Wednesday, June 30, 2010

www.irstaxattorney.com 888-712-7690U.S. v. CLARK, Cite as 105 AFTR 2d 2010-XXXX, 04/08/2010

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UNITED STATES OF AMERICA, Plaintiff, v. SHIRLEY CLARK, individually and doing business as NICHET CORPORATION, Defendant.
Case Information:
Code Sec(s):
Court Name: United States District Court Middle District of Florida Jacksonville Division,
Docket No.: Case No. 3:09-cv-169-J-34MCR,
Date Decided: 04/08/2010.
Disposition:

HEADNOTE
.

Reference(s):

OPINION
United States District Court Middle District of Florida Jacksonville Division,

ORDER
Judge: MARCIA MORALES HOWARD United States District Judge

THIS CAUSE is before the Court on the parties' Joint Motion for Entry of Final Judgment of Permanent Injunction by Consent (Doc. No. 14; Joint Motion), filed on January 6, 2010. Plaintiff filed a three-count complaint against Defendant seeking injunctive relief. See Joint Motion at 1. The parties jointly request that the Court enter a Final Judgment of Permanent Injunction. See id. Defendant waives the entry of findings of fact and conclusions of law under Rule 52 of the Federal Rules of Civil Procedure and 26 U.S.C. §§ 7402, 7407, and 7408. See id. at 2. Defendant waives any right she may have to appeal from the Final Judgment of Permanent Injunction. See id. Defendant states that she enters into the Joint Motion requesting the Final Judgment of Permanent Injunction voluntarily. See id. Defendant acknowledges that entry of the Final Judgment of Permanent Injunction neither precludes the Internal Revenue Service from assessing taxes, interest, or penalties against her for asserted violations of the Internal Revenue Code, nor precludes Defendant from contesting such taxes, interest, or penalties. See id. Defendant agrees that this Court shall retain jurisdiction over her for the purpose of implementing and enforcing the Final Judgment of Permanent Injunction. See id. Furthermore, Defendant admits and this Court independently finds that the Court has jurisdiction over Defendant and over the subject matter of this action. See id. In accordance with the agreements reflected in the Joint Motion, Defendant consents to the entry, without further notice, of the Final Judgment of Permanent Injunction. See id.

The Court having considered the Joint Motion,

IT IS ORDERED AND ADJUDGED THAT:

(1.) The parties' Joint Motion is GRANTED.
(2.) The Clerk of the Court is directed to enter Final Judgment of Permanent Injunction against Defendant and in favor of Plaintiff with the following terms:
(a.) The Court has jurisdiction over this action pursuant to §§ 1340 and 1345 of Title 28 of the United States Code, and §§ 7402, 7407, and 7408 of the Internal Revenue Code of 1986, as amended (26 U.S.C.) (“IRC”).
(b.) Shirley Clark is permanently enjoined from preparing or filing, or assisting in preparing or filing federal tax returns for other persons.
(c.) Shirley Clark is permanently enjoined from advising, counseling, assisting, or instructing anyone about the preparation of a federal tax return.
(d.) Shirley Clark is permanently enjoined from owning, managing, controlling, working for, or volunteering for a tax-return-preparation business.
(e.) Shirley Clark is permanently enjoined from making, in connection with organizing or selling a plan or arrangement, a false or fraudulent statement regarding the excludibility of income or securing of any other tax benefit.
(f.) Shirley Clark is permanently enjoined from engaging in any other activity subject to penalty under I.R.C. §§ 6694, 6695, 6700, 6701, or any other penalty provision in the Internal Revenue Code.
(g.) Shirley Clark is permanently enjoined from engaging in any conduct that interferes with the administration and enforcement of the internal revenue laws.
(h.) Shirley Clark shall contact by mail all persons for whom she has prepared federal tax returns or assisted in preparing tax returns for the tax years 2004 and thereafter, and send them a copy of the Court's Order at docket entry number 15, the Final Judgment of Permanent Injunction and a copy of the Complaint, and certify to the Court within thirty days of entry of the Final Judgment of Permanent Injunction that she has complied with this provision.
(i.) Shirley Clark shall provide to the United States a list of everyone for whom she has prepared (or helped to prepare) a federal tax return for tax year 2004 and thereafter, and certify to the Court within thirty days of entry of the Final Judgment of Permanent Injunction that she has complied with this provision. This list shall include each person's name, address, social security number, telephone number, and the tax year(s) for which a return was prepared.
(3.) The Court shall retain jurisdiction for the purpose of implementing and enforcing the Final Judgment of Permanent Injunction entered in this action.
(4.) The parties shall bear their own costs.
(5.) The Clerk of the Court is directed to terminate all pending motions and deadlines and close the file.
DONE AND ORDERED at Jacksonville, Florida, this 8th day of April, 2010.

MARCIA MORALES HOWARD

United States District Judge

Copies to:

Counsel of Record

Pro Se Parties

Saturday, June 26, 2010

www.irstaxattorney.com 888-712-AMBASE CORP. v. U.S., Cite as 105 AFTR 2d 2010-XXXX, 06/15/2010
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AMBASE CORPORATION, Plaintiff, v. UNITED STATES OF AMERICA, Defendant.
Case Information:
Code Sec(s):
Court Name: UNITED STATES DISTRICT COURT DISTRICT OF CONNECTICUT,
Docket No.: 3:08-cv-651 (WWE),
Date Decided: 06/15/2010.
Disposition:
HEADNOTE
.
Reference(s):
OPINION
UNITED STATES DISTRICT COURT DISTRICT OF CONNECTICUT,
MEMORANDUM OF DECISION ON VARIOUS MOTIONS
Judge: Warren W. Eginton Senior United States District Judge
DISCUSSION

Section 166 of the Internal Revenue Code permits a taxpayer to take a deduction for a debt that becomes worthless within that tax year. 26 U.S.C. § 166(a)(1). Under section 6511(d)(1), “the limitation period for filing a refund claim is extended to seven years from the date the tax return was to be filed if the refund relates to an overpayment of tax resulting from the deduction of a debt which became worthless.” Moretti v. Commissioner, 77 F.3d 637, 646 [77 AFTR 2d 96-1076] (2d Cir. 1996); 26 U.S.C. § 6511(d)(1)(A). A claim brought after the lapse of the seven-year period is outside the district court's jurisdiction. Koss v. United States, 69 F.3d 705, 707 [76 AFTR 2d 95-7316] (3d Cir. 1995); see also United States v. Dalm, 494 U.S. 596, 602 [65 AFTR 2d 90-1210] (1990).
Under section 166, taxpayers generally use the “direct charge-off method” to recognize amounts which they deem to be uncollectible. Since the enactment of the Tax Reform Act of 1986, banks like AmBase, unlike other taxpayers, may use the reserve method under sections 585 and 593 of the Internal Revenue Code to estimate the amount that a taxpayer has of uncollectible receivables. The reserve method allows a taxpayer to set up an allowance for bad debts and enables it to take a deduction for the additional amount of capital that the taxpayer determines should be reserved for the year as uncollectible. A taxpayer using the reserve method, at the time it files its return, deducts an amount equal to the addition to bad debt reserves necessary to reach the amount it determines should be included in its reserves as uncollectible. The amount of the reserve reflects the amount of debts held by the taxpayer anticipated to become worthless. As the Supreme Court explained:
Under the reserve method of accounting a taxpayer includes in his income the full face amount of a receivable on its creation and adjusts at the end of each taxable year the reserve account so that it equals that portion of current accounts receivable that is estimated to become worthless in subsequent years. Any additions necessary to increase the reserve are currently deductible. When an account receivable becomes worthless during the year, the reserve account is decreased and no additional bad debt deduction is allowed.
Nash v. United States, 398 U.S. 1, 2 [25 AFTR 2d 70-1177] (1970).
When a taxpayer using the reserve method charges off worthless debts, the debts are charged off against the reserve account and not deducted directly from its income. While the worthless debt is not directly charged to income, it can have an effect on income if it does not reduce the ultimate reserve for bad debts because an amount equal to the charged-off debt must be added to additions to bad debt to bring the reserve back up to the appropriate level.
AmBase employed the experience method to calculate to what extent reasonable additions to its reserve would have to be made to bring the reserve amount to the level determined to be necessary to satisfy estimated debts that would become uncollectible in the future. This determination was made at the time the return was filed. The Internal Revenue Code states that the:
The amount determined under [the experience method] for a taxable year shall be the amount necessary to increase the balance of the reserve for losses on loans (at the close of the taxable year) to the greater of –
((A)) the amount which bears the same ratio to loans outstanding at the close of the taxable year as (i) the total bad debts sustained during the taxable year and the 5 preceding taxable years..., adjusted for recoveries of bad debts during such period, bears to (ii) the sum of the loans outstanding at the close of such 6 or fewer taxable years, or
((B)) the lower of (i) the balance of the reserve at the close of the base year, or (ii) if the amount of loans outstanding at the close of the taxable year is less than the amount of loans outstanding at the close of the base year, the amount which bears the same ratio to loans outstanding at the close of the taxable year as the balance of the reserve at the close of the base year bears to the amount of loans outstanding at the close of the base year.
26 U.S.C. § 585(b).
Characterizing plaintiff's estimation process, the United States represents that AmBase based its bad debt experience factor on its outstanding debts and the corresponding chargeoffs. Then, it applied that calculation to its then-current outstanding debt to arrive at the maximum possible reserve for bad debts and adjusted that number to arrive at the level that its actual reserve should be.
I. Regulations on Bad Debt Deductions
Plaintiff first contends that 26 C.F.R. §§ 1.593-5(b)(2) and 1.593-6A(a)(1) both permit and, in fact, require plaintiff to amend its bad debt reserve deduction reported on its tax return. In support of this position, plaintiff cites a Tax Court ruling stating, “there is no authority or discretion statutorily reserved to [the IRS] to deny [a taxpayer's] reserve addition election, so long as the taxable year is open.” The Home Group, Inc. v. Commissioner, 91 T.C. 265, 270 (1988).
Unfortunately for plaintiff, the 1992 tax year does not remain open indefinitely. Plaintiff cannot attempt to amend its original 1992 return almost fifteen years after it was filed absent some legislative authority. See 26 U.S.C. § 6501. Plaintiff cites no statute or case law that extends the permissible time for amending a tax return for so long or that holds open a taxable year for such a long time. Therefore, the regulations cannot serve as the basis for granting the Court jurisdiction over plaintiff's claim.
II. Seven Year Statute of Limitations with Respect to Bad Debts and Worthless Securities
A taxpayer using the reserve method can avail itself of the seven year statute of limitations of section 6511(d)(1)(A). See Smith Elec. Co. v. United States, 198 Ct. Cl. 644, 648 [29 AFTR 2d 72-1425] (Ct. Cl. 1972). By its language, however, section 6511(d)(1) applies only to situations where a debt has become worthless. Section 6511(d) permits a taxpayer who takes a bad debt deduction but later learns that such debt became worthless to claim a refund up to seven years later. See Armstrong v. United States, 681 F.2d 774, 776 [50 AFTR 2d 82-5131] (Ct. Cl. 1982) (“The 7-year period was designed to prevent possible prejudice to those taxpayers whose otherwise legitimate deduction might be placed in jeopardy by the general 3-year period.”). The legislative history behind section 6511(d) recognizes the need “to protect a taxpayer for whom “later evidence” discloses a miscalculation about the year in which a debt becomes worthless.” See Indiana Nat'l Corp. v. United States, 980 F.2d 1098, 1102 [70 AFTR 2d 92-6164] (7th Cir. 1992) (citing H.R. Rep. No. 2333, 77th Cong., 1st Sess., reprinted in 1942-2 C.B. 372, 408).
Courts have rejected applying section 6511(d)'s statute of limitations to instances where the taxpayer seeks to amend a tax return upon discovering that his estimate was not accurate. See Wengel, Inc. v. United States, 306 F. Supp. 121, 123 [25 AFTR 2d 70-1027] (E.D. Mich. 1969). Further, a taxpayer may not increase its debt reserve retroactively. Rio Grande Bldg. & Loan Ass'n v. Comm'r, 36 T.C. 657, 664 (1961) (“[A] taxpayer is not to be permitted to enlarge its reserve account retroactively, based upon subsequent events which later support the view that the reserve is inadequate.”).
AmBase asserts that its “claim depends solely on facts that existed at the close of the taxable year.” This contention does not lend support for applying the seven-year statute of limitations. If plaintiff has not discovered new evidence that a debt became worthless, then section 6511(d) cannot apply and cannot create jurisdiction in this matter.
III. Three Year Statute of Limitations for Filing a Claim for Refund
Both parties agree that AmBase had until March 31, 1998 to file a claim for a refund under 26 U.S.C. § 6511(a). Section 6511(a) provides that a “[c]laim for credit or refund of an overpayment of any tax ... in respect of which tax the taxpayer is required to file a return shall be filed by the taxpayer within 3 years from the time the return was filed....” 26 U.S.C. § 6511(a).
AmBase claims that three events toll the statute of limitations rendering this action timely. It asserts first that it filed a timely claim for refund in June 1995. Second, it contends the FDIC filed claims for refund on behalf of Carteret in September 1996. Finally, it maintains that it filed informal notices to put the IRS on notice that it would seek a refund. Each of these arguments fails.
A. June 1995 Claim
AmBase asserts that it filed a protective claim for refund, signed and dated June 6, 1995. It admits, however, that only “substantial circumstantial evidence” supports this claim. According to AmBase, a copy of the claim was placed in an internal file with AmBase's original tax returns for the tax years 1988 and 1989. AmBase further represents that the only documents in this file were filed with the IRS. AmBase seeks limited discovery on whether this protective claim was actually ever filed with the IRS because, as it admits, this circumstantial evidence is insufficient to support jurisdiction.
An income tax return is generally deemed filed on the date when the return is received by the IRS. See Weisbart v. United States Dep't of Treasury, 222 F.3d 93, 96 [86 AFTR 2d 2000-5524] (2d Cir. 2000); 26 U.S.C. § 7502. The exceptions to this rule are where a postmark stamped on a return received by the IRS indicates a different date or when a return is sent via registered mail. See Deutsch v. Comm'r, 599 F.2d 44, 46 [44 AFTR 2d 79-5063] (2d Cir. 1979); Washton v. United States, 1993 U.S. Dist. LEXIS 2863, 8–9 (D. Conn. Feb. 12, 1993); 26 U.S.C. § 7502. The onus is on the taxpayer to keep proper records of its tax return. See Halle v. Comm'r, 175 F.2d 500, 502 [38 AFTR 91] (2d Cir. 1949) (“Implicit in the working of the system is an obvious duty of keeping proper records imposed on the taxpayer.”).
AmBase cannot sufficiently establish that it filed a claim in June 1995. Its circumstantial evidence is insufficient to demonstrate that the IRS received the protective claim. Therefore, the statute of limitations cannot be tolled because of the protective claim.
B. FDIC's September 1996 Protective Claim
Where a financial institution is subject to a receivership, the FDIC is permitted to file claims for refunds for carrybacks on behalf of a consolidated group that includes the receivership. 26 C.F.R. § 301.6402-7. Plaintiff claims that the FDIC filed a timely protective claim in September 1996 on behalf of the AmBase consolidated group and that such protective claim was supplemented in March 2000. Combined, plaintiff asserted, the claim and the supplement serve to allow plaintiff to claim the refund for 1989.
A protective claim puts the IRS on notice when it (1) is in fact filed; (2) made in writing; and (3) “the matter set forth in the writing [is] sufficient to apprise the IRS that a refund is sought and to focus attention on the merits of the dispute so that an examination of the claim may be commenced if the IRS wishes.” Martin v. United States, 833 F.2d 655, 660 [60 AFTR 2d 87-6037] (7th Cir. 1987); see also United States v. Kales, 314 U.S. 186, 194–96 [27 AFTR 309] (1941). The notice must be specific and cannot be generic. As one commentator has observed “it has been held that the filing of a claim for another year or different period does not constitute an informal claim.” Michael I. Saltzman, IRS Practice and Procedure ¶ 11.08[2] (2009).
The protective claim is not before the Court at this time because plaintiff does not have it. Plaintiff contends that with proper discovery of the IRS it will be able to submit it. Plaintiff did submit two letters from the IRS to David Jones of Carteret Bancorp, Inc. These letters indicate that the IRS received the purported claim on September 19, 1996 relating to the tax periods ending December 31, 1986, 1989, 1990 and 1991. In these letters, the IRS stated that it could not process Carteret's claim because the supporting information was not complete. Because the letters are not before the Court, the Court cannot review them to determine whether they meet the requirements of Martin. As such, they cannot serve to establish jurisdiction at this juncture.
Even if these letters provided sufficient bases to find that the underlying protective claims met the requirements of Martin, jurisdiction would still not lodge. Plaintiff contends that the FDIC's claim for refund must have related to 1992 because the FDIC did not control Carteret until 1992. At that point, the FDIC's authority to file a claim for 1989 was limited to carrybacks from 1992.
The IRS is permitted to examine a claim for refund which has been timely filed although it fails to state the ground upon which the demand is filed even when a wholly new claim would have been barred by the statute of limitations. See United States v. Memphis Cotton Oil Co., 288 U.S. 62, 64 [11 AFTR 1116] (1933). The Court does not find Memphis Cotton applicable to this case. Without reviewing the September 1996 claim, the Court cannot conclude that the claim even relates to the 1992 tax year and therefore, determine how Memphis Cotton and St. Joseph Lead Co. v. United States, 299 F.2d 348 [9 AFTR 2d 710] (2d Cir. 1962), both cited by plaintiff, support its position.
Accordingly, on the present record, the Court cannot find that the September 1996 claim meets the requirements of a protective claim under Martin and cannot toll the statute of limitations under section 6511.
C. Informal Protective Claim
Plaintiff additionally argues that it filed two timely informal protective claims by informing IRS personnel multiple times of its intent to file an amended return for 1992 and claim a carryback.
1. Contingent Claims
The first alleged informal protective claim is an attachment to AmBase's consolidated income tax return for 1992 filed on August 30, 1993. This attachment notified the IRS of AmBase's intent to exclude certain institutions from its consolidated group. At the bottom of this exhibit, AmBase wrote, “We reserve the right to review this election when the Reg. § 1.597-4 becomes final.” AmBase received extensions of time until April 30, 1997 to determine whether to elect to disaffiliate. By letter dated April 28, 1997, AmBase notified the IRS of its decision not to elect to disaffiliate. This decision forced AmBase to file an amended 1992 return to reflect New Carteret's operations for December 1992, which were omitted from the original return. The April 28 letter, plaintiff asserts, also informed the IRS of AmBase's intention to file the refund claim necessary to implement the decision once it had received certain documents from the IRS and the FDIC.
AmBase further maintains that in 1995, at the end of the IRS audit that included tax year 1989, AmBase informed the IRS that amended returns may be necessary to correct the carryovers and carrybacks to 1989 once the Tax Court litigation for 1987 was resolved. Had AmBase lost this litigation, a 1989 carryover to 1987 could have been disallowed, which would have made a carryback allowable from 1992 to 1989. AmBase received documents from the IRS which, AmBase contends, indicate that AmBase properly placed the IRS on notice that its 1989 tax liability could be changed once certain contingencies related to carryovers and carrybacks to 1989 were resolved. Specifically, defendant produced a Form 4451 History Sheet that stated in the IRS' notes that “Taxpayer will be filing a protective claim Form 1120X for the years 8812–9112 with the service center to correct the NOL carrybacks and carry-forwards once a decision is reached in tax court on the 1985–1987 years.” This note was made on June 30, 1995.
2. Law on Protective Claims
A protective claim is “filed to protect a right to receive a refund contingent on the occurrence of a future event.” Saltzman, IRS Practice & Procedure ¶ 11.08[3]. A claim may be made conditional upon the occurrence of a future event. As stated by the Supreme Court:
The statement that upon the happening of the contingency the claim will be prosecuted is not inconsistent with the present assertion of it. It is indeed an appropriate, if not the necessary, phraseology for the present assertion of an alternative claim with respect to which a taxpayer, in his presentation of an informal tax refund claim, should be in no less favorable position than the plaintiff in a suit at law who is permitted to plead his cause of action in the alternative.
Kales, 314 U.S. at 196. Where a claim for refund is contingent or indeterminate until some future point, a taxpayer must file a conditional claim before the expiry of the statute of limitations to preserve its rights to a refund. See Swietlik v. United States, 779 F.2d 1306, 1307 [57 AFTR 2d 86-1497] (7th Cir. 1985).
There are three elements of an informal claim.
First, an informal claim must provide the Commissioner of the IRS with notice that the taxpayer is asserting a right to a refund. Second, the claim must describe the legal and factual basis for the refund. Finally, an informal claim must have some written component.
New England Elec. Sys. v. United States, 32 Fed. Cl. 636, 641 [75 AFTR 2d 95-786] (Fed. Cl. 1995); see also American Radiator & Standard Sanitary Corp. v. United States, 318 F.2d 915, 920 [11 AFTR 2d 1616] (Ct. Cl. 1963). The written component may be satisfied by a writing made by the taxpayer or the IRS. See New England Elec. Sys., 32 Fed. Cl. at 643–44.
Plaintiff's submissions, which it asserts put the IRS on notice of its eventual claim for a refund for 1992, do not provide sufficient notice to qualify as contingent claims under the law. None of these documents mention the 1992 tax return, nor do they assert that a refund would be requested for that year. “It is not enough that the Service have in its possession information from which it might deduce that the taxpayer is entitled to, or might desire, a refund; nor is it sufficient that a claim involving the same ground has been filed for another year or by a different taxpayer.” American Radiator, 318 F.2d at 920; see also Simon v. Doe, 463 F. Supp. 2d 466, 470 [98 AFTR 2d 2006-8039] (S.D.N.Y. 2006). The fact that plaintiff needed more time to determine whether it would disaffiliate New Carteret does not sufficiently or directly put the IRS on notice that a refund would be sought as to the 1992 tax year. See Stoller v. United States, 444 F.2d 1391, 1393 [27 AFTR 2d 71-1396] (5th Cir. 1971) (“The Commissioner should not be left to his own devices in order to discover the precise nature of a taxpayer's claim and thus be placed in a position of having to hazard a guess.”). Kales, which plaintiff cites in support of its contingent protective claims, relies on the fact that the taxpayer explicitly discussed what the contingency is and how she would act should it come to pass. See Kales, 314 U.S. at 195–96 (noting that taxpayer stated “that in the event of departmental revision of the valuation of the stock she “will insist” on a higher valuation and will claim the right to a refund...”). There is no explicit discussion of the contingencies and future plans in AmBase's documents that would be analogous to what the Kales Court observed.
D. June 2000 Formal Claim
In view of the fact that the claims that AmBase relies upon for tolling the statute of limitations — the June 1995 claim, the September 1996 claim and the informal protective claims — were either not properly filed or not correctly asserted, the formal refund claim in March 2000 could not have rectified an incomplete previous claim and could have no legal effect.
In light of the Court's finding that there has been no waiver of the government's sovereign immunity for plaintiff's claim, this Court has no jurisdiction to hear this matter. The Court will, however, permit plaintiff forty-five days from the date of the filing of this ruling to conduct limited discovery into the June 1995 and September 1996 claims because the claims may help plaintiff establish subject matter jurisdiction in this matter.
CONCLUSION
For the foregoing reasons, the Court conditionally GRANTS defendant United States' motion to dismiss (Doc. #29) and DENIES plaintiff AmBase's motion for partial summary judgment (Doc. #32) and defendant's motion to strike (Doc. #37).
Dated at Bridgeport, Connecticut, this 15th day of June, 2010.
Warren W. Eginton
Senior United States District Judge
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1
Plaintiff's citation to Global Network Communs., Inc. v. City of New York, 458 F.3d 150 (2d Cir. 2006) is misplaced. That case involved the review of a ruling on a Rule 12(b)(6) motion. Defendant's motion is made under Rule 12(b)(1).

7690

Thursday, June 24, 2010

LMSB designates loss importation transaction as Tier I issue
Tier I Issue - Loss Importation Transaction - Directive No. 1

IRS's Large and Mid-Size Business Division (LMSB) has issued a directive to the field, identifying a “loss importation transaction” as a Tier I issue and providing a uniform approach for examiners to evaluate potential compliance risks and outline the issue management and oversight process. A loss importation transaction is an international tax avoidance transaction in which a U.S. taxpayer typically uses offsetting positions with respect to foreign currency or other property for the purpose of importing a loss, but not the corresponding gain, in determining U.S. taxable income.
RIA observation: Under IRS's rules of engagement for LMSB examinations, Tier I issues are of high strategic importance to LMSB and have a significant impact on one or more industries. Tier I issues could include areas involving a large number of taxpayers, significant dollar risk, substantial compliance risk or high visibility, where there are established legal positions and/or LMSB direction.
Background. Notice 2007-57, 2007-29 IRB 87 , identifies loss importation transactions, and substantially similar ones, as listed transactions for purposes of Reg. § 1.6011-4(b)(2) , Code Sec. 6111 and Code Sec. 6112 (see Weekly Alert ¶ 11 06/28/2007 ). In the variation described in Notice 2007-57 , a U.S. taxpayer (Taxpayer) is a shareholder of an S corporation (S Corporation). S Corporation acquires control of a foreign entity (Foreign Entity) by purchasing from a foreign shareholder stock of Foreign Entity meeting the requirements of Code Sec. 1504(a)(2) (dealing with affiliated groups of corporations). Then S Corporation purchases the Foreign Entity stock. Foreign Entity is classified as a corporation for U.S. tax purposes under Reg. § 301.7701-2(b)(2) and Reg. § 301.7701-3(b)(2)(i)(B) , and is a controlled foreign corporation (CFC) under Code Sec. 957(a) .
Foreign Entity enters into substantially offsetting positions in foreign currency. Next, Foreign Entity disposes of or closes out some positions in the foreign currency for a gain while retaining the offsetting loss positions. Foreign Entity is not itself subject to U.S. taxation on the gains from the offsetting options. Foreign Entity may use the proceeds from these dispositions or closings out to enter into new positions in foreign currency. By entering into the new positions in foreign currency, Foreign Entity can effectively preserve the retained loss positions in the foreign currency and virtually eliminate further economic risk.
After realizing gains from disposing of or closing out some of the offsetting positions, Foreign Entity elects to be disregarded as an entity separate from its owner for U.S. tax purposes. Based on the effective date of this election, Foreign Entity is not a CFC for an uninterrupted period of 30 days during Foreign Entity's tax year, and S Corporation is not required to include any of Foreign Entity's subpart F income in its gross income under Code Sec. 951(a) . The gains are not otherwise subject to U.S. taxation. The election results in the distribution of all of Foreign Entity's assets and liabilities to its shareholder in a deemed liquidation of Foreign Entity. ( Reg. § 301.7701-3(g)(1)(iii) ) After the election, some or all of the loss positions in the foreign currency are allowed to expire, are disposed of, or are closed out, and some or all of the gain positions are allowed to expire, are disposed of, or are closed out, resulting in an aggregate net loss. S Corporation passes Taxpayer's pro rata share of the loss through to Taxpayer. Taxpayer purports to have sufficient basis in its S Corporation stock or in its debt to S Corporation to enable Taxpayer to claim the loss.
Notice 2007-57 also describes some variations of the above transaction.
LMSB Directive. The LMSB Directive noted that loss importation transactions are designed so that taxpayers may claim losses without taking into account the corresponding gain attributable to the offsetting positions. In these transactions, taxpayers attempt to exploit the entity classification rules and Code Sec. 951 (dealing with amounts included in a U.S. shareholder's gross income). IRS has been challenging these transactions by disallowing the loss or allocating the loss to the entity that economically incurred the loss. For transactions after Oct. 22, 2004, Code Sec. 362(e)(1) and Code Sec. 334(b)(1)(B) may prevent importation of losses by providing the transferee or distributee with a fair market value basis in imported assets, thus preventing a later recognition of loss.
The LMSB Directive noted that these transactions were often implemented in combination with other listed transactions such as “Intermediary Transactions” described in Notice 2008-111, 2008-51 IRB 1299 (see Weekly Alert ¶ 11 12/04/2008 ), and Son of Boss Transactions described in Notice 2000-44, 2000-2 CB 255 (see Weekly Alert ¶ 3 08/17/2000 ). Only a very small number of cases have been brought to IRS's attention through listed transaction disclosures under Code Sec. 6011 . Taxpayers who engaged in these transactions but do not file the required disclosures under Code Sec. 6011 and its regs are subject to penalties under Code Sec. 6707A . They may also be subject to an extended period of limitations under Code Sec. 6501(c)(10) . Material advisors who don't file the required disclosures under Code Sec. 6111 and its regs are subject to penalties under Code Sec. 6707(a) .
LMSB has not uncovered evidence that would suggest widespread promotion of loss importation transactions. But these transactions may have escaped detection during the course of examinations of other listed transactions. IRS believes that these transactions are most frequently detected during the course of an audit. Examiners are directed to look for the following U.S. tax disclosures which may be made in connection with these transactions:
... A Form 8832 (check the box election).
... A Form 5471 with respect to the ownership of the foreign entity for the period it is treated as a corporation for U.S. tax purposes.
... A Code Sec. 367(b) disclosure with respect to the deemed liquidation of the foreign entity resulting from the check the box election.
... A Form 926 and a Code Sec. 351 disclosure with respect to the transfer of the option contracts to the foreign entity.
... A Form 8858 or 8865 with respect to the ownership of the foreign entity for the period it is treated as a disregarded entity or partnership for U.S. tax purposes.
IRS advises examination teams to carefully scrutinize cases where a U.S. taxpayer is using offsetting positions with respect to foreign currency or other property and where the tax disclosures described above were filed or would otherwise be required. Heightened scrutiny should be given to cases already identified as involving intermediary transactions or Son of Boss Transactions. IRS examination teams with this issue should contact the Loss Importation Technical Advisor as soon as they identify indicators of this issue and follow the procedures set out in the LMSB Directive throughout the development of the case.
References: For disclosure of tax avoidance transactions, see FTC 2d/FIN ¶ S-4400 et seq.; United States Tax Reporter ¶ 61,114 et seq.; TaxDesk ¶ 817,000 et seq.; TG ¶ 71807 et seq.
Notice 2007-57, 2007-29 IRB 87, 06/20/2007, IRC Sec(s). 6011
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Loss importation transactions—listed transactions.
Headnote:
IRS will challenge transactions in which U.S. taxpayers attempts to use offsetting positions in foreign currency to claim losses without taking into account corresponding gains. Variations of this arrangement were detailed, with IRS noting that taxpayers are trying to exploit entity classification rules and Code Sec. 951(a); and that it intends to assert one or combination of arguments, including economic substance doctrine, in denying claims losses. These and substantially similar arrangements as “listed transactions”, subject to Code Sec. 6011; disclosure requirements, Code Sec. 6111; tax shelter registration, or Code Sec. 6112; list maintenance requirements.
Reference(s): ¶ 60,115.02(10); ¶ 61,114; ¶ 61,124; Code Sec. 6011; Code Sec. 6111; Code Sec. 6112;
Full Text:
The Internal Revenue Service and the Treasury Department are aware of a type of transaction, described below, in which a U.S. taxpayer uses offsetting positions with respect to foreign currency or other property for the purpose of importing a loss, but not the corresponding gain, in determining U.S. taxable income. This notice alerts taxpayers and their representatives that these transactions are tax avoidance transactions and identifies these transactions, and substantially similar transactions, as listed transactions for purposes of § 1.6011-4(b)(2) of the Income Tax Regulations and § § 6111 and 6112 of the Internal Revenue Code. This notice also alerts persons involved with these transactions to certain responsibilities that may arise from their involvement with these transactions.
Facts
In one variation of the loss importation transaction, a U.S. taxpayer (Taxpayer) is a shareholder of an S corporation (S Corporation). S Corporation acquires control of a foreign entity (Foreign Entity) by purchasing from a foreign shareholder stock of Foreign Entity meeting the requirements of § 1504(a)(2). When S Corporation purchases the Foreign Entity stock, Foreign Entity is classified as a corporation for U.S. tax purposes under § 301.7701-2(b)(2) and § 301.7701-3(b)(2)(i)(B) of the Procedure and Administration Regulations, and is a controlled foreign corporation (CFC) within the meaning of § 957(a).
Foreign Entity enters into substantially offsetting positions in foreign currency. Next, Foreign Entity disposes of or closes out some positions in the foreign currency for a gain while retaining the offsetting loss positions. Foreign Entity is not itself subject to U.S. taxation on the gains from the offsetting options. Foreign Entity may use the proceeds from these dispositions or closings out to enter into new positions in foreign currency. By entering into the new positions in foreign currency, Foreign Entity can effectively preserve the retained loss positions in the foreign currency and virtually eliminate further economic risk.
After realizing gains from disposing of or closing out some of the offsetting positions, Foreign Entity elects to be disregarded as an entity separate from its owner for U.S. tax purposes. Based on the effective date of this election, Foreign Entity is not a CFC for an uninterrupted period of 30 days during Foreign Entity's taxable year, and S Corporation is not required to include any of Foreign Entity's subpart F income in its gross income. See § 951(a). The gains are not otherwise subject to U.S. taxation. See, e.g., § § 881 and 882. The election results in the distribution of all of Foreign Entity's assets and liabilities to its shareholder in a deemed liquidation of Foreign Entity. See Treas. Reg. § 301.7701-3(g)(1)(iii). After the election, some or all of the loss positions in the foreign currency are allowed to expire, are disposed of, or are closed out, and some or all of the gain positions are allowed to expire, are disposed of, or are closed out, resulting in an aggregate net loss. S Corporation passes Taxpayer's pro rata share of the loss through to Taxpayer. Taxpayer purports to have sufficient basis in its S Corporation stock or in its indebtedness to S Corporation to enable Taxpayer to claim the loss.
Variations exist in the types of entities and forms of loss importation used in the transaction described above. For example, in one variation of the transaction, a C corporation may be used instead of an S corporation; or a foreign entity with more than one owner may elect to be classified for U.S. tax purposes as a partnership, rather than as an entity disregarded as separate from its owner. Further, the importation of the loss may be accomplished by other methods, such as a corporate reorganization described in § 368(a) or a transfer to which § 351 applies. Variations also exist in how the offsetting positions may be used in the transaction described above. For example, taxpayers may use positions with respect to property other than foreign currency.
Discussion
The transactions described in this notice are designed so that taxpayers may claim losses without taking into account the corresponding gains attributable to the offsetting positions in foreign currency or other property. In the loss importation transaction described above, taxpayers are attempting to exploit the entity classification rules and § 951(a) in order to claim losses without taking into account the corresponding gains attributable to the offsetting positions in foreign currency. The Service may challenge these transactions by, for example, disallowing the loss or allocating the loss to the CFC. The Service may assert one or a combination of arguments including, but not limited to, arguments under § § 165, 269, 482, and 988. In addition, the Service may assert that the transaction fails one or more judicial doctrines, such as the economic substance doctrine.
Transactions that are the same as, or substantially similar to, the transactions described in this notice are identified as “ listed transactions” for purposes of § § 1.6011-4(b)(2) and § § 6111 and 6112 effective June 20, 2007, the date this notice was released to the public. Independent of their classification as listed transactions, transactions that are the same as, or substantially similar to, the transactions described in this notice may already be subject to the requirements of § 6011, § 6111, § 6112, or the regulations thereunder.
Persons required to disclose these transactions under § 1.6011-4 who fail to do so may be subject to the penalty under § 6707A which applies to returns and statements due after October 22, 2004. Persons required to disclose these transactions under § 1.6011-4 who fail to do so may be subject to an extended period of limitations under § 6501(c)(10). Persons required to disclose or register these transactions under § 6111 who fail to do so may be subject to the penalty under § 6707(a). Persons required to maintain lists of investors under § 6112 who fail to do so (or who fail to provide such lists when requested by the Service) may be subject to the penalty under § 6708(a). In addition, the Service may impose penalties on persons involved in these transactions or substantially similar transactions, including the accuracy-related penalty under § 6662 or § 6662A.
The Service and Treasury recognize that some taxpayers may have filed tax returns taking the position that they were entitled to the purported tax benefits of the type of transactions described in this notice. These taxpayers should take appropriate corrective action and ensure that their transactions are disclosed properly.
Drafting Information
The principal author of this notice is Megan Stoner of the Office of Associate Chief Counsel (Passthroughs and Special Industries). For further information regarding this notice, contact Ms. Stoner at (202) 622-3070 (not a toll-free call).
IRS designates loss importation deals as listed transactions
Notice 2007-57, 2007-29 IRB
Notice 2007-57 warns that transactions in which a U.S. taxpayer uses offsetting positions with respect to foreign currency or other property for the purpose of importing a loss, but not the corresponding gain, in determining U.S. taxable income, are tax avoidance transactions. The Notice identifies these transactions, and substantially similar ones, as listed transactions for purposes of Reg. § 1.6011-4(b)(2) , Code Sec. 6111 and Code Sec. 6112 .
How loss importation transactions work. In one variation, a U.S. taxpayer (Taxpayer) is a shareholder of an S corporation (S Corporation). S Corporation acquires control of a foreign entity (Foreign Entity) by purchasing from a foreign shareholder stock of Foreign Entity meeting the requirements of Code Sec. 1504(a)(2) (dealing with affiliated groups of corporations). Then S Corporation purchases the Foreign Entity stock, Foreign Entity is classified as a corporation for U.S. tax purposes under Reg. § 301.7701-2(b)(2) and Reg. § 301.7701-3(b)(2)(i)(B) , and is a controlled foreign corporation (CFC) under Code Sec. 957(a) .
Foreign Entity enters into substantially offsetting positions in foreign currency. Next, Foreign Entity disposes of or closes out some positions in the foreign currency for a gain while retaining the offsetting loss positions. Foreign Entity is not itself subject to U.S. taxation on the gains from the offsetting options. Foreign Entity may use the proceeds from these dispositions or closings out to enter into new positions in foreign currency. By entering into the new positions in foreign currency, Foreign Entity can effectively preserve the retained loss positions in the foreign currency and virtually eliminate further economic risk.
After realizing gains from disposing of or closing out some of the offsetting positions, Foreign Entity elects to be disregarded as an entity separate from its owner for U.S. tax purposes. Based on the effective date of this election, Foreign Entity is not a CFC for an uninterrupted period of 30 days during Foreign Entity's tax year, and S Corporation is not required to include any of Foreign Entity's subpart F income in its gross income under Code Sec. 951(a) . The gains are not otherwise subject to U.S. taxation. The election results in the distribution of all of Foreign Entity's assets and liabilities to its shareholder in a deemed liquidation of Foreign Entity. ( Reg. § 301.7701-3(g)(1)(iii) ) After the election, some or all of the loss positions in the foreign currency are allowed to expire, are disposed of, or are closed out, and some or all of the gain positions are allowed to expire, are disposed of, or are closed out, resulting in an aggregate net loss. S Corporation passes Taxpayer's pro rata share of the loss through to Taxpayer. Taxpayer purports to have sufficient basis in its S Corporation stock or in its debt to S Corporation to enable Taxpayer to claim the loss.
Notice 2007-57 also describes some variations of the above transaction.
IRS's view of these deals. IRS says that, in the loss importation transaction described above, taxpayers are attempting to exploit the entity classification rules and Code Sec. 951(a) in order to claim losses without taking into account the corresponding gains attributable to the offsetting positions in foreign currency. IRS says it may challenge these transactions by, for example, disallowing the loss or allocating the loss to the CFC. It may assert one or a combination of arguments including, but not limited to, arguments under Code Sec. 165 (dealing with allowable losses), Code Sec. 269 (dealing with acquisitions made to evade or avoid income tax), Code Sec. 482 (dealing with allocation of income and deductions between related taxpayers), and Code Sec. 988 (dealing with the treatment of foreign currency transactions). In addition, it may assert that the transaction lacks economic substance or fails to meet other judicial doctrines.
Transactions that are the same as, or substantially similar to, the transactions described in Notice 2007-57 are identified as “listed transactions” for purposes of Reg. § 1.6011-4(b)(2) , Code Sec. 6111 , and Code Sec. 6112 , effective June 20, 2007. Independent of their classification as listed transactions, IRS says transactions that are the same as, or substantially similar to, the ones described in Notice 2007-57 may already be subject to the requirements of Code Sec. 6011 , Code Sec. 6111 and Code Sec. 6112 , or their regs.
Notice 2007-57 also provides that persons required to:
... disclose these transactions under Reg. § 1.6011-4 but fail to do so may be subject to the penalty under Code Sec. 6707A , which applies to returns and statements due after Oct. 22, 2004;
... .disclose these transactions under Reg. § 1.6011-4 , but fail to do so may be subject to an extended period of limitations under Code Sec. 6501(c)(10) ;
... disclose or register these transactions under Code Sec. 6111 , but fail to do so may be subject to the penalty under Code Sec. 6707(a) ;
... maintain lists of investors under Code Sec. 6112 , but fail to do so (or fail to provide such lists when requested by IRS) may be subject to the penalty under Code Sec. 6708(a) .
In addition, IRS says it may impose penalties on persons involved in these transactions or substantially similar transactions, including the accuracy-related penalty under Code Sec. 6662 or Code Sec. 6662A .
References: For disclosure of tax avoidance transactions, see FTC 2d/FIN ¶ S-4400 et seq.; United States Tax Reporter ¶ 61,114 et seq.; TaxDesk ¶ 817,000 et seq.; TG ¶ 71807 et seq. ed.
EXP ¶61,114 Disclosure and list maintenance for tax shelter reportable transactions.
CAUTION: The IRS has issued final regulations ( TD 9351, 7/31/2007 ) that would make the following changes to rules regarding material advisors (defined below) for tax shelter reportable transactions .
Each material advisor must file a return for each reportable transaction (see ¶60,114.02 ) by the date described below. Reg §301.6111-3(a) . A “material advisor” with respect to a transaction is a person who provides any material aid, assistance or advice in organizing, managing, promoting, selling, implementing, insuring or carrying out any reportable transaction, and directly or indirectly derives gross income in excess of the threshold amount (defined below). “Transaction” includes all of the factual elements relevant to the expected tax treatment of any investment, entity, plan or arrangement and includes any series of steps as part of a plan. Reg §301.6111-3(b)(1) .
The following terms are defined in the final regulations:
• Material aid, assistance or advice.
• Tax statement.
• Confidential transactions.
• Transactions with contractual protection.
• Loss transactions.
• Special rules for capacity as an employee, post-filing advice and publicly filed statements. Reg §301.6111-3(b)(2) .
A tax statement is any oral or written statement (including another person's statement) that relates to a tax aspect of a transaction that causes the transaction to be a reportable transaction (see ¶60,114.02 ). Reg §301.6111-3(b)(2)(ii) .
Under proposed regs, a statement would relate to a tax aspect of a transaction that would cause it to be patented transaction (see ¶60,114.02 ) if the statement is made or provided by the patent holder or the patent holder's agent (as defined in Prop Reg §1.6011-4(b)(7)(ii)(C) or Prop Reg §1.6011-4(b)(7)(ii)(D) , see ¶60,114.02 ) and concerns the tax planning method that is the subject of the patent. Prop Reg §301.6111-3(b)(2)(ii)(E) . When the proposed regulations are adopted as final, the rules will apply to transactions entered into after Sept. 25, 2007. Prop Reg §301.6111-3(i)(2) .
The statutory threshold gross income amount is $50,000 for a reportable transaction (see ¶60,114.02 ) substantially all of the tax benefits from which were provided to natural persons (looking through any partnerships, S corporations, or trusts), and $250,000 for all other transactions (discussed below). Reg §301.6111-3(b)(3)(i)(A) . For listed transactions, the amounts are lowered to $10,000 and $25,000 respectively. For transactions of interest, the IRS could identify reduced threshold amounts in published guidance. Reg §301.6111-3(b)(3)(i)(B) .
Under proposed regs for a patented transaction (see ¶60,114.02 ), the threshold amounts in Reg §301.6111-3(b)(3)(i)(A) would be reduced, from $50,000 to $250 and from $250,000 to $500. Prop Reg §301.6111-3(b)(3)(i)(C) . When the proposed regulations are adopted as final, the rules will apply to transactions entered into after Sept. 25, 2007. Prop Reg §301.6111-3(i)(2) .
Material advisor's disclosure statement.
A material advisor required to file a disclosure statement must file a completed Form 8918 , (Oct. 2007) , Material Advisor Disclosure Statement. The form must describe the expected tax treatment and all potential tax benefits expected to result from the transaction, any tax result protection and the transaction in sufficient detail for the IRS to understand the tax structure of the reportable transaction. Reg §301.6111-3(d)(1) . The IRS will issue a reportable transaction number for a disclosed material transaction. Material advisors must provide this number to all taxpayers and material advisors for whom the advisor acts as a material advisor. Reg §301.6111-3(d)(2) .
The disclosure statement for a reportable transaction must be filed by the last day of the month following the end of the calendar quarter in which the advisor became a material advisor with respect to the reportable transaction. Reg §301.6111-3(e) .
The final regulations also include provisions relating to designation agreements (i.e., relating to which of several material advisors should disclose a transaction) and post-filing advice, as well as conforming changes to protective disclosures. Reg §301.6111-3(f) , Reg §301.6111-3(g) .
The final regulations provide that the IRS has discretion, if a potential material advisor requests a ruling as to whether a transaction is a reportable transaction on or before the date that disclosure would be required, to determine that the submission satisfies the disclosure rules if the request fully discloses all relevant facts relating to the transaction that would otherwise be required to be disclosed. Reg §301.6111-3(h) .
Each material advisor for a “reportable transaction” (see ¶60,114.02 ) is required to file an information return with the IRS identifying and describing the transaction and the potential tax benefits that are expected to result from the transaction. Code Sec. 6111(a) ; Reg §301.6111-3 . A “material advisor” is a person who provides certain assistance or advice with regard to the transaction and receives more than certain threshold amounts of income. Code Sec. 6111(b)(1)(A) ; Reg §301.6111-3(b) .
Each material advisor with respect to any reportable transaction (including listed transactions, Conf Rept No. 108-755 ( PL 108-357, 10/22/2004 ), p. 597, see ¶61,111.0079 , must make a return (in the form prescribed by the IRS) setting forth:
• information identifying and describing the transaction;
• information describing any potential tax benefits expected to result from the transaction; and
• any other information that the IRS requests. Code Sec. 6111(a) ; Reg §301.6111-3(d) .
“Reportable transaction” has the same meaning as provided by Code Sec. 6707A(c) (generally, a transaction of a type that the IRS determines as having a potential for tax avoidance or evasion, see ¶67,07A4 ). Code Sec. 6111(b)(2) .
A reportable transaction is defined in Reg §1.6011-4(b)(1) (see ¶60,114.02 ). Reg §301.6112-1(c)(2) . In addition, the rules in Reg § 301.6112-1(b)(2), before amended by TD 9352, 7/31/2007 and Reg § 301.6112-1(c)(2), before amended by TD 9352, 7/31/2007 , see ¶61,124 (without regard to provisions relating to a transaction required to be registered under former Code Sec. 6111 as in effect before Oct. 23, 2004) apply in determining whether a transaction is a reportable transaction with respect to a material advisor. Determinations made by published guidance under Reg §1.6011-4(b)(8) (see ¶60,114.02 ) that a transaction is not considered a reportable transaction or is excluded from a category of reportable transactions, also apply. Notice 2004-80, Sec. A.2, 2004-2 CB 963 .
Who is a material advisor.
A material advisor is any person:
• who provides any material aid, assistance, or advice with respect to organizing, managing, promoting, selling, implementing, insuring, or carrying out any reportable transaction; and
• who directly or indirectly derives gross income in excess of a threshold amount (or such other amount prescribed by the IRS) for that assistance or advice. Code Sec. 6111(b)(1)(A) ; Reg §301.6111-3(b)(1) .
The threshold amount is:
• $50,000 for a reportable transaction substantially all of the tax benefits from which are provided to natural persons (looking through any partnerships, S corporations, or trusts), and
• $250,000 in any other case. Code Sec. 6111(b)(1)(B) ; Reg §301.6111-3(b)(3)(i) .
OBSERVATION: A person can exceed the gross income threshold amount through a combination of different services, for example, promoting and selling, or organizing, promoting and insuring, provided directly or indirectly.
Example 1. X, an individual, receives compensation for material legal services he provides in connection with the organization of a reportable transaction. He is also a partner in a partnership that materially participates in the promotion and sale of the transaction. X is a material advisor if the gross income he derives from the combination of (a) his legal services in connection with the transaction, and (b) his share of the partnership's gross income for promotion and sale of the transaction, exceeds the gross income threshold.
OBSERVATION: Apparently, the threshold gross income amount is applied on a transaction-by- transaction basis.
Example 2. Y gives material advice with respect to organizing two different reportable transactions substantially all of the benefits from which are provided to natural persons. Y receives gross income of $60,000 for the first transaction and $45,000 for the second. Y is a material advisor with respect to the first reportable transaction, but not with respect to the second.
OBSERVATION: The definition of material advisor also applies for purposes of the requirement under Code Sec. 6112 to maintain a list of persons for whom the advisor acted as a material advisor, see ¶61,124 .
Authority for additional disclosure by material advisors.
The IRS may issue regulations which provide:
• that only one person is required to satisfy the disclosure-by-information-return requirements of Code Sec. 6111(a) in cases where two or more persons would otherwise be required to satisfy the requirements;
• exemptions from the disclosure requirements; and
• rules as may be necessary or appropriate to carry out the purposes of the disclosure requirements, Code Sec. 6111(c) , including, for example, rules regarding the aggregation of fees in appropriate circumstances. Conf Rept No. 108-755 ( PL 108-357, 10/22/2004 ) p. 595, ¶61,111.0079 .

Transactions that are not “reportable transactions.”
The IRS has identified certain transactions that are not reportable transactions (see ¶60,114.02 ) under the disclosure rules.
• A transaction with contractual protection is a reportable transaction (see ¶60,114.02 ). Reg §1.6011-4(b)(4)(i) . Generally, this is a transaction involving a fee that is refundable if all or part of the intended tax consequences from the transaction are not sustained or a transaction involving a fee that is contingent on the taxpayer's realization of the tax benefits from the transaction. Reg §1.6011-4(b)(4)(i) ; Rev. Proc. 2004-65, Sec. 2.01, 2004-50 IRB . In determining whether a transaction has a contractual protection, transactions in which the refundable or contingent fee is related to the work opportunity credit, the pre-2007 welfare-to-work credit; and the Indian employment credit are not taken into account. Rev. Proc. 2004-65, Sec. 4.02, 2004-50 IRB 965 . A transaction does not have contractual protection solely because a party to the transaction has the right to terminate the transaction on the happening of an event affecting the taxation of one or more parties to the transaction. Reg §1.6011-4(b)(4)(iii)(A) .
• A loss transaction is a reportable transaction. Generally, a loss transaction is any transaction resulting in the taxpayer claiming a loss under Code Sec. 165 , see ¶1654 et seq., of at least:
(1) $10 million in any single tax year, or $20 million in any combination of tax years for corporations or partnerships that have only corporations as partners (looking through any partners that are themselves partnerships), whether or not any losses flow through to one or more partners; or $2 million in any single tax year, or $4 million in any combination of tax years for all other partnerships, whether or not any losses flow through to one or more partners;
(2) $2 million in any single tax year or $4 million in any combination of tax years for other partnerships, S corporations, individuals, or trusts; or
(3) $50,000 in any single tax year for individuals or trusts if the loss arises from a Code Sec. 988 , see ¶9884 et seq., transaction (relating to foreign currency transactions). Reg §1.6011-4(b)(5)(i) .
In determining whether a transaction is a loss transaction, loss on the sale of an asset with a “qualifying basis,” for example, basis equal to the amount paid in cash for the asset, and certain other losses, for example, casualty or theft losses, and involuntary conversions, are not taken into account: Rev. Proc. 2004-66, 2004-50 IRB 966 .
(1) In the case of transactions involving solely foreign tax credits, sales made in the ordinary course of the taxpayer's trade or business of property described in Code Sec. 1221(a)(1) , see ¶12,214.01 . However, this exception applies only to credits with respect to sales proceeds and not to the receipt of other income, such as interest received on bonds held in inventory.
(2) Transactions involving a brief asset holding period under the principles of Code Sec. 246(c)(4) , see ¶2434.04 , solely by reason of (i) a hedge that reduces only the risk of interest rate or currency fluctuations, or (ii) a guarantee issued by a person that is related to the taxpayer within the meaning of Code Sec. 267(b) , see ¶2674 et seq. or Code Sec. 707(b) , see ¶7074 et seq.
(3) Transactions involving a debt instrument that has a term of 45 days or less if the taxpayer's holding period in the debt instrument equals the debt instrument's entire term.
(4) Transactions resulting in a foreign tax credit for withholding taxes imposed in respect of non-dividend income or gain with respect to any property that are not disallowed under Code Sec. 901(l) , see ¶9014.08 . Rev. Proc. 2004-68, Sec. 4, 2004-50 IRB 969 .
For purposes of Code Sec. 6111 , disclosure is required for reportable transactions with respect to which a material advisor makes a tax statement (other than post-filing advice described in Reg § 301.6112-1(c)(2)(iv)(A), before amended by TD 9352, 7/31/2007 , see ¶61,124 ) after Oct. 22, 2004, regardless of whether any portion of the fee was received before Oct. 22, 2004, or whether the transaction was entered into before Oct. 22, 2004. Notice 2005-22, 2005-1 CB 756 modifying and clarifying Notice 2004-80, 2004-2 CB 963 .
Protective disclosures.
If a potential material advisor is uncertain whether a transaction must be disclosed, the advisor must disclose the transaction and indicate on the disclosure statement that the disclosure is being filed on a protective basis. IRS will not treat disclosure statements filed protectively differently from other disclosure statements filed under Code Sec. 6111 . For a protective disclosure to be effective, the advisor must comply with the regs under Reg §301.6111-3 and Reg §301.6112-1 by providing IRS with all requested information.
Rulings.
If a potential material advisor requests a ruling as to whether a specific transaction is a reportable transaction on or before the date that disclosure would otherwise be required under Code Sec. 6111 , the IRS in its discretion can determine that the submission satisfies the disclosure rules for that transaction if the request fully discloses all relevant facts relating to the transaction that would otherwise be required to be disclosed. The potential obligation of the person to disclose the transaction under Code Sec. 6111 (or to maintain or furnish the list under Reg §301.6112-1 ) won't be suspended while the ruling request is pending. Reg §301.6111-3(h) .
Prior law.
For disclosures required to be filed before Nov. 1, 2007, material advisors could have used either Form 8264, Application for Registration of a Tax Shelter, or Form 8918, to meet the disclosure requirement. Notice 2007-85, 2007-45 IRB 965 .
For transactions with respect to which a material advisor made a tax statement before Aug. 3, 2007, material advisors had to disclose reportable transactions on Form 8264 (see below) ( Notice 2007-85, 2007-45 IRB 965 ) and the regs discussed above generally did not apply.
For transactions entered into before Aug. 3, 2007, the rules in Notice 2004-80, 2004-2 CB 963 , Notice 2005-17, 2005-1 CB 606 , and Notice 2005-22, 2005-1 CB 756 , as in effect before Aug. 3, 2007, generally applied to the transactions described above. Reg §301.6111-3(i)(1) .
Form 8264, Application for Registration of a Tax Shelter, had to be filed instead of Form 8918. A material advisor required to file a return for a reportable transaction had to complete Form 8264 in the following way. A material advisor was required to complete only Parts I (except item 1(b)), IV, and V of Form 8264. In completing Form 8264, the form and instructions were to be read to apply, by substituting:
• “reportable transaction” each place “tax shelter” or “confidential corporate tax shelter” appeared;
• “material advisor” each place “organizer” or “principal organizer” appeared; and
• “Date the material advisor became a material advisor with respect to the reportable transaction” in place of “Date an interest in the tax shelter was first offered for sale” in Part I, line 7, of the form. Notice 2004-80, Sec. A(3), 2004-2 CB 963 . Form 8264 had to be signed under penalty of perjury and sent to IRS Service Center, Ogden, UT 84201.
In Part IV, fees had to be determined by applying the rules in Reg § 301.6112-1(c)(3)(iii), before amended by TD 9352, 7/31/2007 (see ¶61,124 ) instead of the instructions. In Part V, the material advisor had to identify the type of reportable transaction under Reg §1.6011-4(b) (see ¶60,114.02 ) that was being disclosed, and describe the facts of the transaction and the potential tax benefits expected to result from the transaction. Notice 2004-80, Sec. A.3, 2004-2 CB 963 .
A material advisor could file a single Form 8264 for substantially similar transactions. A material advisor was required to supplement information disclosed on Form 8264 if the information provided was no longer accurate, or if additional information that was not disclosed on Form 8264 became available. Notice 2004-80, Sec. A.3, 2004-2 CB 963 .
Once a material advisor had filed a Form 8264 with respect to a transaction, the material advisor was not required to file (1) an additional Form 8264 for each additional taxpayer that later entered into the same transaction or (2) a Form 8264 for a separate transaction that was the same as or substantially similar to the transaction for which the material advisor filed a Form 8264. A material advisor could not make modifications to Form 8264. Notice 2005-22, 2005-1 CB 756 clarifying and modifying Notice 2004-80, 2004-2 CB 963 .
If a person was required to disclose a reportable transaction, and the person registered the transaction under Code Sec. 6111 as in effect before Oct. 22, 2004, that registration met the disclosure requirements provided that the material advisor amended the previous registration to reflect any information required by Notice 2004-80. Notice 2004-80, Sec. A.4, 2004-2 CB 963 .
The return, which was an information return, Conf Rept No. 108-755 ( PL 108-357, 10/22/2004 ) p. 595, ¶61,111.0079 , had to be filed not later than the date specified by the IRS. Code Sec. 6111(a) . The return had to be filed by the last day of the month following the end of the calendar quarter in which a person became a material advisor. However, if a person became a material advisor after Oct. 22, 2004, and before Apr. 1, 2005, that material advisor had to file the return before May 1, 2005. Notice 2005-22, 2005-1 CB 756 modifying and clarifying Notice 2004-80, Sec. A.4, 2004-2 CB 963 .
Before Aug. 3, 2007, the rule on transactions with contractual protection ( Reg §1.6011-4(b)(4) ) didn't apply, but a similar rule applied under prior regs. Reg § 1.6011-4(b)(4), before removed by TD 9350, 7/31/2007 . Further, the following two types of transactions were reportable transactions:
• A transaction with a significant book-tax difference. This was a transaction where the amount for tax purposes of any item or items of income, gain, expense, or loss from the transaction differed by more than $10 million on a gross basis from the amount or amounts for book purposes in any tax year. Certain book-tax differences described in Rev. Proc. 2004-67, 2004-50 IRB 967 were not taken into account. Rev. Proc. 2004-67, 2004-50 IRB 967 ; Reg § 1.6011-4(b)(6), before removed by TD 9350, 7/31/2007 .
• A transaction involving a brief asset holding period, generally a transaction resulting in a taxpayer claiming a tax credit of more than $250,000 if the underlying asset was held by the taxpayer for less than 46 days. Reg § 1.6011-4(b)(7), before removed by TD 9350, 7/31/2007 . In determining whether a transaction was one involving a brief asset holding period, the following transactions were not taken into account:
(1) In the case of transactions involving solely foreign tax credits, sales made in the ordinary course of the taxpayer's trade or business of property described in Code Sec. 1221(a)(1) , see ¶12,214.01 . However, this exception applied only to credits with respect to sales proceeds and not to the receipt of other income, such as interest received on bonds held in inventory. Rev. Proc. 2004-68, Sec. 4, 2004-50 IRB 969 .
(2) Transactions involving a brief asset holding period under the principles of Code Sec. 246(c)(4) , see ¶2434.04 , solely by reason of (i) a hedge that reduced only the risk of interest rate or currency fluctuations, or (ii) a guarantee issued by a person that was related to the taxpayer within the meaning of Code Sec. 267(b) , see ¶2674 et seq. or Code Sec. 707(b) , see ¶7074 et seq. Rev. Proc. 2004-68, Sec. 4, 2004-50 IRB 969 .
(3) Transactions involving a debt instrument that had a term of 45 days or less if the taxpayer's holding period in the debt instrument equaled the debt instrument's entire term. Rev. Proc. 2004-68, Sec. 4, 2004-50 IRB 969 .
(4) Transactions resulting in a foreign tax credit for withholding taxes imposed in respect of non-dividend income or gain with respect to any property that were not disallowed under Code Sec. 901(l) , see ¶9014.08 . Rev. Proc. 2004-68, Sec. 4, 2004-50 IRB 969 .
For transactions of interest entered into before Nov. 2, 2006, for which a material advisor made a tax statement before Nov. 2, 2006, the regs discussed above did not apply. Reg §301.6111-3(i)(1) .
For ruling requests received before Nov. 1, 2006 ( Reg §301.6111-3(i)(1) ), Reg §301.6111-3(h) didn't apply, but a similar rule applied under temporary regs. Reg § 301.6111-3T(h), before removed by TD 9351, 7/31/2007 ; Reg § 301.6111-3T(i)(2), before removed by TD 9351, 7/31/2007 .
Before Feb. 24, 2005, Notice 2005-22 didn't apply. Notice 2005-22, 2005-1 CB 756 .
Before Nov. 16, 2004, the revenue procedures described above were not in effect. Rev. Proc. 2004-65, 2004-50 IRB 965 ; Rev. Proc. 2004-66, 2004-50 IRB 966 ; Rev. Proc. 2004-67, 2004-50 IRB 967 ; Rev. Proc. 2004-68, 2004-50 IRB 969 .
For transactions for which material aid, assistance, or advice was provided before Oct. 23, 2004, Sec. 815(c), PL 108-357, 10/22/2004 , the Code Sec. 6111 rules described above did not apply. Code Sec. 6111 before amend by Sec. 815(a), PL 108-357, 10/22/2004 .
For transactions with respect to which material aid, assistance, or advice was provided before Oct. 23, 2004, Notice 2004-80 was not in effect. Notice 2005-22, 2005-1 CB 756 modifying and clarifying Notice 2004-80, 2004-2 CB 963 .
For the registration rules that applied to transactions for which material aid, assistance, or advice was provided before Oct. 23, 2004, see ¶61,114.01 .
For transactions entered into before Jan. 1, 2003, the revenue procedures described above didn't apply. Rev. Proc. 2004-65, 2004-50 IRB 965 ; Rev. Proc. 2004-66, 2004-50 IRB 966 ; Rev. Proc. 2004-67, 2004-50 IRB 967 ; Rev. Proc. 2004-68, 2004-50 IRB 969 .

Tuesday, June 22, 2010

UNIONBANCAL CORP. v. U.S., Cite as 105 AFTR 2d 2010-XXXX, 06/09/2010

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UNIONBANCAL CORPORATION & SUBSIDIARIES, Plaintiff, v. THE UNITED STATES, Defendant.
Case Information:
Code Sec(s):
Court Name: In the United States Court of Federal Claims,
Docket No.: Case No. 06-587C,
Date Decided: 06/09/2010.
Disposition:

HEADNOTE
.

Reference(s):

OPINION
David F. Abbott, Mayer Brown, LLP, New York, NY, with whom was Andrew W. Steigleder, Mayer Brown, LLP, Chicago, IL, for Plaintiff.

Joseph A. Sergi, Senior Litigation Counsel, with whom were John A. DiCicco, Acting Assistant Attorney General, Steven I. Frahm, Chief, Court of Federal Claims Section, Adam R. Smart andCaroline A. Newman , Trial Attorneys, United States Department of Justice, Tax Division, Washington, DC, for Defendant.

In the United States Court of Federal Claims,

OPINION and ORDER
Judge: SMITH: Senior Judge

FOR PUBLICATION

Motion to Stay, Coast Fed. Bank v. United States, 49 Fed. Cl.11,15 (2001), Landis v. N. Am. Waterwork & Elec. Co., 299 U.S. 248, 254 (1936), CMAX, Inc. v. United States, 300 F.2d 265, 268 (9th Cir. 1962), Balancing Test

Before the Court is Defendant's Motion to Stay the Proceedings pending the outcome on appeal of Wells Fargo & Co. v. United States, 91 Fed. Cl. 35 [105 AFTR 2d 2010-377] (2010), appeal docketed, No. 2010-5108 (Fed. Cir. Apr. 16, 2010). Appellant's opening brief is presently due April 15, 2010. The appeal will present legal issues concerning the application of the substance-over-form and economic substance doctrines to sale-leaseback (SILO) transactions, which is a case of first impression for the Federal Circuit. Statistics from the Federal Circuit's website show that the median time from docketing to disposition, on the merits, is approximately ten months.See Federal Circuit Statistics, http://www.cafc.uscourts.gov/statistics.html (last visited June 4, 2010).

In reviewing whether to grant a motion to stay, “a court has broad discretion to stay proceedings before it.”Coast Fed. Bank v. United States , 49 Fed. Cl. 11, 15 (2001). The “power to stay proceedings is incidental to the power inherent in every court to control the disposition of the causes on its docket with economy of time and effort for itself, for counsel, and for litigants.” Landis v. N. Am. Waterwork & Elec. Co., 299 U.S. 248, 254 (1936). In making this determination, a court must exercise its judgment by considering the most orderly course of justice and the interests of the parties, weighing any competing interests.Id. at 255. The orderly course of justice and judicial economy is served when granting a stay simplifies the “issues, proof, and questions of law which could be expected to result from a stay.” CMAX, Inc. v. United States, 300 F.2d 265, 268 (9th Cir. 1962).

Here, like the stay requested in Landis, is a request to stay further proceedings pending the resolution of an appeal in a separate case that addresses a similar issue.See Landis , 299 U.S. at 250–51. Defendant contends that the facts and legal issues found in the appeal ofWells Fargo are similar to the facts and legal issues found in the present case. Defendant asserts that the Federal Circuit's opinion in Wells Fargo will, at the very least, provide important guidance for the resolution of the legal standard to be applied in this case, and may even avoid the need for further litigation. Holding a trial prior to such guidance would be a waste of judicial and economic resources.

Plaintiff disagrees and opposes the Motion to Stay. Instead, Plaintiff argues that the Federal Circuit's decision inWells Fargo will have little, if any, effect on the present case, and will not preclude the need for a trial in this matter. While Plaintiff agrees that some legal questions may be answered by the Federal Circuit, Plaintiff argues that it is uncertain as to when a decision will be forthcoming and that this eventual decision will not preclude a trial in this matter. Moreover, with the passage of time people's minds dull as to facts, and witnesses could become unavailable. In light of this, Plaintiff argues that the balance tips in its favor — that the prejudice to the Plaintiff outweighs the economic and judicial economy that might be saved.

In this case, the Plaintiff's ultimate issue is whether the lease-leaseback transactions (LILO) possess economic substance, and whether under the economic substance-over form analysis, Plaintiff acquired the benefits and burdens of ownership with respect to the property at issue. Turning to the Wells Fargo case, it appears that the issue presented in that case is similar to the issue here as almost the exact language is used in Wells Fargo's docketing statement at the Federal Circuit. The difference is that, in Wells Fargo, that case involved SILO transactions rather than the LILO transactions, which are at issue in this case. These transactions, although termed differently, present common issues. The issues involve the standards under which both the economic substance and substance-over-form doctrines should be applied to both SILO and LILO transactions. The Federal Circuit will describe those legal standards in the context of the SILO transactions in Wells Fargo. This Court will then assess, in light of that guidance, the extent to which the standards apply to the LILO transactions engaged in by the Plaintiff.

It is true that the Court does not know when the Federal Circuit will decide the Wells Fargo case; however, it only makes sense to obtain the guidance from the Federal Circuit's legal rulings and their application to a similar fact pattern and transactional structure before commencing with a lengthy, expensive trial. The Federal Circuit's decision will most likely help clarify and simplify evidence to be presented at trial and will conserve judicial resources. On average, the numbers show that the Wells Fargo case should be decided shortly after oral argument. Hence, the present case should be ready to proceed to trial in less than a year from now. Although the Court is sympathetic to Plaintiff's concern of dulling memories and the general harm that the passage of time has on a case, the Court holds that the shortness of this stay will allow for the efficient conservation of resources, which outweighs any potential prejudice to the Plaintiff. In addition, the Court would be willing to consider any limited actions by the parties, during this interim, that would preserve memories or other resources useful for a possible or probable future trial that would not be unduly expensive or burdensome.

For the above reasons, the Court hereby GRANTS Defendant's Motion to Stay and the case is hereby STAYED until the disposition of the Wells Fargo case by the Federal Circuit. The parties are DIRECTED to file a status report every ninety days from the date of this Order regarding the status of the Wells Fargo appeal.

It is so ORDERED.

LOREN A. SMITH,

SENIOR JUDGE

© 2010 Thomson Reuters/RIA. All rights reserved.

Monday, June 21, 2010

Vance L. Wadleigh v. Commissioner, 134 T.C. No. 14, Code Sec(s) 6321; 6322; 6330; 6331.

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VANCE L. WADLEIGH, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent .
Case Information: Code Sec(s): 6321; 6322; 6330; 6331
Docket: Docket No. 10783-07L.
Date Issued: 06/15/2010
Judge: Opinion by MARVEL


HEADNOTE
XX.

Reference(s): Code Sec. 6321 ; Code Sec. 6322 ; Code Sec. 6330 ; Code Sec. 6331

Syllabus
Official Tax Court Syllabus
R issued a notice of intent to levy on P's pension income to collect P's unpaid Federal income tax for 2001. P timely requested a hearing under sec. 6330, I.R.C. At the hearing P argued: (1) His liability for the unpaid 2001 Federal income tax was discharged in his 2005 bankruptcy;

(2) the notice of intent to levy was invalid because his pension was not yet in payout status; and (3) a prior notice of levy for a similar amount of unpaid tax was issued and later released. R's Office of Appeals determined that the proposed levy could proceed. P contends the Appeals Office abused its discretion.

Held : The sec. 6321, I.R.C., lien that attached to P's interest in his pension was not discharged by his 2005 bankruptcy because his interest in his pension was excluded from his bankruptcy estate pursuant to 11 U.S.C. sec. 541 (2006).

Held, further, although P's discharge in bankruptcy relieved him of personal liability for the unpaid 2001 Federal income tax, the discharge does not prevent R from collecting P's unpaid 2001 Federal income tax in rem by levy on P's pension income, notwithstanding R's failure to file a valid notice of Federal tax lien with respect to the 2001 Federal income tax liability.

Held , further, although R may not enforce a levy on P's interest in his pension until the pension enters payout status, R's notice of intent to levy is not invalid merely because it was mailed to P 9 months before P's pension entered payout status.

Held , further, R's release of a prior levy does not release the sec. 6321, I.R.C., lien that R held with respect to P's interest in his pension.

Held , further, R's Office of Appeals verified that the requirements of any applicable law and administrative procedure had been satisfied and considered all of P's arguments. However, because the Appeals Office assumed that P's wage income would continue after P started receiving his pension without any support in the administrative record for the assumption, we shall exercise our discretion to remand this case to the Appeals Office for further proceedings.

Counsel
John A. Strain, for petitioner.
Spencer T. Stowe, for respondent.

Opinion by MARVEL

OPINION
Pursuant to section 6330(d), 1 petitioner seeks review of respondent's determination to sustain a proposed levy on petitioner's interest in his pension. The levy relates to petitioner's unpaid 2001 Federal income tax liability. The issue for decision is whether respondent abused his discretion when he sustained the proposed levy. To resolve this issue, we must first decide whether a section 6321 lien that was not perfected by the filing of a valid notice of Federal tax lien (NFTL) may be enforced by a levy on petitioner's pension income after petitioner's personal liability for the unpaid tax has been discharged in bankruptcy.

Background
The parties submitted this case fully stipulated pursuant to Rule 122. The stipulation of facts is incorporated by this reference. On the date he filed his petition, petitioner resided in California.

On June 28, 2002, respondent recorded an NFTL purportedly relating to petitioner's 2001 tax liability. When the NFTL was recorded, petitioner had not yet filed his 2001 Federal income tax return. In fact, respondent intended to issue the NFTL with respect to petitioner's 2000 Federal income tax liability but identified the wrong year (2001) on the NFTL and recorded it in error. 2 Respondent has since withdrawn the NFTL. The record contains no evidence that respondent recorded any other NFTL with respect to petitioner's 2001 tax liability.

On or about August 16, 2002, petitioner filed a 2001 Form 1040, U.S. Individual Income Tax Return. Petitioner reported a balance due on the return but did not pay the balance when he filed the return. On September 16, 2002, respondent assessed the tax shown on the return, an addition to tax for failure to pay timely, an addition to tax for failure to pay estimated tax, and interest. Petitioner has not paid the resulting liability (collectively, the 2001 tax liability).

On August 18, 2005, petitioner and his wife, Linda Wadleigh, filed a voluntary chapter 7 bankruptcy petition in the U.S. Bankruptcy Court for the Central District of California. On Schedule B, Personal Property, of the bankruptcy petition, petitioner listed his interest in his Honeywell Pension Plan account (pension). However, on Schedule C, Property Claimed as Exempt (schedule C), of the bankruptcy petition, petitioner claimed the pension was exempt property. Petitioner included the following statement on schedule C:

The interest in the Honeywell Pension Plan is claimed as exempt to the extent, if any, that said Pension Plan is property of the estate, and the claims of exemption include any increases in the value of Debtors' interests therein. Debtors contend that their interest in the Honeywell Plan are [sic] excluded from the bankruptcy estate under 11 U.S.C. § 541(c)(2); Patterson v. Shumate, 504 U.S. 753 (1992). As reflected on schedule C, petitioner claimed his interest in the pension was excluded from the bankruptcy estate pursuant to 11 U.S.C. sec. 541(c)(2) (2006), which provides: “A restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable nonbankruptcy law is enforceable in a [bankruptcy] case”, as interpreted in Patterson v. Shumate, 504 U.S. 753, 758-759 (1992). 3 Alternatively, petitioner claimed the pension was exempt property under 11 U.S.C. sec. 522(b)(2) (2006) and Cal. Civ. Proc. Code sec. 703.140(b)(10)(E) (West 2009), 4 if and to

Pursuant to 11 U.S.C. sec. 522(b)(2), California has opted out of the exemption scheme provided in the Bankruptcy Code. Cal. Civ. Proc. Code sec. 703.130 (West 2009). However, California has enacted an exemption scheme that mirrors 11 U.S.C. sec. 522(d)(10)(E) with respect to pension and profit-sharing plans. See Cal. Civ. Proc. Code sec. 703.140(b)(10)(E) (West 2009), which provides:

The following exemptions may be elected as provided in subdivision (a):
***
(10) The debtor's right to receive any of the following: ***

(E) A payment under a stock bonus, pension, profit-sharing, annuity, or similar plan or contract on account of illness, disability, death, age, or length of service, to the extent reasonably necessary for the support of the debtor and any dependent of the debtor, unless all of the following apply:

(i) That plan or contract was established by or under the auspices of an insider that employed the debtor at the time the debtor's rights under the plan or contract arose. (continued...) the extent the pension was properly includable in the bankruptcy estate.

When petitioner filed for bankruptcy, he was fully vested in his pension, but the pension was not yet in payout status and did not contain a lump-sum or similar option that would have permitted petitioner to withdraw funds from the pension before reaching retirement age. Petitioner's right to receive monthly payments of $1,242.13 under the pension matured on November 1, 2007.

On December 8, 2005, petitioner received a discharge in the bankruptcy case. Petitioner's 2001 Federal income tax liability was included in the discharge.

On August 31, 2006, respondent mailed petitioner a notice of intent to levy on petitioner's pension income to collect petitioner's unpaid 2000 Federal income tax liability. On November 16, 2006, however, respondent withdrew the notice of intent to levy.

On January 29, 2007, more than 9 months before petitioner's pension entered payout status, respondent mailed petitioner a Final Notice—Notice of Intent to Levy and Notice of Your Right to a Hearing (notice of intent to levy) with respect to petitioner's 2001 tax liability. The notice of intent to levy stated in pertinent part as follows:

You have received a discharge under Chapter 7 of the Bankruptcy Code. Thus, you are relieved from personal liability for the following tax liabilities:

Amount Including
Period Penalties and Interest
Kind of Tax
1040-Income 12/31/2001 $57,805.33 (As of
08-30-2007)
However, at least one Notice of Federal Tax Lien for the above tax liabilities was properly filed before your bankruptcy. Despite your relief from personal liability, the federal tax liens remain attached to your prepetition property, and the IRS is permitted to take collection action, based on these federal tax liens, against your prepetition property at any time within the period permitted by law for collection of the tax. Also, the Service can pursue administrative collection from property excluded from the Bankruptcy estate based solely on its statutory lien. This letter is your notice of our intent to levy against prepetition property under Internal Revenue Code (IRC) section 6331 and your right to receive Appeals consideration under IRC section 6330. Prepetition property is property that you held prior to your bankruptcy filing that was not sold or liquidated by the Chapter 7 trustee for the payment of your debts. Prepetition property includes three types of property:
(1) property you exempted from the bankruptcy estate under section 522 of the Bankruptcy Code; (2) property abandoned by the bankruptcy trustee under section 554 of the Bankruptcy Code; and (3) property excluded from the bankruptcy estate under applicable law, as opposed to property you exempted from the bankruptcy estate. An example of excluded property is an interest in a section 401(k) plan or other employer-sponsored plan that meets the requirements of the Employee Retirement Income Security Act of 1974 (ERISA). *** Although the notice of intent to levy does not expressly identify the pension, the parties have stipulated that the pension is the prepetition property on which respondent plans to enforce his levy. Neither party disputes that the pension is to be paid pursuant to a qualified plan under the Employee Retirement Income Security Act of 1974 (ERISA), Pub. L. 93-406, 88 Stat. 829, or that the plan is subject to the antialienation provision of ERISA sec. 206(d)(1), 88 Stat. 864 (current version at 29 U.S.C. sec. 1056(d)(1) (2006)).

On or about February 12, 2007, petitioner timely filed a Form 12153, Request for a Collection Due Process Hearing, objecting to the proposed levy. Petitioner did not challenge the existence or amount of the 2001 tax liability. Instead, petitioner raised five contentions relating to the appropriateness of respondent's proposed collection action: (1) Respondent had issued a levy notice for a similar amount on August 31, 2006, and released the levy on November 16, 2006; (2) the notice of intent to levy referenced the same retirement payments addressed in the November 16, 2006, release and was inconsistent as to the tax year and amount due; 5 (3) petitioner had not received an analysis regarding what property, if any, secured respondent's claim on petitioner's discharged taxes; (4) because petitioner's pension was not property to which petitioner was entitled at the time of the bankruptcy filing, the pension was not property to which respondent's lien could attach; and (5) petitioner's liability for the unpaid 2001 Federal income tax was discharged in bankruptcy on December 8, 2005.

Adlai Climan (Mr. Climan), a settlement officer in the Internal Revenue Service (IRS) Office of Appeals, was assigned to handle petitioner's section 6330 hearing. During a conversation with Mr. Climan that was part of the hearing process, petitioner argued that respondent could not levy on petitioner's pension income because his 2001 tax liability was discharged in bankruptcy and respondent had released a similar levy on petitioner's interest in his pension. 6 Petitioner did not propose any collection alternatives, such as an offer-in- compromise or an installment agreement, or provide any financial information, such as a Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals. 7

After his conversation with petitioner, Mr. Climan reviewed Form 4340, Certificate of Assessments, Payments, and Other Specified Matters, for petitioner's 2001 taxable year, reviewed financial information contained in petitioner's 2003-2005 Federal income tax returns, and consulted the applicable national and local standards. From this information Mr. Climan calculated petitioner's ability to pay the 2001 tax liability. In making his calculations Mr. Climan assumed that petitioner would continue to work for the same compensation he had earned in 2005. Mr. Climan calculated petitioner's monthly income by dividing the wage income reported on petitioner's 2005 return by 12. From his calculations Mr. Climan determined: (1) "[Petitioner] has more than sufficient income to live on [and] attachment of the pension income will not create a financial hardship”; (2) the proposed levy was necessary for payment of the subject liability; and (3) the proposed levy would balance the Government's need to collect the tax with petitioner's legitimate concern that any collection action be no more intrusive than necessary. Accordingly, Mr. Climan determined that the proposed levy should be sustained.

On April 10, 2007, the Office of Appeals issued a Notice of Determination Concerning Collection Action(s) Under Section 6320 and/or 6330 (notice of determination) sustaining the proposed levy. The notice of determination was accompanied by an “Appeals Case Memo” (memorandum) in which the Appeals Office briefly explained its decision. With respect to the filing of an NFTL, the memorandum stated as follows:

Notices of Federal Tax Lien were filed as follows:

Date recorded
2000: 5/25/05
2001: 7/18/02*
* A severe error has been committed by Collection
as regards this NFTL. This NFTL actually pertains
to the year 2000, but the employee filing the lien
* * * apparently entered the wrong year in the
computerized request. The assessment date on this
NFTL for 2001 shows as 11/26/2001. This is the
assessment date for the 1040-2000 (see above).
This NFTL for 2001 shows a recording date
(7/18/02) prior to the assessment date (9/16/02)
of the return for 2001. This NFTL is to be
withdrawn, or corrected to properly show the year
2001, as it was improperly filed. This, however,
is not the subject of this CDP hearing.
In the section of the memorandum devoted to specific issues, the Appeals Office provided the following explanation regarding its conclusion that respondent may pursue petitioner's pension: the government may not attach any of Wadleigh's future earnings or assets he has retained after the bankruptcy discharge for the years 2000 and 2001. The government, however, is not precluded from attaching (or levying) assets excluded from the bankruptcy, in this case, Wadleigh's pension plan. See 11 USC section 541; certain retirement savings accounts or pension plans may be excluded from the bankruptcy estate. This issue has been discussed in 2006 TNT 167-19, and IRM 5.9.2.9.1.1 in that it is not even required that a Notice of Federal Tax Lien be filed for the government to be allowed to proceed in this fashion (NFTLs were filed in Wadleigh's case). Thus, the government may proceed against Wadleigh's pension income for both of the years 2000 and 2001, and the issuance of the Letter 4066 regarding 2001 is appropriate. Petitioner timely filed a petition with this Court asking us to review the Appeals Office's determination.
Discussion
I. Section 6330

The Commissioner may not levy on a taxpayer's property or rights to property unless he has first notified the taxpayer in writing of his right to request a hearing under section 6330. Sec. 6330(a). If the taxpayer requests a hearing under section 6330(a) (hereinafter hearing), the hearing shall be conducted by an impartial officer or employee of the IRS Office of Appeals. Sec. 6330(b)(1), (3). At the hearing the taxpayer may raise any relevant issue relating to the Commissioner's proposed collection activity, including (1) appropriate spousal defenses, (2) challenges to the appropriateness of collection action, and (3) offers of collection alternatives. Sec. 6330(c)(2)(A); Sego v. Commissioner, 114 T.C. 604, 609 (2000); Goza v. Commissioner, 114 T.C. 176, 180 (2000). The taxpayer may challenge the existence or amount of the underlying tax liability only if the taxpayer did not receive a notice of deficiency for such liability or did not otherwise have an opportunity to dispute the liability. Sec. 6330(c)(2)(B).

Following a hearing, the Appeals Office must issue a notice of determination regarding the validity of the proposed collection action. In making the determination the Appeals Office must take into consideration: (1) Verification presented by the Secretary that the requirements of applicable law and administrative procedure have been met; (2) relevant issues raised by the taxpayer; and (3) whether the proposed collection action appropriately balances the need for efficient collection of taxes with the taxpayer's legitimate concerns regarding the intrusiveness of the proposed collection action. Sec. 6330(c)(3).

II. Standard of Review We have jurisdiction to review a notice of determination. Sec. 6330(d)(1). If the validity of the underlying tax liability was properly at issue in the hearing, we review the determination Sego v. Commissioner, supra at 610; regarding liability de novo. Goza v. Commissioner, supra at 181-182. We review any other determination for abuse of discretion. Sego v. Commissioner, supra at 610; Goza v. Commissioner, supra at 182. A determination will not constitute an abuse of discretion unless it is arbitrary, capricious, or without sound basis in fact or See Swanson v. Commissioner, 121 T.C. 111, 119 (2003) (if law. Commissioner's determination based on erroneous legal interpretation, determination may be set aside as abuse of discretion); Woodral v. Commissioner, 112 T.C. 19, 23 (1999).

Petitioner did not challenge the existence or amount of his 2001 tax liability at his hearing or at trial. However, he does challenge the determination to proceed with collection. In challenging the determination petitioner has raised several issues that require us to decide the legal effect of the section 6321 statutory lien during and after a bankruptcy proceeding and related legal questions. When we are faced with a question of law, the standard of review has no impact on our analysis because under either standard an erroneous legal determination must be rejected. Kendricks v. Commissioner, 124 T.C. 69, 75 (2005); Swanson v. Commissioner, supra at 119. Even if we characterize the applicable standard of review as abuse of discretion, we do not uphold a discretionary determination that is infected by a Kendricks v. Commissioner, supra at 75; material error of law. Swanson v. Commissioner, supra at 119.

III. Scope of Review When reviewing a notice of determination for abuse of discretion under section 6330(d), we have held that in some circumstances we may consider evidence that was presented at trial but was not included in the administrative record. Robinette v. Commissioner, 123 T.C. 85, 101 (2004), revd. 439 F.3d 455, 460-462 [97 AFTR 2d 2006-1391] (8th Cir. 2006). Respondent invites us to overrule our Opinion in Robinette and limit our review to the administrative record. We decline respondent's invitation to overrule our holding in Robinette because the scope of review does not materially affect the outcome at this time, given our conclusion to remand this case for further proceedings.

IV. Bankruptcy, the Section 6321 Lien, and the Section 6331 Levy Before turning to our review of respondent's notice of determination, we must first examine the scope of the section 6321 lien, the effect of a discharge in bankruptcy on an otherwise valid section 6321 lien where the Commissioner fails to file a valid NFTL, and the Commissioner's ability to levy pursuant to section 6331 on property that is subject to a section 6321 lien, in order to determine whether respondent may levy on petitioner's interest in his pension.

A. Section 6321 If any person liable to pay any tax neglects or refuses to pay the tax upon notice and demand, the amount of the tax (together with any costs, penalties, and interest) shall be a lien in favor of the United States on all property and rights to property belonging to the taxpayer. Sec. 6321; sec. 301.6321-1, Proced. & Admin. Regs. A person's liability to pay a tax is established by assessment, which is the formal recording of a liability in the records of the Commissioner. Secs. 6201, 6203. The notice and demand requirement in section 6321 refers to the action required by section 6303, which provides that the Commissioner, as soon as practicable and within 60 days of assessment, must provide written notice, stating the amount of the liability and demanding payment thereof, to each person liable for the unpaid tax.

When a taxpayer fails to pay an assessed tax liability after receiving a notice and demand for payment, the section 6321 lien arises by operation of law and continues until the liability is satisfied or becomes unenforceable by lapse of time. 8 Sec. 6322. The section 6321 lien attaches to all property and rights to property belonging to the taxpayer, including property acquired by the taxpayer after the lien arises. Sec. 6321; Glass City Bank v. United States, 326 U.S. 265, 268-269 [34 AFTR 1] (1945). An unqualified right to receive property in the future is itself a property right to which the section 6321 lien attaches. See United States v. Natl. Bank of Commerce, 472 U.S. 713, 725 [56 AFTR 2d 85-5210] (1985); Connor v. United States, 27 F.3d 365, 366 [74 AFTR 2d 94-5005] (9th Cir. 1994). However, the section 6321 lien is not valid against a purchaser, holder of a security interest, mechanic's lienor, or judgment lien creditor until an NFTL has been filed. Sec. 6323(a).

Petitioner filed a 2001 Federal income tax return on August 16, 2002, that showed a Federal income tax liability and a balance due. Respondent assessed the liability and issued a timely notice and demand for payment on September 16, 2002. By reason of the above, a section 6321 lien attached to all of petitioner's property, including his pension income, notwithstanding that the pension had not yet entered payout status. See sec. 6321. However, respondent never filed a valid NFTL with respect to petitioner's 2001 Federal income tax liability. Respondent concedes the 2001 NFTL was recorded in error and withdrawn, and we infer from the record that respondent did not subsequently file a valid NFTL with respect to the 2001 tax liability. We find, therefore, that respondent has only a section 6321 lien with respect to petitioner's 2001 tax liability.

B. The Effect of Bankruptcy on a Section 6321 Lien The purpose of bankruptcy is to give the debtor a fresh start by discharging many of the debtor's liabilities. Carlson v. Commissioner, 116 T.C. 87, 101 (2001). When a bankruptcy court enters a discharge order in a bankruptcy proceeding, the debtor is discharged from personal liability for all dischargeable debts. 11 U.S.C. sec. 524(a) (2006). However, liens and other secured interests generally survive bankruptcy. Farrey v. Sanderfoot, 500 U.S. 291, 297 (1991). Thus, a discharge in bankruptcy will not necessarily prevent the postdischarge enforcement of a valid prepetition lien on any prepetition property of the debtor that survived the bankruptcy. Isom v. United States, 901 F.2d 744, 745 [67 AFTR 2d 91-314] (9th Cir. 1990). "[A] bankruptcy discharge extinguishes only one mode of enforcing a claim—namely, an action against the debtor in personam—while leaving intact another—namely, an action against the debtor in rem.” Johnson v. Home State Bank, 501 U.S. 78, 84 (1991); Iannone v. Commissioner, 122 T.C. 287, 292-293 (2004). We must examine whether petitioner's pension interest was prepetition property that survived the bankruptcy and whether the section 6321 lien that was not perfected by the filing of a valid NFTL is a valid prepetition lien that survived the bankruptcy.

The filing of a petition in bankruptcy automatically creates a bankruptcy estate consisting of “all legal or equitable interests of the debtor in property as of the commencement of the case.” 11 U.S.C. sec. 541(a)(1) (2006). The bankruptcy estate includes all of the debtor's prepetition property and rights to property except property excluded from the estate under 11 U.S.C. sec. 541 (2006). Title 11 U.S.C. sec. 541(c)(2), as interpreted in Patterson v. Shumate, 504 U.S. at 760, 9 permits a debtor to exclude an interest in an ERISA-qualified pension plan from his bankruptcy estate. 10

Title 11 U.S.C. sec. 522 allows a debtor to exempt from his bankruptcy estate a personal residence, a car, certain property used in a trade or business, retirement funds, and certain other assets, to ensure that the debtor has at least some property with Carlson v. Commissioner, supra at which to make a fresh start. 102. Exempt property initially is part of the debtor's bankruptcy estate, see Taylor v. Freeland & Kronz, 503 U.S. 638, 642 (1992), but is removed from the bankruptcy estate (and is therefore unavailable to satisfy creditors' claims) for the benefit of the debtor as a result of the debtor's exemption, Pasquina v. Cunningham, 513 F.3d 318, 323 (1st Cir. 2008). Property that is exempt from the bankruptcy estate pursuant to 11 U.S.C. sec. 522 is not available to satisfy prepetition debts during or after the bankruptcy, except debts secured by liens 10 (...continued) (1998). We note, however, that several courts have held that an ERISA-qualified pension plan that is listed as exempt property on schedule C of the debtor's bankruptcy petition is excluded from a debtor's bankruptcy estate, notwithstanding the debtor's listing of the pension as exempt property. See, e.g., Ostrander v. Lalchandani, 279 Bankr. 880, 886 (Bankr. 1st Cir. 2002); United States v. Rogers, 558 F. Supp. 2d 774, 787 [101 AFTR 2d 2008-2309] (N.D. Ohio 2008); In re Wilson, 206 Bankr. 808, 809 (Bankr. W.D.N.C. 1996); Rich v. United States, 197 Bankr. 692, 695 (Bankr. N.D. Okla. 1996) (”if Debtor's *** [retirement plan] is ERISA qualified, it is excluded from the bankruptcy estate.”), affd. per order (N.D. Okla., Jan. 9, 1998); In re Hanes, 162 Bankr. 733, 741 (Bankr. E.D. Va. 1994). We also note that there is no formal procedure within the bankruptcy process to clarify what property is excluded. At least one court has commented on the confusion that results from this lack of clarity. See In re Stevens, 177 Bankr. 619, 620 n.2 (Bankr. E.D. Ark. 1995). that are not avoided in the bankruptcy and section 6321 liens with respect to which an NFTL has been filed. 11 U.S.C. sec. 522(c).

Unlike exempt property, which is part of a debtor's bankruptcy estate but is unavailable to satisfy creditors' claims, excluded property never becomes part of the bankruptcy estate and is therefore never subject to the bankruptcy trustee's or the debtor's power to avoid the section 6321 lien. See U.S. IRS v. Snyder, 343 F.3d 1171, 1178-1179 [92 AFTR 2d 2003-6090] (9th Cir. 2003); Traina v. Sewell, 180 F.3d 707, 710 (5th Cir. 1999). Thus, if a section 6321 lien on excluded property has not expired or become unenforceable under section 6322, it survives the bankruptcy. 11

Petitioner was granted a discharge in bankruptcy on December 8, 2005. The discharge included petitioner's 2001 tax liability. On schedule C of his bankruptcy petition, petitioner contended that his pension was excluded from the bankruptcy estate pursuant to 11 U.S.C. sec. 541(c)(2) and Patterson v. Shumate, 504 U.S. 753 (1992). Alternatively petitioner claimed that his pension was exempt property, but only if and to the extent that his pension was includable in the bankruptcy estate. On the basis of the record before us and our review of 11 U.S.C. sec. 541, we 11

The Commissioner has taken the position that “A Notice of Federal Tax Lien need not be on file to pursue collection against assets excluded from the bankruptcy estate.” Internal Revenue Manual (IRM) pt. 5.9.2.9.1.1(2) (Mar. 1, 2007). conclude that petitioner's pension was properly excludable from his bankruptcy estate under 11 U.S.C. sec. 541(c)(2) and Patterson v. Shumate, supra at 765, and that petitioner excluded the pension from his bankruptcy estate. As a result, the section 6321 lien that attached to the pension before bankruptcy continued to attach to petitioner's interest in his pension even after petitioner's personal liability for his 2001 tax liability was discharged in bankruptcy.

C. Section 6331 Section 6331(a) provides:

SEC. 6331(a). Authority of Secretary.—If any person liable to pay any tax neglects or refuses to pay the same within 10 days after notice and demand, it shall be lawful for the Secretary to collect such tax *** by levy upon all property and rights to property (except such property as is exempt under section 6334) belonging to such person or on which there is a lien *** [12] The notice and demand requirement in section 6331(a) is satisfied if the Commissioner issues a written notice of unpaid tax liability and demand for payment and the notice is given to the taxpayer in person, left at the taxpayer's dwelling or usual place of business, or sent via certified or registered mail to the taxpayer's last known address. Sec. 6331(d).

Once the Commissioner has assessed a Federal tax liability and given the requisite notice, he may collect the unpaid tax by levy on “all property and rights to property” belonging to the taxpayer. See sec. 6331(a). However, the Commissioner must stand in the taxpayer's shoes; he acquires through levy only those property rights that the taxpayer himself possesses. United States v. Novak, 476 F.3d 1041, 1062 [99 AFTR 2d 2007-1385] (9th Cir. 2007). Thus, if the Commissioner levies on a taxpayer's pension, he will receive property from the levy only if the pension is already in payout status or the taxpayer has the right to demand a lump-sum distribution of his pension interest. Id.; see also U.S. IRS v. Snyder, supra at 1175 (IRS cannot, outside bankruptcy, enforce its lien on debtor's interest in ERISA-qualified plan until plan enters payout status).

V. Review of Appeals Office's Determination

A. Compliance With Law and Administrative Procedure Section 6330(c)(1) requires the hearing officer to obtain verification from the Secretary that the requirements of applicable law and administrative procedure have been met. The record shows that Mr. Climan verified the following: (1) Petitioner had an unpaid Federal income tax liability for 2001;

(2) respondent properly assessed petitioner's 2001 tax liability as required by section 6203; (3) respondent timely mailed petitioner a notice and demand for payment as required by section 6303; (4) petitioner neglected or refused to pay his 2001 liability; and (5) respondent mailed petitioner a notice of intent to levy and a notice of his right to request a hearing as required by sections 6330 and 6331(d). Mr. Climan correctly concluded that petitioner's 2001 tax liability had been discharged in bankruptcy and that respondent was barred from attaching any of petitioner's future earnings or postpetition assets to satisfy the 2001 liability. However, Mr. Climan also determined that respondent was not precluded from levying on any prepetition property that was excluded from petitioner's bankruptcy estate (in this case, petitioner's pension).

Petitioner contends that respondent failed to follow applicable law and administrative procedure. Specifically, petitioner argues that respondent failed to follow the step-by- step instructions provided in the Internal Revenue Manual before levying on money accumulated in a pension or retirement plan. See 1 Administration, Internal Revenue Manual (IRM) (CCH), pt. 5.11.6.2, at 16,798-16,801 (Mar. 15, 2005). A review of relevant IRM provisions is instructive in ascertaining the procedures the IRS expects its employees to follow in deciding whether to levy on a taxpayer's interest in a pension plan or other retirement account. 13

The IRM “serves as the single, official source of IRS `instructions to staff' relating to the administration and operation of the Service.” IRM pt. 1.11.2.1.1(1) (Apr. 1, 2007). 14 It “provides a central repository of uniform guidelines on operating policies and procedures for use by all IRS offices.”

Several provisions of the IRM address the Commissioner's Id. ability to levy on retirement income and retirement accounts. 1

Administration, IRM (CCH), pt. 5.11.6.1(1), at 16,797 (June 29, 2001), which applies to levies on retirement income, directs IRS employees to “Use discretion before levying retirement income” but provides no specific guidance regarding how that discretion is to be exercised. In contrast, IRM pt. 5.11.6.2, which covers “money accumulated in a pension or retirement plan, as well as Individual Retirement Arrangements (IRAs)” and specifically does not cover “levying retirement income”, directs IRS employees to levy on assets accumulated in pension or retirement accounts only Id. pt. 5.11.6.2(4)-(12), after following detailed procedures. at 16,799-16,801 (Mar. 15, 2005). 15 14 (...continued) out IRS responsibilities to administer tax law and other legal provisions. The business rules, operating guidelines and procedures and delegations guide managers and employees in carrying out day to day responsibilities. [Emphasis added.]

The record establishes that Mr. Climan exercised discretion as directed by IRM pt. 5.11.6.1(1). Although Mr. Climan did not follow the detailed procedures set forth in IRM pt. 5.11.6.2(4)-(12), he was not required to do so. The procedures set forth in IRM pt. 5.11.6. 2 apply only to situations in which the Commissioner seeks to levy on money accumulated in pension or retirement accounts; they do not apply to a proposed levy on payments from a pension plan that constitute retirement income to the recipient. The proposed levy is directed to petitioner's retirement income. We therefore conclude that the Appeals Office obtained verification that the requirements of all applicable law and administrative procedure had been met in accordance with section 6330(c)(1) and that it considered that verification in making its determination as required by section 6330(c)(3).

B. Consideration of Petitioner's Arguments

Petitioner raised five contentions in his Form 12153, which we can condense into three core arguments: (1) Respondent's proposed levy was invalid because a previous levy on petitioner's pension was released; (2) petitioner's 2001 Federal income tax liability was discharged in petitioner's 2005 bankruptcy; and (3) the proposed levy was invalid because it was made before petitioner's pension entered payout status. All three arguments are unavailing.

1. A Release of Levy Does Not Release the Underlying Lien on Petitioner's Pension.

Petitioner's first argument confuses the lien that arises under section 6321 with respondent's ability to levy pursuant to section 6331. The lien on petitioner's pension arose when petitioner's 2001 Federal income tax liability was assessed and petitioner failed to pay the liability upon notice and demand. See sec. 6321. The lien was not released when petitioner's 2001 tax liability was discharged in bankruptcy because the pension was excluded from the bankruptcy estate, see supra pp. 22-23, nor was the lien released by respondent's withdrawal of any prior levy notices. See sec. 6322.

2. Petitioner's Discharge in Bankruptcy Did Not Prevent Respondent From Levying on Petitioner's Prepetition Assets That Remained Subject to Respondent's Section 6321 Lien.

Petitioner's second argument fails because, as discussed above, a discharge in bankruptcy shields a debtor from personal liability with respect to discharged debts but does not prevent the Commissioner from proceeding in rem against any prepetition assets of the debtor that survived the bankruptcy and remain See supra pp. 19-23. In subject to a valid section 6321 lien. the case of exempt property, the section 6321 lien survives the bankruptcy where, pursuant to section 6323(a), the Commissioner filed an NFTL before the bankruptcy; in the case of excluded property, the lien survives the bankruptcy whether or not the See supra pp. 21-23. Because Commissioner filed an NFTL. petitioner's pension was excluded from his bankruptcy estate, the section 6321 lien remains attached to the pension, notwithstanding respondent's failure to properly record an NFTL. Accordingly, respondent may collect petitioner's unpaid 2001 tax liability in rem by levying on petitioner's pension income, even though petitioner's personal liability for the unpaid 2001 Federal income tax was discharged in bankruptcy.

3. Respondent's Notice of Levy Was Valid We reject petitioner's final argument because respondent did not levy prematurely. In fact, respondent has not yet levied on petitioner's pension income; the only thing respondent has done is to issue a notice of intent to levy pursuant to section 6330. Petitioner's argument confuses the notice of intent to levy under section 6330 with the levy itself. Petitioner is correct that respondent could not have withdrawn funds from petitioner's pension until it entered payout status on November 1, 2007. But we are unaware of any authority holding that a notice of intent to levy on pension income that is mailed to a taxpayer pursuant to section 6330 before the pension has entered payout status is improper, let alone invalid, and we can discern no restriction in section 6330 that prevents the Commissioner from issuing a notice of intent to levy once the Commissioner has identified an appropriate levy source, even if the notice of intent to levy is issued before the date when the actual levy may commence to reach payments from the plan (in this case, the date when petitioner's pension enters payout status).

C. Balancing the Need for Efficient Collection of Taxes With the Taxpayer's Concern That Collection Be No More Intrusive Than Necessary Section 6330(c)(3)(C) requires a hearing officer to balance the Commissioner's obligation to collect a validly assessed but unpaid tax liability against a taxpayer's legitimate concern that the collection action may be too intrusive. We review for abuse of discretion the hearing officer's determination regarding the appropriate balance.

As discussed above, the IRM states that a hearing officer must exercise discretion in determining whether to levy on a taxpayer's retirement income but does not tell the hearing officer how to exercise that discretion. 1 Administration, IRM (CCH), pt. 5.11.6.1(1), at 16,797 (June 29, 2001). Mr. Climan chose to exercise his discretion by examining whether a levy on petitioner's retirement income would cause economic hardship. Our problem with that determination arises from the method Mr. Climan used to analyze whether economic hardship would result from the levy.

Mr. Climan calculated petitioner's income as if petitioner would continue to have income from wages after he started to receive his pension. Specifically, Mr. Climan took petitioner's reported income (including wage income) from petitioner's 2005 Federal income tax return and divided the figure by 12 to arrive at an average monthly income figure. He then calculated petitioner's allowable expenses by extracting information from petitioner's 2003-2005 Federal income tax returns and consulting the applicable national and local standards. He then calculated petitioner's net monthly income by subtracting petitioner's average allowable monthly expenses from petitioner's average monthly income.

The problem that is readily apparent from this methodology is that Mr. Climan assumed petitioner would continue to work after he started to receive his pension income in November 2007. Mr. Climan did not assume in making his income calculations that petitioner would retire, and there is nothing in the administrative record to explain why he made that assumption. The administrative record contains no indication that petitioner would continue to work for compensation after November 2007. Without that information in the administrative record or, at a minimum, without some evidence in the administrative record that the information was requested and not provided, we simply cannot evaluate whether the Appeals Office abused its discretion.

Petitioner suggests on brief that his $1,242 monthly pension payment has become a “lifeline” and that he will face economic hardship if he is denied this income stream. We are unwilling to dismiss petitioner's concern without some information in the administrative record to confirm that the hearing officer asked petitioner (1) whether he would continue to work for compensation after he started to receive his pension and (2) to submit financial information to show his financial situation as of November 2007 when he became entitled to his pension income.

We may under certain circumstances remand a case to the Commissioner's Appeals Office while retaining jurisdiction. See Lunsford v. Commissioner, 117 T.C. 183, 189 (2001). The resulting section 6330 hearing on remand provides the parties with an opportunity to complete the initial section 6330 hearing while preserving the taxpayer's right to receive judicial review of the ultimate administrative determination. Drake v. Commissioner, T.C. Memo. 2006-151 [TC Memo 2006-151], affd. 511 F.3d 65 [100 AFTR 2d 2007-7113] (1st Cir. 2007). Because the administrative record is insufficient to enable us to properly evaluate whether the Appeals Office abused its discretion in determining that a levy on petitioner's pension income could proceed, we shall remand this case to enable the parties to clarify and supplement the administrative record as appropriate. 16

VI. Conclusion We have considered the parties' remaining arguments and, to the extent not discussed above, conclude those arguments are irrelevant, moot, or without merit. For the reasons identified above, we will remand this case to the Appeals Office for further proceedings consistent with this Opinion.

To reflect the foregoing,

An appropriate order will be issued. 16

Respondent reserved objections to pars. 33 and 34 of the stipulation of facts, which relate to changes in petitioner's health that have occurred since the Appeals Office issued the notice of determination. On remand respondent should consider information offered by petitioner regarding his financial condition, including any information regarding his medical condition and costs that bear on his financial condition. We shall reserve ruling on respondent's objections until the Appeals Office's review on remand is completed and a supplemental notice of determination is issued.


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1

Unless otherwise indicated, all section references are to the Internal Revenue Code, and all Rule references are to the Tax Court Rules of Practice and Procedure.
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2

Petitioner's 2000 Federal income tax liability is not at issue.
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3

In Patterson v. Shumate, 504 U.S. 753, 758-759 (1992), the Supreme Court held that a debtor's interest in a pension plan which is subject to the antialienation provision of the Employee Retirement Income Security Act of 1974 (ERISA), Pub. L. 93-406, sec. 206(d)(1), 88 Stat. 864 (current version at 29 U.S.C. sec. 1056(d)(1) (2006)), is a beneficial interest in trust that is subject to a restriction on transfer enforceable under applicable nonbankruptcy law, and therefore a debtor may exclude his interest in the ERISA-qualified pension plan from his bankruptcy estate under 11 U.S.C. sec. 541(a)(1) and (c)(2) (2006). For purposes of this Opinion and consistent with the Supreme Court's opinion in Patterson v. Shumate, supra, the phrase “ERISA- qualified pension plan” means a qualified plan that contains the antialienation clause required for qualification under ERISA sec. 206(d)(1), 29 U.S.C. sec. 1056(d)(1). See In re Baker, 114 F.3d 636, 638 (7th Cir. 1997).
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4

Both State and Federal law limit the amount a debtor may exempt. In addition, States may opt out of the Federal exemption scheme, thereby limiting debtors who file for bankruptcy in those States to the exemptions provided under relevant State law. 11 U.S.C. sec. 522(b)(2); Greene v. Savage, 583 F.3d 614, 618 (9th Cir. 2009).
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5

Page 1 of the notice of intent to levy states that the amount due, including additions to tax and interest, was $57,805.33 as of Aug. 30, 2007, and page 3 states that the total amount owed as of May 29, 2006, was $71,016.86. Petitioner asserts the notice is inconsistent with transcripts respondent mailed to him in December 2006.
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6

The record does not disclose when the conversation occurred, nor does it indicate whether the conversation was by telephone or in person.
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7

Petitioner maintains he was never asked to provide financial information. Respondent counters that petitioner was asked for such information. Regardless, the parties do not dispute that petitioner did not submit financial information during the sec. 6330 hearing.
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8

The sec. 6321 lien is sometimes called a “secret lien” because it arises by operation of law without any public filing requirement. Hult v. Commissioner, T.C. Memo. 2007-302 [TC Memo 2007-302].
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9

In Patterson v. Shumate, 504 U.S. at 762, the Supreme Court held that “a debtor may exclude his interest in an ERISA- qualified pension plan from the bankruptcy estate”. The bankruptcy trustee in Patterson argued that the Court's holding rendered 11 U.S.C. sec. 522(d)(10)(E) superfluous, but the Court rejected the argument, observing that 11 U.S.C. sec. 522(d)(10)(E) “exempts from the bankruptcy estate a much broader category of interests than *** [11 U.S.C. sec.] 541(c)(2) excludes.”
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10

We have located only one opinion by a Court of Appeals that has addressed the issue of whether the exclusion of an ERISA-qualified pension interest from a bankruptcy estate is mandatory or permissive. In Rains v. Flinn, 428 F.3d 893, 905- 906 (9th Cir. 2005), the Court of Appeals for the Ninth Circuit held that the exclusion of such a pension from a debtor's bankruptcy estate was permissive rather than mandatory. If exclusion is permissive, then it is logical to assume that the debtor must decide in a bankruptcy proceeding whether the debtor will exclude or exempt an ERISA-qualified pension interest. Excluding or exempting such an interest may have substantially different consequences, particularly with respect to unpaid Federal tax liabilities. See, e.g., Madigan, “Using Unfiled Dischargeable Tax Liens to Attach to ERISA-Qualified Pension Plan Interests After Patterson v. Shumate”, 14 Bankr. Dev. J. 461, 465
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13

Although this Court has held that procedures set forth in the IRM “do not have the force or effect of law” and a failure to adhere to IRM procedures does not rise to the level of a constitutional violation, see, e.g., Vallone v. Commissioner, 88 T.C. 794, 807-808 (1987) (checks obtained in violation of IRM not a constitutional violation requiring suppression); Riland v. Commissioner, 79 T.C. 185 (1982) (failure to abide by IRM procedures not a violation of due process), and that the IRM does not create enforceable rights for taxpayers, see Fargo v. Commissioner, 447 F.3d 706, 713 [97 AFTR 2d 2006-2381] (9th Cir. 2006), affg. T.C. Memo. 2004-13 [TC Memo 2004-13], sec. 6330(c)(1) specifically requires that the Appeals officer at the sec. 6330 hearing shall obtain verification from the Secretary that the requirements of any applicable law or administrative procedure have been met. Moreover, sec. 6330(c)(3) provides that the determination by an Appeals officer under sec. 6330(c) shall take into consideration the verification presented under sec. 6330(c)(1). Because petitioner has questioned whether Mr. Climan followed applicable IRM procedures in making his determination, we examine the IRM procedures. However, because we conclude that the Appeals Office met the verification requirement of sec. 6330(c)(1), we need not and do not decide whether the procedures described in the IRM are administrative procedures that come within the verification requirement of sec. 6330(c)(1).
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14

Before its amendment in 2007, 1 Administration, IRM (CCH) pt. 1.11.2.1(2), at 5,027 (Oct. 10, 2003), stated in pertinent part as follows:

The IRM outlines business rules and administrative procedures and guidelines used by the agency to conduct business. It contains policy, direction and delegations of authority that are necessary to carry
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15

With respect to retirement accounts that are excluded from the bankruptcy estate, 1 Administration, IRM (CCH) pt. 5.11.6.2(12), at 16,801 (Mar. 15, 2005), states that the IRS may levy on such accounts to collect taxes discharged in bankruptcy if an NFTL was filed before the bankruptcy, and it instructs employees to consider levying on retirement accounts “if there is no other property that survived the bankruptcy.” However, IRM pt. 5.11.6.2(12) also contains the following note: “Where no Notice of Federal Tax Lien was filed before bankruptcy, it is not settled whether the IRS can levy to collect discharged taxes from excluded retirement accounts. Counsel should be consulted in such situations.”
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