Taxpayer Wins Rare Reversal in CDP Lien Appeal

0 Flares Filament.io 0 Flares ×

Last week we covered Collection Due Process in the Federal Tax Clinic seminar at Villanova. Each student had to find a CDP opinion authored by a judge coming to Philadelphia this spring, and present the opinion to the class. I like this exercise, but it is somewhat discouraging. In all the cases presented this semester (and most semesters), the taxpayers were self-represented, and they all lost their appeals. As one student after another explains why the IRS did not abuse its discretion in their case, the exercise shows the wide discretion that the IRS enjoys in the collection domain, and the Tax Court’s deferential standard of review.

Collection Due Process is not always a futile exercise, however. Carl Smith alerted the PT team to an interesting bench opinion posted in December 2019, Cue v. Comm’r, where the Tax Court flatly rejected the IRS’s lien determination. The Cue opinion is unusual not just because the Court found abuse of discretion on a lien determination, but also because the Court did not remand the case to Appeals.

”read

The Secret Lien, the NFTL, and Collection Due Process

Before we get to the Cue case, a brief reminder of the lay of the land. The Notice of Federal Tax Lien is a powerful compliance tool. While a “secret lien” in favor of the government arises by operation of law, the Notice of Federal Tax Lien (NFTL) perfects this lien and alerts the world (and the taxpayer’s other creditors) to the government’s claim on the taxpayer’s property. The unperfected “secret” lien can be defeated by creditors who would have to fall in line behind a perfected lien.

So when a taxpayer fails to pay the government, it makes sense that the government would protect its priority against other creditors by filing an NFTL. However, this can cause a hardship for taxpayers, as prospective landlords, lenders, suppliers, and customers may see the lien and decline to do business with the taxpayer. Taxpayers without stable housing are particularly vulnerable. The NFTL also seems excessively punitive where the taxpayer has no significant assets and no realistic chance of acquiring any. NFTLs are filed against taxpayers, not against particular pieces of property, and there is no requirement that a taxpayer own real estate or significant assets before the government can perfect its lien. Keith wrote about the problems caused by systematic lien filings in low-dollar cases here. Since Keith’s article was published, the IRS Fresh Start Initiative raised the filing threshold from $5,000 to $10,000. Still, NFTL filing remains a concern for low-income taxpayers, and it is still a tool wielded systemically by the IRS’s automated collection system.

Collection Due Process acts as a check on the juggernaut of automated collections by requiring Appeals to engage in a balancing test, finding that the IRS’s proposed collection action “balances the need for efficient collection of taxes with the legitimate concern of the person that any collection action be no more intrusive than necessary.” IRC 6330(c)(2)(A).

One might think, at least for taxpayers who own little to no property, that the balancing test would favor restraint. But where IRS policy requires a lien determination, the taxpayer faces an uphill battle to prove that the NFTL will cause a specific serious hardship or impair their ability to pay the tax debt. And the Tax Court reviews the IRS’s determination for abuse of discretion. This leads to cases like Richards v. Commissioner, T.C. Memo. 2019-89, in which Judge Vasquez held that it was not abuse of discretion for Appeals to sustain an NFTL filing against taxpayers in Currently Not Collectible status whose only income was from Social Security.

Mr. Richards pointed out that the NFTL was doing the government no good, whereas on his side of the balancing test it hurt his credit rating and he feared it would hurt his chances of getting a car loan. Unfortunately, the Court found this “bare assertion is insufficient to establish that lien withdrawal would facilitate collection or would be in the United States’ best interests.” Regarding the balancing test, the Court noted,

petitioners do not contend that [Settlement Officer] Piro misinterpreted the IRM in making her determination. Nor did petitioners present any concrete evidence during the CDP hearing to demonstrate how the NFTL would negatively affect their financial circumstances and credit standing.

…SO Piro actually considered Mr. Richards’ argument about petitioners’ credit standing and pursued a followup inquiry. Specifically, SO Piro asked whether the NFTL would affect petitioners’ ability to earn income. After learning from Mr. Richards that their only income source was Social Security, SO Piro determined that the NFTL was not overly intrusive and was necessary to protect the Government’s interest. This determination was well within her discretion.

So the first hurdle a taxpayer faces in fighting a NFTL determination is proving that there is a specific harm caused by the public lien filing, and this should be a harm which impedes collectability of the tax debt. Carl Smith gave a good example in an email:

At Cardozo, I once got a lien withdrawn at a CDP hearing for a person who had virtually no money, but had been working on a screenplay with a big Hollywood producer. I got a letter from the producer saying that he could not have my taxpayer listed among the creative team (or paid) if he was going to seek financing for the film, since investors do tax lien searches on creative teams before investing money. In order to help her possibly earn money from her screenplay work, the SO agreed to remove the filed lien (she had no other property the lien would secure) and leave her in CNC. But, I almost never hear of anyone else successfully getting a lien withdrawn.

Eberto Cue v. Commissioner

Finally we get to today’s case and taxpayer Eberto Cue. Carl Smith described the case:

There was a pro se CDP case on Judge Goeke’s Nov. 12 calendar involving a banker who owed money for taxes reported on two older returns.  The debt had gone into CNC.  Then, the IRS filed a tax lien.  (He owns a condo.)  It appears he had recently gotten a job as a banker that, like many in the financial industry, prohibits his having a notice of federal tax lien filed against him.  In his Form 12153, he asked for the lien filing to be withdrawn, explaining that he would lose his license and his job if the lien notice were not withdrawn. 

Mr. Cue did not propose any collection alternatives. The Appeals settlement officer (SO) offered him three options under which she would withdraw the NFTL:

  1. a direct debit installment agreement under which the total liability would be paid off within 60 months;
  2. immediate full payment; or
  3. documentation that Mr. Cue would lose his job if the notice was not withdrawn.

Not surprisingly, Mr. Cue chose Option 3. On 8/14/18 Mr. Cue sent the SO a letter with information about his banking license. This showed that federal tax liens “would be noted by the licensing officials adversely to his request to renew his license, which he had to renew every year…”

The SO then essentially reneged on her offer. She found that Mr. Cue “was already in breach of the licensing requirements, apart from the Notice of Federal Tax Lien filing,” because he “owed the federal government, and [his] home was foreclosed.” Therefore, she disregarded his documentation and his argument. In a Notice of Determination dated 9/26/18, the SO determined that the account would remain in CNC status, but the lien filing was sustained. Mr. Cue filed a timely petition to the Tax Court.

The Court’s opinion notes that during the CDP appeal, Mr. Cue discussed the NFTL with his employer as required by his banking license. On 8/19/18 he was advised, “You are ineligible to remain in your current position due to your outstanding tax lien.” It is unclear from the opinion whether the SO had this evidence to consider before the Notice of Determination.

Carl Smith:

…the SO did not withdraw the lien notice, and the taxpayer thereafter lost both the job he had at the bank requiring the license and any other job at the bank.  He has been unemployed ever since, relying on being supported by his wife.  So, ultimately, the IRS got nothing by its collection efforts (except possibly priority if the condo gets sold, assuming there is any equity in it).

The IRS had moved for summary judgment exactly 60 days before the calendar call.  Judge Goeke set the motion to be argued at the calendar call. 

At the calendar call on November 12, Attorney Karen Lapekas entered a limited entry of appearance for Mr. Cue. Judge Goeke denied the IRS’s motion for summary judgment and held the trial that same day.

If one goal of CDP is to find an appropriate collection alternative benefiting both the taxpayer and the Treasury, it seems odd that neither petitioner nor the SO in this case proposed an affordable monthly payment as a way to avoid a NFTL. To Judge Goeke, the SO’s reasoning (Mr. Cue was already exposed to losing his license, so the NFTL would not matter) “overlooked the fact that the petitioner had been employed for some time, and was in a position to generate income…”

…it was unreasonable for the settlement officer to overlook the impact of the lien and its public filing on the petitioner’s employment. Her failure to seriously consider the petitioner’s assertions that he would lose his position demonstrates that the settlement officer did not seriously intend to act on the third condition that she provided the petitioner in the telephonic hearing. …the fact that the settlement officer did not seek a reasonable payment from the petition[er] demonstrates that the settlement officer was not actually interested in generating collection from the petitioner, but merely wished to sustain the Notice of Federal Tax Lien.

The Court went on to hold

Given these circumstances, we believe the settlement officer’s actions were arbitrary and capricious, and we sustain the petitioner’s argument that the Notice of Federal Tax Lien should be withdrawn. … We do not look at his current situation [and re-weigh the balancing test]. Rather, we look at the actual analysis of the settlement officer, contemporaneous with the determination, … [and] that analysis we find to be arbitrary and capricious.

Reverse or Remand?

Generally, where abuse of discretion is found the Court will remand the case to Appeals for a supplemental hearing. The lien determination cases of Budish v. Comm’r and Loveland v. Comm’r (blogged by Keith here) and the levy case Dang v. Commissioner (blogged by Keith here) are all good examples of this practice. Keith wrote about the frustration that can result from repeated remands in CDP cases here.

In Mr. Cue’s case however, Judge Goeke simply reversed the Settlement Officer and declined to sustain the Notice of Determination. Under the circumstances, this seems appropriate. The NFTL clearly had cost Mr. Cue his ability to work in banking and had destroyed his ability to make payments towards his tax debts. Under these facts, no reasonable settlement officer could sustain the notice of federal tax lien.

 

Christine Speidel About Christine Speidel

Christine Speidel is Assistant Professor and Director of the Federal Tax Clinic at Villanova University Charles Widger School of Law. Prior to her appointment at Villanova she practiced law at Vermont Legal Aid, Inc. At Vermont Legal Aid Christine directed the Vermont Low-Income Taxpayer Clinic and was a staff attorney for Vermont Legal Aid's Office of the Health Care Advocate.

Comments

  1. Steven M. Harris says

    Sadly, the judge’s ruling cannot be reviewed by a higher court. It is incorrect and evidences a misunderstanding of “arbitrary and capricious.”

Comment Policy: While we all have years of experience as practitioners and attorneys, and while Keith and Les have taught for many years, we think our work is better when we generate input from others. That is one of the reasons we solicit guest posts (and also because of the time it takes to write what we think are high quality posts). Involvement from others makes our site better. That is why we have kept our site open to comments.

If you want to make a public comment, you must identify yourself (using your first and last name) and register by including your email. If you do not, we will remove your comment. In a comment, if you disagree with or intend to criticize someone (such as the poster, another commenter, a party or counsel in a case), you must do so in a respectful manner. We reserve the right to delete comments. If your comment is obnoxious, mean-spirited or violates our sense of decency we will remove the comment. While you have the right to say what you want, you do not have the right to say what you want on our blog.

Speak Your Mind

*