United States v. Kenny, No. 1:16-cv-02149 (N.D. Ohio June 6, 2018) involves a spectacularly non-compliant taxpayer against whom the IRS seeks both the reduction of assessments to judgment and an injunction. The court grants both. Mr. Kenny’s defense relied upon the statute of limitation on collection and the failure of his three OICs to extend it. The issue arises regularly because of the handling of OICs by the offer groups in Brookhaven and Memphis.
read more...Mr. Kenny failed to pay taxes voluntarily for about 25 years. He receives income as an independent contractor or a business owner and not as a wage earner. The court described in some detail his failure to voluntarily comply with his tax obligations and his expenditures which included almost $5,000 in monthly rent, almost $2,000 each month in meals and gas, extensive travel, payment of his son’s student loans and his daughter’s tuition. As with almost any case of this type, the described behavior would appear to have the facts needed in order to pursue prosecution under IRC 7201 for evasion of payment; however, for reasons not explained in the opinion, the government seeks other remedies against Mr. Kenny.
In addition to obtaining a judgment against him for the outstanding balance of the taxes, the IRS also sought an injunction to “to comply with his on-going tax obligations.” In addition to the almost $1.5 million in income taxes he also owes about $10,000 in trust fund recovery penalty. I have seen injunction cases to keep taxpayers from pyramiding trust fund taxes, but his case appears to be an injunction directed at complying with the income tax laws.
The court starts out stating that it generally disfavors injunctions “that do no more than require on-going compliance with the law.” The court goes on, however, to state that the unique facts here support the use of injunction as a tool to promote compliance. It cites to five factors developed by the 6th Circuit for determining whether to issue an injunction:
- The gravity of the offence
- Extent of participation
- Scienter
- Recurrent nature of offense
- Likelihood that his business activities will involve him in some offense again
The court spends a long paragraph explaining how Mr. Kenny fits into all of the categories set out by its circuit. The paragraph ends with the notation that the IRS withdrew the request for the appointment of a receiver to handle the business affairs of Mr. Kenny. The appointment of a receiver is a remedy even more extraordinary than an injunction.
Statute of Limitations
Mr. Kenny’s defense to the effort to obtain a judgment against him focuses on the statute of limitations and the impact on the statute on the three offer in compromise (OIC) requests that he filed with the IRS. Essentially, he argues that the IRS rejected the OICs as non-processable returning them without consideration. Further, he argues that because each of the offers were returned as non-processable his submission of the OICs would not extend the statute of limitations on collection and that the IRS needs the extra time it argues results from his submission of the OICs in order for the suit against him reducing the liability to judgment to be considered timely. The applicable IRM provision (IRM 5.8.7.2) provides “An offer can be returned as either a “not processable return” or a “processable return”. It is important to note the distinction because when there is a not processable return the collection statute is not suspended…” The court does not provide the detail needed to reveal exactly what happened when Mr. Kenny submitted his OIC requests; however, it appears that the IRS rejected the OICs at some time after the processability point thereby triggering the statute of limitations extension needed by the IRS.
The issue of when the IRS rejects an OIC has significance not always noted when the OIC gets returned to the taxpayer. Just as a taxpayer should not submit an OIC without thinking about the statute of limitations implications, a taxpayer should carefully note the basis for the IRS returning an OIC without acceptance. Many things can cause the IRS to return an OIC as non-processable and a detailed description of the circumstances that cause the IRS to determine an offer is non-processable as well as the process for making the determination can be found in IRM 5.8.2. The Centralized OIC units make the determination as stated in IRM 5.8.7.2.1 which provides:
Not Processable Returns
- An offer is determined to be not processable if any of the “Not Processable” criteria listed in IRM 5.8.2.3.1, Determining Processability, is present. This decision is the sole responsibility of the Centralized OIC (COIC) sites located in the Brookhaven and Memphis Campus.
About a dozen years ago several taxpayers litigated the processability issue with respect to the bankruptcy criteria. These taxpayers argued that making bankruptcy a processability criteria disadvantaged them in an inappropriate manner. After a couple of victories at the bankruptcy level (See In re Holmes, 298 B.R. 477 (Bankr. M.D. Ga. 2003); In re Chapman, 1999 Bankr. LEXIS 1091 (Bankr. S.D. W. Va. 1999)), the tide turned on this issue and the IRS prevailed (See In re Shope, 347 B.R. 270 (Bankr. S.D. Ohio 2006); In re Uzialko, 339 B.R. 579 (Bankr. E.D. Pa. 2006). I mention the cases for those who might have interest in attacking the processability criteria to show that such an attack would prove difficult because of the discretion IRC 7122 gives to the IRS in making the OIC determination.
A sure sign that the IRS is returning an OIC as non-processable is that the IRS does not give a taxpayer appeal rights when it rejects an OIC. Those who regularly submit offers know that getting a call from the OIC unit relatively quickly after submitting an OIC where the person at the offer unit says “if I do not receive X within 10 days I am going to return your offer as non-processable” happens fairly regularly.
It appears from IRS activity on Mr. Kenny’s OIC submissions several months after the initial submission that the IRS did consider the OICs on their merits before rejecting them; however, the type of rejection may not always be clear. In a recent post complaining about the telephone number provided by the offer unit, I spoke about a processability rejection (an incorrect one) because the assessment occurred as a result of a restitution order and when it does the IRS has no ability to administratively compromise the liability. Unfortunately, the Kenny case offers little guidance on when the return of an OIC results from a non-processable submission verses an unacceptable one on the merits of the offer because Mr. Kenny did not provide much evidence. Despite the absence of clear guidance, the Kenny case serves as a reminder that submitting an offer suspends the statute of limitations on collection and submitting multiple offers can suspend it for quite some time if the submitted offers make it past the processability stage. For taxpayers seeking to defend collection suits on the basis of the statute of limitations keeping careful track of these submissions and the basis for denial of the OIC requests becomes important in deciding if a procedural defense to the suit is available.
“The court described in some detail his failure to voluntarily comply with his tax obligations”
“As with almost any case of this type, the described behavior would appear to have the facts needed in order to pursue prosecution under IRC 7201 for evasion of payment; however, for reasons not explained in the opinion, the government seeks other remedies against Mr. Kenny.”
Could the reason be because the court and the government call that kind of compliance “voluntary”? Of course no sensible person outside of court and government would call it voluntary; that would be frivolous. But maybe the government is estopped from calling that kind of compliance anything other than “voluntary” and they can’t complain that the guy didn’t volunteer?
Some people do volunteer. The only two times I owed the US money after Forms 2555 and 1116, I sent overpayments and got refunds. A few earlier times I thought I owed money, I sent payments and got full refunds. The US wouldn’t even have known about these if I hadn’t volunteered. Only when I had the kind of withholding that an IRS employee was jailed for withholding, I haven’t got my refunds. This is the kind of voluntary honesty that gets penalized and labelled as not being a genuine sincere effort to comply with US law.
‘The applicable IRM provision (IRM 5.8.7.2) provides “An offer can be returned as either a “not processable return” or a “processable return”. It is important to note the distinction because when there is a not processable return the collection statute is not suspended…” The court does not provide the detail needed to reveal exactly what happened when Mr. Kenny submitted his OIC requests; however, it appears that the IRS rejected the OICs at some time after the processability point thereby triggering the statute of limitations extension needed by the IRS.’
Right, the IRM doesn’t count for beans in any court other than Tax Court. Besides, how could there be a “processability point” on a “not processable return”?
Maybe the government would be better off if it would stop calling compliance “voluntary” and if the government itself would start complying with laws. It sounds like section 7201 could have got the right result hones… hon….. I can’t say it, the government doesn’t work that way.
I tried to avoid writing a “story behind the story” about this case, because I do not want to wear out my welcome. But then arose the intriguing possibility of a connection to the Harvard Lampoon and the college classic movie “Animal House.” I will try to keep it brief.
The full name of the defendant in this case is Douglas A. Kenny. He is a dentist in Chagrin Falls, Ohio, as can be found in the government’s motions to extend the deadline for service of process, which it claimed he had been avoiding. This case was not his first experience in federal court. In 2005, a judgment was filed against him for $200,000 owed on student loans. Then in 2010, another judgment for $160,000 owed on student loans was entered in the District Court for the Northern District of Ohio. (This might be the same loan; when I try to access that Complaint and other documents on PACER, I am told “you are not authorized to view” them.)
If you look online for more information on Dr. Douglas A. Kenny of Chagrin Falls, you will find little about him and much about Douglas C. Kenney of Chagrin Falls (Harvard, Class of 1968), who in 1970 was one of the three founding editors of the Harvard Lampoon. He and his partners sold out for $7 million, about five years later. Then before his untimely death in 1980 at age 33, Kenney co-wrote the screen play for the movie “Animal House,” and produced and wrote with others the movie “Caddyshack.”
The famous Kenney was married in about 1970, and divorced several years later. Online records show that our Dr. Kenny is 53 years old, so born about 1965. Perhaps there is no relationship between Douglas Kenney, deceased, and Douglas Kenny, DDS. I have found no information on family or heirs to the late comic genius.
Meanwhile, Ohio Dental Board records report that in November 2006 Kenny was charged with three counts of passing bad checks, and two counts of grand theft. All charges were felonies, and he pled guilty to all of them. (He kept his license, despite some negative findings from a 2007 investigation of his patient records and office hygiene practices.)
In 2006, he reported a federal income tax liability of $75,000. A transcript filed with the court shows adjusted gross income of $209,203. Dentistry is often more profitable than law, but still — how much more would he have earned without that criminal case? Is there some other income involved? For example, inherited royalties?
Well, probably not. But reading the 246-page deposition of Dr. Kenny by a Department of Justice attorney, I was disappointed that she asked him if his wife had income from gifts or inheritances, but did not ask him. His testimony about his career since 1991 does not present a picture of financial success. He was not asked, either, about income related to writing prescriptions. After all, it’s just a tax case.