In addition to holding that the procedures under Section 6901 are not the exclusive means of collecting from transferees, the Henco court further supported its position with the case of United States v. Galletti, 541 US 114 (2004), which addressed the question of whether partners in a partnership had to be individually assessed for the United States to recover a tax debt owed by the partnership from the partners. In Galletti, the Supreme Court held that separate assessments were not required, as “it is the tax that is assessed, not the taxpayer.” Holding that it was bound by both Leighton and Galletti, the Eleventh Circuit stated that it was undisputed that there was a timely assessment made against Henco, and that the United States could attempt to collect from the shareholders as transferees of the taxpayer under the relevant state law.

This is not the end of this saga, however, as the Eleventh Circuit merely reversed the dismissal of the shareholder/defendants and remanded the case to the district court for further proceedings. The United States must still prove that the shareholders are transferees liable under the Georgia statute in effect at the time of the transaction, now more than two decades ago. Then, the United States must hope the shareholders still have the money and didn’t lose it in the great recession, the pandemic downturn or just having a good time. Given the propensity of these defendants to drag things out, at the end of all this, the United States may still be left with an empty bag.

Refund Claim Time Limits Create an Unwelcome Barrier

Today’s post is from occasional guest blogger Marilyn Ames, a retired Chief Counsel attorney. Marilyn is a Contributing Author who works with me on Saltzman and Book, IRS Practice & Procedure. She and I recently substantially revised the chapter on statute of limitations relating to refund claims, one of the trickiest areas in tax procedure. We also have just completed the last treatise update of the 2020 calendar year, and in that update we came across the sad case of Koopman v United States, which, as Marilyn discusses below, highlights how the rules in Section 6511 can lead to some harsh results. Les

For even the most experienced tax lawyers, one of the most confusing parts of the Internal Revenue Code is Section 6511, which sets out the statute of limitations for refund claims. For most claims, the requirements for filing a timely refund claim are contained in Section 6511(a) and (b), which consists of two parts. First, Section 6511(a) requires the claim for the refund to be filed with a period of three years from the time the return was filed or two years from the time the tax was paid. However, this is only the first hurdle that a taxpayer must successfully cross in order to get a refund. Section 6511(b) then provides that the amount of the refund is limited to the tax paid within the three-year period immediately before the claim is filed if the taxpayer filed the claim within three years from filing the return, as set out in section 6511(a). If the taxpayer had an extension to file the return, that period is added to the three-year period of subsection 6511(b) for determining the amount of the claim allowed. If the claim was filed within subsection (a)’s two-year period, then the refund is limited to the tax paid within the two years immediately prior to the claim. The two-year rule allows taxpayers to file a claim for refund if the taxpayer pays the tax more than three years after filing the return, and then wishes to challenge some aspect of the tax within two years of the payment. The subsection (b) limitations are often referred to as the “look-back” rules. Because of the look-back rules, taxpayers can file a claim for refund that is timely, but still be barred from receiving any part of the refund. The Supreme Court determined in United States v. Clintwood Elkhorn Mining Co. (553 US 1 (2008)) that taxpayers must meet the Section 6511 requirements in order for the court to have jurisdiction to hear a refund suit. (It should be noted that Section 6511 has a long list of exceptions to the Section 6511(a) and (b) requirements that apply in special cases.)


These two requirements work together in a sometimes-Byzantine way that can create results that seem unfair to taxpayers.  The recent case of Koopman v. United States decided by the Court of Federal Claims in September of this year, illustrates the difficulties a taxpayer can encounter when trying to meet the requirements of both subsections (a) and (b) of Section 6511.  The taxpayer, William Koopman, retired from United Airlines in 2001. When he retired, he was covered by United’s non-qualified deferred compensation plan. Because of the special timing rule for FICA taxes, Mr. Koopman was required to pay the relevant portion of FICA on the present value of his deferred compensation in 2001, the year he retired, although he was to receive his benefits under United’s plan from 2001 through 2006. Unfortunately for Mr. Koopman, United filed a Chapter 11 bankruptcy in 2002, and he only received $248,293 of his deferred compensation instead of the $415,025.91 on which he paid FICA tax.  Instead of cash, he eventually received common stock in partial compensation, with the last distribution of the stock occurring in April of 2007.  

Mr. Koopman, unhappy he had paid FICA taxes on compensation he did not receive, filed a claim for refund in August of 2007 seeking a refund of the FICA taxes paid on the difference between the amount he actually received as deferred compensation and the amount on which he paid the tax. He subsequently filed suit in the Court of Federal Claims, and the United States filed a motion for lack of jurisdiction based on Mr. Koopman’s failure to meet the requirements of section 6511. Although Mr. Koopman was seeking a refund of only $2,416, he was not the only unhappy former United employee; the court notes that he had a co-plaintiff and that there are other cases involving the same issue.  

In ruling on the government’s motion to dismiss for lack of jurisdiction, the court held that under the deemed paid rules of Section 6513(c), United’s quarterly returns for 2001 were deemed filed and the FICA tax included on the returns was deemed paid on April 15, 2002.

Under Section 6511(a), Mr. Koopman only had until April 15, 2005 –three years after the returns were filed—to file a timely refund claim.  He missed that date by over two years.  Additionally, the court determined, under the look-back rules, the taxes were paid no later than April 29, 2004, as United had transferred credits to its FICA taxes for 2001 as late as April 29, 2002. Under Section 6511(b), no amount was paid within either the three-year or two-year periods looking back from the filing of the claim. Accordingly, because neither the three-year or two-year rule of Section 6511(a) was met, the court held it did not have jurisdiction over Mr. Koopman’s refund suit.

Mr. Koopman, pointing out the unfairness of this due to the litigation in the United bankruptcy that had prevented the final distribution being made to him any earlier, raised several arguments to try and overcome the barriers of Section 6511.  The court quickly disposed of his argument that Section 6511 did not apply to FICA taxes, as the statute expressly provides that it applies to any tax imposed by the Internal Revenue Code.  The court then rejected his argument that the statute of limitations should be equitably tolled, as the final determination that United was not going to pay him the full amount of the deferred compensation was made long after the statute of limitations on filing a refund claim expired.  Based on precedent, the court concluded that there is no equitable tolling of the refund statute of limitations as general principles of equity may not override the statutory requirements.  Mr. Koopman also argued that the statute of limitations should not begin running until the taxpayer has an opportunity to learn that the tax has been paid in error.  The court also rejected this argument, based on the precedent of another Supreme Court case, United States v. Dalm (494 US 596 (1990)). Although Mr. Koopman argued that application of Section 6511(a)’s time periods to his situation was unconstitutional under the due process clause, the court concluded that the United States can only be sued in its own courts under the express authorization given by Congress.  

Although situations such as Mr. Koopman’s seem to cry out for a remedy, Mr. Koopman could have acted earlier to protect his rights.  United filed bankruptcy in 2002, which should have been a red flag to Mr. Koopman that he was not going to receive all his deferred compensation.  He could have filed a protective claim for refund any time before April 15, 2005 that would have been timely, and then waited for the result of the bankruptcy litigation that was delaying a final determination as to his treatment.  The Internal Revenue Service is not only familiar with protective refund claims, but in some cases, reminds taxpayers who may be affected by ongoing litigation to file such a claim.  Earlier this year, the IRS issued a notice that the due date for filing a protective claim for the 2016 tax year for individual tax payments had been postponed until July 15, 2020, with an emphasis that this included claims involving the Affordable Care Act litigation.  The protective claim procedure allows tax practitioners to protect taxpayers whose rights may be affected by current litigation or expected changes in the law from being caught up in the Draconian maze of Section 6511 without a right to recourse if they wait for a final outcome.

Tax Refunds and the Disposable Income Test

We welcome back occasional guest blogger Marilyn Ames, who like me is retired from the Office of Chief Counsel, IRS and who did a lot of bankruptcy work when she worked for the government.  She discusses today a recent 5th Circuit case allowing the debtor to keep an earned income tax credit despite some local rules in Texas requiring her to turn a part of it over.  Although the 5th Circuit does not base its decision on the fact that the refund resulted from the earned income tax credit, that fact plays an important role.  Keith

As illustrated by the Covid-19 payments recently dispersed by the Internal Revenue Service and the use of the IRS to carry out portions of Obamacare, Congress frequently uses the IRS and the Internal Revenue Code as a means of administering social programs that have little or nothing to do with taxes. One of the problems of using the IRS to execute these types of programs is that courts assume that all provisions in the Internal Revenue Code are tax-related, which can, at worst, result in decisions at odds with the purposes of these programs, and at best, create precedent that fails to acknowledge Congressional intent.


The Fifth Circuit’s recent decision in the bankruptcy case of Matter of Diaz (found here or at 2020 WL 5035800) illustrates this issue. While the Fifth Circuit reached what is clearly the right conclusion under the Bankruptcy Code, it did so without recognizing why its decision was correct as a matter of policy. The Diaz case involves the amount of a tax refund that must be turned over as part of a Chapter 13 plan as disposable income, to be paid to general unsecured creditors. The bankruptcy court, the district court and the Fifth Circuit all failed to state why the debtor had a refund, but the Fifth Circuit does provide enough facts for an educated guess to be made that Ms. Diaz’s refund for 2017 resulted from the earned income credit. During 2017, Ms. Diaz worked as a medical assistant, and earned $2,644.16 per month, or a total of $29,791 for the year. During this year, she was a single parent with two children.  She filed bankruptcy on December 1, 2017, but her bankruptcy schedules filed later included her refund for 2017 in the amount of $3,261. Assuming that Ms. Diaz filed a return showing three exemptions and claiming the standard deduction for a head of household of $9,350, her return for 2017 would have showed a taxable income of $8,291 and a tax liability of $828. Making another assumption that she qualified for the earned income credit, the EITC for 2017 would have been $3,208, or about the amount of the refund she claimed on her return. (The tax liability on her return could have been offset by the child tax credit, resulting in a refund of any withholding, and she could also have been entitled to the additional child tax credit, but close enough given the facts available.)

Ms. Diaz filed bankruptcy in the Western District of Texas, which uses a standard form for Chapter 13 plans. Section 4.1 of the standard form provides that the debtor must turn over any tax refunds in excess of $2,000 to be disbursed to creditors pursuant to the plan by the Chapter 13 trustee. The only exception to turning over these funds is if the debtor’s plan provides for payment of 100% of the general unsecured claims, the debtor files a notice requesting that she be permitted to keep the excess refund amount, and the trustee does not object. Ms. Diaz could not make such a request, as her plan provided for only 12% of the general unsecured claims to be paid. Rather than filing a plan providing for the excess amount of $1,261 from her 2017 refund to be turned over to the Chapter 13 trustee, Ms. Diaz filed a plan that divided the total amount of her refund by 12 months, and then included that portion in her monthly income.  Provision 4.1 of the standard form was then stricken through. When the refund was included as part of her monthly income, the plan was adequate to meet the requirements of the Bankruptcy Code.

This gerrymandering did not sit well with the Chapter 13 trustee, who objected to the plan as it did not meet the provisions of Section 4.1 of the standard plan.  Ms. Diaz argued that the plan violated both the Bankruptcy Code and the Federal Rules of Bankruptcy Procedure. The bankruptcy court and the district court for the Western District of Texas disagreed, holding that the district court had authority to require that a standard Chapter 13 plan be used pursuant to the provisions of Federal Rule of Bankruptcy Procedure 3015.1, and that tax refunds are disposable income under Bankruptcy Code § 1325(b)(2) that must be included in the plan. The bankruptcy court rejected the debtor’s argument that her tax refund was similar to payments received for dependent adult children that are excludable from a debtor’s disposable income, apparently not recognizing that all or part of the debtor’s refund was probably attributable to the EITC, which is computed based on the number of dependents a taxpayer has. The district court affirmed the ruling of the bankruptcy court with even less consideration of why the debtor was entitled to a refund.  The bankruptcy court opinion can be found here (586 BR 588) and the district court opinion can be found here (2019 WL 4545613).

The Fifth Circuit disagreed that the debtor was required to turn over the refund, relying on Bankruptcy Code § 1325. If a plan does not provide for an allowed unsecured claim pursuant to § 1325(a), the plan cannot be confirmed unless the debtor includes all projected disposable income to be paid out to general unsecured creditors. Ms. Diaz’s plan did not provide for her unsecured creditors pursuant to § 1325(a), so she could only have a plan confirmed that included all projected disposable income. Noting that district courts may not adopt local rules or create standard plans that abridge, enlarge or modify any substantive right, the Fifth Circuit focused on whether the tax refund in excess of $2,000 was part of the debtor’s projected disposable income that had to be turned over to the Chapter 13 trustee.

Although the Bankruptcy Code does not define projected disposable income, § 1325(b)(1)(B) does state how it is to be calculated. Disposable income is the current monthly income received by the debtor, less “amounts reasonably necessary to be expended” for the debtor’s maintenance and support, plus any qualifying charitable contributions and business expenditures. Current monthly income is calculated by averaging the debtor’s monthly income in the six full months preceding the bankruptcy petition. The definition of “amounts reasonably necessary to be expended” is included in §1325(b)(3), and is different depending on whether the debtor has monthly income, when calculated for a year, greater than the median family income of the applicable state.  This amount can vary depending on the number of individuals in the household. If the debtor has current monthly income, when calculated over 12 months, greater than the applicable state median family income, only those expenses included in Bankruptcy Code § 707(b)(2) are included as amounts reasonably necessary.  If the debtor has less than the applicable median amount, all amounts for the maintenance or support of the debtor or the debtor’s dependents are included.

In the Diaz case, Ms. Diaz’s current monthly income, projected over 12 months, was less than $59,570, the median income for a family of her size in Texas in 2017. The expenses she claimed on her bankruptcy schedules totaled far less than the IRS National Standards for a family of the same size.  The Fifth Circuit concluded that “[W]e find it entirely plausible that Debtor will use her ‘excess’ tax refund of $1,261 for expenses that are reasonably necessary for her family’s maintenance and support.” Because the standard form required Ms. Diaz to turn over the tax refund in excess of $2,000 without determining whether the excess was an amount reasonably necessary to be expended, it violated her substantive right as a below-median income debtor to retain any refund reasonably necessary to be expended for her family’s support.

Although reaching the correct decision under the Bankruptcy Code, the Fifth Circuit failed to consider whether the refund was generated by the EITC and, if so, whether that fact should be considered in determining whether a debtor should be required to include these funds. The earned income tax credit was enacted in part to provide relief for low-income families. Hopefully, the provisions of Bankruptcy Code § 1325(b)(1)(B) expanding the amounts that can be considered to be amounts reasonably necessary to be expended for the maintenance and support of families with incomes below the median income of the state will be sufficient to continue to protect the relief Congress granted to low-income families through the EITC provisions. However, the fact that Ms. Diaz was required to appeal her case to the Fifth Circuit in order to protect her rights argues for an opinion that more explicitly recognizes the purposes of the EITC.

Trying to Find Order in the Anti-Injunction Act and the Tax Injunction Act

We welcome back Marilyn Ames who has blogged for us several times in the past.  She graciously agreed to write about some recent litigation that highlights the confusion currently surrounding these provisions.  Keith

In the past few weeks, I have been revising the subchapter in Saltzman and Book, IRS Tax Practice and Procedure on the Anti-Injunction Act.  It has been an exercise in frustration, as, although the Supreme Court says it likes “rule[s] favoring clear boundaries in the interpretation of jurisdiction statutes,” it doesn’t necessary mean what it says.  That’s a quote from Direct Marketing Association v. Brohl, 135 S. Ct. 1124, 1131 (2015), discussing the lesser known sibling of the AIA, the Tax Injunction Act, which is aimed at preventing federal courts from hearing suits intended to restrain the assessment, levy, and collection of state taxes.  And in the midst of this attempt to make some sort of order out of something which does not have any, two district courts have added their opinions to the fray.


In State of New York, et al. v. Mnuchin, which can be found here, the Southern District of New York takes on the issue of whether the Anti-Injunction Act prevents four states from bringing suit to litigate the constitutionality of the $10,000 ceiling placed on the deduction of state and local taxes (SALT) by the 2017 Tax Cuts and Jobs Act. The federal government raised three challenges to the Court’s subject matter jurisdiction, including the limitation imposed by the Anti-Injunction Act (AIA). The AIA, located at 26 USC § 7421(a) provides, with numerous exceptions, that “no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person, whether or not such person is the person against whom such tax was assessed.”  (For those of you interested in historical/legal trivia, the initial iteration of the AIA was passed in 1867.) In addition to the exceptions to the AIA actually contained in the statute, the Supreme Court created a judicial exception to the AIA in Enochs v. Williams Packing & Navigation Co.,370 U.S. 1 (1962), requiring the plaintiff to meet a two-part test to overcome the bar of the AIA: (1) it is clear at the time the suit is filed that under no circumstances could the government prevail on the merits; and (2) the action at issue will cause the plaintiff irreparable injury. And with this opinion, the race began to explore the boundaries of this court-made exception. 

One of these cases, and the one relied on by the court in State of New York v. Mnuchin, is South Carolina v. Regan,465 US 367 (1984).  In Regan, South Carolina invoked the Supreme Court’s original jurisdiction and asked leave to file a complaint against Donald Regan, the Secretary of the Treasury at the time to litigate whether a provision of TEFRA was unconstitutional. The provision in question required state obligations to be issued in registered rather than bearer form in order to qualify as tax exempt under IRC § 103.  The government raised the AIA in its objection to South Carolina’s motion, arguing that the state did not fall within any of the specific exceptions or within the judicial exception created in Williams Packing.  The Supreme Court then created an exception to its exception, holding that the AIA was not intended to bar a suit when Congress has not provided the plaintiff with an alternative legal way to challenge the validity of a tax.  Because South Carolina was not liable for a tax which it could then pay and use as the basis for a refund suit, it had no other way to litigate the constitutionality of the TEFRA provision.  In this situation, the Supreme Court said “a careful reading of Williams Packing and its progeny supports our conclusion that the [AIA] was not intended to apply in the absence of such a remedy.”

In State of New York v. Mnuchin, four states that impose lots of state and local taxes sued to have the $10,000 ceiling on the deduction of SALT declared unconstitutional.  The federal government argued that the suit was barred by the AIA and that the Williams Packing exception did not apply.  This is not like South Carolina v. Regan, the federal government argued, because the taxpayers affected in these four states have a motivation to file refund actions to challenge the law.  (It’s not clear from the opinion why the federal government felt that the bond holders in Regan who bought bonds that no longer qualified as tax exempt would not have a similar motivation.) The district court rejected the federal government’s argument, and noted that in both Regan and the suit before the court, the plaintiff-states were seeking to protect their own interests, rather than those of their taxpayers. In this situation, the court in State of New York v. Mnuchin held, a state has no other legal remedy to assert its sovereign interests. When a plaintiff has no other legal remedy to litigate the issue, then the AIA does not apply even if the plaintiff cannot meet the Williams Packing test.  Having won the jurisdictional battle, the states in New York v. Mnuchin then lost the war when the district court held that the ceiling on SALT deductions is constitutional.  Lots for everyone to argue about on appeal.

The second opinion of American Trucking Associations, Inc. v. Alviti, 377 F.Supp.3d 125 (D.R.I. 2019)involves the Tax Injunction Act, 28 USC § 1341, which provides “the district courts shall not enjoin, suspend or restrain the assessment, levy or collection of any tax under State law where a plain, speedy and efficient remedy may be had in the courts of such State.” As the Supreme Court recognized in Williams Packing, the TIA “throws light on the proper construction to be given” to the AIA.  In other words, these statutes have similar language and purpose. In the Alviti case, which can be found here, the plaintiffs are long distance trucking companies and associations that filed suit against the state of Rhode Island challenging the constitutionality of a bridge toll scheme.  The statute, known as the “Rhodeworks” Act, expressly prohibits the imposition of the bridge toll on any vehicles other than large commercial trucks. Under the Rhodeworks Act, the toll is set by state agencies in terms of the amount and the locations where it will be collected, and the funds go into a special account to be used only for the replacement, rehabilitation, and maintenance of bridges. The scheme instituted sets maximum daily amounts that can be collected based on the routes traveled, which the plaintiffs argue falls more heavily on trucks involved in interstate rather than intrastate travel.

The state of Rhode Island raised the TIA as a defense to the suit, arguing that although the fees were labelled as tolls, they were actually taxes subject to the TIA.  Although the Supreme Court has indicated it prefers clear boundaries, the district court framed the issue as one “which pits the actual language of the TIA and the context surrounding its enactment in the 1930s against several more modern decisions of the First Circuit that attempt to distinguish between fees and taxes.” In other words, let’s make this more confusing. The district court then cited a number of cases decided prior to enactment of the TIA, including one decided by the Supreme Court in 1887, that a toll is not a tax and that they are distinct and serve different purposes. Despite these decisions, the court then discussed whether the exaction in question fell within the three-pronged test of San Juan Cellular Telephone Co. v. Pub. Serv. Comm’n of P.R., 967 F.2d 683 (1st Cir. 1992), the purpose of which is to decide if a challenged assessment is more like a tax or a regulatory fee.  Despite finding that two of the three prongs were more in the nature of a fee, the court relied on the final prong of the test to decide the bridge tolls were actually taxes, and the suit was thus barred by the TIA. The case has been appealed to the First Circuit, and as the trucking company plaintiffs note in the brief to the circuit, this is the first case involving an exaction labelled a toll that has been found to be a tax.

It seems that while the mirage of clear boundaries for the AIA and the TIA is out there, the courts have difficulties in making their way to it.  I am reminded of a scene from Monty Python and the Holy Grail – “Bring me a shrubbery.” “Not THAT shrubbery.”

And we go on trying to make sense of what the courts really want.

The Sixth Circuit Sustains the IRS on Another MidCoast Transferee Liability Case

We welcome back occasional guest blogger Marilyn Ames. As I have mentioned before Marilyn and I worked together at Chief Counsel’s office for many years though I mostly worked in Richmond and she in Houston. In retirement she calls upon her deep knowledge of collection and tax procedure issues to assist in updating the treatise edited by Les, “IRS Practice and Procedure.” More specifically, one of the chapters she assists in updating is Chapter 17 involving transferee liability. The case she discusses in this post will soon make its way into the treatise as do many of the cases we write about in PT. By reading the post you receive a little more depth that usually goes into the treatise and you receive the information a little earlier but if you do not look at the treatise you can lose some of the context provided by the expanded discussion of the issue in general. Enjoy the post and remember that the treatise can assist you in obtaining a greater understanding of the issue. Keith

Prior to the creation of the intermediary transaction, Section 6901 of the Internal Revenue Code was a sleepy little backwater whose appearance in litigation was mainly in cases involving tax protesters trying to keep from paying taxes by transferring their property to various trusts and family members. Section 6901 is a procedural mechanism that permits the United States to collect unpaid tax liability from insolvent taxpayers by reaching transferees who have received property belonging to the taxpayer in a fraudulent conveyance. Because Section 6901 is solely a procedural statute, the government must show the transferee is liable by using some other federal statute, such as the Federal Debt Collection Procedures Act, or the relevant state fraudulent conveyance statute. Currently, the vast majority of states have fraudulent conveyance statutes based on the Uniform Fraudulent Transfer Act, which was approved as a uniform law in 1984. Prior to that time, most states passed fraudulent conveyance statutes based on the 1918 Uniform Fraudulent Conveyance Act.


In the last years of the last century and the first years of this one, a company called MidCoast caused the government to take a second look at the use of Section 6901 when MidCoast began marketing a tax transaction to help shareholders that sold privately held corporations to save on the income taxes that would otherwise be owed on the sale. To do this, MidCoast, in what the Internal Revenue Service named an intermediary transaction, combined an asset and a stock sale of the privately held corporation. The corporation would sell its assets to an unrelated third party, thus triggering a tax on the corporation for any gain realized on the assets. The shareholders would then sell their shares to MidCoast, which would resell the stock to another not so unrelated third party. Although MidCoast claimed to borrow the funds from the purchaser of the shares to pay the shareholders, in actually it would use the cash held by the corporation from its asset sale, leaving the corporation insolvent with no way to pay its tax liability. MidCoast would set the price of the shares at the amount of the cash held by the corporation, less a percentage of the estimated tax liability triggered by the asset sale. MidCoast marketed at least sixty of these transactions.

In 2001, the Internal Revenue Service issued Notice 2001-16 (2001-1 CB 730), designating the “intermediary transaction” tax shelter as a listed transaction. Litigation began as to whether the government could collect the corporations’ tax liability from the former shareholders who had walked away with cash for their shares as transferees under Section 6901. Initially, the Tax Court was not sympathetic to the government’s arguments, and held in favor of the shareholders under various arguments. Some of these cases can be found in the Tax Court’s opinion in Julia R. Swords Trust v. Comm’r, 142 TC 317 (2014), the citations for which are replete with little red flags as the various circuit courts reversed and remanded many of these cases to the Tax Court. After the initial flood of reversals, the Tax Court got the hint and began finding transferee liability existed in most of these cases, based on the relevant state law, with the courts of appeal affirming the later decisions entered in the Service’s favor. (The Julia Swords case is an exception, notable as it was decided under Virginia law, which is one of the few states that has not passed a version of the Uniform Fraudulent Transfer Act).

The latest opinion in the Section 6901 litigation is that of Hawk v. Commissioner, 924 F3d 821 (6th Cir. 2019), and with this opinion the Sixth Circuit drives another nail in the intermediary transaction coffin for those cases decided in states with law based on the Uniform Fraudulent Transfer Act. The former shareholders in Hawk argued that they should not be held liable as transferees under Tennessee law as they did not know that MidCoast’s scheme was fraudulent, and without such knowledge, there was no fraudulent conveyance. The Sixth Circuit rejected this argument, noting that the Uniform Fraudulent Transfer Act, upon which the Tennessee act is based, replaced the language that an exchange of property was made for fair consideration if it was made in good faith, with the language that the transfer had to be for “reasonably equivalent value.” The “good faith” language had been part of the Uniform Fraudulent Conveyance Act, and the court held that the drafters of the Uniform Fraudulent Transfer Act had made the change to “reasonable equivalent value” to eliminate any inquiry into the transferee’s intent when determining whether a transfer is constructively fraudulent. The bottom line, the court holds is that the transferees’ “ ‘extensive emphasis on their due diligence and lack of knowledge of illegality’ doesn’t shield them from the sham nature of the transaction and absolve them of transferee liability.”

Apparently tiring of intermediary transactions and Section 6901 litigation, the court goes further and asks “Was there a way to make this tax-reduction strategy work?” The court’s answer is “ ‘maybe’ in the abstract and ‘not likely’ here.”

With the Hawk opinion, it appears that the litigation involving intermediary transactions may be on the wane, and that Section 6901 may be on its way back to the quiet little backwater where it previously spent its days.

When Does Interest Start Running on a Transferee Liability

We welcome back guest blogger Marilyn Ames. Marilyn is retired from Chief Counsel’s office but works with us on IRS Practice and Procedure assisting with many chapters because of the breadth of her knowledge. She has done a lot of writing on transferee liability and provides insight on a recent case in that area. Keith

When a taxpayer has an unpaid income tax liability, the Internal Revenue Code is clear that interest on the unpaid tax accrues from the original due date of the return. However, when the Internal Revenue Service attempts to collect liability under Internal Revenue Code § 6901, the transferee liability section, questions arise as to the ability of the IRS to collect interest on the unpaid tax debt.  Because Section 6901 is merely a procedural law, the Internal Revenue Service must look to state law or other federal law for the substantive provisions that allow collection of taxes from a person who receives property from the taxpayer. The Internal Revenue Code provides that a transferee is liable for interest on the unpaid tax debt after the Internal Revenue Service issues a notice of transferee liability, but does state law govern the collection of interest before this date? The Ninth Circuit addressed this in the recent case of Tricarichi v. Comm’r, 122 AFTR2d 2018-6634 (9th Cir. Nov. 13, 2018). 


The transferee in this case, Michael Tricarichi, was the sole shareholder of West Side Cellular, Inc., which received a $65 million settlement in 2003. Before its return for 2003 was due, Mr. Tricarichi, who was then a resident of Ohio, sold his West Side stock in a “Midco” tax-shelter transaction, leaving West Side Cellular with insufficient assets to pay its corporate income taxes for 2003. Mr. Tricarichi received about $35.2 million in the transaction, and then moved to Nevada to enjoy the fruits of his labors. (The workings of the Midco transaction, which have been the subject of frequent litigation in the recent past, are outlined in Diebold Foundation, Inc. v. Comm’r, 736 F3d 172 (2d Cir. 2013)).

In 2012, the Internal Revenue Service issued a notice of transferee liability to Mr. Tricarichi, which was duly litigated in the Tax Court, the result being that the Tax Court determined that Mr. Tricarichi was liable for the full amount of West Side’s tax deficiency and the associated penalties and interest in the tidy total sum of about $35.1 million. In a separate opinion, the Ninth Circuit affirmed the Tax Court’s conclusion that Mr. Tricarchi was liable as a transferee under Internal Revenue Code § 6901 and the Ohio Uniform Fraudulent Transfer Act, leaving the question of when and whether a transferee is liable for the amount of interest due on the transferor’s tax liability before the notice of transferee liability is issued to this opinion.

Mr. Tricarichi, the transferee, argued that Ohio law determined his liability for any interest before the notice of transferee liability was interested. Under Ohio law, Mr. Tricarichi would have owed nothing instead of the nearly $13.9 million that accrued between the due date for the 2003 return and the issuance of the notice of transferee liability in 2012. He cited the Supreme Court’s decision in Commissioner v. Stern, 357 US 39 (1958), for the proposition that state law should determine the existence and extent of transferee liability, including the amount of the interest that can be collected on the underlying claim – which in Mr. Tricarichi’s view would be the tax and penalties owed by the taxpayer, but not the interest that accrued between the due date of the taxpayer’s 2003 return and June of 2012 when the IRS issued the notice of transferee liability.

The Ninth Circuit disagreed, holding that Internal Revenue Service’s claim is computed under the Internal Revenue Code, and will include statutory interest. The extent of the liability to be determined under state law is actually a question of the amount of the claim that can be recovered from the assets transferred. When the taxpayer transfers sufficient assets to pay the underlying claim, including the interest that has been accruing under the Internal Revenue Code for the unpaid tax liability, it is unnecessary to look to state law for the creation of a right to interest. It is only necessary to look to state law for interest when the assets transferred are insufficient to satisfy the total claim for the liability of the transferor/taxpayer. In that case, the relevant state law determines whether the Internal Revenue Service may recover any prejudgment interest beyond the value of the assets transferred. The Ninth Circuit adopted the “simple rule” formulated by the First Circuit in Schussel v. Werfel, 758 F3d 82 (1st Cir. 2014) that “the IRS may recover from [the transferee] all amounts [the transferor] owes to the IRS (including section 6601 interest accruing on [the transferor’s] tax debt), up to the limit of the amount transferred to [the transferee], with any recovery of prejudgment interest above the amount transferred to be determined in accord with [state] law.”

Under this relatively simple rule, because West Side’s tax deficiency, including interest and penalties was $35.1 million, and Mr. Tricarichi received $35.2 million in assets from West Side, an amount in excess of West Side’s tax liability, Mr. Tricarichi was liable for the full amount of the $35.1 million. The fact that Mr. Tricarichi will also be liable for interest as a transferee from the issuance of the notice of transferee liability in 2012 is irrelevant to the determination that he received more from West Side in assets than the tax claim against West Side. As a resident of Nevada, Mr. Tricarichi should understand that his attempt to break the bank in his litigation with the IRS has left him busted.