Tuesday, May 31, 2011
For any new business, the IRS will normally want to determine if the operation is a "hobby" and not a buiness.
In order to make this determination, taxpayers should consider the following factors:
Does the time and effort put into the activity indicate an intention to make a profit?
Does the taxpayer depend on income from the activity?
If there are losses, are they due to circumstances beyond the taxpayer’s control or did they occur in the start-up phase of the business?
Has the taxpayer changed methods of operation to improve profitability?
Does the taxpayer or his/her advisors have the knowledge needed to carry on the activity as a successful business?
Has the taxpayer made a profit in similar activities in the past?
Does the activity make a profit in some years?
Can the taxpayer expect to make a profit in the future from the appreciation of assets used in the activity?
The IRS presumes that an activity is carried on for profit if it makes a profit during at least three of the last five tax years, including the current year — at least two of the last seven years for activities that consist primarily of breeding, showing, training or racing horses.
If an activity is not for profit, losses from that activity may not be used to offset other income. An activity produces a loss when related expenses exceed income. The limit on not-for-profit losses applies to individuals, partnerships, estates, trusts, and S corporations. It does not apply to corporations other than S corporations.
Deductions for hobby activities are claimed as itemized deductions on Schedule A (Form 1040). These deductions must be taken in the following order and only to the extent stated in each of three categories:
Deductions that a taxpayer may take for personal as well as business activities, such as home mortgage interest and taxes, may be taken in full.
Deductions that don’t result in an adjustment to basis, such as advertising, insurance premiums and wages, may be taken next, to the extent gross income for the activity is more than the deductions from the first category.
Business deductions that reduce the basis of property, such as depreciation and amortization, are taken last, but only to the extent gross income for the activity is more than the deductions taken in the first two categories.
CFC's Subpart F income was qualifying income for RIC parent
IRS has privately ruled that the Subpart F income of a regulated investment company's (RIC's) wholly owned subsidiary, which was a controlled foreign corporation (CFC), from its investments in commodity-related investments and short-term, high quality securities to be used to support its commodity derivatives, was qualifying income under Code Sec. 851(b)(2) , without regard to whether that income was distributed by the subsidiary to the RIC.
Background. Under Code Sec. 851(b)(2) , to be a RIC for a tax year, a corporation must meet an income test (qualifying income requirement) under which at least 90% of its gross income is derived from certain enumerated sources, including dividends, interest, payments with respect to securities loans, and gains from the sale or other disposition of stock or securities (as defined in §2(a)(36) of the Investment Company Act of 1940 (the 1940 Act, 15 U.S.C. 80a-1 et seq.) or foreign currencies, or other income (including but not limited to gains from options, futures or forward contracts) derived with respect to the RIC's business of investing in the stock, securities, or currencies.
For purposes of Code Sec. 851(b)(2) , amounts included in gross income under Code Sec. 951(a)(1)(A)(i) (relating to CFCs) are treated as dividends for the tax year to the extent that under Code Sec. 959(a)(1) , there is a distribution out of the earnings and profits of the tax year which are attributable to the amounts so included. ( Code Sec. 851(b) )
CFC. Under Code Sec. 957 , a CFC is defined as a foreign corporation with regard to which more than 50% of the total combined voting power of all classes of stock entitled to vote or the total value of the stock of the corporation is owned (directly, indirectly, or constructively) by U.S. shareholders. A U.S. shareholder for CFC purposes is defined as a U.S. person who owns (directly, indirectly, or constructively) 10% or more of the total combined voting power of all classes of stock entitled to vote of the foreign corporation. ( Code Sec. 951(b) )
Under Code Sec. 952 , Subpart F income includes foreign base company income, which in tern, under Code Sec. 954(a)(1) , includes foreign personal holding company income. Under Code Sec. 964(c)(1) , foreign personal holding company income includes (among other things): dividends, interest, royalties, rents and annuities; gains in excess of losses from transactions in commodities (including futures, forwards, and similar transactions but excluding certain hedging transaction and certain active business gains and losses), and, subject to certain exceptions, net income from notional principal contracts.
Facts. Fund intends to qualify each year as a regulated investment company (RIC). Fund, which is registered as an open-end management investment company under the 1940 Act, is a series of Trust, which is a State business trust under Subchapter M of the Code. Fund invests in Subsidiary, a wholly-owned subsidiary incorporated as a Type A Company under the laws of Country. Under Country's law, a Type A Company shareholder's liability is limited to the amount, if any, unpaid with respect to the shares acquired by the shareholder. Subsidiary will file an election on Form 8832, Entity Classification Election, to be taxed as a corporation for federal income tax purposes under Reg. § 301.7701-3 .
Fund represents that, although Subsidiary will not be registered as an investment company under the 1940 Act, it will comply with the requirements of §18(f) of the 1940 Act, Investment Company Act Release No. 10666, and related SEC guidance on asset coverage with respect to investments that would apply if the Subsidiary were registered.
Fund will invest a portion of its assets in Subsidiary, subject to the limitations set out in Code Sec. 851(b)(3) . Subsidiary invests in commodity-related investments. It also invests in short-term, high quality securities to be used to support its commodity derivative investments. Subsidiary will be wholly-owned by Fund, a U.S. person, and so is expected to be classified as a CFC. Fund will include its Subpart F income attributable to the Subsidiary under the rules applicable to CFCs under the Code.
PLR's conclusion. In the private letter ruling (PLR), IRS concluded that based on the facts represented, Subsidiary's Subpart F income attributable to the Fund was income derived with respect to Fund's business of investing in the Subsidiary stock. Accordingly, it was qualifying income under Code Sec. 851(b)(2) , without regard to whether that income was distributed by Subsidiary to the Fund.
References: For RICs, see FTC 2d/FIN ¶ E-6001 et seq.; United States Tax Reporter ¶ 8514 et seq.; TG ¶ 20525 et seq.
UIL No. 851.02-00
Regulated investment cos.—qualifying income.
Subpart F income of sub. attributable to funds is income derived with respect to funds' business of investing in sub. and therefore is qualifying income under Code Sec. 851(b)(2); .
Reference(s): Code Sec. 851;
Release Date: 5/20/2011
Index Number: 851.02-00
[Third Party Communication: [Redacted Text]
Date of Communication: Month DD, YYYY]
Person To Contact: [Redacted Text]
[Redacted Text], ID No.
Telephone Number: [Redacted Text]
Refer Reply To: [Redacted Text]
February 15, 2011
Type A Company =
Dear [Redacted Text]
This responds to your letter dated December 6, 2010, submitted by your authorized representative on behalf of Fund. Fund requests that the Internal Revenue Service rule that income derived from its investment in a wholly-owned subsidiary that is a controlled foreign corporation (“CFC”) constitutes qualifying income under § 851(b)(2) of the Internal Revenue Code of 1986, as amended (the “Code”).
Fund is registered as an open-end management investment company under the Investment Company Act of 1940, 15 U.S.C. 80a-1 et seq., as amended (the “1940 Act”). Fund is a series of Trust, which is a State business trust. Fund intends to qualify each year as a regulated investment company (“RIC”) under Subchapter M of the Code.
Fund invests in Subsidiary, a wholly-owned subsidiary incorporated as a Type A Company under the laws of Country. Under the laws of Country, a Type A Company provides limited liability for all holders of shares. A shareholder's liability is limited to the amount, if any, unpaid with respect to the shares acquired by the shareholder. Subsidiary will file an election on Form 8832, Entity Classification Election, to be taxed as a corporation for federal income tax purposes pursuant to § 301.7701-3 of the Procedure and Administration Regulations.
Fund represents that, although Subsidiary will not be registered as an investment company under the 1940 Act, Subsidiary will comply with the requirements of section 18(f) of the 1940 Act, Investment Company Act Release No. 10666, and related SEC guidance pertaining to asset coverage with respect to investments that would apply if the Subsidiary were registered under the 1940 Act.
Fund will invest a portion of its assets in Subsidiary, subject to the limitations set forth in § 851(b)(3) of the Code. The Subsidiary invests in commodity-related investments. The Subsidiary also invests in short-term, high quality securities to be used to support its commodity derivative investments. It is expected that all of the Subsidiary's income will be subpart F income as defined in § 952.
Subsidiary will be wholly-owned by Fund, and is thus expected to be classified as a CFC, as defined in § 957. Fund will include its “subpart F income” attributable to the Subsidiary under the rules applicable to CFCs under the Code.
Law and Analysis:
Section 851(b)(2) of the Code provides that a corporation shall not be considered a RIC for any taxable year unless it meets an income test (the “Qualifying Income Requirement”). Under this test, at least 90 percent of its gross income must be derived from certain enumerated sources. Section 851(b)(2) defines qualifying income, in relevant part, as -
dividends, interest, payments with respect to securities loans (as defined in section 512(a)(5)), and gains from the sale or other disposition of stock or securities (as defined in section 2(a)(36) of the 1940 Act) or foreign currencies, or other income (including but not limited to gains from options, futures or forward contracts) derived with respect to [the RIC's] business of investing in such stock, securities, or currencies...
Section 2(a)(36) of the 1940 Act defines the term “security” as -
any note, stock, treasury stock, security future, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security (including a certificate of deposit) or on any group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a “security”, or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.
In addition, § 851(b) of the Code provides that, for purposes of § 851(b)(2), there shall be treated as dividends amounts included in gross income under §§ 951(a)(1)(A)(i) or 1293(a) for the taxable year to the extent that, under §§ 959(a)(1) or 1293(c) (as the case may be), there is a distribution out of the earnings and profits of the taxable year which are attributable to the amounts so included.
Section 957 of the Code defines a controlled foreign corporation (“CFC”) as any foreign corporation in which more than 50 percent of (1) the total combined voting power of all classes of stock entitled to vote, or (2) the total value of the stock is owned by United States shareholders on any day during the corporation's taxable year. A United States shareholder is defined in § 951(b) as a United States person who owns 10 percent or more of the total voting power of a foreign corporation. Fund represents that it will own 100 percent of the voting power of the stock of Subsidiary. Fund is a United States person. Fund therefore represents that Subsidiary will qualify as a CFC under these provisions.
Section 951(a)(1) of the Code provides that, if a foreign corporation is a CFC for an uninterrupted period of 30 days or more during any taxable year, every person who is a United States shareholder of this corporation and who owns stock in this corporation on the last day of the taxable year in which the corporation is a CFC shall include in gross income the sum of the shareholder's pro rata share of the CFC's subpart F income for the taxable year.
Section 952 of the Code defines subpart F income to include foreign base company income determined under § 954. Under § 954(a)(1), foreign base company income includes foreign personal holding company income determined under § 954(c).
Under § 964(c)(1), foreign personal holding company income includes (among other things): dividends, interest, royalties, rents and annuities; gains in excess of losses from transactions in commodities (including futures, forwards, and similar transactions but excluding certain hedging transaction and certain active business gains and losses); and, subject to certain exceptions, net income from notional principal contracts.
Subsidiary's income from its investments in commodity-related investments and short-term, high quality securities to be used to support its commodity derivative investments may generate subpart F income. Fund therefore represents that it will include in income Subsidiary's subpart F income for the taxable year in accordance with § 951.
Based on the facts as represented, we rule that subpart F income of the Subsidiary attributable to the Fund is income derived with respect to Fund's business of investing in the stock of Subsidiary and thus constitutes qualifying income under § 851(b)(2), without regard to whether that income is distributed by Subsidiary to the Fund.
This ruling is directed only to the taxpayer who requested it, and is limited to the facts as represented by the taxpayer. Section 6110(k)(3) provides that this letter may not be used or cited as precedent.
In accordance with the Power of Attorney on file with this office, a copy of this letter is being sent to your authorized representative.
Branch Chief, Branch 1
Office of Associate Chief Counsel
(Financial Institutions & Products)
Saturday, May 28, 2011
Reg §301.7122-1. Compromises.
Caution: The Treasury has not yet amended Reg § 301.7122-1 to reflect changes made by P.L. 109-432
Effective: Effective July 18, 2002.
(a) WG&L Treatises In general.
(1) If the Secretary determines that there are grounds for compromise under this section, the Secretary may, at the Secretary's discretion, compromise any civil or criminal liability arising under the internal revenue laws prior to reference of a case involving such a liability to the Department of Justice for prosecution or defense.
(2) An agreement to compromise may relate to a civil or criminal liability for taxes, interest, or penalties. Unless the terms of the offer and acceptance expressly provide otherwise, acceptance of an offer to compromise a civil liability does not remit a criminal liability, nor does acceptance of an offer to compromise a criminal liability remit a civil liability.
(b) Grounds for compromise.
(1) Doubt as to liability. Doubt as to liability exists where there is a genuine dispute as to the existence or amount of the correct tax liability under the law. Doubt as to liability does not exist where the liability has been established by a final court decision or judgment concerning the existence or amount of the liability. See paragraph (f)(4) of this section for special rules applicable to rejection of offers in cases where the Internal Revenue Service (IRS) is unable to locate the taxpayer's return or return information to verify the liability.
(2) Doubt as to collectibility. Doubt as to collectibility exists in any case where the taxpayer's assets and income are less than the full amount of the liability.
(3) Promote effective tax administration.
(i) A compromise may be entered into to promote effective tax administration when the Secretary determines that, although collection in full could be achieved, collection of the full liability would cause the taxpayer economic hardship within the meaning of §301.6343-1.
(ii) If there are no grounds for compromise under paragraphs (b)(1), (2), or (3)(i) of this section, the IRS may compromise to promote effective tax administration where compelling public policy or equity considerations identified by the taxpayer provide a sufficient basis for compromising the liability. Compromise will be justified only where, due to exceptional circumstances, collection of the full liability would undermine public confidence that the tax laws are being administered in a fair and equitable manner. A taxpayer proposing compromise under this paragraph (b)(3)(ii) will be expected to demonstrate circumstances that justify compromise even though a similarly situated taxpayer may have paid his liability in full.
(iii) No compromise to promote effective tax administration may be entered into if compromise of the liability would undermine compliance by taxpayers with the tax laws.
(c) Special rules for evaluating offers to compromise.
(1) In general. Once a basis for compromise under paragraph (b) of this section has been identified, the decision to accept or reject an offer to compromise, as well as the terms and conditions agreed to, is left to the discretion of the Secretary. The determination whether to accept or reject an offer to compromise will be based upon consideration of all the facts and circumstances, including whether the circumstances of a particular case warrant acceptance of an amount that might not otherwise be acceptable under the Secretary's policies and procedures.
(2) Doubt as to collectibility.
(i) Allowable expenses. A determination of doubt as to collectibility will include a determination of ability to pay. In determining ability to pay, the Secretary will permit taxpayers to retain sufficient funds to pay basic living expenses. The determination of the amount of such basic living expenses will be founded upon an evaluation of the individual facts and circumstances presented by the taxpayer's case. To guide this determination, guidelines published by the Secretary on national and local living expense standards will be taken into account.
(ii) Nonliable spouses.
(A) In general. Where a taxpayer is offering to compromise a liability for which the taxpayer's spouse has no liability, the assets and income of the nonliable spouse will not be considered in determining the amount of an adequate offer. The assets and income of a nonliable spouse may be considered, however, to the extent property has been transferred by the taxpayer to the nonliable spouse under circumstances that would permit the IRS to effect collection of the taxpayer's liability from such property (e.g., property that was conveyed in fraud of creditors), property has been transferred by the taxpayer to the nonliable spouse for the purpose of removing the property from consideration by the IRS in evaluating the compromise, or as provided in paragraph (c)(2)(ii)(B) of this section. The IRS also may request information regarding the assets and income of the nonliable spouse for the purpose of verifying the amount of and responsibility for expenses claimed by the taxpayer.
(B) Exception. Where collection of the taxpayer's liability from the assets and income of the nonliable spouse is permitted by applicable state law (e.g., under state community property laws), the assets and income of the nonliable spouse will be considered in determining the amount of an adequate offer except to the extent that the taxpayer and the nonliable spouse demonstrate that collection of such assets and income would have a material and adverse impact on the standard of living of the taxpayer, the nonliable spouse, and their dependents.
(3) Compromises to promote effective tax administration.
(i) Factors supporting (but not conclusive of) a determination that collection would cause economic hardship within the meaning of paragraph (b)(3)(i) of this section include, but are not limited to—
(A) Taxpayer is incapable of earning a living because of a long term illness, medical condition, or disability, and it is reasonably foreseeable that taxpayer's financial resources will be exhausted providing for care and support during the course of the condition;
(B) Although taxpayer has certain monthly income, that income is exhausted each month in providing for the care of dependents with no other means of support; and
(C) Although taxpayer has certain assets, the taxpayer is unable to borrow against the equity in those assets and liquidation of those assets to pay outstanding tax liabilities would render the taxpayer unable to meet basic living expenses.
(ii) Factors supporting (but not conclusive of) a determination that compromise would undermine compliance within the meaning of paragraph (b)(3)(iii) of this section include, but are not limited to—
(A) Taxpayer has a history of noncompliance with the filing and payment requirements of the Internal Revenue Code;
(B) Taxpayer has taken deliberate actions to avoid the payment of taxes; and
(C) Taxpayer has encouraged others to refuse to comply with the tax laws.
(iii) The following examples illustrate the types of cases that may be compromised by the Secretary, at the Secretary's discretion, under the economic hardship provisions of paragraph (b)(3)(i) of this section:
Example (1). The taxpayer has assets sufficient to satisfy the tax liability. The taxpayer provides full time care and assistance to her dependent child, who has a serious long-term illness. It is expected that the taxpayer will need to use the equity in his assets to provide for adequate basic living expenses and medical care for his child. The taxpayer's overall compliance history does not weigh against compromise.
Example (2). The taxpayer is retired and his only income is from a pension. The taxpayer's only asset is a retirement account, and the funds in the account are sufficient to satisfy the liability. Liquidation of the retirement account would leave the taxpayer without an adequate means to provide for basic living expenses. The taxpayer's overall compliance history does not weigh against compromise.
Example (3). The taxpayer is disabled and lives on a fixed income that will not, after allowance of basic living expenses, permit full payment of his liability under an installment agreement. The taxpayer also owns a modest house that has been specially equipped to accommodate his disability. The taxpayer's equity in the house is sufficient to permit payment of the liability he owes. However, because of his disability and limited earning potential, the taxpayer is unable to obtain a mortgage or otherwise borrow against this equity. In addition, because the taxpayer's home has been specially equipped to accommodate his disability, forced sale of the taxpayer's residence would create severe adverse consequences for the taxpayer. The taxpayer's overall compliance history does not weigh against compromise.
(iv) The following examples illustrate the types of cases that may be compromised by the Secretary, at the Secretary's discretion, under the public policy and equity provisions of paragraph (b)(3)(ii) of this section:
Example (1). In October of 1986, the taxpayer developed a serious illness that resulted in almost continuous hospitalizations for a number of years. The taxpayer's medical condition was such that during this period the taxpayer was unable to manage any of his financial affairs. The taxpayer has not filed tax returns since that time. The taxpayer's health has now improved and he has promptly begun to attend to his tax affairs. He discovers that the IRS prepared a substitute for return for the 1986 tax year on the basis of information returns it had received and had assessed a tax deficiency. When the taxpayer discovered the liability, with penalties and interest, the tax bill is more than three times the original tax liability. The taxpayer's overall compliance history does not weigh against compromise.
Example (2). The taxpayer is a salaried sales manager at a department store who has been able to place $2,000 in a tax-deductible IRA account for each of the last two years. The taxpayer learns that he can earn a higher rate of interest on his IRA savings by moving those savings from a money management account to a certificate of deposit at a different financial institution. Prior to transferring his savings, the taxpayer submits an e-mail inquiry to the IRS at its Web Page, requesting information about the steps he must take to preserve the tax benefits he has enjoyed and to avoid penalties. The IRS responds in an answering e-mail that the taxpayer may withdraw his IRA savings from his neighborhood bank, but he must redeposit those savings in a new IRA account within 90 days. The taxpayer withdraws the funds and redeposits them in a new IRA account 63 days later. Upon audit, the taxpayer learns that he has been misinformed about the required rollover period and that he is liable for additional taxes, penalties and additions to tax for not having redeposited the amount within 60 days. Had it not been for the erroneous advice that is reflected in the taxpayer's retained copy of the IRS e-mail response to his inquiry, the taxpayer would have redeposited the amount within the required 60-day period. The taxpayer's overall compliance history does not weigh against compromise.
(d) Procedures for submission and consideration of offers.
(1) In general. An offer to compromise a tax liability pursuant to section 7122 must be submitted according to the procedures, and in the form and manner, prescribed by the Secretary. An offer to compromise a tax liability must be made in writing, must be signed by the taxpayer under penalty of perjury, and must contain all of the information prescribed or requested by the Secretary. However, taxpayers submitting offers to compromise liabilities solely on the basis of doubt as to liability will not be required to provide financial statements.
(2) When offers become pending and return of offers. An offer to compromise becomes pending when it is accepted for processing. The IRS may not accept for processing any offer to compromise a liability following reference of a case involving such liability to the Department of Justice for prosecution or defense. If an offer accepted for processing does not contain sufficient information to permit the IRS to evaluate whether the offer should be accepted, the IRS will request that the taxpayer provide the needed additional information. If the taxpayer does not submit the additional information that the IRS has requested within a reasonable time period after such a request, the IRS may return the offer to the taxpayer. The IRS may also return an offer to compromise a tax liability if it determines that the offer was submitted solely to delay collection or was otherwise nonprocessable. An offer returned following acceptance for processing is deemed pending only for the period between the date the offer is accepted for processing and the date the IRS returns the offer to the taxpayer. See paragraphs (f)(5)(ii) and (g)(4) of this section for rules regarding the effect of such returns of offers.
(3) Withdrawal. An offer to compromise a tax liability may be withdrawn by the taxpayer or the taxpayer's representative at any time prior to the IRS' acceptance of the offer to compromise. An offer will be considered withdrawn upon the IRS' receipt of written notification of the withdrawal of the offer either by personal delivery or certified mail, or upon issuance of a letter by the IRS confirming the taxpayer's intent to withdraw the offer.
(e) Acceptance of an offer to compromise a tax liability.
(1) An offer to compromise has not been accepted until the IRS issues a written notification of acceptance to the taxpayer or the taxpayer's representative.
(2) As additional consideration for the acceptance of an offer to compromise, the IRS may request that taxpayer enter into any collateral agreement or post any security which is deemed necessary for the protection of the interests of the United States.
(3) Offers may be accepted when they provide for payment of compromised amounts in one or more equal or unequal installments.
(4) If the final payment on an accepted offer to compromise is contingent upon the immediate and simultaneous release of a tax lien in whole or in part, such payment must be made in accordance with the forms, instructions, or procedures prescribed by the Secretary.
(5) Acceptance of an offer to compromise will conclusively settle the liability of the taxpayer specified in the offer. Compromise with one taxpayer does not extinguish the liability of, nor prevent the IRS from taking action to collect from, any person not named in the offer who is also liable for the tax to which the compromise relates. Neither the taxpayer nor the Government will, following acceptance of an offer to compromise, be permitted to reopen the case except in instances where—
(i) False information or documents are supplied in conjunction with the offer;
(ii) The ability to pay or the assets of the taxpayer are concealed; or
(iii) A mutual mistake of material fact sufficient to cause the offer agreement to be reformed or set aside is discovered.
(6) Opinion of Chief Counsel. Except as otherwise provided in this paragraph (e)(6), if an offer to compromise is accepted, there will be placed on file the opinion of the Chief Counsel for the IRS with respect to such compromise, along with the reasons therefor. However, no such opinion will be required with respect to the compromise of any civil case in which the unpaid amount of tax assessed (including any interest, additional amount, addition to the tax, or assessable penalty) is less than $50,000. Also placed on file will be a statement of—
(i) The amount of tax assessed;
(ii) The amount of interest, additional amount, addition to the tax, or assessable penalty, imposed by law on the person against whom the tax is assessed; and
(iii) The amount actually paid in accordance with the terms of the compromise.
(f) Rejection of an offer to compromise.
(1) An offer to compromise has not been rejected until the IRS issues a written notice to the taxpayer or his representative, advising of the rejection, the reason(s) for rejection, and the right to an appeal.
(2) The IRS may not notify a taxpayer or taxpayer's representative of the rejection of an offer to compromise until an independent administrative review of the proposed rejection is completed.
(3) No offer to compromise may be rejected solely on the basis of the amount of the offer without evaluating that offer under the provisions of this section and the Secretary's policies and procedures regarding the compromise of cases.
(4) Offers based upon doubt as to liability. Offers submitted on the basis of doubt as to liability cannot be rejected solely because the IRS is unable to locate the taxpayer's return or return information for verification of the liability.
(5) Appeal of rejection of an offer to compromise.
(i) In general. The taxpayer may administratively appeal a rejection of an offer to compromise to the IRS Office of Appeals (Appeals) if, within the 30-day period commencing the day after the date on the letter of rejection, the taxpayer requests such an administrative review in the manner provided by the Secretary.
(ii) Offer to compromise returned following a determination that the offer was nonprocessable, a failure by the taxpayer to provide requested information, or a determination that the offer was submitted for purposes of delay. Where a determination is made to return offer documents because the offer to compromise was nonprocessable, because the taxpayer failed to provide requested information, or because the IRS determined that the offer to compromise was submitted solely for purposes of delay under paragraph (d)(2) of this section, the return of the offer does not constitute a rejection of the offer for purposes of this provision and does not entitle the taxpayer to appeal the matter to Appeals under the provisions of this paragraph (f)(5). However, if the offer is returned because the taxpayer failed to provide requested financial information, the offer will not be returned until a managerial review of the proposed return is completed.
(g) Effect of offer to compromise on collection activity.
(1) In general. The IRS will not levy against the property or rights to property of a taxpayer who submits an offer to compromise, to collect the liability that is the subject of the offer, during the period the offer is pending, for 30 days immediately following the rejection of the offer, and for any period when a timely filed appeal from the rejection is being considered by Appeals.
(2) Revised offers submitted following rejection. If, following the rejection of an offer to compromise, the taxpayer makes a good faith revision of that offer and submits the revised offer within 30 days after the date of rejection, the IRS will not levy to collect from the taxpayer the liability that is the subject of the revised offer to compromise while that revised offer is pending.
(3) Jeopardy. The IRS may levy to collect the liability that is the subject of an offer to compromise during the period the IRS is evaluating whether that offer will be accepted if it determines that collection of the liability is in jeopardy.
(4) Offers to compromise determined by IRS to be nonprocessable or submitted solely for purposes of delay. If the IRS determines, under paragraph (d)(2) of this section, that a pending offer did not contain sufficient information to permit evaluation of whether the offer should be accepted, that the offer was submitted solely to delay collection, or that the offer was otherwise nonprocessable, then the IRS may levy to collect the liability that is the subject of that offer at any time after it returns the offer to the taxpayer.
(5) Offsets under section 6402. Notwithstanding the evaluation and processing of an offer to compromise, the IRS may, in accordance with section 6402, credit any overpayments made by the taxpayer against a liability that is the subject of an offer to compromise and may offset such overpayments against other liabilities owed by the taxpayer to the extent authorized by section 6402.
(6) Proceedings in court. Except as otherwise provided in this paragraph (g)(6), the IRS will not refer a case to the Department of Justice for the commencement of a proceeding in court, against a person named in a pending offer to compromise, if levy to collect the liability is prohibited by paragraph (g)(1) of this section. Without regard to whether a person is named in a pending offer to compromise, however, the IRS may authorize the Department of Justice to file a counterclaim or third-party complaint in a refund action or to join that person in any other proceeding in which liability for the tax that is the subject of the pending offer to compromise may be established or disputed, including a suit against the United States under 28 U.S.C. 2410. In addition, the United States may file a claim in any bankruptcy proceeding or insolvency action brought by or against such person.
(h) Deposits. Sums submitted with an offer to compromise a liability or during the pendency of an offer to compromise are considered deposits and will not be applied to the liability until the offer is accepted unless the taxpayer provides written authorization for application of the payments. If an offer to compromise is withdrawn, is determined to be nonprocessable, or is submitted solely for purposes of delay and returned to the taxpayer, any amount tendered with the offer, including all installments paid on the offer, will be refunded without interest. If an offer is rejected, any amount tendered with the offer, including all installments paid on the offer, will be refunded, without interest, after the conclusion of any review sought by the taxpayer with Appeals. Refund will not be required if the taxpayer has agreed in writing that amounts tendered pursuant to the offer may be applied to the liability for which the offer was submitted.
(i) Statute of limitations.
(1) Suspension of the statute of limitations on collection. The statute of limitations on collection will be suspended while levy is prohibited under paragraph (g)(1) of this section.
(2) Extension of the statute of limitations on assessment. For any offer to compromise, the IRS may require, where appropriate, the extension of the statute of limitations on assessment. However, in any case where waiver of the running of the statutory period of limitations on assessment is sought, the taxpayer must be notified of the right to refuse to extend the period of limitations or to limit the extension to particular issues or particular periods of time.
(j) Inspection with respect to accepted offers to compromise. For provisions relating to the inspection of returns and accepted offers to compromise, see section 6103(k)(1).
(k) Effective date. This section applies to offers to compromise pending on or submitted on or after July 18, 2002.
T.D. 9007, 7/18/2002 .
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Service Centers Shouldn't Abate Assessments of Compromised Tax Liability
Headnote:IRS advised that when IRS accepts an offer in compromise, service center shouldn't abate assessment of compromised tax and that statute of limitations will begin running from date tax liability was assessed.
Reference(s): IRC Sec(s). 7122 ; IRC Sec(s). 6502 ; IRC Sec(s). 6404
FULL TEXT:UILC: 6404.00-00, 7122.00-00
Release Date: 3/9/2001
Date: January 26, 2001
Refer Reply to: CC:PA:APJP:B3
INTERNAL REVENUE SERVICE SIGNIFICANT SERVICE CENTER ADVICE
MEMORANDUM FOR ASSOCIATE AREA COUNSEL,
AREA 5, SALT LAKE CITY
Associate Chief Counsel
Significant Service Center Advice
This Significant Service Center Advice responds to your request of October 16, 2000, for guidance on a question posed by the Ogden Service Center.
ISSUEIf the Internal Revenue Service accepts an offer in compromise, should a service center abate assessment of the compromised tax liability?
CONCLUSIONNo, the service center should not abate the assessment. Notwithstanding the offer in compromise, the statute of limitations on collection of the tax liability will run from the date the tax liability was assessed.
FACTSAccording to your memorandum, the local service center has sought guidance on offers in compromise and the statute of limitations for collection. Specifically, the service center is concerned with the following situation. A taxpayer receives a refund of an overpayment shown on the taxpayer's return. Later, the service center selects the return for audit and assesses additional amounts. After the service center makes the additional assessment, the taxpayer submits an offer in compromise, which is accepted. In response, the service center enters on the taxpayer's account a transaction code for an abatement of the additional liability, or a transaction code clearing the assessed debit. If the taxpayer fails to meet the conditions of the offer in compromise, the service center reassesses the additional amount if that amount was abated, or reverses the transaction code clearing the debit. In some cases, the amount placed back on the account after default is treated as a new assessment giving rise to a new statute of limitations for collection that runs from the new assessment date rather than the original assessment date.
DISCUSSIONUnder I.R.C. section 7122, the Service may compromise any civil case not referred to the Department of Justice for prosecution or defense. Grounds for compromise are doubt as to liability, doubt as to collectibility, and the promotion of effective tax administration. See Temp. Treas. Reg. section 301.7122-1T.
Whatever the ground for compromise, an offer in compromise is an agreement between a taxpayer and the Service that resolves the taxpayer's tax liability. Not until all the terms in the agreement have been fulfilled does the Service have authority to extinguish the taxpayer's tax liability. See Finen v. Commissioner, 41 T.C. 557, 560-61 (1964); Robbins Tire & Rubber Co. v. Commissioner, 52 T.C. 420, 435 (1969). When a taxpayer submits an offer in compromise, the taxpayer acknowledges that the taxpayer's liability does not end at the moment the Service accepts the offer in compromise; among the terms the taxpayer agrees to by submitting Form 656, “Offer in Compromise,” is condition (j), which provides:
Accordingly, pursuant to the plain language of the accepted offer in compromise, it is improper for a service center to treat a compromised tax liability as discharged until the Service has determined that all the terms of the offer have been fulfilled.I/we understand that I/we remain responsible for the full amount of the tax liability, unless and until the IRS accepts the offer in writing and I/we have met all the terms and conditions of the offer. The IRS will not remove the original amount of the tax liability from its records until I/we have met all the terms of the offer.
If the service center concludes that the terms of the offer have been met, should it abate the underlying tax liability? In answering this question, it is important to bear in mind that an abatement extinguishes an assessment, and is proper only if the assessment it eradicates is not. See Hopper v. Government of the Virgin Islands, 550 F.2d 844, 847 n.3 (3d Cir. 1977). Moreover, the term “abatement” should be used only to describe an action taken in accord with I.R.C. section 6404(a). Under section 6404(a), an abatement may be made only when an assessment is (1) excessive in amount; (2) untimely; or (3) erroneous or illegal. 1 An offer in compromise does not establish that an assessed tax liability is excessive in amount; it merely reflects that the parties have agreed to resolve that liability for less than its full amount, PROVIDED certain conditions specified in the offer are satisfied. An offer in compromise similarly is no statement about the timeliness of an assessment. Finally, an offer in compromise does not establish that the assessed tax liability was erroneous or illegally assessed, even if the offer is predicated on doubt as to liability; such doubt is not tantamount to actual error or illegality. Under no circumstances, therefore, should a service center abate an assessment in response to an offer in compromise.
In contrast to an abatement made as the result of a substantive reconsideration of a taxpayer's liability (an abatement that may not be reversed), or an abatement made as the result of inadvertent clerical error (such as an error in inputting data) (an abatement that can be reversed), an abatement made in response to an offer in compromise does not qualify as a valid abatement under I.R.C. section 6404. That illegality renders the abatement void ab initio. See Bugge v. United States, 99 F.3d 740, 745-46 (5th Cir. 1996). If a service center has abated an assessment in response to an offer in compromise and the taxpayer fails to meet the terms of the compromise agreement, the service center should reinstate the assessment as of the date the original assessment was made; the service center should not make a new assessment. See id. The applicable limitations period under I.R.C. section 6502 for collection will run from the original date of the assessment.
In the future, some other method of accounting for an accepted offer in compromise, and adjusting a taxpayer's account as the offer terms are met, should be used.
Please call if you have further questions.
By: Richard G. Goldman
Chief, Branch 3,
Administrative Provisions and
I.R.C. section 6404(a) states the general rule for abatements. Other subsections of I.R.C. section 6404 state rules for abatement in specific circumstances, such as where small tax balances are involved (I.R.C. section 6404(c)). We have no information that the offers in compromise that concern the service center present any basis for invoking these specialized abatement rules, so we confine our analysis to abatement under the general rule.
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Posted by www.irstaxattorney.com at 6:23 AM
U.S. v. STOREY, Cite as 107 AFTR 2d 2011-XXXX, 05/16/2011
UNITED STATES OF AMERICA, Plaintiff-Appellee, Beneficial Mortgage Corporation; State of Ohio, Department of Taxation; City of Toledo, Division of Taxation, Defendants-Appellees, v. Anyse J. Storey, Defendant-Appellant.
|Court Name:||UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT,|
|Docket No.:||No. 09-3848,|
ON BRIEF: Mark R. McBride, Toledo, Ohio, for Appellant. John Schumann, Thomas J. Clark, UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C., Washington, D.C., Suzana Kukovec-Krasnicki, KEITH D. WEINER & ASSOCIATES CO., LPA, Cleveland, Ohio, for Appellees.
UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT,
Appeal from the United States District Court for the Northern District of Ohio at Toledo. No. 07-00905—Jack Zouhary, District Judge.
Before: GRIFFIN and WHITE, Circuit Judges; MURPHY, District Judge. *
MURPHY, D. J., delivered the opinion of the court, in which GRIFFIN, J., joined. WHITE, J. (pp. 13–15) delivered a separate opinion concurring in part and dissenting in part.
Judge: STEPHEN J. MURPHY, III, District Judge.
RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit Rule 206
For ten years of a twelve-year period, Anyse Storey filed federal income tax returns that showed she owed taxes — but she failed to pay them. The United States brought an action to reduce to judgment Storey's tax liabilities for the ten years, and to foreclose on its tax liens placed on real property owned by Storey. Storey argued that her Chapter 7 bankruptcy petition discharged her tax liabilities for some of the years preceding the filing. The district court disagreed and entered judgment in favor of the United States, finding that Storey had willfully attempted to evade paying taxes for those years, preventing discharge of the obligations through her bankruptcy filing. Because the United States cannot carry its burden on the issue of willfulness, we REVERSE.
During all times relevant to the present appeal, Storey was a practicing physician residing in Maumee, Ohio. For ten years out of a twelve-year span, she filed federal income tax returns that showed she owed federal income taxes, but she did not pay any of the taxes due. Specifically, Storey filed tax returns showing taxable income in 1994, 1995, 1996, 1997, 2000, 2001, 2002, 2003, 2004 and 2005, but has never paid any federal income tax for those years.
On March 15, 2002, Storey filed a Chapter 7 bankruptcy petition in the Northern District of Ohio. Neither Storey nor the United States filed an adversary complaint seeking a determination regarding the dischargeability of her federal income tax liabilities. In July 2002, the bankruptcy court entered an order of discharge pursuant to 11 U.S.C. § 727, and the bankruptcy case was closed on September 10, 2004.
Two and a half years later, on March 28, 2007, the United States brought the present action seeking to reduce to judgment Storey's federal income tax liabilities for the years 1994 through 1997 and 2000 through 2005, and to foreclose on its tax liens on real property acquired by Storey in 1994, referred to herein as “the Morningdew Property.” The United States sued Storey and joined as defendants various other parties that might claim an interest in the Morningdew Property, a number of whom defaulted by not appearing in the action. Storey argued that her tax obligations for the years 1994, 1995, 1996, and 1997 were discharged in her bankruptcy proceedings.
The district judge held a telephonic status conference on November 5, 2007, at which all parties not in default were present. Following the conference, the district judge issued an order in which he ruled that Northern District of Ohio General Order No. 84 did not grant jurisdiction to the bankruptcy court on the dischargeability of debts in Storey's 2002 bankruptcy. The order also set a deadline of November 16, 2007 for Storey “to file a brief with respect to the applicability of the discharge exception under Section 523,” and directed the United States to respond by December 14, 2007, with no replies permitted. R. 26.
Storey filed a brief identifying four issues she believed to be relevant to the proceedings: 1) whether the district court had jurisdiction over the action as it pertains to the bankruptcy discharge and its effect on the United States' ability to obtain a personal judgment against Storey; 2) whether the income tax obligations owing at the time Storey filed her bankruptcy petition were discharged in the bankruptcy; 3) whether Storey had an obligation to file a complaint in the bankruptcy action to determine dischargeability of income tax obligations; and 4) whether the United States had violated the injunction in effect by virtue of the discharge in bankruptcy. Storey argued that her taxes for the years 1994 through 1997 were discharged by her 2002 bankruptcy under 11 U.S.C. § 507(a)(8) because she timely filed tax returns, the obligation was more than three years old, and the Internal Revenue Service had not issued a notice of assessment within 240 days immediately preceding the filing of the bankruptcy petition. In response, the United States argued that the dischargeability of Storey's tax debts is governed not by 11 U.S.C. § 507(a)(8), but rather by 11 U.S.C. § 523(a)(1)(C), which provides that a discharge under § 727 is not allowed for a tax liability with respect to which the debtor made a fraudulent return or willfully attempted in any manner to evade or defeat the tax. The United States argued, without elaboration, that its position in the litigation was that Storey's tax liabilities for those years were not dischargeable based upon her willful attempt to evade or defeat her taxes.
After the government filed its brief, Storey sought leave to supplement her previously filed memorandum in support of discharge and for an enlargement of time. She argued that the district court should be afforded an opportunity to hear all arguments regarding whether the tax liabilities were discharged or are now dischargeable and what the appropriate forum should be for determining these issues. The district court denied Storey's motion in a marginal entry order and set the case for a telephonic status conference.
Following the off-the-record status conference, the district court issued an order ruling on the four points raised by Storey in her memorandum. On the question of whether Storey's income tax obligations were discharged in her 2002 bankruptcy, the district court held that 11 U.S.C. § 523(a)(1)(C) exempts tax liabilities from bankruptcy discharge when a debtor “willfully attempts in any manner to evade or defeat such tax,” that Storey's pattern of failing to pay income tax over a number of years was evidence of a willful attempt to defeat the tax, and that the taxes therefore were not discharged in her bankruptcy proceeding. R. 35. The district court concluded that the case could proceed as to all tax years set forth in the complaint. On February 27, 2008, the district court entered a partial judgment in favor of the United States against Storey for unpaid federal tax liabilities for tax years 1994, 1995, 1996, 1997, 2000, 2001, 2002, 2003, 2004 and 2005 in the amount of $319,698.76.
Storey timely appealed the district court's final judgment.
Storey challenges the district court's conclusion that her federal income tax obligations for the years 1994 through 1997 were not discharged in her 2002 bankruptcy proceedings. We agree with her position and reverse. 1
We address first the proper standard of review. The district court ruled in a summary fashion, but did not specify the procedural mechanism it used to do so. The order is titled “Order,” and mentions no rule of procedure. There were no factual findings. The court simply stated that “Defendant's tax obligations were exempted under § 523(a)(1)(C) and were not discharged in her bankruptcy proceeding,” after concluding that Storey's “pattern of failing to pay income tax over a number of years is evidence of a willful attempt to defeat the tax.” R. 35. The parties agree that the district court's decision resembles that of an entry of summary judgment sua sponte. This is a fair characterization of the decision given that there was no trial or findings of fact. Moreover, the parties agree that the material facts are undisputed and that whether Storey's tax obligations were discharged is a legal question.
We agree that the proper way to view the district court's decision is as a sua sponte entry of summary judgment. Accordingly, we will review the district court's decision de novo. See Schreiber v. Moe, 596 F.3d 323, 329 (6th Cir. 2010). “Summary judgment is proper if the evidence, taken in the light most favorable to the nonmoving party, shows that there are no genuine issues of material fact and that the moving party is entitled to a judgment as a matter of law.”Id. (citation and internal quotation marks omitted). Summary judgment must be entered against “a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial.” Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986).
A debtor filing a petition for bankruptcy under Chapter 7 of the Bankruptcy Code generally is granted discharge from all debts (including tax debts) that arose before the filing of the petition. 11 U.S.C. § 727(b); see Stamper v. United States (In re Gardner), 360 F.3d 551, 557 [93 AFTR 2d 2004-1327] (6th Cir. 2004). Exceptions to the general rule do exist, however, and they are to be strictly construed in favor of the debtor.United States v. Hindenlang ( In reHindenlang) , 164 F.3d 1029, 1034 [83 AFTR 2d 99-509] (6th Cir. 1999). Relevant here:
- ((a)) a discharge under section 727 ... of this title does not discharge an individual debtor from any debt—
- ((1)) for a tax or customs duty—
(C) with respect to which the debtor made a fraudulent return or willfully attempted in any manner to evade or defeat such tax ....
- ((1)) for a tax or customs duty—
11 U.S.C. § 523(a)(1)(C). This exception “serves to limit the Bankruptcy Code's discharge of tax debts to the honest but unfortunate debtor.” Stamper, 360 F.3d at 557 (citing Grogan v. Garner, 498 U.S. 279, 286–87 [70 AFTR 2d 92-5639] (1991)). The government has the burden of demonstrating by a preponderance of the evidence that the debtor willfully attempted to evade the tax liability. Id.
The analysis under § 523(a)(1)(C) has two components: a conduct requirement and a mental state requirement.Id. at 558. To satisfy the conduct requirement, the government must demonstrate that the debtor avoided or evaded payment or collection of taxes through acts of omission, such as failure to file returns and failure to pay taxes, or through acts of commission, such as affirmative acts of evasion.Id. at 557. Nonpayment of tax alone is not sufficient to bar discharge of a tax obligation, but it is a relevant consideration in the overall analysis. Myers v. IRS (In re Myers), 216 B.R. 402, 405 [81 AFTR 2d 98-635] (6th Cir. BAP 1998), aff'd sub nom. Meyers v. IRS (In reMeyers) , 196 F.3d 622 [84 AFTR 2d 99-6997] (6th Cir. 1999); see also In re Birkenstock, 87 F.3d 947, 951 [78 AFTR 2d 96-5229] (7th Cir. 1996) (noting that “mere nonpayment, without more, evidences not dishonesty but the defining characteristic of all debtors — honest and dishonest, alike — insufficient resources to honor all of one's obligations” (citation, internal quotation marks, and alterations omitted)).
Here, non-payment of Storey's tax obligations is the only evidence relevant to the conduct requirement. Storey filed federal tax returns for the years in question, and there is no dispute that she did so timely and accurately. She simply failed to pay the taxes she owed. This is not enough by itself to render her tax debt nondischargeable. Unless her non-payment was “knowing and deliberate,” the tax obligations were discharged in her bankruptcy. See Stamper, 360 F.3d at 557 (noting that “a “knowing and deliberate” nonpayment provides the basis for determining that the tax debt is non-dischargeable”); but see Haas v. IRS (In reHaas), 48 F.3d 1153, 1158 [75 AFTR 2d 95-1585] (11th Cir. 1995) (holding that mere non-payment is not sufficient to satisfy the conduct element of § 523(a)(1)(C), and thereby the government's burden, without regard to debtor's mental state),overruled in part by Griffith v. United States ( In re Griffith), 206 F.3d 1389, 1396 [85 AFTR 2d 2000-1249] (11th Cir. 2000) (en banc); see also United States v. Fretz (In re Fretz), 244 F.3d 1323, 1328–29 [87 AFTR 2d 2001-1380] (11th Cir. 2001). 2 Accordingly, we turn now to the mental state requirement.
Non-dischargeability under 523(a)(1)(C) requires a “voluntary, conscious, and intentional evasion.”Stamper , 360 F.3d at 557. The government must prove that the debtor 1) had a duty to pay taxes, 2) knew she had a duty, and 3) voluntarily and intentionally violated that duty.Id. at 558. Storey concedes that she had a known duty to pay taxes, but argues that there is no evidence that she voluntarily and intentionally violated that duty. Thus, only the third element of the willfulness requirement is at issue here.
There is little evidence to support a finding that Storey voluntarily and intentionally violated her known duty to pay taxes. The only argument made to the district court on this issue was in response to the court's request for briefing, where the United States asserted: “[t]he United States maintains that Storey's tax liabilities are nondischargeable based upon her willful attempt to evade or defeat her taxes.” United States Resp. Br. 5 (R. 32). The United States alleged no facts to support its position, despite being yoked with the burden of proof on this issue. On appeal, the United States adds that Storey's purchase of the Morningdew Property in 1994 — the very year she stopped paying taxes — demonstrates a voluntary and intentional choice to evade her tax obligations. Not so. There is no indication that the property is more lavish than Storey's previous residence or that the home was an unnecessary expense, purchased as an alternative to paying future tax obligations. Nor is there any evidence that when Storey purchased the home, she was even aware she would later become unable to pay her taxes. If the purchase were made in the yearsafter Storey stopped paying taxes, there might be reason to suspect an intent to evade her tax obligations.See, e.g., United States v. Mitchell ( In reMitchell) , 633 F.3d 1319, 1328 [107 AFTR 2d 2011-979] (11th Cir. 2011). But the home was purchased at the beginning of (and perhaps before — we cannot be sure) Storey's financial difficulties. Without facts or evidence — materials the United States had the burden of producing — there is only speculation. “Mere speculation is insufficient to create a preponderance of the evidence.” United States v. Burke, 252 F. App'x 49, 54 (6th Cir. 2007).
We note also that there is no evidence that Storey lived lavishly during the years she did not pay her taxes, or that she chose to engage in recreational or philanthropic activities instead of paying her taxes. See, e.g., Mitchell, 633 F.3d at 1329 (“[W]illful intent is further shown by Mitchell's discretionary spending, which included purchasing vacation timeshares, purchasing stock, repaying a $30,000 personal loan, and donating approximately $81,000 to his church.”);Stamper, 360 F.3d at 560–61 (finding willfulness where debtor engaged in twenty golfing and vacation trips over span of nearly three years, expending substantial sums, instead of paying taxes); Volpe v. IRS (In re Volpe), 377 B.R. 579, 589 [100 AFTR 2d 2007-6852] (Bankr. N.D. Ohio 2007) (finding willfulness where debtor spent his money on vacations and private schooling for children instead of paying taxes, noting that “when the debtor used his disposable income for leisure activities, knowing that he had a significant tax liability, the debtor made a voluntary decision to spend the money on himself rather than to pay his taxes”; “[t]he debtor's decision to spend his money on vacations and private school tuition weighs in favor of a finding that he willfully evaded his tax liability”).
The United States relies heavily on the decision of the bankruptcy court denying Storey's request for a discharge of her student loan obligations. The published decision was not expressly considered by the district court. The bankruptcy court set forth the following facts as undisputed:
The Debtor, who is presently 50 years of age, is a licensed physician. The Debtor has practiced medicine for the past 15 years, and presently specializes in the field of urology. At some time in the not too distant future, the Debtor will become “board certified” in this specialty. At the present time, the Debtor practices solo, employing three part-time staff.
Storey v. Nat'l Enter. Sys. (In reStorey) , 312 B.R. 867, 870 (Bankr. N.D. Ohio 2004). The bankruptcy court further found that “the Debtor's present annual income is in the $50,000.00 range. In the past, however, the Debtor earned as high as $96,000.00 per year.”Id. at 873. It found that Storey had recently declined to take a job that paid $110,000 per year, and Storey stated that she could work longer hours if needed.Id. at 872–73. The court also noted that Storey's husband lived with her but did not contribute significantly to the household expenses, choosing instead to maintain a separate residence for his own family members, where the members resided rent-free. Id. at 874. The bankruptcy court found that Storey was capable of earning at least double her then--current salary, but simply chose not to.Id. Finding that Storey had options available that would permit her to pay her student loan obligations, and that her present inability to pay her obligations would later subside, the court concluded that she had failed to meet her burden of demonstrating an “undue hardship” by a preponderance of the evidence. Id.
We think it inappropriate to consider the bankruptcy court's decision here. The treatment of student loans in bankruptcy is distinctive, and differs significantly from the treatment of tax obligations. For one, there is a presumption that student loan debts are non-dischargeable and therefore the burden of establishing a discharge of student loans is on the debtor, by a preponderance of the evidence. Barrett v. Educ. Credit Mgmt. Corp. (In re Barrett), 487 F.3d 353, 358–59 (6th Cir. 2007). On the other hand, in the case of pre-petition tax debts, the presumption is that such debtsare dischargeable, and therefore the government bears the burden of establishing otherwise by a preponderance of the evidence. Stamper, 360 F.3d at 557. Additionally, in determining whether student loan debts are dischargeable, a court must determine whether repayment of the loans would cause undue hardship, which is forward-looking.See Tenn. Student Assistance Corp. v. Hornsby ( In re Hornsby), 144 F.3d 433, 437 (6th Cir. 1998) (discussing the widely-accepted three-part test for undue hardship). On the other hand, the question of whether the failure to pay taxes was willful looks backwards in time to the conduct and state of mind of the debtor at the time he or she failed to pay the taxes. Storey's failure to carry her burden to show an undue hardship in the student loan context cannot create a windfall to the United States by establishing willful evasion as a matter of law.
But even indulging the United States' request that we consider the facts contained in the bankruptcy court's decision does not change the result here. While it was undisputed that Storey's income was in the $50,000 range and that she had in the past made as much as $96,000 per year, no evidence was offered regarding why or when her pay decreased. Storey declined the offer for a job paying $110,000 per year, but did so because the job required relocation, to her son's detriment. Furthermore, no reason was provided for why Storey's husband did not contribute to the household. None of these undisputed facts contributes to a finding of willful evasion by a preponderance of the evidence. The bankruptcy court also concluded that Storey had options that would enable her to repay her student loans. Civil Rule 52(a)(6) does not require that we defer to this ultimate conclusion of fact since it is not the bankruptcy court's decision under review here. Regardless, the ultimate finding demonstrates only that as of July 29, 2004 (the date the decision issued) Storey would soon have the ability to repay her student loans. It does not touch upon what is relevant here: whether Storey voluntarily and intentionally avoided paying her taxes.
Thus, we conclude that the district court should not have effectively granted summary judgment to the United States on the dischargeability issue. The United States failed to offer sufficient evidence to rebut the presumption that the tax obligations were discharged in Storey's bankruptcy proceedings, or that she is anything other than “the honest but unfortunate debtor.” Grogan, 498 U.S. at 286–87 (citation and internal quotation marks omitted). Moreover, we see no reason to remand so the United States can offer additional evidence. For one, the United States has not requested a remand as an alternative to affirming. More importantly, by arguing on appeal that the district court provided both parties “a fair opportunity to present their positions on this critical legal issue,” United States Br. 24–25, the United States is foreclosed from arguing that the district court did not give the United States ample opportunity to meet its burden under § 523(a)(1)(C). See White v. Wyndham Vacation Ownership, Inc., 617 F.3d 472, 476 (6th Cir. 2010) (“The doctrine of judicial estoppel generally prevents a party from prevailing in one phase of a case on an argument and then relying on a contradictory argument to prevail in another phase.” (citation and internal quotation marks omitted)). We are permitted to presume that the United States can present no additional facts or evidence to support its position. A remand for discovery and a trial would therefore serve no purpose.
Evidence did not support the district court's entry of partial judgment against Storey on the issue of willful evasion of her federal income tax obligations for years 1994 through 1997. The record does not support a finding that Storey willfully attempted to evade or defeat her federal income taxes for these years. The presumption that the obligations were discharged in bankruptcy thus remains unrebutted. Accordingly, partial judgment must be entered in favor of Storey with respect to her tax obligations for years 1994 through 1997. We REVERSE and REMAND to the district court for proceedings consistent with this opinion.
CONCURRING IN PART AND DISSENTING IN PART
Judge: HELENE N. WHITE, Circuit Judge (concurring in part and dissenting in part). To render Storey's tax debt nondischargeable, the government must prove by a preponderance of the evidence that she attempted a “voluntary, conscious, and intentional evasion” of her responsibility to pay taxes. Stamper v. United States (In re Gardner), 360 F.3d 551, 557 [93 AFTR 2d 2004-1327] (6th Cir. 2004) (citing Toti v. United States (In reToti) , 24 F.3d 806, 809 [73 AFTR 2d 94-2022] (6th Cir. 1994)); 11 U.S.C. § 523(a)(1)(C). I agree with the majority that the government has not established that it is entitled to summary judgment on this issue, and therefore concur in the reversal of the district court's judgment. I do not, however, agree that the government failed to meet its burden of showing that there is a genuine issue of material fact whether Storey willfully attempted to evade payment of the taxes. I would remand to allow the parties to present factual evidence and arguments. As the majority observes, “[n]onpayment alone is insufficient to bar discharge of a tax obligation ....”Stamper, 360 F.3d at 557; see also Myers v. IRS (In re Myers), 216 B.R. 402, 405 [81 AFTR 2d 98-635] (6th Cir. BAP 1998), aff'd sub nom Meyers v. IRS (In reMeyers), 196 F.3d 622 [84 AFTR 2d 99-6997] (6th Cir. 1999); In re Birkenstock, 87 F.3d 947, 951 [78 AFTR 2d 96-5229] (7th Cir. 1996). To render the tax debts nondischargeable, the government must make the additional showing that Storey had the requisite mental state: that she “voluntarily, consciously, and knowingly evaded payment.” Stamper, 360 F.3d at 558. There was little evidence or argument on this element in the proceedings below. The majority concludes that Storey's buying the Morningdew Property and the findings of the bankruptcy court in the student-loan-discharge matter are insufficient to raise a genuine issue of material fact regarding the mental-state element of § 523's tax-debt-discharge provision. I agree that the findings of the bankruptcy court in the student-debt-discharge decision are not preclusive here, but the same facts are enough to raise a genuine issue of fact as to Storey's intent in not paying her taxes. See Storey v. Nat'l Enter. Sys. (In re Storey), 312 B.R. 867, 870 (Bankr. N.D. Ohio 2004). Similarly, the purchase of the Morningdew property is relevant evidence on the question of Storey's mental state, notwithstanding the timing of the purchase. Cases construing § 523(a)(1)(C) look to all the circumstances surrounding the debtor's nonpayment of taxes to assess whether that nonpayment was voluntary, conscious, and intentional. Relevant considerations include whether the debtor attempted to conceal income and assets from the IRS,Stamper , 360 F.3d at 558 (debtor placed income and assets in the names of others); Griffith v. United States (In re Griffith), 206 F.3d 1389, 1396 [85 AFTR 2d 2000-1249] (11th Cir. 2000) (en banc) (debtor fraudulently conveyed property to wife); Birkenstock, 87 F.3d at 952–53 (debtors “attempted to attribute their personal income to their family trust”), whether the debtor spent excessively on nonessential expenses instead of paying taxes,Stamper , 360 F.3d at 558, 560 (“[T]he debtor lived lavishly during the period of time the IRS sought to collect the tax liability .... [including] twenty golfing and vacation trips upon which appellant lavished substantial sums.”); United States v. Mitchell (In re Mitchell), 633 F.3d 1319, 1329 [107 AFTR 2d 2011-979] (11th Cir. 2011) (“[W]illful intent is further shown by Mitchell's discretionary spending, which included purchasing vacation timeshares, purchasing stock, repaying a $30,000 personal loan, and donating approximately $81,000 to his church.”), whether the debtor had the ability to pay taxes,Stamper , 360 F.3d at 558; Toti, 24 F.3d at 809, and whether the debtor had the sophistication and wherewithal to understand her tax responsibilities,United States v. Fretz ( In re Fretz), 244 F.3d 1323, 1331 [87 AFTR 2d 2001-1380] (11th Cir. 2001) (“Put bluntly, someone who can control his drinking enough to perform medical procedures during twelve- to twenty-four hour shifts in an emergency room over a period of years can control his drinking enough to file tax returns and pay taxes during that same period. Instead of doing that, as Dr. Fretz himself put it, he “just totally ignored” his tax responsibilities.”). Because neither party established an entitlement to summary judgment, and the parties did not submit the case to the court for judgment on the facts, I would remand for further proceedings. The government should be permitted to present evidence of how much Storey earned and what she did with her earnings, as well as other evidence relevant to her mental state. Storey, in turn, should be permitted to put on evidence that she failed to pay her taxes only because she could not afford to. I would reverse the district court's order finding that Storey's tax obligations were not discharged by the bankruptcy proceeding and would remand for additional proceedings on issues relevant to Storey's mental state.