Tuesday, July 31, 2007

Tax Help: Offer in Compromise - abuse of discretion

William J. and Lois J. DiCindio v. Commissioner.Dkt. No. 7029-03L , TC Memo. 2007-77, 93 TCM 1060, April 2, 2007.

[
The IRS's determination to reject a married couple's offer-in-compromise (OIC) and proceed with collection of tax liabilities was not an abuse of discretion. Returning the OIC for additional information was not arbitrary and capricious, and the decision not to process the OIC because the couple failed to provide additional requested information was consistent with the prescribed guidelines and was a reasonable exercise of the IRS's discretion. It was also not an abuse of discretion to reject the couple's OIC because they failed to submit additional information before the court ruled on their pending motion for reconsideration. An extension of any deadlines related to the IRS's processing of the OIC would not have changed the OIC's disposition. --

William J. and Lois J. DiCindio, pro se; Donald M. Brachfeld, for respondent.

MEMORANDUM OPINION
COLVIN, Chief Judge: Respondent sent a Notice of Determination Concerning Collection Action(s)

Under 1 and/or 2 Thereafter petitioners timely filed a petition in which they requested our review of respondent's determination. The issue for decision is whether respondent's determination to reject petitioners' offer-in-compromise (OIC) and proceed with collection was an abuse of discretion. We hold that it was not.
Background

Some of the facts have been stipulated and are so found. Petitioners are married and resided in Edison, New Jersey, at the time the petition was filed.

Respondent issued a Final Notice of Intent to Levy and Notice of Your Right to a Hearing to petitioners on September 5, 2002. Petitioners timely requested a collection due process hearing on October 1, 2002. Petitioners' outstanding tax liability is $463,496 plus statutory additions. Petitioners did not challenge the assessments or the underlying tax liabilities. A settlement officer (SO) from respondent's Appeals Office (Appeals) spoke on the telephone with petitioners' representative on February 4, 2003. The SO told petitioners' representative that collection alternatives such as an OIC or an installment agreement would not be considered because of petitioners' poor compliance record. Respondent issued the notice of determination on April 8, 2003, sustaining the levy.
In the petition, petitioners alleged errors in the notice of determination, specifically that Appeals failed to give them a fair hearing and that Appeals failed to act properly with regard to the collection activity. After the petition was filed, counsel for respondent requested that Appeals discuss collection alternatives with petitioners at a face-to-face hearing. Petitioner3 and respondent's SO met on September 9, 2003, and discussed collection alternatives. Petitioners submitted an OIC on November 6, 2003. On December 1, 2003, the SO sent petitioners a letter requesting that they complete missing items on the form and submit additional information.



Discussion

Petitioners contend that respondent's refusal to consider their offer-in-compromise submitted on November 15, 2005, for the years in issue was an abuse of discretion. We disagree.

Petitioners contend that respondent's rejection of their OIC while a motion for reconsideration was pending before the Court was an abuse of discretion. We disagree.
[Dec. 34,014] 66 T.C. 962 (1976); Estate of Halas v. Commissioner [Dec. 43,183], 87 T.C. 164, 166-167 (1986). Motions to reconsider will not be granted unless unusual circumstances or substantial error is shown. Estate of Halas v. Commissioner, supra at 574; Vaughn v. Commissioner, supra at 167. Petitioners submitted their offer-in-compromise to respondent on November 15, 2005. However, they failed to respond to respondent's repeated requests for additional information. In April 2006, petitioners requested an extension until August 15, 2006, so that petitioner could file his 2005 income tax return. The Court was not persuaded that petitioners were entitled to an extension of any deadlines related to respondent's processing of the OIC and denied their motion. In the interim, respondent rejected petitioners' OIC.
We have no reason to believe that an extension to August would have changed the disposition of petitioners' offer-in-compromise. The reason for the requested extension was to file petitioner's 2005 income tax return. However, the filing of petitioner's 2005 income tax return was not a requirement of respondent's acceptance of the offer. The OS knew that petitioner had requested an extension for filing his 2005 taxes. The information that the OS needed, however, had to do with additional information to verify and confirm the data on the submitted OIC. Therefore, it was not an abuse of discretion to reject petitioners' OIC on account of their failure to submit additional information before the Court ruled on petitioners' pending motion for reconsideration.

We conclude that respondent may proceed with collection of petitioners' tax liabilities for 1985-89 and 1991-2001 because respondent's rejection of petitioners' offer-in-compromise was not an abuse of discretion.
Alvin S. Brown
tax attorney
703 425-1400
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Tax Attorney: Offer in Compromise - Bankruptcy

Court concluded that IRS was correct in not processing an OIC during bankruptcy.

re 1900 M Restaurant Associates, Inc. Debtor. 1900 M Restaurant Associates, Inc., Appellant v. United States, Appellee., U.S. District Court, D.C.; Civ. 05-570 (EGS), September 20, 2006, 352 BR 1.

Affirming a BC-DC D.C. decision 2005-1 USTC ¶50,313.

[Code Sec. 7122]

The IRS did not violate 11 U.S.C. §525 when it returned a corporation's offer in compromise (OIC) as nonprocessable during the pendency of its chapter 11 bankruptcy proceeding. IRS policy and procedures provided that, because the corporation was in bankruptcy, processing its OIC was not in the government's best interest. Moreover, mandamus relief was not available to the corporation as an alternative means to compel the government to consider its OIC. The IRS owed no clear duty to the corporation to act as required for mandamus relief. Its discretion to compromise carried with it the discretion not to exercise that discretion.




MEMORANDUM OPINION


SULLIVAN, District Court Judge: Before the Court is the appeal of the appellant, 1900 M Restaurant Associates, Inc. ("1900 M Restaurant"), pursuant to 28 U.S.C. §158(a)(1), from an order of the United States Bankruptcy Court for the District of Columbia. By an order dated January 24, 2005, the bankruptcy court granted the United States's motion for summary judgment and dismissed the action. See 1900 M Restaurant Associates, Inc. v. United States (In re 1900 M Restaurant) [2005-1 USTC ¶50,313], 319 B.R. 302 (D.D.C. 2005). This Court agrees with the legal conclusions and the result reached by the bankruptcy court. Therefore, the bankruptcy's court's Order is affirmed.



I. BACKGROUND1

Appellant is a restaurant operating in the District of Columbia under the tradename "Rumors." On April 9, 2003, appellant filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code. The majority of the appellant's obligations consisted of priority tax claims owed to the District and the Internal Revenue Service ("IRS").

On January 26, 2004, appellant submitted an offer-in-compromise ("OIC") to the IRS on IRS Form 656, pursuant to 26 U.S.C. §7122. An OIC is an offer submitted by a taxpayer to pay less than what is owed in federal taxes. On February 6, 2005, appellant's offer was returned as nonprocessable because under IRS procedures, IRS cannot accept for review any OICs from taxpayers with open, pending bankruptcy cases. Further, appellant had not filed several tax returns, the liability for which was the subject of the offer.

When appellant's offer was returned as nonprocessable, appellant filed suit in the bankruptcy court for a declaratory judgment that IRS's policy to return as nonprocessable offers submitted by taxpayers in open bankruptcy proceedings violated 11 U.S.C. §525(a). Appellant requested the bankruptcy court to compel IRS, pursuant to 11 U.S.C. §105, to consider appellant's OIC --not to approve and accept the offer --but to merely consider it.

The parties filed cross motions for summary judgment before the Bankruptcy Court of the District of Columbia. The bankruptcy court granted the government's motion, and dismissed the action. On appeal, appellant presents two issues: (1) whether the bankruptcy court erred as a matter of law in determining that 11 U.S.C. §525(a) does not apply to the IRS when it refused to consider an OIC under 26 U.S.C. §7122 during the pendency of a bankruptcy case; and (2) whether the bankruptcy court erred as a matter of law in determining that 11 U.S.C. §105 is not available to compel the IRS to consider appellant's OIC.

The bankruptcy court held that §525(a) does not apply to the IRS's refusal to consider an OIC submitted under §7122 during the pendency of a bankruptcy case. In re 1900 M Restaurant 2005-1 USTC ¶50,313, 319 B.R. at 305. Specifically, the court determined that a debtor's "right to submit an offer-in-compromise" is not a "license, permit, charter, or franchise" within the ordinary meanings of those words. Id. Further, the court found that it is not a grant either within any of the ordinary meanings of that word. Id.

Then the court turned to the question of whether §105(a) provides an alternative means to compel the government to consider appellant's OIC. After examining the legislative history of §105(a), the court held that §105(a) is similar to the All Writs Statute, 28 U.S.C. §1651. Id. at 306. The court concluded that to the extent that the debtor seeks to compel performance of an alleged duty, the relief the debtor seeks is in the nature of mandamus. Id. The court held that the appellant failed to meet the requirements of a writ of mandamus: (1) appellant has a clear right to relief; (2) the appellee has a clear duty to act; and (3) there is no other adequate remedy available to appellant. Id.

Focusing on the second element, the court found that the IRS had no clear duty to the appellant under §7122 to consider and process its OIC. Id. at 307. Section 7122(a) does not command the Secretary of the IRS to consider an OIC, rather it only provides that the Secretary "may" compromise a tax liability. Id. The court held that a discretion to compromise carries with it the discretion not to exercise the discretion. Id. In short, in exercising the statutory discretion of §7122(a), the Secretary was free to specify what types of offers will be processed. Id. at 309.

Alternatively, the court also held that mandamus is unavailable on an alternative ground. Id. at 311. Because mandamus is an extraordinary remedy that is available only if other relief is inadequate, the court concluded that mandamus is not appropriate here because the appellant already has at its disposal another way to present a payment proposal to the IRS, that is much akin to an OIC. Id. at 312. The court explained that appellant presented to the IRS a proposed plan of reorganization, and that "through this process, [appellant] has received a decision regarding the acceptability to the IRS of the treatment [appellant] proposes. Because [appellant] has already achieved a decision regarding the acceptability of the treatment his plan proposes for the IRS's claims, [it] has achieved [its] end in filing an offer-in-compromise, and mandamus is inappropriate. ... It follows that a decision on the acceptability of [appellant's] plan achieved the end of what [appellant] desired, even though not employing the means [appellant] desired." Id.



II. DISCUSSION




A. Standard of Review


On appeal, a summary judgment decision entered by a bankruptcy court is reviewed de novo both as to conclusions of law and findings of fact. U.S. v. Spicer, 57 F.3d 1152, 1159 (D.C. Cir. 1995). Summary judgment in bankruptcy is governed by Bankruptcy Rule 7056, which incorporates the standard of Rule 56 of the Federal Rules of Civil Procedure. Id.




B. Appellant's Argument


Appellant argues that, notwithstanding the various strengths and/or weaknesses of the appellant's OIC, the IRS summarily rejected it because it refused to consider offers while a bankruptcy proceeding was pending. Appellant argues that IRS's refusal to even consider its offer violates 11 U.S.C. §525(a) because that section prohibits discrimination against individuals in bankruptcy on the sole basis of their bankruptcy. Appellant concedes that it is within IRS's discretion to accept or deny its OIC, but to not even consider and process the offer violate §525(a).

Appellant does concede that an OIC is not a "license, permit, charter, or franchise," as articulated in §525(a), within the ordinary meanings of those terms. However, appellant argues that an OIC is "other similar grant" under §525(a) because the term "grant" is to be interpreted broadly given the legislative history which states that §525(a) is not exhaustive in terms of describing the various forms of discrimination which that statute was intended to prevent. Moreover, the phrase, "other similar grant" is not defined by the Bankruptcy Code. In short, OIC is an "other similar grant," thus, the IRS violated the anti-discriminatory provisions of §525(a) when it refused to even consider appellant's offer due to its open bankruptcy case.

Further, appellant argues that because §525(a) lacks any remedial provisions in its own rights, 11 U.S.C. §105(a) is necessary to remedy the IRS's conduct in this case. It argues that §105(a) provides the bankruptcy courts with broad equitable powers to order "any" type of order that is necessary or appropriate to carry out the provisions of the Bankruptcy Code. Accordingly, because the IRS's policy of refusing to consider appellant's OIC while it is in bankruptcy violates §525(a), §105(a) may be invoked to remedy the IRS's conduct in this case by ordering IRS to consider appellant's OIC.




C. Appellee's Argument


The government argues that §525(a) is not applicable to this case because an OIC is not a "license, permit, charter, franchise or other similar grant." Further, it argues that the case appellant relies on for its argument is clearly distinguishable. The government also points out that legislative history does not support appellant's contention that "other similar grant" should be interpreted broadly to encompass OICs. The government argues that the legislative history is clear that any expansion of §525(a) is limited to licensing-type actions and not just any type of interests and actions. See H.R. Rep. No. 595, 95th Cong., 1st Sess. 367; Sen. Rep. No. 95-989-, 95th Cong., 2nd Sess. 81 ("This section permits further development to prohibit actions by governmental or quasi-governmental organizations that perform licensing functions. ..."). The government contends that IRS does not perform licensing functions and the appellant is in no way being denied an opportunity to engage in its business. In short, the legislative history confirms that §525(a) is not intended to cover the present situation.

Next the government argues the bankruptcy court below correctly determined that §105(a) did not authorize it to order the IRS to consider appellant's OIC. First, §105(a) only authorizes an order that will effectuate another express bankruptcy court provision. Once appellant's argument that the IRS violated §525(a) has failed, there is no other provision. Therefore, the order appellant seeks is one of mandamus under §525(a), and the appellant has failed to meet the required factors for a writ of mandamus to issue in this case.




D. Analysis





1. Offers-in-Compromise


The Internal Revenue Code provides that taxpayers may compromise any civil or criminal tax obligation by submitting an OIC. See 28 U.S.C. §7122. Only the IRS may process an OIC, and only under the various regulations, rules, guidelines, and revenue procedures established under 28 U.S.C. §7122. Section 7122(a) provides:


(a) Authorization. The Secretary may compromise any civil or criminal case arising under the internal revenue law prior to reference to the Department of Justice for prosecution or defense; and the Attorney General or his delegate may compromise any such case after reference to the Department of Justice for prosecution or defense.


An OIC under §7122 "must be submitted according to the procedures, and in the form and manner, prescribed by the Secretary." 26 C.F.R. §301.7122-1(d)(1). An OIC under §7122 is generally submitted on IRS Form 656. The IRS may refuse to process an OIC and return the OIC to the taxpayer if the IRS determines that "the offer was submitted solely to delay collection or was otherwise nonprocessable." 26 C.F.R. §301.7122-1(d)(2). What constitutes a nonprocessable offer is determined by IRS policy.

On July 12, 2004, the Internal Revenue Service Office of Chief Counsel issued a notice explaining IRS's policy of returning OIC of taxpayers currently in bankruptcy as nonprocessable. See CC-2004-25, 2004 IRS Chief Counsel Notice LEXIS 18 (July 12, 2004) ("Notice"). The Notice explained that the Commissioner of IRS had determined that processing OIC of taxpayers in bankruptcy was not in the government's best interest and that IRS would instead consider payment proposals by such taxpayers as part of the plan confirmation process. The plan confirmation process permits IRS to exercise its discretion to accept different treatment of priority claims than is provided for by the Bankruptcy Code. In sum, if a taxpayer is in bankruptcy at the time the OIC is submitted, IRS will return the offer as nonprocessable, therefore, §7122 is unavailing to such a taxpayer.




2. IRS Did Not Violate 11 U.S.C. §525(a) When It Refused to Consider an Offer-In-Compromise Submitted During the Pendency of a Bankruptcy Case.


11 U.S.C. §525(a) is known as the anti-discrimination provision of the Bankruptcy Code. It provides that a government unit may not discriminate against a person with respect to certain grants solely because that person is, or has been, a bankrupt party. Specifically, §525(a) provides:


[A] governmental unit may not deny, revoke, suspend, or refuse to renew a license, permit, charter, franchise, or other similar grant to, condition such a grant to, [or] discriminate with respect to such a grant against ... a person that is or has been a debtor under this title ... solely because such bankrupt or debtor is or has been a debtor under this title. ...


The legislative history of §525 provides in part:


This section is additional debtor protection. It codifies the result of Perez v. Campbell, 402 U.S. 637 (1971), which held that a State would frustrate the Congressional policy of a fresh start for a debtor if it were permitted to refuse to renew a drivers license because a tort judgment resulting from an automobile accident had been unpaid as a result of a discharge in bankruptcy.



In addition, the section is not exhaustive. The enumeration of various forms of discrimination against former bankrupts is not intended to permit other forms of discrimination. The courts have been developing the Perez rule. This section permits further development to prohibit actions by governmental or quasi-governmental organizations that perform licensing functions such as a State bar association or a medical society, or by other organizations that can seriously affect the debtors' livelihood or fresh start, such as exclusions from a union on the basis of discharge of a debt to the union's credit union. ... This section is not so broad as a comparable section proposed by the Bankruptcy Commission, H.R. 31, 94th Cong., 1st Sess. §4-508(1975), which would have extended the prohibition to any discrimination, even by private parties. Nevertheless, it is not limiting either, as noted. The courts will continue to mark the contours of the anti-discrimination provision in pursuit of sound bankruptcy policy.


HR Rep No. 595, 95th Cong, 1st Sess 366-367 (1977); S Rep No. 989, 95th Cong, 2d Sess 81 (1978).

"A fundamental canon of statutory construction is that, unless otherwise defined, words will be interpreted as taking their ordinary, contemporary common meaning." Perrin v. United States, 444 U.S. 37, 42-43. (1979). "The plain language of legislation should be conclusive except in the rare cases in which the literal application of a statute will produce a result demonstrably at odds with the intentions of its drafters." United States v. Ron Pair [89-1 USTC ¶9179], 489 U.S. 235, 242 (1989).

When the actual language and the legislative history of §525(a) are analyzed, it is clear that an OIC is not like a "license, permit, charter, franchise or other similar grant" within the ordinary meanings of those words. In order for an OIC to fit within the statute, appellant must establish that an OIC is a grant and is similar to a license, permit, charter or franchise. This the appellant cannot do. Appellant attempts to stretch the meaning of "other similar grant" to include offers-in-compromise, but essentially it is comparing apples with oranges, and that fact cannot be avoided when one looks closely at Stoltz v. Brattleboro Housing Authority, 315 F.3d 80 (2d Cir. 2002), appellant's primary case.

The Stoltz Court reviewed whether a public housing lease fell under the protections of §525(a). The Court examined the commonly understood definitions of a "grant" and a "lease" to determine whether a lease is a grant similar to a "license, permit, charge, or franchise." Id. The Stolz Court defined grant as: (1) "a transfer of property by deed or writing;" and (2) "an agreement that creates a right of any description other than the one held by the grantor." Id. It defined lease as "a contract by which a rightful possessor of real property conveys the right to use and occupy that property in exchange for consideration." Id. The Court concluded that a public housing lease is a grant by which a public housing authority conveys a public housing tenant the right to use and occupy public housing in exchange for rent. Id. Having determined that a lease is a grant, the Stolz Court next determined whether a public housing lease is a grant "similar" to a "license, permit, charter or franchise" under §525(a). It concluded that it is because the public housing lease, like the other property interests specifically protected under §525(a), is unobtainable from the private sector, and is essential to a debtor's fresh start, which was stressed in the legislative history of §525(a).

In looking at the definition of "grant" as articulated by the Second Circuit, the Court concludes that an OIC is not a grant. An OIC does not constitute a transfer of a property right or an agreement that creates certain rights. In sum, because an OIC is not like a "license, permit, charter, franchise or other similar grant" within the ordinary meanings of those words, the government did not violate 11 U.S.C. §525(a).2




3. 11 U.S.C. §105 Does Not Authorize an Order to the IRS to Consider Appellant's Offer-In-Compromise.


Having determined that the IRS's policy of returning OICs as nonprocessable from taxpayers in bankruptcy proceedings does not violate §525(a), the Court must now turn to whether 11 U.S.C. §105(a) nonetheless permits the Court to order IRS to consider appellant's OIC.

11 U.S.C. §105(a) provides that "[t]he court may issue any order, process, or judgment that is necessary or appropriate to carry out the provision of this title." The legislative history to §105(a) states that it "is similar in effect to the All Writs Statute, 28 U.S.C. §1651 ... The section is repeated here for the sake of continuity from current law and ease of reference, and to cover any powers traditionally exercised by a bankruptcy court that are not encompassed by the All Writs Statute." H.R. Rep. 95-595, 95th Cong., 1st Sess., at 316-17 (1977).

The Court agrees with the bankruptcy court that since there is no other express bankruptcy provision upon which the Court is asked to act, the order appellant seeks is one of mandamus. The "remedy of mandamus is a drastic one, to be invoked only in extraordinary circumstances." Power v. Barnhart, 292 F.3d 781, 784 (D.C. Cir. 2002). Mandamus is available only if: (1) the appellant has a clear right to relief; (2) the appellee has a clear duty to act; and (3) there is no other adequate remedy available to appellant. Id.

"When a statute uses a permissive term such as 'may' rather than a mandatory term such as 'shall,' this choice of language suggests that Congress intends to confer some discretion on the agency, and that courts should accordingly show deference to the agency's determination." Dickson v. Secretary of Defense, 68 F.3d 1396, 1401 (D.C. Cir. 1995). Section 7122 clearly states that the "Secretary may compromise any civil or criminal case...". By using the word "may," Congress vested discretion in the Secretary, and thus, it logically follows that discretion to compromise carries with it discretion not to exercise that discretion. Accordingly, because appellee does not owe a clear duty to act, as required under the second prong of seeking mandamus relief, mandamus is not available here.

Further, the Court adopts the bankruptcy court's reasoning as to why the holdings of In re Mancher, 2003 WL 23169807 (Bkrtcy. W.D. Va. June 5, 2003) and In re Holmes [2003-2 USTC ¶50,685], 298 B.R. 477 (M.D. Ga. 2003) will not be followed. The bankruptcy court explained how the Bankruptcy Code's "fresh start" principle and the common sense realities of bankruptcy reorganization do not require that the government be ordered to consider appellant's OIC under §105(a). Accordingly, having found the bankruptcy court's reasons to be persuasive, and to the extent that the appellant is challenging them in its brief, the Court adopts the bankruptcy court's well-reasoned conclusions.



III. CONCLUSION

The Court concludes that the bankruptcy court correctly determined that the appellee did not violate 11 U.S.C. §525(a) and that appellant is not entitled to the relief it seeks under 11 U.S.C. §105. Accordingly, the bankruptcy court's decision is AFFIRMED.

1 The facts of the case are adopted from the parties' respective statement of material facts as to which there is no genuine dispute filed with their respective cross motions for summary judgment before the bankruptcy court.

2 The Court notes that the only case to hold that the IRS violated §525(a) is In re Mills [2000-1 USTC ¶50,103], 240 B.R. 689 (S.D. W.Va. 1999). Appellant urges the Court to consider the policy rationales relied on by the Mills Court. Rather than looking at the specific language of §525(a) to determine whether an OIC is a grant that is similar to a "license, permit, charter, or franchise," the Mills Court's conclusion emanates from a policy angle. Finding that it is unfair to treat taxpayers in open bankruptcy proceedings differently by not affording them an opportunity open to other taxpayers, the Court held that the government violated the anti-discrimination provision of the Bankruptcy Code. Section 525(a) does address discriminatory treatment of debtors, however, Congress did not prohibit all discriminatory treatment, rather it chose its language carefully, and the courts must look to the plain language and meaning of the statute to determine what conduct is covered by the statute.
Back Taxes: Offer in Compromise - abuse of discretion

Edward F. Murphy, Petitioner, Appellant v . Commissioner of Internal Revenue, Respondent, Appellee.U.S. Court of Appeals, 1st Circuit; 06-1109, November 20, 2006, 469 F3d 27.Affirming the Tax Court, 125 TC 301.




[
2005-1 USTC ¶50,395], 411 F.3d 621, 624 (6th Cir. 2005). During the hearing, a taxpayer may raise "any relevant issue relating to the unpaid tax or the proposed levy, including ... offers of collection alternatives, which may include an offer-in-compromise." 26 U.S.C. §6330(d)(1) (as amended by Pub. L. No. 109-281, §855(a)).2
A. Extra-Record EvidenceDuring the evidentiary hearing before the Tax Court, Murphy testified about the circumstances that made him unable to offer a larger settlement payment, and the appeals officer testified concerning the process that she employed to evaluate Murphy's offer-in-compromise. The IRS objected to the introduction of this testimony on the basis that the Tax Court should not consider evidence that was not part of the administrative record of the CDP hearing. The court rejected this argument but still excluded the evidence as irrelevant. The IRS urges us to affirm this ruling on an alternative ground: Tax Court review should be limited to the administrative record.We recently considered this issue in the context of a taxpayer appeal to the district court from the denial of an offer-in-compromise made during a CDP hearing. See Olsen [
2005-2 USTC ¶50,637], 414 F.3d at 155. The reasons supporting application of the administrative record rule in district court CDP hearing appeals have equal force where the appeal takes place in the Tax Court. The Tax Court, like the district court, is charged with determining whether the IRS's rulings during a CDP hearing were within its discretion. Thus, judicial review normally should be limited to the information that was before the IRS when making the challenged rulings. See Robinette [

B. Conduct of the HearingMurphy contends that the IRS abused its discretion in the conduct of his CDP hearing. He argues that the appeals officer acted "with a clear predisposition toward an inflexible and expeditious determination of ... the matter" by declining to grant him additional extensions to file more information.The relevant regulations do not provide a time period within which a CDP hearing must be concluded. Rather, they instruct the IRS to complete the hearing "as expeditiously as possible under the circumstances." 26 C.F.R. §301.6330-1(e)(3). Thus, there is no requirement that an appeals officer "wait a certain amount of time before rendering [a] determination as to a proposed levy." Clawson v. Comm'r [
In exercising this discretion, the IRS must consider all the facts and circumstances of the taxpayer's case, including whether they warrant acceptance of an amount that might not otherwise be acceptable under the IRS's policies and procedures. Id. There is no dispute that Murphy established a doubt as to collectability and therefore was eligible to compromise his debt. The only question is whether the IRS abused its discretion in declining to accept Murphy's proposed compromise.
Murphy argues that the IRS's determination that the reasonable collection value of his case exceeded $10,000 was unreasonable.Based on information provided by Murphy, the appeals officer calculated that, after expenses, Murphy had a monthly surplus of $1,128. The officer multiplied this figure by 60 months (a reasonable period until Murphy could expect to retire) for a total of $67,680 in available income.
The officer then added realizable equity to conclude that Murphy could offer to pay $82,164 to settle his tax liability.Murphy has never mounted a serious challenge to these calculations. After complaining to the appeals officer that her proposed compromise figure was too high, Murphy never offered an explanation for why the officer's calculations were unreasonable. Even now, Murphy offers only a conclusory allegation that the appeals officer's calculation was "preposterous."
3 Affirmed.* Of the District of Rhode Island, sitting by designation.1 The court did admit testimony from the appeals officer explaining the meaning of certain notes and symbols that appeared in the record.2 Prior to the enactment of Pub. L. No. 109-281, appeals from CDP hearings were heard in federal district court if the Tax Court did not have jurisdiction over the underlying tax liability. See 26 U.S.C. 3 Murphy has not presented a developed argument that the IRS abused its discretion by declining to accept his offer-in-compromise because of special circumstances. See United States v. Zannino, 895 F.2d 1, 17 (1st Cir. 1990).
Tax Help: Self employment tax - IRC 1402


Nancy L. and Gerald L. Harper v. Commissioner.Docket No. 17561-05S . Filed July 30, 2007.[1402] Self-employment tax. --

A married couple failed to report the wife's commission income from her sales of insurance policies as an independent insurance agent; the couple was liable for self-employment tax but was entitled to a deduction for one half of the self-employment tax. The commissions were taxable despite the taxpayers' contention that they did not receive a check corresponding to the amount reported on Form 1099-MISC.

Monday, July 30, 2007

Tax Attorney IRS Identifies Frivolous Argument


Notice 2007-30, I.R.B. 2007-14, March 15, 2007.

[Code Secs. 6159, 6320, 6330, 6702, 7122 and 7811]

Penalties, civil: Frivolous returns: Frivolous submissions: Frivolous positions: Installment agreements: Collection Due Process hearings: Offer in compromise: Taxpayer assistance orders. --The IRS has identified 40 frivolous positions that have been deemed frivolous by courts or have no basis for validity in existing law. These positions are determined to be frivolous for purposes of the Code Sec. 6702(a) penalty for filing frivolous tax returns, and the Code Sec. 6702(b) penalty for filing specified frivolous submissions, which include requests for collection due process (CDP) hearings, and applications for installment agreements, offers in compromise, and taxpayer assistance orders. The identified frivolous positions include most of the common tax-protester-type arguments, such as false claims that wages are not taxable income; filing returns and paying taxes is voluntary; the IRS must provide the taxpayer with a Form 23C, Assessment Certificate - Summary Record of Assessments, before collecting overdue taxes; and the taxpayer's income is not taxable because the taxpayer is a citizen of an individual state or is not a "person" as defined by the Internal Revenue Code. Back references: ¶37,181.20, ¶38,134.023, ¶38,134.20, ¶38,184.023, ¶38.184.108, ¶40,043.01, ¶40,043.50, ¶41,130.025, ¶41,130.45 and ¶43,312.10.



PURPOSE

Positions that are the same as or similar to the positions listed in this Notice are identified as frivolous for purposes of the penalty for a "frivolous tax return" under section 6702(a) of the Internal Revenue Code and the penalty for a "specified frivolous submission" under section 6702(b). Persons who file a purported return of tax, including an original or amended return, based on one or more of these positions are subject to a penalty of $5,000 if the purported return of tax does not contain information on which the substantial correctness of the self-assessed determination of tax may be judged or contains information that on its face indicates the self-assessed determination of tax is substantially incorrect. Likewise, persons who submit a "specified submission" (namely, a request for a collection due process hearing or an application for an installment agreement, offer-in-compromise, or Taxpayer Assistance Order) based on one or more of the positions listed in this Notice are subject to a penalty of $5,000. The penalty may also be applied if the purported return or any portion of the specified submission is not based on a position set forth in this Notice, yet reflects a desire to delay or impede the administration of Federal tax laws for purposes of section 6702(a)(2)(B) or 6702(b)(2)(A)(ii).



BACKGROUND

Section 407 of Tax Relief and Health Care Act of 2006, Pub. L. No. 109-432, 120 Stat. 2922 (2006), amended section 6702 to increase the amount of the penalty for frivolous tax returns from $500 to $5,000 and to impose a penalty of $5,000 on any person who submits a "specified frivolous submission." A submission is a "specified frivolous submission" if it is a "specified submission" (defined in section 6702(b)(2)(B) as a request for a hearing under section 6320 or 6330 or an application under section 6159, 7122 or 7811) and any portion of the submission (i) is based on a position identified by the Secretary as frivolous or (ii) reflects a desire to delay or impede administration of the Federal tax laws. Section 6702 was further amended to add a new subsection (c) requiring the Secretary to prescribe a list of positions identified as frivolous. This Notice contains the prescribed list.



DISCUSSION

Frivolous Positions. Positions that are the same as or similar to the following are frivolous.


(1) Compliance with the internal revenue laws is voluntary or optional and not required by law, including arguments that:



a. Filing a Federal tax or information return or paying tax is purely voluntary under the law, or similar arguments described as frivolous in Rev. Rul. 2007-20, 2007-14 I.R.B. ___



b. Nothing in the Internal Revenue Code imposes a requirement to file a return or pay tax, or that a person is not required to file a tax return or pay a tax unless the Internal Revenue Service responds to the person's questions, correspondence, or a request to identify a provision in the Code requiring the filing of a return or the payment of tax.



c. There is no legal requirement to file a Federal income tax return because the instructions to Forms 1040, 1040A, or 1040EZ or the Treasury regulations associated with the filing of the forms do not display an OMB control number as required by the Paperwork Reduction Act of 1980, 44 U.S.C. §3501 et seq., or similar arguments described as frivolous in Rev. Rul. 2006-21, 2006-15 I.R.B. 745.



d. Because filing a tax return is not required by law, the Service must prepare a return for a taxpayer who does not file one in order to assess and collect tax.



e. A taxpayer has an option under the law to file a document or set of documents in lieu of a return or elect to file a tax return reporting zero taxable income and zero tax liability even if the taxpayer received taxable income during the taxable period for which the return is filed, or similar arguments described as frivolous in Rev. Rul. 2004-34, 2004-1. C.B. 619.



f. An employer is not legally obligated to withhold income or employment taxes on employees' wages.



g. A taxpayer may "untax" himself or herself at any time or revoke the consent to be taxed and thereafter not be subject to internal revenue taxes.



h. Only persons who have contracted with the government by applying for a governmental privilege or benefit, such as holding a Social Security number, are subject to tax, and those who have contracted with the government may choose to revoke the contract at will.



i. A taxpayer may lawfully decline to pay taxes if the taxpayer disagrees with the government's use of tax revenues, or similar arguments described as frivolous in Rev. Rul. 2005-20, 2005-1 C.B. 821.



j. An administrative summons issued by the Service is per se invalid and compliance with a summons is not legally required.



(2) The Internal Revenue Code is not law (or "positive law") or its provisions are ineffective or inoperative, including the sections imposing an income tax or requiring the filing of tax returns, because the provisions have not been implemented by regulations even though the provisions in question either (a) do not expressly require the Secretary to issue implementing regulations to become effective or (b) expressly require implementing regulations which have been issued.



(3) A taxpayer's income is excluded from taxation when the taxpayer rejects or renounces United States citizenship because the taxpayer is a citizen exclusively of a State (sometimes characterized as a "natural-born citizen" of a "sovereign state"), that is claimed to be a separate country or otherwise not subject to the laws of the United States. This position includes the argument that the United States does not include all or a part of the physical territory of the 50 States and instead consists of only places such as the District of Columbia, Commonwealths and Territories (e.g., Puerto Rico), and Federal enclaves (e.g., Native American reservations and military installations), or similar arguments described as frivolous in Rev. Rul. 2004-28, 2004-1 C.B. 624, or Rev. Rul. 2007-22, 2007-14 I.R.B. ___.



(4) Wages, tips, and other compensation received for the performance of personal services are not taxable income or are offset by an equivalent deduction for the personal services rendered, including an argument that a taxpayer has a "claim of right" to exclude the cost or value of the taxpayer's labor from income or that taxpayers have a basis in their labor equal to the fair market value of the wages they receive, or similar arguments described as frivolous in Rev. Rul. 2004-29, 2004-1 C.B. 627, or Rev. Rul. 2007-19, 2007-14 I.R.B. ___ .



(5) United States citizens and residents are not subject to tax on their wages or other income derived from sources within the United States, as only foreign-based income or income received by nonresident aliens and foreign corporations from sources within the United States is taxable, and similar arguments described as frivolous in Rev. Rul. 2004-30, 2004-1 C.B. 622.



(6) A taxpayer has been removed or redeemed from the Federal tax system though the taxpayer remains a United States citizen or resident, or similar arguments described as frivolous in Rev. Rul. 2004-31, 2004-1 C.B. 617.



(7) Only certain types of taxpayers are subject to income and employment taxes, such as employees of the Federal government, corporations, nonresident aliens, or residents of the District of Columbia or the Federal territories, or similar arguments described as frivolous in Rev. Rul. 2006-18, 2006-15 I.R.B. 743.



(8) Only certain types of income are taxable, for example, income that results from the sale of alcohol, tobacco, or firearms or from transactions or activities that take place in interstate commerce.



(9) Federal income taxes are unconstitutional or a taxpayer has a constitutional right not to comply with the Federal tax laws for one of the following reasons:



a. The First Amendment permits a taxpayer to refuse to pay taxes based on religious or moral beliefs.



b. A taxpayer may withhold payment of taxes or the filing of a tax return until the Service or other government entity responds to a First Amendment petition for redress of grievances.



c. Mandatory compliance with, or enforcement of, the tax laws invades a taxpayer's right to privacy under the Fourth Amendment.



d. The requirement to file a tax return is an unreasonable search and seizure contrary to the Fourth Amendment.



e. Income taxation, tax withholding, or the assessment or collection of tax is a "taking" of property without due process of law or just compensation in violation of the Fifth Amendment.



f. The Fifth Amendment privilege against self-incrimination grants taxpayers the right not to file returns or the right to withhold all financial information from the Service.



g. Mandatory or compelled compliance with the internal revenue laws is a form of involuntary servitude prohibited by the Thirteenth Amendment.



h. Individuals may not be taxed unless they are "citizens" within the meaning of the Fourteenth Amendment.



i. The Sixteenth Amendment was not ratified, has no effect, contradicts the Constitution as originally ratified, lacks an enabling clause, or does not authorize a non-apportioned, direct income tax.



j. Taxation of income attributed to a trust, which is a form of contract, violates the constitutional prohibition against impairment of contracts.



k. Similar constitutional arguments described as frivolous in Rev. Rul. 2005-19, 2005-1 C.B. 819.



(10) A taxpayer is not a "person" within the meaning of section 7701(a)(14) or other provisions of the Internal Revenue Code, or similar arguments described as frivolous in Rev. Rul. 2007-22, 2007-14 I.R.B. ___.



(11) Federal Reserve Notes are not taxable income when paid to a taxpayer because they are not gold or silver and may not be redeemed for gold or silver.



(12) In a transaction using gold and silver coins, the value of the coins is excluded from income or the amount realized in the transaction is the face value of the coins and not their fair market value for purposes of determining taxable income.



(13) A taxpayer with a home-based business may deduct as business expenses the costs of maintaining the taxpayer's household along with personal expenses, or similar arguments described as frivolous by Rev. Rul. 2004-32, 2004-1 C.B. 621.



(14) A "reparations" tax credit exists, including arguments that African-American taxpayers may claim a tax credit on their Federal income tax returns as reparations for slavery or other historical mistreatment, that Native Americans are entitled to an analogous credit (or are exempt from Federal income tax on the basis of a treaty), or similar arguments described as frivolous in Rev. Rul. 2004-33, 2004-1 C.B. 628, or Rev. Rul. 2006-20, 2006-15 I.R.B. 746.



(15) A Native American or other taxpayer who is not an employer engaged in a trade or business may nevertheless claim (for example, in an amount exceeding all reported income) the Indian Employment Credit under section 45A, which explicitly requires, among other criteria, that the taxpayer be an employer engaged in a trade or business to claim the credit.



(16) A taxpayer's wages are excluded from Social Security taxes if the taxpayer waives the right to receive Social Security benefits, or a taxpayer is entitled to a refund of, or may claim a charitable-contribution deduction for, the Social Security taxes that the taxpayer has paid, or similar arguments described as frivolous in Rev. Rul. 2005-17, 2005-1 C.B. 823.



(17) Taxpayers may reduce or eliminate their Federal tax liability by altering a tax return, including striking out the penalty-of-perjury declaration, or attaching documents to the return, such as a disclaimer of liability, or similar arguments described as frivolous in Rev. Rul. 2005-18, 2005-1 C.B. 817.



(18) A taxpayer is not obligated to pay income tax because the government has created an entity separate and distinct from the taxpayer --a "straw man" --that is distinguishable from the taxpayer by some variation of the taxpayer's name, and any tax obligations are exclusively those of the "straw man," or similar arguments described as frivolous in Rev. Rul. 2005-21, 2005-1 C.B. 822.



(19) Inserting the phrase "nunc pro tunc" on a return or other document filed with or submitted to the Service has a legal effect, such as reducing a taxpayer's tax liability, or similar arguments described as frivolous in Rev. Rul. 2006-17, 2006-15 I.R.B. 748.



(20) A taxpayer may avoid tax on income by attributing the income to a trust, including the argument that a taxpayer can put all of the taxpayer's assets into a trust to avoid income tax while still retaining substantial powers of ownership and control over those assets or that a taxpayer may claim an expense deduction for the income attributed to a trust, or similar arguments described as frivolous in Rev. Rul. 2006-19, 2006-15 I.R.B. 749.



(21) A taxpayer may lawfully avoid income tax by sending income offshore, including depositing income into a foreign bank account.



(22) By purchasing equipment and services for an inflated price (which may or may not have been actually paid), a taxpayer can use the section 44 Disabled Access Credit to reduce tax or generate a refund irrespective of whether the taxpayer is a small business that purchased the equipment or services to comply with the requirements of the Americans with Disabilities Act.



(23)A taxpayer is allowed to buy or sell the right to claim a child as a qualifying child for purposes of the Earned Income Tax Credit.



(24) An IRS Form 23C, Assessment Certificate - Summary Record of Assessment, is an invalid record of assessment for purposes of section 6203 and Treas. Reg. §301.6203-1, the Form 23C must be personally signed by the Secretary of the Treasury for an assessment to be valid, the Service must provide a copy of the Form 23C to a taxpayer if requested before taking collection action, or similar arguments described as frivolous in Rev. Rul. 2007-21, 2007-14 I.R.B. ___.



(25) A tax assessment is invalid because the assessment was made from a section 6020(b) substitute for return, which is not a valid return.



(26) A statutory notice of deficiency is invalid because the taxpayer to whom the notice was sent did not file an income tax return reporting the deficiency or because the statutory notice of deficiency was unsigned or not signed by the Secretary of the Treasury or by someone with delegated authority.



(27) A Notice of Federal Tax Lien is invalid because it is not signed by a particular official (such as by the Secretary of the Treasury), or because it was filed by someone without delegated authority.



(28) The form or content of a Notice of Federal Tax Lien is controlled by or subject to a state or local law, and a Notice of Federal Tax Lien that does not comply in form or content with a state or local law is invalid.



(29) A collection due process notice under section 6320 or 6330 is invalid if it is not signed by the Secretary of the Treasury or other particular official, or if no certificate of assessment is attached.



(30) Verification under section 6330 that the requirements of any applicable law or administrative procedure have been met may only be based on one or more particular forms or documents (which must be in a certain format), such as a summary record of assessment, or that the particular forms or documents or the ones on which verification was actually determined must be provided to a taxpayer at a collection due process hearing.



(31) A Notice and Demand is invalid because it was not signed, was not on the correct form (e.g., a Form 17), or was not accompanied by a certificate of assessment when mailed.



(32) The United States Tax Court is an illegitimate court or does not, for any purported constitutional or other reason, have the authority to hear and decide matters within its jurisdiction.



(33) Federal courts may not enforce the internal revenue laws because their jurisdiction is limited to admiralty or maritime cases or issues.



(34) Revenue Officers are not authorized to issue levies or Notices of Federal Tax Lien or to seize property in satisfaction of unpaid taxes.



(35) A Service employee lacks the authority to carry out the employee's duties because the employee does not possess a certain type of identification or credential, for example, a pocket commission or a badge, or it is not in the correct form or on the right medium.



(36) A person may represent a taxpayer before the Service or in court proceedings even if the person does not have a power of attorney from the taxpayer, has not been enrolled to practice before the Service, or has not been admitted to practice before the court.



(37) A civil action to collect unpaid taxes or penalties must be personally authorized by the Secretary of the Treasury and the Attorney General.



(38) A taxpayer's income is not taxable if the taxpayer assigns or attributes the income to a religious organization (a "corporation sole" or ministerial trust) claimed to be tax-exempt under section 501(c)(3), or similar arguments described as frivolous in Rev. Rul. 2004-27, 2004-1 C.B. 625.



(39) The Service is not an agency of the United States government but rather a private-sector corporation or an agency of a State or Territory without authority to administer the internal revenue laws.



(40) Any position described as frivolous in any revenue ruling or other published guidance in existence when the return adopting the position is filed with or the specified submission adopting the position is submitted to the Service.


Returns or submissions that contain positions not listed above, which on their face have no basis for validity in existing law, or which have been deemed frivolous in a published opinion of the United States Tax Court or other court of competent jurisdiction, may be determined to reflect a desire to delay or impede the administration of Federal tax laws and thereby subject to the $5,000 penalty.

The list of frivolous positions above will be periodically revised as required by section 6702(c).



DRAFTING INFORMATION

The principal author of this notice is the Office of Associate Chief Counsel (Procedure & Administration). For further information regarding this notice contact the Office of Associate Chief Counsel (Procedure & Administration), Administrative Provisions & Judicial Practice Division, Branch 2, at (202) 622-4940 (not a toll-free call).

For questions on what is frivolous argument, contact

Alvin S. Brown, Esq.
Tax attorney
www.irstaxattorney.com
703.425.1400


Contact www.irsforum.org if you wish to offer an opinion about any of your IRS experiences.
Back Taxes: Section 83 - Substantially vested stock

The IRS addressed the tax consequences under Code Sec. 83 when restrictions were imposed on substantially vested stock, causing that stock to become substantially nonvested. Analyzing three fact patterns, the IRS ruled that if the imposition of restrictions on substantially vested stock causes that stock to become substantially nonvested, but there was no exchange of stock, the substantially nonvested stock is not subject to Code Sec. 83. However, if substantially vested stock is exchanged for substantially nonvested stock, the nonvested stock is subject to Code Sec. 83.


Rev. Rul. 2007-49 , I.R.B. 2007-31, July 6, 2007.


ISSUES

1) Is there a transfer of substantially nonvested stock subject to §83 of the Internal Revenue Code where restrictions imposed on substantially vested stock cause the substantially vested stock to become substantially nonvested?

2) Is there a transfer of substantially nonvested stock subject to §83 where a service provider exchanges substantially vested stock for substantially nonvested stock in a reorganization described in §368(a)?

3) Is there a transfer of substantially nonvested stock subject to §83 where a service provider exchanges substantially vested stock for substantially nonvested stock in a taxable stock acquisition?



FACTS

Investors form Corporation´in 2004, by contributing $1,000 each to Corporation X in exchange for 100 shares of Corporation´stock. In exchange for Individual A's agreement to perform services for Corporation X, Corporation´issues 100 shares of its stock to A. The fair market value of the Corporation´stock on that date is $10 per share. The shares of Corporation´stock transferred to A are "substantially vested" within the meaning of §1.83-3(b) of the Income Tax Regulations.

For the 2004 taxable year, the amount included in A's income under §83(a) is $1,000 (the fair market value of the stock ($10´100 shares) less the amount paid ($0)). A's basis in the stock is $1,000.

Situation 1. In connection with its plan to start a new business venture, Corporation´seeks financing from Investor M on July 9, 2007. Investor M agrees to invest funds in Corporation´in exchange for a specified number of shares and the further requirement that A agree to subject A's shares to a restriction that will cause the stock to be "substantially nonvested" within the meaning of §1.83-3(b). Under this restriction, if the employment of A with Corporation X terminates before July 9, 2009, A must sell the shares to Corporation´in exchange for the lesser of $150 per share (the fair market value of Corporation´stock on July 9, 2007) or the fair market value at the time of forfeiture. In addition, the shares are nontransferable before that date. A remains employed with Corporation X, and on July 9, 2009, the fair market value of Corporation´stock is $250 per share.

Situation 2. Corporation Y, a corporation unrelated to Corporation X, agrees to acquire all of the stock of Corporation X. Accordingly, on August 9, 2010, Corporation Y causes Corporation Z (a newly formed wholly-owned subsidiary of Corporation Y) to merge into Corporation´in a transaction that qualifies as a reorganization described in §368(a). In the merger, the shareholders of Corporation´receive solely Corporation Y voting stock in exchange for their Corporation´stock. The fair market value of the Corporation´stock on August 9, 2010, is $310 per share.

In the merger, A's 100 shares of substantially vested Corporation X stock are exchanged for 100 shares of Corporation Y stock subject to a restriction that will cause the stock to be "substantially nonvested" within the meaning of §1.83-3(b). Under this restriction, if A's employment with Corporation´is terminated for any reason before August 9, 2013, A must sell the substantially nonvested Corporation Y shares to Corporation Y in exchange for the lesser of $310 per share (the fair market value of the shares on August 9, 2010) or the fair market value at the time of forfeiture. In addition, the shares are nontransferable before that date. No other shareholder of Corporation´receives Corporation Y stock subject to a restriction.

A timely files an election under §83(b) with respect to the substantially nonvested Corporation Y stock A receives in the merger.

A continues to be employed by Corporation´until August 9, 2013 at which time the fair market value of the stock is $500. A sells the stock on October 31, 2014 when the fair market value of the stock is $550 per share.

Situation 3. Assume the same facts as in Situation 2 except that in the merger half of the Corporation´stock is exchanged for cash and half is exchanged for Corporation Y stock, the transaction is fully taxable, and all of A's Corporation´stock is exchanged for Corporation Y stock.



LAW

Section 83, provides that if, in connection with the performance of services, property is transferred to any person other than the service recipient, the excess of the fair market value of the property (determined without regard to any restriction other than a restriction which by its terms will never lapse), on the first day that the rights to the property are either transferable or not subject to a substantial risk of forfeiture, over the amount paid for the property is included in the service provider's gross income for the first taxable year in which the rights to the property are either transferable or not subject to a substantial risk of forfeiture.

Section 1.83-3(f) provides that property transferred to an employee or independent contractor (or beneficiary thereof) in recognition of the performance of, or the refraining from performance of, services is considered transferred in connection with the performance of services within the meaning of §83. However, the existence of other persons entitled to buy stock on the same terms and conditions as an employee, whether pursuant to a public or private offering, may indicate that in such circumstances a transfer to the employee is not in recognition of the performance of, or the refraining from performance of, services.

Subjecting stock to a restriction that will cause it to be "substantially nonvested" (within the meaning of §1.83-3(b)) indicates that the property is transferred in connection with the performance of services even if the employee pays fair value for the stock. See Alves v. Commissioner [ 84-2 USTC ¶9546], 734 F.2d 478 (9th Cir. 1984), aff'g [ CCH Dec. 39,501] 79 T.C. 864 (1982).

Section 1.83-1(a)(1) provides that property transferred in connection with the performance of services is not taxable under §83(a) until it has been transferred (as defined in §1.83-3(a)) to an employee or independent contractor and becomes substantially vested (as defined in §1.83-3(b)) in such person. Until such property becomes substantially vested, the transferor is regarded as the owner of the property, and any income from such property received by the employee or independent contractor (or beneficiary thereof) or the right to the use of such property by the employee or independent contractor constitutes additional compensation and must be included in the gross income of such employee or independent contractor for the taxable year in which such income is received or such use is made available.

Section 83(b) provides that any person who has performed services in connection with which property is transferred to any person may elect to include in gross income, for the taxable year in which such property is transferred, the excess of the fair market value of such property at the time of transfer (determined without regard to any restriction other than a restriction which by its terms will never lapse) over the amount paid for such property.

Section 1.83-2(a) provides, in part, that the fact that the transferee has paid full value for the property transferred, realizing no bargain element in the transaction, does not preclude the use of the election under §83(b). If this election is made, the substantial vesting rules of §83(a) and the regulations thereunder do not apply with respect to such property. Thus, with respect to such property, the excess (if any) of the fair market value of the property at the time of transfer (determined without regard to any restriction other than a restriction which by its terms will never lapse) over the amount (if any) paid for such property is includible in gross income as compensation at the time of transfer, and no compensation will be includible in gross income when such property becomes substantially vested. An employee who makes an election under §83(b) is considered to be the owner of the property. See Rev. Rul. 83-22, 1983-1 C.B. 17.

Section 1001(a) provides that the gain from the sale or other disposition of property is the excess of the amount realized over the adjusted basis provided in §1011 for determining gain, and the loss is the excess of the adjusted basis provided in such section for determining loss over the amount realized.

Section 1001(b) provides that the amount realized from the sale or other disposition of the property is the sum of any money received plus the fair market value of the property (other than money) received.

Section 1001(c), provides, except as otherwise provided in Subtitle A, the entire amount of the gain or loss, determined under section 1001, on the sale or exchange of the property shall be recognized.

Section 1.83-3(g) provides that for purposes of §83 and its regulations, the term "amount paid" refers to the value of any money or property paid for the transfer of property to which §83 applies.



ANALYSIS - Situation 1

In Situation 1, in connection with the new investment, the substantially vested shares of Corporation´stock owned by A are subjected to a restriction causing them to be "substantially nonvested". Because the substantially vested shares of Corporation´stock are already owned by A for purposes of §83, there is no "transfer" under §83. Thus, the imposition of new restrictions on the substantially vested shares has no effect for purposes of §83.

When the substantially nonvested Corporation´stock becomes substantially vested on July 9, 2009, A does not recognize compensation income under §83(a). A's basis in the stock continues to be $1,000.



ANALYSIS - Situation 2

In Situation 2, A receives 100 shares of Corporation Y stock with an exchanged basis of $1,000 in the tax-free reorganization. Because the substantially vested Corporation´stock is exchanged for stock that is subjected to a restriction causing the shares to be "substantially nonvested," the substantially nonvested shares are treated as having been transferred in connection with the performance of services, and thus, are subject to §83. As a result of the §83(b) election, A becomes the owner of those shares.

The "amount paid" for the stock under §83 on the transfer of the substantially nonvested shares is the fair market value of the substantially vested Corporation´stock exchanged for the substantially nonvested Corporation Y stock ($31,000) on the exchange date, August 9, 2010. On A's election under §83(b), $31,000 is treated as the amount paid for the Corporation Y stock for purposes of applying §83. On A's return for the 2010 taxable year, A does not report any taxable income from the transfer of the Corporation Y stock under the §83(b) election because the fair market value of the stock less the amount paid is $0. A does not include any amount in compensation income in the 2013 taxable year when the stock becomes substantially vested because of the prior §83(b) election. A's basis in the Corporation Y stock continues to be $1,000. Upon the sale of the shares in 2014, A recognizes capital gain of $54,000, the amount by which $55,000 ($550, the fair market value of the stock,´100 shares) exceeds A's $1,000 basis in the shares.



ANALYSIS - Situation 3

In Situation 3, A holds substantially vested Corporation´stock with a basis of $1,000 at the time of the merger. A exchanges that substantially vested Corporation´stock for substantially nonvested Corporation Y stock with a fair market value of $310 per share in a taxable transaction. Because A disposed of the substantially vested Corporation´stock in exchange for substantially nonvested Corporation Y stock in an exchange to which §1001 applies, A recognizes capital gain on the disposition of the Corporation´stock in the amount of $30,000 ($31,000 fair market value of substantially nonvested Corporation Y stock ($310 per share´100 shares) less $1,000 basis in the Corporation´stock). A's basis in the Corporation Y stock is $31,000.

Because the substantially vested Corporation´stock is exchanged for Corporation Y stock that is subjected to a restriction causing the shares to be "substantially nonvested," the substantially nonvested shares are treated as having been transferred in connection with the performance of services, and thus, are subject to §83.

As in Situation 2, the "amount paid" for the stock under §83 is $31,000. When A makes an election under §83(b) with respect to the Corporation Y stock, A does not report any additional amount of income for the 2010 taxable year as a result of such election because the fair market value of the stock less the amount paid for the stock is $0. A does not include any amount in compensation income in the 2013 taxable year when the stock becomes substantially vested because of the prior §83(b) election. A's basis in the Corporation Y stock continues to be $31,000. On the sale of the 100 shares in 2014, A will recognize capital gain of $24,000, the amount by which $55,000 ($550, the sale price,´100 shares) exceeds A's $31,000 basis in the shares.

If A had not made an election under §83(b) with respect to the Corporation Y stock, when the stock becomes substantially vested on August 9, 2013, A would include $19,000 in gross income as compensation under §83(a). This is the amount by which the fair market value of 100 Corporation Y shares ($50,000 or $500 per share) exceeds the amount paid for those shares ($31,000). Consequently, A's basis in the Corporation Y stock would be increased by $19,000 to $50,000. See §1.83-4(b). On the sale of the 100 shares, A would recognize capital gain of $5,000, the amount by which $55,000 ($550, the sale price,´100 shares) exceeds A's basis of $50,000 in the shares.



HOLDINGS

1) There is not a transfer of substantially nonvested stock subject to §83 where restrictions imposed on substantially vested stock cause the substantially vested stock to become substantially nonvested.

2) There is a transfer of substantially nonvested stock subject to §83 where a service provider exchanges substantially vested stock for substantially nonvested stock in a reorganization described in §368(a).

3) There is a transfer of substantially nonvested stock subject to §83 where a service provider exchanges substantially vested stock for substantially nonvested stock in a taxable stock acquisition.



DRAFTING INFORMATION

The principal author of this revenue ruling is Jean Casey of the Office of Division Counsel/Associate Chief Counsel (Tax Exempt & Government Entities). However, other personnel from the IRS and Treasury Department participated in its development. For further information regarding this revenue ruling, contact Ms. Casey at (202) 622-6030 (not a toll-free call). For further information regarding issues with respect to subchapter C, contact Ms. Jean Brenner at (202) 622-7790 (not a toll-free number).


Alvin S. Brown, Esq.
Tax attorney
www.irstaxattorney.com

You can upload any of your IRS experiences to www.irsforum.com, a nonprofit corporation

Friday, July 27, 2007

Tax Help: "Hardship" will not eliminat 10% early withdrawal penalty

Unfortunately, the courts stricly construe the statutory limitations for avoiding the 10% penalty for from a retirment plans.

Jeffrey Lee Golian v. Commissioner.Docket No. 6603-06S . Filed July 26, 2007.[

On line 15a of his return, petitioner reported an IRA distribution of $86,333.33, and on line 15b he reported the entire distribution as the taxable amount, which he included in gross income.
section 7491(a) applies in this case.4

section 401(k) plan and an IRA. See 408(a), 5

iv), (F).The 10-percent additional tax does not apply to certain distributions, including distributions: (1) To an employee age 59-1/2 or older; (2) on account of the employee's disability; (3) as part of a series of substantially equal periodic payments made for the employee's life (or life expectancy); or (4) to an individual from an IRA which are qualified first-time home buyer distributions.6 7

Petitioner also does not contend that he satisfies any of the specific exceptions set forth in section 72(t). E.g., Arnold v. Commissioner, 111 T.C. 250, 255 (1998); Milner v. Commissioner, T.C. Memo. 2004-111; Gallagher v. Commissioner, T.C. Memo. 2001-34.

We recognize that petitioner received his IRA distribution at a time when he was both a single parent and temporarily unemployed and that he used the distribution for a laudable purpose. Unfortunately for petitioner, we are bound by the list of statutory exceptions set forth in

Finally, the fact that respondent only determined the 10-percent additional tax sometime after making a mechanical adjustment to petitioner's return upon its initial processing is of no moment.8 The fact of the matter is that respondent sent petitioner the notice of deficiency within the applicable statute of limitations. See sec. 6404(e), (h); Rule 280(b); see generally tit. XXVII, Tax Court Rules of Practice and Procedure, regulating actions for review of failure to abate interest; see also Bax v. Commissioner, 13 F.3d 54, 56-57 (2d Cir. 1993) (Tax Court ordinarily lacks jurisdiction to consider interest on a deficiency in the context of an action for redetermination of deficiency); Pen Coal Corp. v. Commissioner, 107 T.C. 249, 255 (1996) (same).

To reflect our disposition of the disputed issue, as well as the parties' concessions, see supra note 2,
Decision will be entered for respondent as to the deficiency in income tax and for petitioner as to the accuracy-related penalty under 1 All subsequent section references are to the Internal Revenue Code in effect for 2003, the taxable year in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.2 Petitioner concedes that he received taxable nonemployee compensation of $1,106 from Translink, Inc., that was not reported on his 2003 return. Respondent concedes that petitioner is not liable for the accuracy-related penalty under 3 The distribution did not exhaust petitioner's account balance; however, the distribution was not part of a series of substantially equal periodic payments made for petitioner's life (or life expectancy).4 Pursuant to sec. 72(t) is an "additional amount" for which respondent bears the burden of production, respondent has met such burden by demonstrating that petitioner was 46 years old in 2003 when he received the distribution in issue. See Milner v. Commissioner, T.C. Memo. 2004-111 n. 2.5 At trial, petitioner accurately described his IRA as an account "for my retirement." This is precisely why a preretirement distribution is generally subject to the 10-percent additional tax and why there are relatively few exceptions. "The legislative purpose underlying the 6 For purposes of Sec. 72(t)(5).7 Generally, a distribution from an IRA is includable in the distributee's gross income in the year of distribution under the provisions of sec. 408(d)(1); see also 8 See sec. 6213(b)(1), permitting summary assessments arising out of mathematical or clerical errors.
Alvin S. Brown, Esq.
703.425.1400
Submit any of your IRS experiences to www.irsforum.org

Thursday, July 26, 2007

Tax Attorney: Interest Abatement not abuse of discretion



Ralph Howell v. Commissioner, Dkt. No. 13117-05 , TC Memo. 2007-204, July 25, 2007.



[Code Sec. 6404]



The IRS's denial of a taxpayer's interest abatement request was not an abuse of discretion because none of the errors or delays he complained of were ministerial acts under Code Sec. 6404. The taxpayer had requested an abatement of interest that had accrued while the IRS conducted a criminal investigation of several tax-shelter partnerships in which he had invested. Although the IRS included erroneous information regarding the status of the investigation in a letter to the taxpayer, that did not contribute to the accrual of interest. Moreover, the IRS was not collaterally estopped by the case of another investor (Beall v. U.S., 2006-2 USTC ¶50,615) from denying it lost some of the records it had confiscated, and that others were returned in disarray, because that issue was not litigated in Beall. --CCH.




MEMORANDUM OPINION


VASQUEZ, Judge: Petitioner submitted to the Internal Revenue Service (IRS) a request for abatement of interest relating to his 1984, 1985, and 1986 income tax liabilities. Respondent denied the request. The issue for our determination is whether respondent abused his discretion under section 6404 by failing to abate assessments of interest relating to petitioner's 1984, 1985, and 1986 taxable years.1



Background







OPINION




I. Section 6404(e)

Pursuant to section 6404(e)(1) as it applies in this case, the Commissioner may abate the assessment of interest in two situations: (1) When a deficiency is attributable to an error or delay by an officer or employee of the IRS in performing a ministerial act, or (2) when interest is assessed on any payment of certain taxes (including income tax) to the extent that an error or delay in such payment is attributable to an officer or employee of the IRS being erroneous or dilatory in performing a ministerial act.5 An error or delay by an officer or employee of the IRS shall be taken into account only if no significant aspect of such error or delay can be attributed to the taxpayer involved, and after the IRS has contacted the taxpayer in writing with respect to such deficiency or payment. Id.

A "ministerial act" is a procedural or mechanical act that does not involve the exercise of judgment or discretion and that occurs during the processing of a taxpayer's case after all prerequisites to the act, such as conferences and review by supervisors, have taken place. Sec. 301.6404-2T(b)(1), Temporary Proced. & Admin. Regs., 52 Fed. Reg. 30163 (Aug. 13, 1987).6 A decision concerning the proper application of Federal tax law (or other Federal or state law) is not a ministerial act. Id.

Even where errors or delays are present, the Commissioner's decision to abate interest remains discretionary. See sec. 6404(e)(1); Mekulsia v. Commissioner, T.C. Memo. 2003-138, affd. 389 F.3d 601 (6th Cir. 2004). When Congress enacted section 6404(e), it did not intend the provision to be used routinely to avoid payment of interest. Rather, Congress intended abatement of interest to be used only where failure to do so "would be widely perceived as grossly unfair." H. Rept. 99-426, at 844 (1985), 1986-3 C.B. (Vol. 2) 1, 844; S. Rept. 99-313, at 208 (1986), 1986-3 C.B. (Vol. 3) 1, 208.



II. Standard of Review and Burden of Proof

When reviewing the Commissioner's determination not to abate interest, we apply an abuse of discretion standard. See sec. 6404; Camerato v. Commissioner, T.C. Memo. 2002-28. The taxpayer bears the burden of proof with respect to establishing an abuse of discretion. See Rule 142(a). In order to prevail, the taxpayer must establish that in not abating interest the Commissioner exercised his discretion arbitrarily, capriciously, or without sound basis in fact or law. Lee v. Commissioner, 113 T.C. 145, 149 (1999); Woodral v. Commissioner, 112 T.C. 19, 23 (1999).



III. Analysis

Petitioner alleges that respondent engaged in several forms of ministerial error or delay.

Petitioner first alleges that during respondent's criminal investigation of AMCOR respondent "was in full possession of the records necessary to issue a tax deficiency, but failed to do so."

Regardless of whether respondent possessed the records required to determine petitioner's deficiencies during respondent's criminal investigation of AMCOR, the long and winding procedural history of the AMCOR audit and litigation prevented respondent from making that determination for several years. Pursuant to section 6221, the proper tax treatment of petitioner's AMCOR-related items was required to be determined at the partnership level. Pursuant to section 6225(a), respondent was prohibited from assessing or collecting petitioner's deficiencies until the decisions in the AMCOR partnership cases in this Court became final. As noted supra, that did not occur until October 17, 2001, long after respondent returned the AMCOR records in 1993. Petitioner has therefore failed to establish that respondent's delay in assessing petitioner's deficiencies until the close of AMCOR-related partnership litigation constitutes error or delay in performing a ministerial act.7

Petitioner also alleges that the imposition of interest is grossly unfair because the amounts of interest assessed now greatly exceed the amounts of the deficiencies. As we have noted on several occasions, the mere passage of time does not establish error or delay in performing a ministerial act. Lee v. Commissioner, supra at 151; Mekulsia v. Commissioner, supra; Hawksley v. Commissioner, T.C. Memo. 2000-354; Cosgriff v. Commissioner, T.C. Memo. 2000-241.

Petitioner further alleges that the information regarding the examination status of Agri-Venture Fund contained in respondent's letter of January 20, 1997, was erroneous and its inclusion constituted ministerial error.8


In order to qualify for relief pursuant to section 6404(e), a taxpayer must demonstrate a direct link between the error or delay and a specific period during which interest accrued. Guerrero v. Commissioner, T.C. Memo. 2006-201; Braun v. Commissioner, T.C. Memo. 2005-221. Respondent's error has not been shown to have caused the accrual of any interest. Although the case of Agri-Venture Fund may not have been "in Appeals" when respondent issued the letter of January 20, 1997, the case was before this Court when the letter was issued. As the letter correctly noted, the period of limitations on assessment of deficiencies in petitioner's taxes was consequently suspended. See sec. 6229(d)(1). Petitioner has not shown that respondent's letter of January 20, 1997, caused any accrual of interest that is attributable to error or delay in performing a ministerial act.

Petitioner further contends that the error contained in respondent's letter of January 20, 1997, provides an independent basis for the abatement of interest pursuant to section 6404(f). Generally speaking, section 6404(f) allows for the abatement of penalties and additions to tax, and not of assessments of interest.9 See sec. 301.6404-3(c)(2), Proced. & Admin. Regs. Petitioner's argument regarding section 6404(f) is therefore unfounded.

Finally, petitioner argues that respondent lost some of the documents that respondent seized in March of 1989 from AMCOR's office and that respondent returned other documents in a state of disarray. Petitioner appears to argue that respondent is collaterally estopped from denying such facts pursuant to statements in the U.S. Court of Appeals for the Fifth Circuit's opinion in the case of another AMCOR investor, Beall v. United States, 467 F.3d 864 (5th Cir. 2006) affg. 335 F. Supp. 2d 743, (E.D. Tex. 2004).10 The relevant portion of the Court of Appeals' opinion reads as follows: "The IRS did not return the partnerships' books and records until 1993, and when the IRS did return them, some had been lost and the remainder were in disarray." Id. at 866.

The doctrine of issue preclusion, or collateral estoppel, provides that once an issue of fact or law is "'actually and necessarily determined by a court of competent jurisdiction, that determination is conclusive in subsequent suits based on a different cause of action involving a party to the prior litigation.'" Monahan v. Commissioner, 109 T.C. 235, 240 (1997) (quoting Montana v. United States, 440 U.S. 147, 153 (1979)). The following five conditions must be satisfied before application of issue preclusion in the context of a factual dispute: (1) The issue in the second suit must be identical in all respects with the one decided in the first suit; (2) there must be a final judgment rendered by a court of competent jurisdiction; (3) collateral estoppel may be invoked against parties and their privies to the prior judgment; (4) the parties must actually have litigated the issues and the resolution of these issues must have been essential to the prior decision; and (5) the controlling facts and applicable legal rules must remain unchanged from those in the prior litigation. Peck v. Commissioner, 90 T.C. 162, 166-167 (1988), affd. 904 F.2d 525 (9th Cir. 1990).

The statement in the Court of Appeals' opinion in Beall does not establish that respondent failed to return documents or that respondent returned other documents in disarray. First, petitioner was not a party to the dispute in Beall . Second, as respondent correctly notes, the Court of Appeals' opinion in Beall related to the review of a District Court's decision to grant a motion of respondent's that was treated as a motion to dismiss for failure to state a claim upon which relief could be granted pursuant to rule 12(b)(6) of the Federal Rules of Civil Procedure. Pursuant to that rule:

"a claim may be dismissed when a plaintiff fails to allege any set of facts in support of his claim which would entitle him to relief," and "the court accepts as true the well-pled factual allegations in the complaint, and construes them in the light most favorable to the plaintiff."

Beall v. United States, 335 F. Supp. 2d at 747 (quoting Taylor v. Books A Million, Inc., 296 F.3d 376, 378 (5th Cir. 2002)) (internal citations removed). Applying this standard, both the District Court and the Court of Appeals were required to accept the plaintiffs' factual allegations as true regardless of their veracity. Consequently, the question of whether respondent's agents or employees lost some documents and returned others in disarray was not actually litigated in Beall, and collateral estoppel does not apply to the factual assumptions in Beall. The parties have not stipulated the relevant factual assumptions in Beall. Petitioner has therefore not established that respondent lost some AMCOR records and returned others in disarray in pursuit of respondent's criminal investigation of AMCOR.

We conclude that respondent's denial of petitioner's request for interest abatement was not arbitrary, capricious, or without sound basis in fact or law. In reaching all of our holdings herein, we have considered all arguments made by the parties, and to the extent not mentioned above, we find them to be irrelevant or without merit.

To reflect the foregoing,

Decision will be entered for respondent.

1 All section references are to the Internal Revenue Code in effect for the years in issue unless otherwise indicated, and all Rule references are to the Tax Court Rules of Practice and Procedure.

2 After receiving an extension of time to file, petitioner timely filed his 1984 return. Petitioner filed his 1985 and 1986 returns a few days after the end of extension periods respondent granted.

3 For some of the history of AMCOR and the investigation into its operations, see, for example, Crop Associates-1986 v. Commissioner, T.C. Memo. 2000-216.

4 The parties did not submit a copy of respondent's Jan. 17, 2003, letter disallowing petitioner's request for interest abatement with regard to his 1986 deficiency, but the parties stipulated that the contents of that letter were identical in all respects to the letters disallowing petitioner's requests for interest abatement with regard to his 1984 and 1985 deficiencies.

5 In 1996, sec. 6404(e) was amended by the Taxpayer Bill of Rights 2, Pub. L. 104-168, sec. 301(a)(1) and (2), 110 Stat. 1457, to permit the Commissioner to abate the assessment of interest attributable to IRS errors or delays in performing both managerial and ministerial acts. The amendment applies to interest accruing with respect to deficiencies for taxable years beginning after July 30, 1996, and therefore does not apply to the matter before us.

6 Final regulations under sec. 6404 were issued on Dec. 18, 1998, and contain the same definition of a ministerial act as do the temporary regulations. See sec. 301.6404-2(b)(2), Proced. & Admin. Regs. The final regulations generally apply to interest accruing on deficiencies or payments of tax described in sec. 6212(a) for taxable years beginning after July 30, 1996, and do not apply to the years at issue in this case. See sec. 301.6404-2(d)(1), Proced. & Admin. Regs.

7 In Crop Associates-1986 v. Commissioner, supra, in answer to the TMP's allegations that respondent had delayed the litigation of AMCOR partnership cases, we concluded that "Blame (if any) for the time it took to proceed to the present posture cannot be laid only at the feet of respondent." Indeed, it appears that the litigation was protracted by, among other things, sundry claims advanced on behalf of the AMCOR partnerships, none of which was deemed persuasive. See Crop Associates-1986 v. Commissioner, 113 T.C. 198 (1999); Agri-Cal Venture Associates v. Commissioner, T.C. Memo. 2000-271; Crop Associates-1986 v. Commissioner, T.C. Memo. 2000-216.

8 In his second amended petition, petitioner alleges that an additional letter from respondent dated June 27, 2000, contained similar erroneous information. Petitioner attached a copy of that letter to his second amended petition, but no copy of the letter was entered into evidence. Documentary material attached to a petition is not evidence. Greengard v. Commissioner, 29 F.2d 502 (7th Cir. 1928), affg. 8 B.T.A. 734 (1927); Pallottini v. Commissioner, T.C. Memo. 1986-530. Moreover, in a fully stipulated case such as the matter before us, we consider those matters not contained in the stipulations to be without support in the record. Miyamoto v. Commissioner, T.C. Memo. 1986-313. We therefore do not consider the contents of the letter attached to petitioner's second amended petition. We note, however, that consideration of the letter would not alter our conclusions in the matter before us.

9 Sec. 6404(f) does allow for abatement of interest imposed with respect to any penalty or addition to tax. See sec. 301.6404-3(c)(2), Proced. & Admin. Regs. Such interest is not at issue in the matter before us.

10 Petitioner does not appear to request that the Court take judicial notice of the "facts" in Beall v. United States, 467 F.3d 864 (5th Cir. 2006). We note, however, that taking judicial notice would be inappropriate in this matter. See Abelein v. Commissioner, T.C. Memo. 2007-24.

Alvin S. Brown, Esq.
Tax Attorney
703.45.1400
www.irstaxattorney.com

for IRS abuses, see www.IRSForum.org