Tax Court Holds Benefits Exempt from Levy Are Part of a Taxpayer’s Ability to Pay

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The Ligman Tax Court case from earlier this month is a CDP case involving an Installment Agreement (IA). In Ligman, the Tax Court sustained the proposed levy and declined to find that Appeals abused its discretion in rejecting the taxpayer’s IA. What interests me is the court’s discussion (or more precisely lack of discussion) regarding accepting the treatment of railroad benefits as income available for an IA even though the benefits are generally exempt from levy.

I will simplify the facts and briefly describe what I found interesting about the case.


Taxpayer Walter Ligman owed an unspecified amount of tax from 2008. In a timely response to a notice of intent to levy, Ligman stated he disagreed with the levy and requested either an IA or OIC on the basis that “he was disabled, financially distressed, and receiving Railroad Retirement Board benefits(Railroad benefits) and that some of these benefits were exempt from levy.”

After some back and forth with the SO and the taxpayer’s representative, the taxpayer requested a partial pay installment agreement of $25 per month; the SO countered and said that Ligman’s monthly disposable income was $946 and calculated an installment agreement with a payment of $765 per month.

At the time of Appeals’ rejection of the IA, the railroad benefits were the only source of Ligman’s income.

The wide variance in the taxpayer’s and Appeals’ calculation on ability to pay turned on how to characterize the railroad benefits. The railroad benefits are generally exempt from levy, though subject to the 15% continuous levy under Section 6331(h). Ligman and his rep thus based the IA on excluding the benefits from his ability to pay calculation; Appeals said that while the benefits may be exempt from levy, they are available to Ligman absent showing offsetting expenses and should be part of the calculation as to what Ligman could afford monthly.

The Tax Court resolved this in favor of the IRS. Here is what the court said:

IRM pt. 5.15.1 (Oct. 2, 2012) instructs IRS collection personnel on how to analyze a taxpayer’s financial condition. It states that “[g]enerally all household income will be used to determine the taxpayer’s ability to pay.” Id. pt. The IRM does not carve out any exceptions for levy-proof benefits. For example, it instructs that income consists of pensions, including Social Security benefits. Id. pt. Certain Social Security payments, like Railroad benefits, are subject to a maximum 15% levy under the Federal Payment Levy Program. See sec. 6331(h)(2)(B); see also IRM pt., (j) (Aug. 28, 2012).

Although the IRM does not specifically state that Railroad benefits are included in income, it does not specifically exempt them. The IRM specifically includes other analogous partial or fully levy-proof benefits in the income calculation, such as Social Security benefits. We find that the settlement officer did not act arbitrarily, capriciously, or without sound basis in fact or law by including petitioner’s Railroad benefits to analyze petitioner’s financial condition and calculate his monthly disposable income. (emphasis added).

Brief Analysis

I do not think the Tax Court’s conclusion as a policy matter is off the mark. Congress’ determination to exempt railroad benefits from levy does not equate necessarily to exempting those funds from use in a collection alternative. I have not researched the issue  but what strikes me as potentially troubling with the IRS and court’s approach is that whether railroad benefits are considered as part of available income is a legal conclusion. In this case, apart from an analogous IRM provision, there appears to be no guidance IRS or Treasury issues to help Appeals and taxpayers understand what should be part of the available pool of funds that enters into a collection alternative analysis. In the current landscape, ability to pay largely turns on IRM provisions. As taxpayer’s collection rights have increasingly become statutorily protected (including consideration of collection alternatives) leaving the ability to pay determination in less than precise IRM provisions strikes me as bad as a matter of policy and law. In effect, the IRM provisions especially if accepted on an abuse of discretion basis transform guidance to IRS personnel into legal conclusions. There is no opportunity for notice and comment. Moreover, absent CDP, many of the collection determinations are not even subject to limited judicial review.

Some may say so what, especially when the conclusion as in Ligman seems right. I am aware of cases in the Villanova Tax Clinic where settlement officers and managers insisted that a family member’s discretionary gifts that were used by the taxpayer for living expenses were properly part of that taxpayer’s ability to pay. The absence of authority discussing the contours of ability to pay makes it difficult for taxpayers to overcome Appeals when its decisions seem wrong. In fact,that absence backstopped by in many cases an absence of judicial review can lead to effectively unreviewable erroneous IRS determinations. That is not a recipe for good tax administration.


Avatar photo About Leslie Book

Professor Book is a Professor of Law at the Villanova University Charles Widger School of Law.


  1. Carl Smith says

    I agree with Les that it is time for the methods of calculating both the income and expense sides of the Collection Financial Standards need to be at least put into regulations. The standards were sort of codified in the tax law by 7122(d) (originally 7122(c)) in 1998, then codified again by references in the bankruptcy reform act of 2005. They are too much part of the law now to simply be left to IRM sections that can be changed at whim.

    It seems right to me that certain exempt income be counted on the “income” side of the Collection Financial Standards calculation — since that side is really an available cash flow side, not a taxable income side. I think the IRS and court reach the right conclusion in the case, but the answer is for the taxpayer not to sign any installment agreement and let the IRS levy 15% of his RRA funds (assuming that 15% amount is less than the amount the Collection Financial Standards would determine he can afford).

    Like the Villanova clinic, at the Cardozo clinic I once had a situation of a taxpayer who made too little each month on which to pay her monthly expenses, so her mother sent her $300 a month as a gift to make ends meet. The SO insisted on including the $300 of gifts on the “income” side of the equation for the purposes of calculating revenue collection potential for purposes of an OIC, notwithstanding my pointing out to the SO that the mother would not make gifts that were simply going to be transferred to the IRS. I could not convince the SO. In the end, the taxpayer could not get the OIC. But, the IRS never collected anything, either, as the taxpayer’s other income consisted of 1009 income from multiple sporadic sources — so levy on it was not feasible or even tried by the IRS.

  2. Jason T. says

    Mr. Ligman did raise a clever argument. I can’t feel sorry, however, that he lost his Tax Court case.

    A wide gulf appears between a $25 and a $765 monthly IA payment. I understand the negotiation process; I don’t see, though, how Mr. Ligman could have made his IA offer in good faith.

    I agree with Carl that the taxpayer’s financial standards side is a cash flow one. To me, that means if a taxpayer has funds available to him, then he must dedicate those funds toward his collection alternative offer–irrespective that all or some of the funds are exempt from levy.

    I analogize IA and OIC offers to the “willfulness” determination made for the sec. 6672 100% penalty. If a responsible person taxpayer pays available funds to his company’s other creditors, instead of to the IRS, then he acts willfully and is subject to penalty. Similarly, when a delinquent taxpayer pays his available funds to other creditors (or toward personal expenses) instead of to the IRS, then he is subject to “penalty,” i.e., the IRS rejects his collection alternative offer.

    For that same reason, Carl’s client with the rejected OIC fails to stir my sympathies.
    Q: What did she intend to do with her mother’s $300 monthly gift, if not pay her tax debts? A: Pay other debts or expenses.

    The mother indeed had every right to terminate her monthly gifts…even if she (curiously) would do so only if her daughter used the gifts to reduce her tax debts. But the daughter’s attempt to omit that regular $300 revenue stream from her OIC offer was dishonest. As in Ligman, Appeals was right to reject Carl’s client’s own “exempt” based collection alternative offer.

    • Thanks to you both for your comments.
      The differing views I think proves the point that we would benefit from guidance in this area. On the other hand, the lack of guidance may serve IRS interests as it fits in with the view that collection alternative determinations should be subject to effectively unchecked IRS discretion. RRA 98 and other codification of the collection process (not to mention general administrative law principles) do not support that view. Yet, many IRS determinations on collection alternatives are not subject to review arguably cuts the other way.

  3. Bob Kamman says

    The larger question is whether IRS can insist on collecting more than the taxpayer would pay by filing bankruptcy. A lot of time and expense on both sides of the negotiations could be saved if Congress instructed IRS to accept the bankruptcy amount, rather than forcing the taxpayer into bankruptcy. (Time and expense could also be saved in the bankruptcy courts.)

    For calculating the bankruptcy definition of “disposable income,” Congress excluded Social Security but did not exclude Railroad Retirement benefits, which at least in part are equivalent to Social Security. See discussion at In re Scholz, 699 F.3d 1167 (9th Cir. 2012). That may not be fair, but it’s the law. Now the issue is whether another law should be enacted to come up with a different answer for tax debtors and collectors. Or maybe the same answer.

    Why should Congress bother? What is the policy behind “it’s OK for IRS to force people into bankruptcy because IRS is allowed its own ideas about a Fresh Start”? Seems to me this is the kind of question that a National Taxpayer Advocate should ask.

  4. Interesting. However, and not having read the case, I wonder what the total amount of monthly Railroad benefits were. They appear to exceed $1,000 per month. Let’s assume $1,000 per month, though. 15% levy threshold against $1,000 per month is $150. Which exceeds $25, the amount of TP’s offer. So, even though IRS calculated reasonable collection potential of $765, TP’s failure to increase his offer to anywhere up to at least $150 would seem to allow the court to find that the SO did not abuse discretion here. Seems to me to be a poor strategy by TP in this case.

    In addition, why should IRS be required to change its procedures–they already seem pretty clear, that all available income should be considered. And that seems fair (and bright-line enough), in light of the fact that it appears the tax owed here was not the subject of any legitimate dispute. And that also seems like a reasonable policy for a tax collector to take–otherwise one invites differing treatment of similarly situated TPs. If there is truly a problem with IRS abuse here, then Congress, and not the IRS, should be the entity determining the proper policy.

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