Offer in Compromise - IRS abused its discretion - section 6330 collection due process appeal
Judy Hedrick Blosser v. Commissioner.
Dkt. No. 9350-06L , TC Memo. 2007-323, October 29, 2007.[Appealable, barring stipulation to the contrary, to CA-4. --CCH.][Code Sec. 6330]Notice of Levy and Right to Hearing: Issues raised at hearing : Abuse of discretion. --
The IRS Appeals office abused its discretion by failing to consider issues raised by the taxpayer at the collection due process (CDP) hearing. Although the taxpayer did not submit a new collection information statement (CIS) prior to the scheduled telephonic hearing, she explained at the time of the hearing that she was unable to do so due to a recent tragedy in her family. Moreover, the settlement officer did not discuss changes in the taxpayer's financial status, despite the fact that the taxpayer claimed that she had lost her full-time job and obtained a part-time job after she submitted the original CIS. There was also no indication that the settlement officer considered the taxpayer's statement that she was incarcerated during the tax years at issue or that he made any determination that her incarceration was sufficient verification that the taxpayer had no filing obligations for those years.
MEMORANDUM OPINION
GOEKE, Judge: This matter is before the Court on the parties' cross-motions for summary judgment pursuant to Rule 121.1 The issue in this collection case is whether respondent's Appeals Office abused its discretion in sustaining respondent's proposed levy action against petitioner to collect income tax liabilities for the taxable years 1994, 1995, and 1996 and denying petitioner's request for alternative collection methods. We conclude that there are no genuine issues as to any material facts, a decision may be rendered as a matter of law, and the Appeals Office abused its discretion.
Background
At the time she filed her petition, petitioner resided in Harrisonburg, Virginia.
Petitioner did not file Federal income tax returns for taxable year 1994, 1995, or 1996. Respondent issued notices of deficiency for those years and determined tax deficiencies of $2,892, $6,368, and $2,937, respectively.
On November 22, 2005, respondent mailed to petitioner a Letter L-1058, Final Notice of Intent to Levy and Notice of Your Right to a Hearing, informing petitioner that respondent proposed to levy on her property to collect Federal income taxes owed for 1994, 1995, and 1996. After assessing penalties and interest and applying withholding credits, respondent determined that petitioner owed a total of $26,011.04.
On December 9, 2005, petitioner timely filed a Form 12153, Request for a Collection Due Process Hearing, regarding the proposed levy. Petitioner claimed that she could not afford to pay the income tax owed, and as evidence of her financial situation she attached a Form 433-F, Collection Information Statement, dated September 22, 2005. The Form 433-F detailed petitioner's income, expenses, and assets at that time. Petitioner also stated that she anticipated having to find a new job in January of 2006.
By letter dated February 28, 2006, an Appeals Office settlement officer notified petitioner that she had scheduled a telephone hearing for April 6, 2006. The letter requested petitioner to submit within 14 days a completed Form 433-A, Collection Information Statement For Wage Earners and Self-Employed Individuals, a completed offer in compromise package, and signed Federal income tax returns for taxable years 1999 through 2003 so that the Appeals Office could consider collection alternatives in a collection hearing. Petitioner did not send any of the requested information.
According to the administrative record, during the telephone hearing petitioner told the settlement officer that she had lost her full-time job and had acquired a part-time job. Petitioner stated that she was unable to make a payment at that time and thought that she would be granted currently not collectible (CNC) status because she had sent a Form 433-F to another Internal Revenue Service officer. The settlement officer told petitioner that her account had been on CNC status but was removed from said status in September of 2005. The settlement officer inquired why petitioner had not provided another collection information statement (CIS). Petitioner explained that she had not been able to because of a family tragedy. Petitioner also explained that she did not file tax returns for 1999 through 2003 because she was incarcerated during those years. The settlement officer told petitioner that she could not consider collection alternatives at that time because petitioner had failed to provide current financial information, file tax returns for the specified years, or provide verification as to why she did not file the requested returns. The settlement officer also told petitioner that she would be receiving a notice of determination and had the right to challenge the Appeals Office's determination in this Court. Petitioner told the settlement officer that she intended to prepare current financial information in order to request reinstatement of CNC status.
On April 20, 2006, respondent mailed petitioner a Notice of Determination Concerning Collection Action(s) Under Section 6320 and/or 6330 (notice of determination), sustaining the proposed levy action. The Appeals Office determined that petitioner (1) did not provide current financial information, (2) failed to file the requested tax returns, and (3) failed to provide any reason why she did not file the requested returns.
Petitioner timely petitioned this Court for review of respondent's determination pursuant to section 6330(d). Petitioner submitted with her posttrial brief records indicating that she had been incarcerated from 1999 to 2003.
Discussion
Summary judgment may be granted where there is no genuine issue of any material fact and a decision may be rendered as a matter of law. Rule 121(a) and (b); Beery v. Commissioner [Dec. 55,553], 122 T.C. 184, 187 (2004). The moving party bears the burden of proving that there is no genuine issue of material fact, and factual inferences will be viewed in the manner most favorable to the nonmoving party. Dahlstrom v. Commissioner [Dec. 42,486], 85 T.C. 812, 821 (1985). In this case, there is no apparent disagreement as to the material facts and circumstances. Accordingly, this case is ripe for resolution by means of summary judgment.
Section 6330(a)(1) gives a taxpayer the right to a hearing with the Appeals Office before the Secretary can levy on the taxpayer's property. Under section 6330(d)(1), where a taxpayer's underlying tax liability is not at issue, we generally review the Appeals Office's determination following the hearing for an abuse of discretion. Goza v. Commissioner [Dec. 53,803], 114 T.C. 176, 181-182 (2000). An abuse of discretion occurs if the Appeals Office exercises its discretion arbitrarily, capriciously, or without sound basis in fact or law. Woodral v. Commissioner [Dec. 53,206], 112 T.C. 19, 23 (1999). Because petitioner does not dispute her underlying tax liability, we apply the abuse of discretion standard.
Under section 6330(c)(3), in making a determination the Appeals Office must (1) verify that the requirements of applicable law and administrative procedures have been met, (2) consider the issues the taxpayer raised at the hearing, including collection alternatives, and (3) determine whether any proposed collection action balances the need for the efficient collection of taxes with the legitimate concern of the person that any collection be no more intrusive than necessary. Petitioner argues only that the Appeals Office abused its discretion by failing to consider the collection alternative she proposed during the telephone hearing.
The Internal Revenue Manual states that settlement officers may not consider collection alternatives unless the taxpayer has provided adequate financial information, such as the filing of a current CIS, and has filed all required tax returns. See 2 Administration, Internal Revenue Manual (CCH), sec. 5.16.1.2.9(1), at 17,810; sec. 5.15.1.1, at 17,653. Petitioner does not object to this policy, and we have found it to be reasonable. See Estate of Atkinson v. Commissioner [Dec. 56,900(M)], T.C. Memo. 2007-89. It is also the policy of the Appeals Office to request a new CIS if the taxpayer's financial condition changes after the submission of an earlier statement, and we have upheld determinations based on this policy. Etkin v. Commissioner [Dec. 56,174(M)], T.C. Memo. 2005-245; 2 Administration, Internal Revenue Manual (CCH), sec. 5.15.1.1(8), at 17,654.
Respondent argues that when a settlement officer follows the prescribed guidelines in determining whether a collection alternative is acceptable, the settlement officer's conclusion will be considered reasonable and not an abuse of discretion. In support of this argument, respondent cites Moorhous v. Commissioner [Dec. 55,198(M)], T.C. Memo. 2003-183, Rodriguez v. Commissioner [Dec. 55,168(M)], T.C. Memo. 2003-153, and Schenkel v. Commissioner [Dec. 55,043(M)], T.C. Memo. 2003-37.
Petitioner correctly points out that these cases address whether the Appeals Office abused its discretion by refusing offers-in-compromise (OICs). Petitioner did not make an OIC but requested a collection alternative --that her account be placed on CNC status. However, we disagree that these cases are distinguishable, although sections 7122(e) and 6159(e) specifically require the Secretary to establish procedures for administrative review of rejections of OICs and terminations of installment agreements, while there is no statutory mandate for establishing procedures for placing a taxpayer's account on CNC status. We see no reason, however, to hold the Appeals Office to a higher standard when considering collection alternatives from a taxpayer who is seeking complete relief from her undisputed tax liability than when considering a taxpayer who is offering to pay part of her tax liability, particularly when the procedural prerequisites are essentially the same in both situations, and we agree with respondent to that extent. However, this policy does not excuse the Appeals Office for disregarding a taxpayer's attempts to provide current financial information.
Petitioner argues that even if following its established policies would have shielded the Appeals Office, it still abused its discretion in denying her CNC status because she provided the requested information. In particular, petitioner argues that the Appeals Office erred (1) by claiming that she had not provided current financial information despite the facts that she had provided the Appeals Office with a CIS before the hearing and further explained the changes in her financial situation during the hearing, and (2) by refusing to consider her statement that she was incarcerated from 1999 to 2003 as verification of her assertion that she earned no income, and therefore had no filing obligation, for those years, or by failing to ask for additional verification.
Respondent argues that our review is limited to the administrative record, and there is nothing in the administrative record indicating that the Appeals Office abused its discretion. Indeed, there is little that petitioner offers for us to consider apart from the information contained in the administrative file. Nevertheless, this case is a good example of the problems created by the lack of a transcript or actual record of the discussions between the taxpayer and the settlement officer. The only record of the April 6, 2006, telephone conversation between petitioner and the settlement officer is the entry made by the settlement officer in her log for this case. This telephone conversation was the only "hearing" that petitioner received, and the settlement officer's entry is very abbreviated. We are forced to make certain inferences from the information that is known.
According to the settlement officer's entry, petitioner submitted a CIS when she requested a collection hearing, and the settlement officer knew this. Petitioner told the settlement officer that she lost her full-time job and gained a part-time job after she had submitted the CIS. Petitioner explained that she was unable to provide a new CIS because her family had recently experienced a tragedy. She also explained that she did not file Federal tax returns for 1999 to 2003 because she was incarcerated during those years. After hearing this information, the settlement officer told petitioner that respondent would be sending her a notice of determination. There is no indication in the administrative record that the settlement officer discussed the particulars of the changes in petitioner's financial information from the time she completed the CIS in September 2005, despite the fact that petitioner claimed in her request for a collection hearing that she could not pay the underlying tax liability and that her financial status became worse after she completed the original CIS. There is also no indication that the settlement officer considered petitioner's statement that she was incarcerated from 1999 to 2003 or made any determination whether this was sufficient verification that she had no filing obligations during those years. Had the settlement officer asked for verification, petitioner would have been able to provide it just as she provided this Court with records confirming her incarceration. Given the undisputed facts, we find that the abrupt decision by the settlement officer indicates she did not consider the issues petitioner raised during the hearing as required by section 6330(c)(3)(B) before deciding to issue the notice of determination, which was an abuse of her discretion. If section 6330(b) is to be given any force, the Appeals Office must make its determination after the taxpayer has had the opportunity to be heard at a fair hearing and after giving adequate consideration to all meritorious issues the taxpayer has raised during the hearing.
Accordingly, because we conclude that respondent abused his discretion by not considering the issues petitioner raised at the hearing, and no genuine issue of material fact exists requiring trial, we shall grant petitioner's motion for summary judgment and deny respondent's motion for summary judgment.
To reflect the foregoing,
An appropriate order and decision will be entered.
1 Unless otherwise indicated, all Rule references are to the Tax Court Rules of Practice and Procedure, and all section references are to the Internal Revenue Code of 1986, as amended.
Alvin S. Brown, Esq.
Tax Attorney
703 425-1400
www.irstaxattorney.com
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Friday, November 2, 2007
Offer in Compromise - section 7122 - levy of a retirement account
[T.C. Summary Opinion 2007-187]
Wayne Smith v. Commissioner.Docket No. 16263-05S .
Filed November 1, 2007.[Code Sec. 72]
Tax Court: Summary opinion: Levies on retirement funds. --
A Code Sec. 6331 levy on an individual retirement account (IRA) will not trigger the recapture tax of Code Sec. 72(t)(4)(A). The exception to recapture for non-voluntary withdrawals under Code Sec. 72(t)(2)(A)(vii) applies.
[Code Sec. 6331]Tax Court: Summary opinion: Levies on retirement funds. --
The IRS's rejection of an offer in compromise and levy on a taxpayer's individual retirement account (IRA) for unpaid taxes was not an abuse of discretion. The taxpayer would not suffer under the recapture provisions of Code Sec. 72(t)(4)(A) (the basis of the claimed abuse of discretion) because the exception of Code Sec. 72(t)(2)(A)(vii) to recapture for levies pursuant to Code Sec. 6331 would apply. In addition, the taxpayer's claims that other general hardships imposed by the levy showed abuse of discretion were rejected. --
PURSUANT TO INTERNAL REVENUE CODE SECTION 7463(b),THIS OPINION MAY NOT BE TREATED AS PRECEDENT FOR ANY OTHER CASE.
Frank M. Schuler and Tara Jensen, for petitioner. Vicki L. Miller, for respondent.
GOLDBERG, Special Trial Judge: This matter was heard pursuant to the provisions of section 7463 of the Internal Revenue Code in effect at the time the petition was filed. Pursuant to section 7463(b), the decision to be entered is not reviewable by any other court, and this opinion shall not be treated as precedent for any other case. Unless otherwise indicated, all Rule references are to the Tax Court Rules of Practice and Procedure, and all section references are to the Internal Revenue Code, as amended.
This matter is before us under Rule 121 on the parties' cross-motions for summary judgment.
Respondent issued a notice of determination concerning collection action(s) under section 6320 and/or 6330 sustaining a levy on petitioner's property to collect unpaid taxes for taxable years 2000, 2001, and 2002. The underlying issue for decision in this matter is whether respondent's Appeals Office abused its discretion by rejecting offers-in-compromise made on petitioner's behalf, thus sustaining respondent's proposed levy action against petitioner's Individual Retirement Account (IRA).
Background
For purposes of addressing the parties' cross-motions for summary judgment, the record in this matter consists of the pleadings, the parties' cross-motions for summary judgment, and the relevant documents attached thereto. The underlying facts in this case are not in dispute.
In order to collect unpaid Federal income taxes and related additions to tax and interest for 2000, 2001, and 2002 respondent seeks to levy on petitioner's IRA for the taxes owed as follows: $1,636.51 for 2000; $27,368.92 for 2001; and $5,800.83 for 2002.
Filing of Federal Income Tax Returns
Petitioner delinquently filed his Federal income tax return for taxable year 2000 on October 22, 2002. On his 2000 return, he reported tax in the amount of $13,825, less withholding credits of $12,502. He did not remit the $1,323 owed when he filed his return. Petitioner later made three payments, totaling $557, towards the amount owed for 2000.
Petitioner delinquently filed his Federal income tax return for taxable year 2001 on January 28, 2003. On his 2001 return, he reported tax in the amount of $22,511, less withholding credits of $5,099. He did not remit the $17,412 owed when he filed his return.
Petitioner delinquently filed his 2002 Federal income tax return on May 1, 2003. On his 2002 return, he reported tax in the amount of $6,227, less withholding credits of $1,700. He did not remit the $4,672 owed when he filed his return.
Request for Collections Due Process Hearing
On August 7, 2004, respondent mailed to petitioner a Final Notice of Intent to Levy and Notice of Your Right to a Hearing Under Section 6330/6331, which stated that respondent intended to levy on petitioner's IRA account in 30 days. In response, petitioner timely filed a request for a collection due process (CDP) hearing with respondent's Appeals Office. Petitioner's request for a hearing indicated his disagreement with respondent's Notice of Intent to Levy on the grounds that the "collection by levy is inappropriate as [I] intend to submit an offer in compromise to resolve the tax liability soon."
Offer-In-Compromise
As contemplated in his request for a hearing, an offer-incompromise (OIC) was submitted on petitioner's behalf by the Kansas City Tax Clinic on September 30, 2004. Petitioner offered to pay a total of $9,407.60 in 24 monthly payments of $391.98, to compromise his outstanding total tax liabilities, including any interest, penalties, and additions to tax with respect to the taxable years at issue.
A document entitled "Explanation of Special Circumstances" (Explanation) was attached to petitioner's OIC. In this Explanation, petitioner stated that when he was retired from AT&T in 1998 as the result of a corporate downsizing, his pension account with Bank of America had a value of approximately $400,000. At some time after his separation from AT&T, petitioner bifurcated this pension account, placing about one-half of its total value into a new, separate retirement account, also with Bank of America. The Explanation also stated that a combination of his taking several distributions from both of his Bank of America accounts, along with poor market factors, had resulted in a total depletion of one of the two Bank of America accounts.
The record reflects that at the time of his separation from AT&T, petitioner started receiving a series of substantially equal periodic payments, pursuant to section 72(t)(4), from one of the two Bank of America accounts in the form of a monthly distribution in the amount of $1,931. Petitioner was still receiving this monthly amount at the time the present motions were heard by the Court.
Petitioner's financial statements, which are included as part of the record, contain the following information regarding petitioner's IRA accounts:
Amount Issued to
Year Amount Held in IRA Petitioner
(Form 5498) (Form 1099-R)
1998 $805,349 $428,899
1999 538,390 83,373
2000 383,631 61,178
2001 222,290 80,077
2002 159,406 38,606
2003 145,155 23,177
With respect to the establishment and value of petitioner's bifurcated accounts, and the amounts withdrawn on each, the record contains only one bank statement from the Bank of America accounts, dated January 1-31, 2001. This statement contains the following information:
Account Number Portfolio Detail Total Value
* * * 1315 Mutual funds $289,802.65
* * * 1323 Cash/mutual funds 86,848.52
The Kansas City Tax Clinic, in letters to respondent dated May 5, 2005, and May 10, 2005, explained that petitioner's withdrawals from the Bank of America accounts were due to his inability to work as a result of general downsizing in the telecommunications market, his considerable personal expenses, and his gambling addiction. The May 5, 2005, letter contained a Bank of America statement dated February 27 through March 28, 2001, showing that in the course of 1 month, petitioner withdrew nearly $4,000 from ATMs which the Kansas City Tax Clinic describes as either "at the Woodlands racetrack," or "the Argosy Casino."
Petitioner attached to his OIC Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, on which he listed the following as his monthly income and expenses:
During the taxable years in issue through the time that the present motions were heard, petitioner resided with his mother in her home. The record contains a letter dated August 24, 2004, and signed "Linora Smith" which states: "Wayne Smith has paid $300 a month rent in cash for approximately the past three-andone-half years."
With respect to the substantiation of the above expenses, the record contains voided photocopies of personal money orders drafted on an account held with Central Communications Credit Union dated January through March of 2005. The "Pay to the Order of" line on each of these money orders has been filled in by hand, and neither the amounts reflected in these orders nor their payees correspond exactly to the expenses listed above.
Finally, and with respect to additional, "special" circumstances, the Explanation attached to the original OIC states that petitioner, at 56 years old, "is unable to find any worthwhile work", and that he previously underwent "two angioplasty procedures."
Collections Due Process Hearing
A CDP hearing occurred between petitioner's representative and the Internal Revenue Service (IRS) on May 11, 2005. At that hearing, petitioner's representative restated the OIC in the amount of $9,407.60, and also proposed a second, alternative OIC, whereby the IRS could levy on petitioner's then-existing accounts to collect the full payment for the periods covered by the hearing, provided that the IRS would both waive all penalties1 associated with the account withdrawal, and compromise any liability stemming from petitioner's 2005 taxable year on the amounts withdrawn on the account for $1.00. The Appeals Office rejected both the original OIC and the newly proposed OIC on the grounds that they were unacceptable and not viable collection alternatives. The Appeals Office also stated that the proposed levy would not deplete petitioner's remaining IRA account, and that petitioner had neither alleged nor proven that he was disabled or unable to work.
On July 27, 2005, respondent mailed to petitioner a Notice of Determination Concerning Collection Action(s) Under Section 6320 and/or 6330 in which respondent's Appeals Office sustained respondent's proposed levy action.
The petition alleges that respondent's Appeals Office abused its discretion in denying petitioner's OIC because it did not appreciate the effect that the recapture penalty under section 72(t)(4)(A) would have on petitioner as a result of a levy on petitioner's Bank of America account. The petition also lists as grounds for relief that the proposed levy is more intrusive than necessary, and that petitioner has shown special hardship circumstances which demand a settlement of a lesser amount than that of the full assessment.
Discussion
Summary judgment is intended to expedite litigation and avoid unnecessary and expensive trials. Fla. Peach Corp. v. Commissioner, 90 T.C. 678, 681 (1988). Summary judgment may be granted where there is no genuine issue of any material fact and a decision may be rendered as a matter of law. Rule 121(a) and (b); see Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), affd. 17 F.3d 965 (7th Cir. 1994).
The moving party bears the burden of proving that there is no genuine issue of material fact, and factual inferences will be read in a manner most favorable to the party opposing summary judgment. Dahlstrom v. Commissioner, 85 T.C. 812, 821 (1985). A party opposing a motion for summary judgment "may not rest upon the mere allegations or denials of such party's pleading," but the objecting party's response "must set forth specific facts showing that there is a genuine issue for trial." Rule 121(d); Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986).
The petition was filed pursuant to section 6330(d), which provides for Tax Court review of the Commissioner's administrative determinations to proceed with the collection of tax liabilities via levies on property. Where the validity of the underlying tax liability is at issue, the Court will review that matter de novo. Davis v. Commissioner, 115 T.C. 35, 39 (2000). Where, as here, the underlying liability is not at issue, the Court will review the determinations made by respondent's Appeals Office with respect to the proposed collections action under the abuse of discretion standard. Goza v. Commissioner, 114 T.C. 176 (2000). Under this standard, the Court shall consider whether the actions of the Appeals Office in rejecting petitioner's OIC and thus, sustaining respondent's proposed collections action, were arbitrary, capricious, or without sound basis in law. See Sego v. Commissioner, 114 T.C. 604, 610 (2000); Woodral v. Commissioner, 112 T.C. 19, 23 (1999).
Petitioner argues that respondent's Appeals Office abused its discretion in rejecting both proposed OICs because it did not consider that a levy upon petitioner's remaining IRA, a periodic payments account structured under section 72(t)(4), would trigger the recapture tax in such a manner that petitioner would be essentially left with little or no assets to live on until the time that he would be eligible to receive Social Security. Moreover, petitioner argues that respondent's Appeals Office ignored evidence that he was unable to work, and that his offers were reasonable in the light of his considerable and necessary monthly expenses.
Generally, amounts distributed from an IRA are includable in gross income as provided in section 72. Sec. 408(d)(1). Section 72(t)(1) further provides: "If any taxpayer receives any amount from a qualified retirement plan * * * the taxpayer's tax under this chapter for the taxable year in which such amount is received shall be increased by an amount equal to 10 percent of the portion of such amount which is includable in gross income." Section 72(t)(2) further provides:
Paragraph [72(t)(1) shall not apply to any of the following distributions:
(A) * * * Distributions which are --
(iv) part of a series of substantially equal periodic payments * * * or
*******
(vii) made on account of a levy under section 6331 on the qualified retirement plan.
Section 72(t)(4) provides:
(A) In general. If --
(i) paragraph (1) does not apply to a distribution by reason of paragraph (2)(A)(iv), and
(ii) the series of payments under such paragraph are subsequently modified (other than by reason of death or disability)-
(I) before the close of the 5-year period beginning with the date of the first payment and after the employee attains age 59-1/2, or
(II) before the employee attains age 59-1/2, the taxpayer's tax for the 1st taxable year in which such modification occurs shall be increased by an amount, determined under regulation, equal to the tax which (but for paragraph (2)(A)(iv)) would have been imposed, plus interest for the deferral period.
Petitioner's argument is premised on his belief that section 72(t)(4)(A), which applies the aforementioned recapture tax when a taxpayer modifies an existing series of substantially equal payments, supersedes the exception to the 10-percent additional tax provided in section 72(t)(2)(A)(vii), in cases where the distribution from a qualified plan is made as a result of a levy action under section 6331. As we cannot point to authoritative case law, we accordingly begin our analysis with the relevant legislative history and intent behind the enactment of clause (vii) of section 72(t)(2)(A).
Section 72(t)(2)(A)(vii) was enacted as an amendment to section 72(t) as part of the IRS Restructuring and Reform Act of 1998, Pub. L. 105-206, 112 Stat. 685. As reasoning for the addition of clause (vii), the Senate report states:
the imposition of the 10-percent early withdrawal tax on amounts distributed from employer-sponsored retirement plans or IRAs on account of an IRS levy may impose significant hardships on taxpayers. Accordingly, the Committee believes such distributions should be exempt from the 10-percent early withdrawal tax. [S. Rept. 105-174, at 83 (1998), 1998-3 C.B. 537, 619.]
Notably, in further explanation of clause (vii), the Senate report emphasizes that the exception provided in clause (vii) shall only apply if "the plan or IRA is levied; it does not apply, for example, if the taxpayer withdrawals funds to pay taxes in the absence of a levy, [or] in order to release a levy on other interests." Id.
Therefore, the distinction that gives section 72(t)(2)(A)(vii) precedence over the recapture tax clause in section 72(t)(4)(A) is the concept of voluntariness; namely, that clause (vii) is intended to apply where the action that caused a distribution to be made did not originate with the taxpayer and/or did not occur at the discretion or direction of the taxpayer.
This concept of voluntariness is also echoed in Arnold v. Commissioner, 111 T.C. 250 (1998), concerning the recapture tax provision under section 74(t)(4), and United States v. Novak, 476 F.3d 1041 (9th Cir. 2007), addressing section 72(t)(2)(A)(vii). In Arnold, the taxpayer elected to receive a series of substantially equal payments from an IRA pursuant to section 72(t)(4)(A) when he retired from his own company at age 55. Four years later, when he sold the business for less profit than he anticipated, he received an additional distribution from his account to compensate him for his loss of anticipated revenue. This Court held that petitioner's receipt of an additional distribution did not fall within one of the exceptions provided in section 72(t)(2)(A) and was an impermissible modification to the prior series of substantially equal periodic payments, thus triggering the recapture tax under section 72(t)(4). Arnold v. Commissioner, supra at 255-256.
In Novak, the Court of Appeals for the Ninth Circuit examined whether the IRS possessed the power to levy upon an ERISA account to compensate the victims of the defendant's crimes,2 and where the defendant's right to access the account without incurring a penalty for Federal income tax purposes had not yet commenced. As to the latter consideration, the Court of Appeals held:
under the "steps into the taxpayer's shoes" principle, see Nat'l Bank of Commerce, 472 U.S. 713, 725, a tax levy can demand (1) that a retirement plan directly pay to the IRS any post-retirement payments that otherwise would have automatically gone to the taxpayer; and (2) if the plan allows the participant to demand payment before retirement or at a different rate --including immediate payment of the entire present value of benefits --the full amount that the participant could presently demand. Retirement plan distributions to satisfy [such] a tax levy are not subject to the ten-percent penalty tax.
Other circuits have held that the IRS has the authority to demand annuity and retirement funds when the beneficiary has the contractual right immediately to withdraw the money sought. See Kane v. Capital Guardian Trust Co., 145 F.3d 1218, 1223 (10th Cir. 1998) ("[Taxpayer's] right to liquidate his IRA and withdraw the funds therefrom (even if subject to some interest penalty) undoubtedly constituted a 'right to property' subject to the IRS' administrative levy power under [26 U.S.C. sec. 6331(a).] Upon [the plan's] receipt of the notice of levy, the IRS stepped into [the taxpayer's] shoes and acquired all his rights in the IRA, including his right to liquidate the mutual fund shares in his IRA and withdraw the cash proceeds."
United States v. Novak, 476 F.3d 1041, 1062 (9th Cir. 2007).
Accordingly, for purposes of determining whether the recapture provision under section 72(t)(4)(A) applies in the light of a levy action commenced under section 6330, if the levy on the property occurs as the result of the IRS's "stepping into the shoes of the taxpayer," then that action should be treated as nonvoluntary on the part of the taxpayer and accordingly, not subject to either the 10-percent additional tax under section 72(t) or the recapture tax pursuant to section 72(t)(4)(A). If, however, the taxpayer has a right to access the funds, and does so in an effort to alleviate his tax liability, or does so in a manner (such as in Arnold v. Commissioner, supra) that modifies the series of substantially equal payments under section 72(t)(4)(A) for his personal gain, then that voluntary action should trigger the recapture penalty under section 74(t)(4)(A).
Based on the foregoing, we reject petitioner's argument that the recapture penalty under section 72(t)(4)(A) supersedes the levy exception provision under section 72(t)(2)(A)(vii). In doing so, we conclude that respondent's Appeals Office did not act in an arbitrary or capricious manner in disregarding petitioner's position that a levy upon his IRA account would result in not only a significant withdrawal from his account, but an unduly and overly intrusive depletion of most of the account as a result of the application of the recapture tax.
As to petitioner's argument that respondent's Appeals Office did not consider petitioner's position that the proposed levy is unfair in the light of his inability to work and medical conditions, we are unpersuaded that any issue of fact exists. Petitioner presented no evidence at the time of the hearing that he was unable to work. He merely stated that due to a tight job market in the telecommunications industry he was unable to find "worthwhile" work. Although petitioner did include mention in his Explanation (attached to the original OIC) that he had undergone "two angioplasty procedures", he offered no additional evidence to show how these procedures, or the effects therefrom, had rendered him medically unable to work. Accordingly, we hold that respondent's Appeals Office did not act in an arbitrary or capricious manner in sustaining the proposed levy action as there was no evidence presented whereby the Appeals Office could determine that the levy was unduly burdensome given petitioner's medical status.
With respect to petitioner's argument that respondent's Appeals Office failed to appreciate fully petitioner's monthly expenses in the light of the monthly amount he was receiving from his IRA, we are again unpersuaded by the lack of evidence produced by petitioner in support of this claim. First, petitioner only provided a scant, 3-month record vis-a-vis photocopies of money orders, all of which appear to be notated to correspond to the expenses as listed on his OIC Form 433-A in anticipation of trial, none of which correspond in amount to the amounts listed on Form 433-A. Second, we are unconvinced by the letter purportedly written by petitioner's mother that he had been renting space in her home for the past 3 years and paying her $300 per month in rent. Petitioner produced no receipts or bank records to corroborate this claim. Moreover, while we are convinced that petitioner did, in fact, live with his mother, we are not persuaded that he was required to spend more than one-half of his monthly income on rent, food, and clothing. Accordingly, we hold that respondent's Appeals Office did not act in an arbitrary or capricious manner in rejecting petitioner's OICs, which were largely premised on his position that he could not afford to make a larger payment.
Finally, we note that the IRS Manual on Notice in Levy Cases provides that in deciding whether to levy on a retirement account, the Commissioner's Appeals Office should determine "whether the taxpayer's conduct has been flagrant [, with] * * * some examples of flagrant conduct [being] * * * Taxpayers who have placed other assets beyond the reach of the government [by] * * * dissipating them." Administration, Internal Revenue Manual (CCH), Notice to Levy, sec. 5.11.6.2(5) at 16,719. In this case, the Kansas City Tax Clinic candidly shared with respondent the details of petitioner's gambling addiction. We are convinced, based on this evidence, and our examination of both petitioner's financial statements and the rapidly declining IRA balances as previously detailed in this report, that a large portion of the $660,194 withdrawn from petitioner's IRA accounts between 1998 and 2003 went to fund his gambling addiction.
We are further convinced by our examination of the Bank of America statements that detail petitioner's account balances as of January 2001, that at the time that petitioner would have been required to pay his Federal income tax owing for all of the years in issue he could have done so, but elected not to for the benefit of his proclivity for racetracks and casinos. Finally, we are convinced, in the light of the above IRS Manual guidance, and the unfortunate, yet convincing, facts presented with respect to petitioner's gambling habit, that respondent's Appeals officer did not act in an arbitrary or capricious manner in rejecting either of petitioner's OICs and, in doing so, sustaining the proposed levy action.
Accordingly, without any evidence to create a question of fact whether respondent's Appeals Office abused its discretion, respondent's motion for summary judgment will be granted, and petitioner's cross-motion for summary judgment will be denied.
An appropriate order and decision will be entered.
1 Namely, the recapture penalty under sec. 72(t)(4)(A).2 Notably, in Murillo v. Commissioner, T.C. Memo. 1998-13 (1998), affd. without published opinion 166 F.3d 1201 (2d Cir. 1998), the Court held that a taxpayer's forfeit of his retirement plan as part of his criminal plea would also not trigger application of the 10-percent additional tax under sec. 72(t)(1).
Levy and Distraint: Synopsis - property subject to levy: notices and other procedural requirementsThe IRS may levy upon (i.e, seize) a taxpayer's property and rights to property if a taxpayer fails to pay a tax liability. (See ¶38,225.01 et seq. for exemptions for certain property.) The first step in the levy process is to provide a taxpayer with a written "Notice and Demand" for payment. A notice and demand is a notice which states that the tax has been assessed and demands that payment be made (Code Sec. 6303). If the taxpayer fails to pay the tax within 10 days after receipt of the "Notice and Demand," the IRS may seize a taxpayer's property, but no sooner than 30 days after sending the taxpayer a second notice, called a "Final Notice of Intent to Levy" (Code Sec. 6331(d)). The two notices, however, may be sent at the same time (Reg. §301.6331-2(a)(1)).In addition, the IRS is required to send the taxpayer a pre-levy Collection Due Process Hearing Notice (pre-levy CDP notice) at least 30 days prior to levying. The taxpayer may suspend the levy action by requesting a Collection Due Process hearing within 30 days after the date shown on the CDP notice (Code Sec. 6330). See ¶38,187.022.The IRS has indicated in the preamble to T.D. 8809 (1999-1 CB 478), under which Code Sec. 6330 regulations for collection due process actions were issued, that a taxpayer who fails to pay tax within 10 days after receiving a Notice and Demand for payment may be sent an "Urgent Notice." The Urgent Notice will inform the taxpayer that the IRS may levy upon a taxpayer's state tax refund after 30 days from the date of that notice. The Urgent Notice will include all information required under Code Sec. 6331(d) (described below) with respect to a Final Notice of Intent to Levy and will constitute the notice required under that section. As in the case of a Final Notice of Intent to Levy, an Urgent Notice will begin the ten-day period that leads to the doubling (from .5 percent to 1 percent per month) of the penalty for failure to pay tax imposed by Code Sec. 6651. See ¶39,475.022.The Code permits the immediate seizure of a delinquent taxpayer's property or rights to property without regard to the 10-day waiting period if the IRS makes a determination that the collection of the tax is in jeopardy and the delinquent taxpayer fails to pay the tax after receipt of the "Notice and Demand" (Code Sec. 6331(a)). A "Final Notice of Intent to Levy" is not required where the tax is in jeopardy (Code Sec. 6331(d)(3)).The Final Notice of Intent to Levy must be a brief statement written in simple and nontechnical terms. It must include a description of (1) the statutory provisions relating to the levy and sale of property, (2) the procedures applicable to the levy and sale of property, (3) the administrative appeals available to the taxpayer with respect to the levy and sale and the procedures relating to those appeals, (4) the alternatives available to taxpayers that could prevent levy on the property (including installment agreements), (5) the statutory provisions relating to redemption of property and the release of liens on property, and (6) the procedures applicable to the redemption of property and the release of a lien on property (Code Sec. 6331(d)(4)).The Final Notice of Intent to Levy must be given in person, left at the dwelling or usual place of business of the taxpayer, or sent by registered or certified mail to the taxpayer's last known address (Code Sec. 6331(d)(2); Reg. §301.6331-2(a)(1)).No levy may be made on the property of any person on a day when that person is required to appear in response to a summons issued by the Secretary of the Treasury for the purpose of collecting any underpayment of tax. This protection extends to any officer or employee of the person (Reg. §301.6331-2(c)). However, this provision will not apply if the collection of tax is found to be in jeopardy (Reg. §301.6331-2(d)).Also, no levy can be made on property if the estimated amount of the expenses that would be incurred with respect to the levy and sale of the property exceeds its fair market value at the time of the levy (Code Sec. 6331(f); Reg. §301.6331-2(b)).Levy is also prohibited during the consideration or pendency of an offer in compromise or an installment agreement (Code Sec. 6331(k); see ¶38,187.027).Under Code Sec. 6331(b), the term "levy" includes the power of distraint and seizure by any means (Code Sec. 6331(b)). The power of distraint and seizure by any means does not refer to warrantless intrusions into privacy. Such an intrusion is not justifiable merely because it occurs pursuant to a tax investigation. See GM Leasing Corp., SCt, 77-1 USTC ¶9140, at ¶38,187.175.A levy proceeding may be carried on against real property without first proceeding against personal property
Alvin S. Brown, Esq.
Tax Attorney
703 425-1400
http://www.sirstaxattorney.com/
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Levy and Distraint: Synopsis - property subject to levy: notices and other procedural requirementsThe IRS may levy upon (i.e, seize) a taxpayer's property and rights to property if a taxpayer fails to pay a tax liability. (See ¶38,225.01 et seq. for exemptions for certain property.) The first step in the levy process is to provide a taxpayer with a written "Notice and Demand" for payment. A notice and demand is a notice which states that the tax has been assessed and demands that payment be made (Code Sec. 6303). If the taxpayer fails to pay the tax within 10 days after receipt of the "Notice and Demand," the IRS may seize a taxpayer's property, but no sooner than 30 days after sending the taxpayer a second notice, called a "Final Notice of Intent to Levy" (Code Sec. 6331(d)). The two notices, however, may be sent at the same time (Reg. §301.6331-2(a)(1)).In addition, the IRS is required to send the taxpayer a pre-levy Collection Due Process Hearing Notice (pre-levy CDP notice) at least 30 days prior to levying. The taxpayer may suspend the levy action by requesting a Collection Due Process hearing within 30 days after the date shown on the CDP notice (Code Sec. 6330). See ¶38,187.022.
The IRS has indicated in the preamble to T.D. 8809 (1999-1 CB 478), under which Code Sec. 6330 regulations for collection due process actions were issued, that a taxpayer who fails to pay tax within 10 days after receiving a Notice and Demand for payment may be sent an "Urgent Notice." The Urgent Notice will inform the taxpayer that the IRS may levy upon a taxpayer's state tax refund after 30 days from the date of that notice. The Urgent Notice will include all information required under Code Sec. 6331(d) (described below) with respect to a Final Notice of Intent to Levy and will constitute the notice required under that section. As in the case of a Final Notice of Intent to Levy, an Urgent Notice will begin the ten-day period that leads to the doubling (from .5 percent to 1 percent per month) of the penalty for failure to pay tax imposed by Code Sec. 6651. See ¶39,475.022.The Code permits the immediate seizure of a delinquent taxpayer's property or rights to property without regard to the 10-day waiting period if the IRS makes a determination that the collection of the tax is in jeopardy and the delinquent taxpayer fails to pay the tax after receipt of the "Notice and Demand" (Code Sec. 6331(a)).
A "Final Notice of Intent to Levy" is not required where the tax is in jeopardy (Code Sec. 6331(d)(3)).The Final Notice of Intent to Levy must be a brief statement written in simple and nontechnical terms. It must include a description of (1) the statutory provisions relating to the levy and sale of property, (2) the procedures applicable to the levy and sale of property, (3) the administrative appeals available to the taxpayer with respect to the levy and sale and the procedures relating to those appeals, (4) the alternatives available to taxpayers that could prevent levy on the property (including installment agreements), (5) the statutory provisions relating to redemption of property and the release of liens on property, and (6) the procedures applicable to the redemption of property and the release of a lien on property (Code Sec. 6331(d)(4)).The Final Notice of Intent to Levy must be given in person, left at the dwelling or usual place of business of the taxpayer, or sent by registered or certified mail to the taxpayer's last known address (Code Sec. 6331(d)(2); Reg. §301.6331-2(a)(1)).No levy may be made on the property of any person on a day when that person is required to appear in response to a summons issued by the Secretary of the Treasury for the purpose of collecting any underpayment of tax. This protection extends to any officer or employee of the person (Reg. §301.6331-2(c)). However, this provision will not apply if the collection of tax is found to be in jeopardy (Reg. §301.6331-2(d)).Also, no levy can be made on property if the estimated amount of the expenses that would be incurred with respect to the levy and sale of the property exceeds its fair market value at the time of the levy (Code Sec. 6331(f); Reg. §301.6331-2(b)).Levy is also prohibited during the consideration or pendency of an offer in compromise or an installment agreement (Code Sec. 6331(k); see ¶38,187.027).Under Code Sec. 6331(b), the term "levy" includes the power of distraint and seizure by any means (Code Sec. 6331(b)). The power of distraint and seizure by any means does not refer to warrantless intrusions into privacy. Such an intrusion is not justifiable merely because it occurs pursuant to a tax investigation. See GM Leasing Corp., SCt, 77-1 USTC ¶9140, at ¶38,187.175.A levy proceeding may be carried on against real property without first proceeding against personal property
[T.C. Summary Opinion 2007-187]
Wayne Smith v. Commissioner.Docket No. 16263-05S .
Filed November 1, 2007.[Code Sec. 72]
Tax Court: Summary opinion: Levies on retirement funds. --
A Code Sec. 6331 levy on an individual retirement account (IRA) will not trigger the recapture tax of Code Sec. 72(t)(4)(A). The exception to recapture for non-voluntary withdrawals under Code Sec. 72(t)(2)(A)(vii) applies.
[Code Sec. 6331]Tax Court: Summary opinion: Levies on retirement funds. --
The IRS's rejection of an offer in compromise and levy on a taxpayer's individual retirement account (IRA) for unpaid taxes was not an abuse of discretion. The taxpayer would not suffer under the recapture provisions of Code Sec. 72(t)(4)(A) (the basis of the claimed abuse of discretion) because the exception of Code Sec. 72(t)(2)(A)(vii) to recapture for levies pursuant to Code Sec. 6331 would apply. In addition, the taxpayer's claims that other general hardships imposed by the levy showed abuse of discretion were rejected. --
PURSUANT TO INTERNAL REVENUE CODE SECTION 7463(b),THIS OPINION MAY NOT BE TREATED AS PRECEDENT FOR ANY OTHER CASE.
Frank M. Schuler and Tara Jensen, for petitioner. Vicki L. Miller, for respondent.
GOLDBERG, Special Trial Judge: This matter was heard pursuant to the provisions of section 7463 of the Internal Revenue Code in effect at the time the petition was filed. Pursuant to section 7463(b), the decision to be entered is not reviewable by any other court, and this opinion shall not be treated as precedent for any other case. Unless otherwise indicated, all Rule references are to the Tax Court Rules of Practice and Procedure, and all section references are to the Internal Revenue Code, as amended.
This matter is before us under Rule 121 on the parties' cross-motions for summary judgment.
Respondent issued a notice of determination concerning collection action(s) under section 6320 and/or 6330 sustaining a levy on petitioner's property to collect unpaid taxes for taxable years 2000, 2001, and 2002. The underlying issue for decision in this matter is whether respondent's Appeals Office abused its discretion by rejecting offers-in-compromise made on petitioner's behalf, thus sustaining respondent's proposed levy action against petitioner's Individual Retirement Account (IRA).
Background
For purposes of addressing the parties' cross-motions for summary judgment, the record in this matter consists of the pleadings, the parties' cross-motions for summary judgment, and the relevant documents attached thereto. The underlying facts in this case are not in dispute.
In order to collect unpaid Federal income taxes and related additions to tax and interest for 2000, 2001, and 2002 respondent seeks to levy on petitioner's IRA for the taxes owed as follows: $1,636.51 for 2000; $27,368.92 for 2001; and $5,800.83 for 2002.
Filing of Federal Income Tax Returns
Petitioner delinquently filed his Federal income tax return for taxable year 2000 on October 22, 2002. On his 2000 return, he reported tax in the amount of $13,825, less withholding credits of $12,502. He did not remit the $1,323 owed when he filed his return. Petitioner later made three payments, totaling $557, towards the amount owed for 2000.
Petitioner delinquently filed his Federal income tax return for taxable year 2001 on January 28, 2003. On his 2001 return, he reported tax in the amount of $22,511, less withholding credits of $5,099. He did not remit the $17,412 owed when he filed his return.
Petitioner delinquently filed his 2002 Federal income tax return on May 1, 2003. On his 2002 return, he reported tax in the amount of $6,227, less withholding credits of $1,700. He did not remit the $4,672 owed when he filed his return.
Request for Collections Due Process Hearing
On August 7, 2004, respondent mailed to petitioner a Final Notice of Intent to Levy and Notice of Your Right to a Hearing Under Section 6330/6331, which stated that respondent intended to levy on petitioner's IRA account in 30 days. In response, petitioner timely filed a request for a collection due process (CDP) hearing with respondent's Appeals Office. Petitioner's request for a hearing indicated his disagreement with respondent's Notice of Intent to Levy on the grounds that the "collection by levy is inappropriate as [I] intend to submit an offer in compromise to resolve the tax liability soon."
Offer-In-Compromise
As contemplated in his request for a hearing, an offer-incompromise (OIC) was submitted on petitioner's behalf by the Kansas City Tax Clinic on September 30, 2004. Petitioner offered to pay a total of $9,407.60 in 24 monthly payments of $391.98, to compromise his outstanding total tax liabilities, including any interest, penalties, and additions to tax with respect to the taxable years at issue.
A document entitled "Explanation of Special Circumstances" (Explanation) was attached to petitioner's OIC. In this Explanation, petitioner stated that when he was retired from AT&T in 1998 as the result of a corporate downsizing, his pension account with Bank of America had a value of approximately $400,000. At some time after his separation from AT&T, petitioner bifurcated this pension account, placing about one-half of its total value into a new, separate retirement account, also with Bank of America. The Explanation also stated that a combination of his taking several distributions from both of his Bank of America accounts, along with poor market factors, had resulted in a total depletion of one of the two Bank of America accounts.
The record reflects that at the time of his separation from AT&T, petitioner started receiving a series of substantially equal periodic payments, pursuant to section 72(t)(4), from one of the two Bank of America accounts in the form of a monthly distribution in the amount of $1,931. Petitioner was still receiving this monthly amount at the time the present motions were heard by the Court.
Petitioner's financial statements, which are included as part of the record, contain the following information regarding petitioner's IRA accounts:
Amount Issued to
Year Amount Held in IRA Petitioner
(Form 5498) (Form 1099-R)
1998 $805,349 $428,899
1999 538,390 83,373
2000 383,631 61,178
2001 222,290 80,077
2002 159,406 38,606
2003 145,155 23,177
With respect to the establishment and value of petitioner's bifurcated accounts, and the amounts withdrawn on each, the record contains only one bank statement from the Bank of America accounts, dated January 1-31, 2001. This statement contains the following information:
Account Number Portfolio Detail Total Value
* * * 1315 Mutual funds $289,802.65
* * * 1323 Cash/mutual funds 86,848.52
The Kansas City Tax Clinic, in letters to respondent dated May 5, 2005, and May 10, 2005, explained that petitioner's withdrawals from the Bank of America accounts were due to his inability to work as a result of general downsizing in the telecommunications market, his considerable personal expenses, and his gambling addiction. The May 5, 2005, letter contained a Bank of America statement dated February 27 through March 28, 2001, showing that in the course of 1 month, petitioner withdrew nearly $4,000 from ATMs which the Kansas City Tax Clinic describes as either "at the Woodlands racetrack," or "the Argosy Casino."
Petitioner attached to his OIC Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, on which he listed the following as his monthly income and expenses:
During the taxable years in issue through the time that the present motions were heard, petitioner resided with his mother in her home. The record contains a letter dated August 24, 2004, and signed "Linora Smith" which states: "Wayne Smith has paid $300 a month rent in cash for approximately the past three-andone-half years."
With respect to the substantiation of the above expenses, the record contains voided photocopies of personal money orders drafted on an account held with Central Communications Credit Union dated January through March of 2005. The "Pay to the Order of" line on each of these money orders has been filled in by hand, and neither the amounts reflected in these orders nor their payees correspond exactly to the expenses listed above.
Finally, and with respect to additional, "special" circumstances, the Explanation attached to the original OIC states that petitioner, at 56 years old, "is unable to find any worthwhile work", and that he previously underwent "two angioplasty procedures."
Collections Due Process Hearing
A CDP hearing occurred between petitioner's representative and the Internal Revenue Service (IRS) on May 11, 2005. At that hearing, petitioner's representative restated the OIC in the amount of $9,407.60, and also proposed a second, alternative OIC, whereby the IRS could levy on petitioner's then-existing accounts to collect the full payment for the periods covered by the hearing, provided that the IRS would both waive all penalties1 associated with the account withdrawal, and compromise any liability stemming from petitioner's 2005 taxable year on the amounts withdrawn on the account for $1.00. The Appeals Office rejected both the original OIC and the newly proposed OIC on the grounds that they were unacceptable and not viable collection alternatives. The Appeals Office also stated that the proposed levy would not deplete petitioner's remaining IRA account, and that petitioner had neither alleged nor proven that he was disabled or unable to work.
On July 27, 2005, respondent mailed to petitioner a Notice of Determination Concerning Collection Action(s) Under Section 6320 and/or 6330 in which respondent's Appeals Office sustained respondent's proposed levy action.
The petition alleges that respondent's Appeals Office abused its discretion in denying petitioner's OIC because it did not appreciate the effect that the recapture penalty under section 72(t)(4)(A) would have on petitioner as a result of a levy on petitioner's Bank of America account. The petition also lists as grounds for relief that the proposed levy is more intrusive than necessary, and that petitioner has shown special hardship circumstances which demand a settlement of a lesser amount than that of the full assessment.
Discussion
Summary judgment is intended to expedite litigation and avoid unnecessary and expensive trials. Fla. Peach Corp. v. Commissioner, 90 T.C. 678, 681 (1988). Summary judgment may be granted where there is no genuine issue of any material fact and a decision may be rendered as a matter of law. Rule 121(a) and (b); see Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), affd. 17 F.3d 965 (7th Cir. 1994).
The moving party bears the burden of proving that there is no genuine issue of material fact, and factual inferences will be read in a manner most favorable to the party opposing summary judgment. Dahlstrom v. Commissioner, 85 T.C. 812, 821 (1985). A party opposing a motion for summary judgment "may not rest upon the mere allegations or denials of such party's pleading," but the objecting party's response "must set forth specific facts showing that there is a genuine issue for trial." Rule 121(d); Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986).
The petition was filed pursuant to section 6330(d), which provides for Tax Court review of the Commissioner's administrative determinations to proceed with the collection of tax liabilities via levies on property. Where the validity of the underlying tax liability is at issue, the Court will review that matter de novo. Davis v. Commissioner, 115 T.C. 35, 39 (2000). Where, as here, the underlying liability is not at issue, the Court will review the determinations made by respondent's Appeals Office with respect to the proposed collections action under the abuse of discretion standard. Goza v. Commissioner, 114 T.C. 176 (2000). Under this standard, the Court shall consider whether the actions of the Appeals Office in rejecting petitioner's OIC and thus, sustaining respondent's proposed collections action, were arbitrary, capricious, or without sound basis in law. See Sego v. Commissioner, 114 T.C. 604, 610 (2000); Woodral v. Commissioner, 112 T.C. 19, 23 (1999).
Petitioner argues that respondent's Appeals Office abused its discretion in rejecting both proposed OICs because it did not consider that a levy upon petitioner's remaining IRA, a periodic payments account structured under section 72(t)(4), would trigger the recapture tax in such a manner that petitioner would be essentially left with little or no assets to live on until the time that he would be eligible to receive Social Security. Moreover, petitioner argues that respondent's Appeals Office ignored evidence that he was unable to work, and that his offers were reasonable in the light of his considerable and necessary monthly expenses.
Generally, amounts distributed from an IRA are includable in gross income as provided in section 72. Sec. 408(d)(1). Section 72(t)(1) further provides: "If any taxpayer receives any amount from a qualified retirement plan * * * the taxpayer's tax under this chapter for the taxable year in which such amount is received shall be increased by an amount equal to 10 percent of the portion of such amount which is includable in gross income." Section 72(t)(2) further provides:
Paragraph [72(t)(1) shall not apply to any of the following distributions:
(A) * * * Distributions which are --
(iv) part of a series of substantially equal periodic payments * * * or
*******
(vii) made on account of a levy under section 6331 on the qualified retirement plan.
Section 72(t)(4) provides:
(A) In general. If --
(i) paragraph (1) does not apply to a distribution by reason of paragraph (2)(A)(iv), and
(ii) the series of payments under such paragraph are subsequently modified (other than by reason of death or disability)-
(I) before the close of the 5-year period beginning with the date of the first payment and after the employee attains age 59-1/2, or
(II) before the employee attains age 59-1/2, the taxpayer's tax for the 1st taxable year in which such modification occurs shall be increased by an amount, determined under regulation, equal to the tax which (but for paragraph (2)(A)(iv)) would have been imposed, plus interest for the deferral period.
Petitioner's argument is premised on his belief that section 72(t)(4)(A), which applies the aforementioned recapture tax when a taxpayer modifies an existing series of substantially equal payments, supersedes the exception to the 10-percent additional tax provided in section 72(t)(2)(A)(vii), in cases where the distribution from a qualified plan is made as a result of a levy action under section 6331. As we cannot point to authoritative case law, we accordingly begin our analysis with the relevant legislative history and intent behind the enactment of clause (vii) of section 72(t)(2)(A).
Section 72(t)(2)(A)(vii) was enacted as an amendment to section 72(t) as part of the IRS Restructuring and Reform Act of 1998, Pub. L. 105-206, 112 Stat. 685. As reasoning for the addition of clause (vii), the Senate report states:
the imposition of the 10-percent early withdrawal tax on amounts distributed from employer-sponsored retirement plans or IRAs on account of an IRS levy may impose significant hardships on taxpayers. Accordingly, the Committee believes such distributions should be exempt from the 10-percent early withdrawal tax. [S. Rept. 105-174, at 83 (1998), 1998-3 C.B. 537, 619.]
Notably, in further explanation of clause (vii), the Senate report emphasizes that the exception provided in clause (vii) shall only apply if "the plan or IRA is levied; it does not apply, for example, if the taxpayer withdrawals funds to pay taxes in the absence of a levy, [or] in order to release a levy on other interests." Id.
Therefore, the distinction that gives section 72(t)(2)(A)(vii) precedence over the recapture tax clause in section 72(t)(4)(A) is the concept of voluntariness; namely, that clause (vii) is intended to apply where the action that caused a distribution to be made did not originate with the taxpayer and/or did not occur at the discretion or direction of the taxpayer.
This concept of voluntariness is also echoed in Arnold v. Commissioner, 111 T.C. 250 (1998), concerning the recapture tax provision under section 74(t)(4), and United States v. Novak, 476 F.3d 1041 (9th Cir. 2007), addressing section 72(t)(2)(A)(vii). In Arnold, the taxpayer elected to receive a series of substantially equal payments from an IRA pursuant to section 72(t)(4)(A) when he retired from his own company at age 55. Four years later, when he sold the business for less profit than he anticipated, he received an additional distribution from his account to compensate him for his loss of anticipated revenue. This Court held that petitioner's receipt of an additional distribution did not fall within one of the exceptions provided in section 72(t)(2)(A) and was an impermissible modification to the prior series of substantially equal periodic payments, thus triggering the recapture tax under section 72(t)(4). Arnold v. Commissioner, supra at 255-256.
In Novak, the Court of Appeals for the Ninth Circuit examined whether the IRS possessed the power to levy upon an ERISA account to compensate the victims of the defendant's crimes,2 and where the defendant's right to access the account without incurring a penalty for Federal income tax purposes had not yet commenced. As to the latter consideration, the Court of Appeals held:
under the "steps into the taxpayer's shoes" principle, see Nat'l Bank of Commerce, 472 U.S. 713, 725, a tax levy can demand (1) that a retirement plan directly pay to the IRS any post-retirement payments that otherwise would have automatically gone to the taxpayer; and (2) if the plan allows the participant to demand payment before retirement or at a different rate --including immediate payment of the entire present value of benefits --the full amount that the participant could presently demand. Retirement plan distributions to satisfy [such] a tax levy are not subject to the ten-percent penalty tax.
Other circuits have held that the IRS has the authority to demand annuity and retirement funds when the beneficiary has the contractual right immediately to withdraw the money sought. See Kane v. Capital Guardian Trust Co., 145 F.3d 1218, 1223 (10th Cir. 1998) ("[Taxpayer's] right to liquidate his IRA and withdraw the funds therefrom (even if subject to some interest penalty) undoubtedly constituted a 'right to property' subject to the IRS' administrative levy power under [26 U.S.C. sec. 6331(a).] Upon [the plan's] receipt of the notice of levy, the IRS stepped into [the taxpayer's] shoes and acquired all his rights in the IRA, including his right to liquidate the mutual fund shares in his IRA and withdraw the cash proceeds."
United States v. Novak, 476 F.3d 1041, 1062 (9th Cir. 2007).
Accordingly, for purposes of determining whether the recapture provision under section 72(t)(4)(A) applies in the light of a levy action commenced under section 6330, if the levy on the property occurs as the result of the IRS's "stepping into the shoes of the taxpayer," then that action should be treated as nonvoluntary on the part of the taxpayer and accordingly, not subject to either the 10-percent additional tax under section 72(t) or the recapture tax pursuant to section 72(t)(4)(A). If, however, the taxpayer has a right to access the funds, and does so in an effort to alleviate his tax liability, or does so in a manner (such as in Arnold v. Commissioner, supra) that modifies the series of substantially equal payments under section 72(t)(4)(A) for his personal gain, then that voluntary action should trigger the recapture penalty under section 74(t)(4)(A).
Based on the foregoing, we reject petitioner's argument that the recapture penalty under section 72(t)(4)(A) supersedes the levy exception provision under section 72(t)(2)(A)(vii). In doing so, we conclude that respondent's Appeals Office did not act in an arbitrary or capricious manner in disregarding petitioner's position that a levy upon his IRA account would result in not only a significant withdrawal from his account, but an unduly and overly intrusive depletion of most of the account as a result of the application of the recapture tax.
As to petitioner's argument that respondent's Appeals Office did not consider petitioner's position that the proposed levy is unfair in the light of his inability to work and medical conditions, we are unpersuaded that any issue of fact exists. Petitioner presented no evidence at the time of the hearing that he was unable to work. He merely stated that due to a tight job market in the telecommunications industry he was unable to find "worthwhile" work. Although petitioner did include mention in his Explanation (attached to the original OIC) that he had undergone "two angioplasty procedures", he offered no additional evidence to show how these procedures, or the effects therefrom, had rendered him medically unable to work. Accordingly, we hold that respondent's Appeals Office did not act in an arbitrary or capricious manner in sustaining the proposed levy action as there was no evidence presented whereby the Appeals Office could determine that the levy was unduly burdensome given petitioner's medical status.
With respect to petitioner's argument that respondent's Appeals Office failed to appreciate fully petitioner's monthly expenses in the light of the monthly amount he was receiving from his IRA, we are again unpersuaded by the lack of evidence produced by petitioner in support of this claim. First, petitioner only provided a scant, 3-month record vis-a-vis photocopies of money orders, all of which appear to be notated to correspond to the expenses as listed on his OIC Form 433-A in anticipation of trial, none of which correspond in amount to the amounts listed on Form 433-A. Second, we are unconvinced by the letter purportedly written by petitioner's mother that he had been renting space in her home for the past 3 years and paying her $300 per month in rent. Petitioner produced no receipts or bank records to corroborate this claim. Moreover, while we are convinced that petitioner did, in fact, live with his mother, we are not persuaded that he was required to spend more than one-half of his monthly income on rent, food, and clothing. Accordingly, we hold that respondent's Appeals Office did not act in an arbitrary or capricious manner in rejecting petitioner's OICs, which were largely premised on his position that he could not afford to make a larger payment.
Finally, we note that the IRS Manual on Notice in Levy Cases provides that in deciding whether to levy on a retirement account, the Commissioner's Appeals Office should determine "whether the taxpayer's conduct has been flagrant [, with] * * * some examples of flagrant conduct [being] * * * Taxpayers who have placed other assets beyond the reach of the government [by] * * * dissipating them." Administration, Internal Revenue Manual (CCH), Notice to Levy, sec. 5.11.6.2(5) at 16,719. In this case, the Kansas City Tax Clinic candidly shared with respondent the details of petitioner's gambling addiction. We are convinced, based on this evidence, and our examination of both petitioner's financial statements and the rapidly declining IRA balances as previously detailed in this report, that a large portion of the $660,194 withdrawn from petitioner's IRA accounts between 1998 and 2003 went to fund his gambling addiction.
We are further convinced by our examination of the Bank of America statements that detail petitioner's account balances as of January 2001, that at the time that petitioner would have been required to pay his Federal income tax owing for all of the years in issue he could have done so, but elected not to for the benefit of his proclivity for racetracks and casinos. Finally, we are convinced, in the light of the above IRS Manual guidance, and the unfortunate, yet convincing, facts presented with respect to petitioner's gambling habit, that respondent's Appeals officer did not act in an arbitrary or capricious manner in rejecting either of petitioner's OICs and, in doing so, sustaining the proposed levy action.
Accordingly, without any evidence to create a question of fact whether respondent's Appeals Office abused its discretion, respondent's motion for summary judgment will be granted, and petitioner's cross-motion for summary judgment will be denied.
An appropriate order and decision will be entered.
1 Namely, the recapture penalty under sec. 72(t)(4)(A).2 Notably, in Murillo v. Commissioner, T.C. Memo. 1998-13 (1998), affd. without published opinion 166 F.3d 1201 (2d Cir. 1998), the Court held that a taxpayer's forfeit of his retirement plan as part of his criminal plea would also not trigger application of the 10-percent additional tax under sec. 72(t)(1).
Levy and Distraint: Synopsis - property subject to levy: notices and other procedural requirementsThe IRS may levy upon (i.e, seize) a taxpayer's property and rights to property if a taxpayer fails to pay a tax liability. (See ¶38,225.01 et seq. for exemptions for certain property.) The first step in the levy process is to provide a taxpayer with a written "Notice and Demand" for payment. A notice and demand is a notice which states that the tax has been assessed and demands that payment be made (Code Sec. 6303). If the taxpayer fails to pay the tax within 10 days after receipt of the "Notice and Demand," the IRS may seize a taxpayer's property, but no sooner than 30 days after sending the taxpayer a second notice, called a "Final Notice of Intent to Levy" (Code Sec. 6331(d)). The two notices, however, may be sent at the same time (Reg. §301.6331-2(a)(1)).In addition, the IRS is required to send the taxpayer a pre-levy Collection Due Process Hearing Notice (pre-levy CDP notice) at least 30 days prior to levying. The taxpayer may suspend the levy action by requesting a Collection Due Process hearing within 30 days after the date shown on the CDP notice (Code Sec. 6330). See ¶38,187.022.The IRS has indicated in the preamble to T.D. 8809 (1999-1 CB 478), under which Code Sec. 6330 regulations for collection due process actions were issued, that a taxpayer who fails to pay tax within 10 days after receiving a Notice and Demand for payment may be sent an "Urgent Notice." The Urgent Notice will inform the taxpayer that the IRS may levy upon a taxpayer's state tax refund after 30 days from the date of that notice. The Urgent Notice will include all information required under Code Sec. 6331(d) (described below) with respect to a Final Notice of Intent to Levy and will constitute the notice required under that section. As in the case of a Final Notice of Intent to Levy, an Urgent Notice will begin the ten-day period that leads to the doubling (from .5 percent to 1 percent per month) of the penalty for failure to pay tax imposed by Code Sec. 6651. See ¶39,475.022.The Code permits the immediate seizure of a delinquent taxpayer's property or rights to property without regard to the 10-day waiting period if the IRS makes a determination that the collection of the tax is in jeopardy and the delinquent taxpayer fails to pay the tax after receipt of the "Notice and Demand" (Code Sec. 6331(a)). A "Final Notice of Intent to Levy" is not required where the tax is in jeopardy (Code Sec. 6331(d)(3)).The Final Notice of Intent to Levy must be a brief statement written in simple and nontechnical terms. It must include a description of (1) the statutory provisions relating to the levy and sale of property, (2) the procedures applicable to the levy and sale of property, (3) the administrative appeals available to the taxpayer with respect to the levy and sale and the procedures relating to those appeals, (4) the alternatives available to taxpayers that could prevent levy on the property (including installment agreements), (5) the statutory provisions relating to redemption of property and the release of liens on property, and (6) the procedures applicable to the redemption of property and the release of a lien on property (Code Sec. 6331(d)(4)).The Final Notice of Intent to Levy must be given in person, left at the dwelling or usual place of business of the taxpayer, or sent by registered or certified mail to the taxpayer's last known address (Code Sec. 6331(d)(2); Reg. §301.6331-2(a)(1)).No levy may be made on the property of any person on a day when that person is required to appear in response to a summons issued by the Secretary of the Treasury for the purpose of collecting any underpayment of tax. This protection extends to any officer or employee of the person (Reg. §301.6331-2(c)). However, this provision will not apply if the collection of tax is found to be in jeopardy (Reg. §301.6331-2(d)).Also, no levy can be made on property if the estimated amount of the expenses that would be incurred with respect to the levy and sale of the property exceeds its fair market value at the time of the levy (Code Sec. 6331(f); Reg. §301.6331-2(b)).Levy is also prohibited during the consideration or pendency of an offer in compromise or an installment agreement (Code Sec. 6331(k); see ¶38,187.027).Under Code Sec. 6331(b), the term "levy" includes the power of distraint and seizure by any means (Code Sec. 6331(b)). The power of distraint and seizure by any means does not refer to warrantless intrusions into privacy. Such an intrusion is not justifiable merely because it occurs pursuant to a tax investigation. See GM Leasing Corp., SCt, 77-1 USTC ¶9140, at ¶38,187.175.A levy proceeding may be carried on against real property without first proceeding against personal property
Alvin S. Brown, Esq.
Tax Attorney
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Levy and Distraint: Synopsis - property subject to levy: notices and other procedural requirementsThe IRS may levy upon (i.e, seize) a taxpayer's property and rights to property if a taxpayer fails to pay a tax liability. (See ¶38,225.01 et seq. for exemptions for certain property.) The first step in the levy process is to provide a taxpayer with a written "Notice and Demand" for payment. A notice and demand is a notice which states that the tax has been assessed and demands that payment be made (Code Sec. 6303). If the taxpayer fails to pay the tax within 10 days after receipt of the "Notice and Demand," the IRS may seize a taxpayer's property, but no sooner than 30 days after sending the taxpayer a second notice, called a "Final Notice of Intent to Levy" (Code Sec. 6331(d)). The two notices, however, may be sent at the same time (Reg. §301.6331-2(a)(1)).In addition, the IRS is required to send the taxpayer a pre-levy Collection Due Process Hearing Notice (pre-levy CDP notice) at least 30 days prior to levying. The taxpayer may suspend the levy action by requesting a Collection Due Process hearing within 30 days after the date shown on the CDP notice (Code Sec. 6330). See ¶38,187.022.
The IRS has indicated in the preamble to T.D. 8809 (1999-1 CB 478), under which Code Sec. 6330 regulations for collection due process actions were issued, that a taxpayer who fails to pay tax within 10 days after receiving a Notice and Demand for payment may be sent an "Urgent Notice." The Urgent Notice will inform the taxpayer that the IRS may levy upon a taxpayer's state tax refund after 30 days from the date of that notice. The Urgent Notice will include all information required under Code Sec. 6331(d) (described below) with respect to a Final Notice of Intent to Levy and will constitute the notice required under that section. As in the case of a Final Notice of Intent to Levy, an Urgent Notice will begin the ten-day period that leads to the doubling (from .5 percent to 1 percent per month) of the penalty for failure to pay tax imposed by Code Sec. 6651. See ¶39,475.022.The Code permits the immediate seizure of a delinquent taxpayer's property or rights to property without regard to the 10-day waiting period if the IRS makes a determination that the collection of the tax is in jeopardy and the delinquent taxpayer fails to pay the tax after receipt of the "Notice and Demand" (Code Sec. 6331(a)).
A "Final Notice of Intent to Levy" is not required where the tax is in jeopardy (Code Sec. 6331(d)(3)).The Final Notice of Intent to Levy must be a brief statement written in simple and nontechnical terms. It must include a description of (1) the statutory provisions relating to the levy and sale of property, (2) the procedures applicable to the levy and sale of property, (3) the administrative appeals available to the taxpayer with respect to the levy and sale and the procedures relating to those appeals, (4) the alternatives available to taxpayers that could prevent levy on the property (including installment agreements), (5) the statutory provisions relating to redemption of property and the release of liens on property, and (6) the procedures applicable to the redemption of property and the release of a lien on property (Code Sec. 6331(d)(4)).The Final Notice of Intent to Levy must be given in person, left at the dwelling or usual place of business of the taxpayer, or sent by registered or certified mail to the taxpayer's last known address (Code Sec. 6331(d)(2); Reg. §301.6331-2(a)(1)).No levy may be made on the property of any person on a day when that person is required to appear in response to a summons issued by the Secretary of the Treasury for the purpose of collecting any underpayment of tax. This protection extends to any officer or employee of the person (Reg. §301.6331-2(c)). However, this provision will not apply if the collection of tax is found to be in jeopardy (Reg. §301.6331-2(d)).Also, no levy can be made on property if the estimated amount of the expenses that would be incurred with respect to the levy and sale of the property exceeds its fair market value at the time of the levy (Code Sec. 6331(f); Reg. §301.6331-2(b)).Levy is also prohibited during the consideration or pendency of an offer in compromise or an installment agreement (Code Sec. 6331(k); see ¶38,187.027).Under Code Sec. 6331(b), the term "levy" includes the power of distraint and seizure by any means (Code Sec. 6331(b)). The power of distraint and seizure by any means does not refer to warrantless intrusions into privacy. Such an intrusion is not justifiable merely because it occurs pursuant to a tax investigation. See GM Leasing Corp., SCt, 77-1 USTC ¶9140, at ¶38,187.175.A levy proceeding may be carried on against real property without first proceeding against personal property
Thursday, November 1, 2007
Offer in Compromise – section 7122 - IRS must consider taxpayer bankruptcy IRM sec. 5.8.10.2.2(1),
Carl Klein v. Commissioner.Dkt. Nos. 7162-06L ; 7163-06L , TC Memo. 2007-325, October 30, 2007.
[Code Sec. 6651]
Penalties, civil: Failure to file: Failure to pay: Reasonable cause. --
A taxpayer was liable for additions to tax as determined by the IRS for failure to file tax returns and pay taxes for all tax years at issue. The taxpayer was an attorney and was fully aware of his obligation to file returns and that he had unpaid tax liabilities. In spite of personal adversity that he encountered, including a divorce and the collapse of his employer, he succeeded in generating substantial income. Consequently, his personal obstacles did not rise to a level amounting to reasonable cause for failure to file his return or pay the tax liabilities.
[Code Sec. 7122]
Offer-in-compromise: Allowable living standards: Bankruptcy. --
The IRS did not abuse its discretion in rejecting a taxpayer's offer-in-compromise of his outstanding tax liabilities. In evaluating his reasonable collection potential, the taxpayer argued that the IRS failed to make an allowance for his basis living expenses greater than provided in published guidance and that the IRS failed to take into consideration his option to file for bankruptcy and potentially discharge some of the tax liabilities. However, the taxpayer had not disclosed any special circumstances that would warrant allowing him a standard of living more lavish that the standard for the area where he lived. The evidence also indicated that the IRS did consider the possibility that the taxpayer might file for bankruptcy; however, in light of the changes to the bankruptcy law, the IRS believed that the taxpayer would not be able to avoid paying the total tax liability by filing for bankruptcy..
.
MEMORANDUM OPINION
JACOBS, Judge:1 The petitions in these consolidated cases were each filed in response to a Notice of Determination Concerning Collection Action(s) Under Section 6320 and/or 6330(notice of determination).2 Pursuant to section 6330(d), petitioner seeks our review of respondent's determination upholding the proposed use of a levy to collect petitioner's income tax liabilities for tax years 1997, 1998, 1999, and 2000. The issue for decision is whether respondent's proposed levy actions may proceed.
Background
These consolidated cases were submitted fully stipulated pursuant to Rule 122. The case at docket No. 7163-06L pertains to tax years 1997 and 1998. The case at docket No. 7162-06L pertains to tax years 1999 and 2000. The stipulations of fact and the attached exhibits are incorporated herein by this reference. At the time he filed the petitions, petitioner resided in Chicago, Illinois.
Petitioner, who was born in 1946, is an attorney who practiced law with various Chicago law firms at different times during the years at issue. Petitioner filed income tax returns for the years at issue as follows:
Adjusted
Gross
Date Return Income Income Self-Employment
Due (After Date Return per Tax per Tax per
Year Extensions) Filed Return Return Return
Oct. 15, July 25,
1997 1998 2001 $163,286 $25,692 $15,431
Oct. 15, Aug. 15,
1998 1999 2001 213,864 40,918 16,684
Aug. 15, Apr. 15,
1999 2000 2003 102,994 47,963 19,208
Aug. 15, Aug. 28,
2000 2001 2002 151,475 28,949 17,792
Respondent assessed the tax for each year and demanded payment for the unpaid balances.3 When petitioner failed to pay the balances, respondent determined that enforced collection action would be required. On November 12, 2003, respondent mailed petitioner a Letter 1058, Final Notice of Intent to Levy and Notice of Your Right to a Hearing for 1997 and 1998, and a separate such notice for 1999 and 2000.4 According to respondent's notices of levy, petitioner's total unpaid tax liability, including additions to tax and interest, exceeded $200,000.5 In response to each notice of levy, petitioner, by means of a Form 12153, Request For a Collection Due Process Hearing, timely requested a hearing under section 6330. In his requests for a hearing, petitioner claimed: (1) He was entitled to abatement of the "penalties"6 assessed against him because he had reasonable cause for his failure to pay the taxes; (2) the Internal Revenue Service (IRS) should have accepted his offer-incompromise based on doubt as to collectibility because of the possibility of discharge of his taxes in the event he filed for bankruptcy; and (3) alternatively, in the event his offer-incompromise was not accepted, the IRS should have allowed him to pay his tax liability in installments.
Petitioner's section 6330 hearing was conducted by means of a face-to-face meeting, correspondence, and telephone conversations with a settlement officer in respondent's Appeals Office (the settlement officer). On November 2, 2004, the IRS received petitioner's offer to compromise his total tax liability for 1997, 1998, 1999, 2000, and 2001 for $70,000.7 On December 8, 2005, following petitioner's submission of additional information in response to requests by respondent, the settlement officer advised petitioner that petitioner was ineligible for an offer-in-compromise because petitioner had the ability to fully pay his income tax liability over 48 months. On December 22, 2005, the settlement officer wrote a letter to petitioner explaining, among other things: (1) That petitioner had not as yet provided any verification of reasonable cause for abatement of additions to tax and that respondent would assume that there was none unless such was provided within the next 15 days; (2) that consideration of petitioner's bankruptcy assertion must be made in the light of the new bankruptcy laws which take "a harder look at future income than the old law did". The settlement officer noted that "You have significant income potential, as you have displayed through past performance, and I do not think that you would avoid paying all the taxes if you file [for bankruptcy]"; and (3) that if petitioner wished to enter into an installment agreement, he should, through his representatives, contact respondent within 15 days.
Petitioner responded to the settlement officer's December 22, 2005, letter by reiterating his position that respondent had not given adequate consideration to his potential bankruptcy because respondent had not considered that his future earnings were uncertain because petitioner was aging and was at that time practicing law without associates and without a formal office or support staff. In addition, petitioner contested the settlement officer's calculation of petitioner's realizable collection potential, claiming that increased allowances should have been made for petitioner's basic living expenses. Petitioner did not attempt to enter into an installment agreement and did not respond to the invitation to submit verification of reasonable cause for abatement of the additions to tax. The settlement officer ultimately recommended rejection of petitioner's offer-in-compromise, and on March 15, 2006, respondent's Appeals Office issued notices of determination sustaining the levy actions for the tax years in issue.
Petitioner timely filed his petitions, in which he seeks review of respondent's determinations. Petitioner contends that respondent acted impermissibly: (1) In denying petitioner's requests for abatement of additions to tax, (2) in rejecting petitioner's offer-in-compromise, and (3) in sustaining the proposed levy actions.
Discussion
The parties are not at odds regarding the technical provisions of section 6330. Further, petitioner does not claim that respondent failed to satisfy any of the mechanical or procedural obligations contemplated by that statute. Nor does petitioner contest the propriety of the assessments of tax as a procedural matter. Consequently, we immediately turn our attention to petitioner's complaints and begin with his first contention that respondent acted impermissibly in denying petitioner's requests for abatement of additions to tax due to reasonable cause. We construe petitioner's position in this regard to be that he should not be held liable for the additions to tax.
Section 6330(c)(2)(B) provides that a person may challenge "the existence or amount of the underlying tax liability for any tax period if the person did not receive any statutory notice of deficiency for such tax liability or did not otherwise have an opportunity to dispute such tax liability." Petitioner did not receive a notice of deficiency for 1998 or for 1999 or otherwise have an opportunity to dispute those additions. Therefore, petitioner is entitled to challenge the existence or amount of the tax liabilities with respect to those returns, which he did in his section 6330 hearing. See Montgomery v. Commissioner [Dec. 55,501], 122 T.C. 1 (2004). We review de novo respondent's determinations with respect to 1998 and 1999. See Davis v. Commissioner [Dec. 53,969], 115 T.C. 35, 39 (2000); Goza v. Commissioner [Dec. 53,803], 114 T.C. 176, 181 (2000).
The record is not entirely clear as to whether petitioner received a statutory notice of deficiency for 1997 or for 2000, and if he did, the extent to which additions to tax were determined therein. Assuming they are subject to review, and regardless of which standard we use to review respondent's determinations (de novo or for an abuse of discretion), we find no basis on which to relieve petitioner from liability for any of the additions to tax.
The Commissioner bears the burden of production regarding the additions to tax. Sec. 7491(c); Higbee v. Commissioner [Dec. 54,356], 116 T.C. 438 (2001). In order to meet this burden, the Commissioner must produce sufficient evidence indicating that it is appropriate to impose an addition to tax. Higbee v. Commissioner, supra at 446. Once the Commissioner has met this burden, the taxpayer must come forward with evidence sufficient to persuade the Court that the Commissioner's determination is incorrect or an exception applies. Id. at 447.
As relevant here, in general, section 6651(a)(1) provides for an addition to tax that can amount to 25 percent of the tax (net amount) required to be shown on the return if the return is filed more than 4 months after the due date of the return, including extensions.8 See sec. 6651(b). Section 6651(a)(2), in general, provides for an addition to tax that can amount to 25 percent of the unpaid portion of the tax shown on a return if the unpaid portion remains unpaid for more than 49 months after the tax is due to be paid. A taxpayer can be absolved of liability from the aforementioned additions to tax if the taxpayer demonstrates that the failure to file, or the failure to pay, as appropriate, is due to reasonable cause and not due to willful neglect. Sec. 6651(a); Higbee v. Commissioner, supra.
Reasonable cause for the failure to file a return may be shown where the taxpayer has made a satisfactory showing that he exercised ordinary business care and prudence but nevertheless was unable to file the return within the prescribed time. Reasonable cause for the failure to pay the tax may be shown where the taxpayer has made a satisfactory showing that he exercised ordinary business care and prudence in providing for payment of his tax liability and was nevertheless either unable to pay the tax or would suffer an undue hardship if he paid on the due date. Sec. 301.6651-1(c)(1), Proced. & Admin. Regs.
Petitioner does not dispute that he filed his returns late and that the taxes shown on the returns remained unpaid as reflected in respondent's records. Petitioner contends that his failure to file returns timely and timely pay taxes was due to personal circumstances during the years at issue and that these circumstances constituted reasonable cause for purposes of section 6651(a). Specifically, petitioner claims that his
marriage was ending, the firms he was associated with were collapsing around him, or not following through on promised remuneration, and he was in the midst of a significantly over-budget rehabilitation project on a dream home that almost immediately upon completion he was forced to sell due to the divorce. This occurred all while trying to assure his family's needs were met.
The record shows that petitioner requested extensions of time to file in each of the tax years at issue. Thus, there is no doubt but that petitioner knew of his obligation to file returns and knew the dates on which they were due. Moreover, he knew that he had an unpaid tax liability.
In spite of the personal adversity he encountered, petitioner succeeded in generating substantial income for the years at issue and apparently chose to spend this income to maintain an elevated lifestyle and to "assure his family needs were met"9 as opposed to paying his taxes. Petitioner is an attorney and obviously knew he had an obligation to obey the tax laws, including the obligation to file timely returns and pay the taxes when due. The obstacles petitioner describes simply do not rise to a level amounting to reasonable cause. After reviewing the record and applying the de novo standard of review for all years at issue, we hold that petitioner is liable for the additions to tax under section 6651(a)(1) and (2) for all of the years at issue.
Section 6654(a) imposes an addition to tax for failure to pay estimated income tax where prepayments of such tax, either through withholding or by making estimated quarterly tax payments during the course of the year, do not equal the percentage of total liability required under the statute. The amount required to be paid through each such estimated quarterly payment is 25 percent of the required annual payment. Sec. 6654(d)(1)(A). The required annual payment is, in turn, the lesser of 90 percent of the tax shown on the return for that taxable year or 100 percent of the tax shown on the return for the preceding taxable year (or a greater percent for individuals with adjusted gross income exceeding $150,000). Sec. 6654(d)(1)(B) and (C). There is no broadly applicable reasonable cause exception to the section 6654 addition to tax.
The record shows that petitioner did not make sufficient estimated tax payments for 1997, 1998, or 1999, the years for which respondent seeks to impose the section 6654 addition. None of the statutory exceptions to imposition of the addition applies. We conclude that respondent has met his burden of production under section 7491(c) regarding petitioner's liability for the additions to tax under section 6654 and that petitioner is liable for those additions.10
Petitioner's second contention is that respondent abused his discretion in rejecting petitioner's offer-in-compromise on the basis of doubt as to its collectibility.
Section 7122(a) authorizes the Secretary to compromise any civil case arising under the internal revenue laws and requires him to prescribe guidelines for officers and employees of the IRS to determine whether an offer-in-compromise is adequate and should be accepted to resolve a dispute. Sec. 7122(a), (c)(1).
The contemplated guidelines and schedules pertaining to evaluating offers-in-compromise on the basis of collectibility have been published in the regulations interpreting section 7122. See sec. 301.7122-1(c)(2), Proced. & Admin. Regs.; 1 Administration, Internal Revenue Manual (CCH), sec. 5.8.4.4 at 16,306. Under this administrative guidance, the Secretary will generally compromise a liability on the basis of doubt as to collectibility only if the liability exceeds the taxpayer's reasonable collection potential. Cf. Murphy v. Commissioner [Dec. 56,232], 125 T.C. 301, 308-310 (2005), affd. [2007-1 USTC ¶50,115] 469 F.3d 27 (1st Cir. 2006). A taxpayer's reasonable collection potential is determined, in part, using the published guidelines for certain national and local allowances for basic living expenses and essentially treating income and assets in excess of those needed for basic living expenses as available to satisfy Federal income tax liabilities. See 2 Administration, Internal Revenue Manual (CCH), exh. 5.15.1-3 at 17,668, exh. 5.15.1-8 at 17,686, exh. 5.15.1-9 at 17,742. Application of the standard allowances for housing and utility expenses (rather than the taxpayer's actual expenses) is not an abuse of discretion where use of the standard allowances does not result in the taxpayer's not having adequate means to provide for basic living expenses. See McDonough v. Commissioner [Dec. 56,665(M)], T.C. Memo. 2006-234.
The foregoing formulaic approach is disregarded, however, upon a showing by the taxpayer of special circumstances that may cause an offer to be accepted notwithstanding that it is for less than the taxpayer's reasonable collection potential (e.g., the taxpayer is incapable of earning a living because of a long-term illness, and it is reasonably foreseeable that the taxpayer's financial resources will be exhausted providing for care and support during the course of the condition). Sec. 301.7122-1(b)(3), (c)(3), Proced. & Admin. Regs.; 1 Administration, Internal Revenue Manual (CCH), sec. 5.8.11.2.1 at 16,375, sec. 5.8.11.2.2 at 16,377. Petitioner does not allege, and it does not appear, that any such special circumstances are present.
According to petitioner, respondent did not properly apply the published guidelines because he failed to make an allowance for petitioner's basic living expenses which were greater than that indicated in the published guidelines. Petitioner contends that a greater amount should have been allowed to reflect the cost of his living in the downtown Chicago area because of his need to entertain clients in his home. Further, petitioner claims that respondent failed to evaluate petitioner's option to file for bankruptcy and the potential discharge of some of the taxes that respondent seeks to collect by levy.
Respondent, in applying the published guidelines, allowed petitioner $2,474 per month for basic living expenses, which petitioner agrees was substantially the same as the amount provided for under the published guidelines.11 When subtracted from the $22,000 gross monthly income that petitioner disclosed in his offer-in-compromise, and in the light of respondent's records which showed that petitioner had $302,400 in wages and $13,400 in nonemployee compensation for tax year 2004,12 respondent concluded that petitioner would be able to pay his by-then $252,462 tax liability in full over 48 months.
We agree with respondent that petitioner had sufficient income to meet his basic living expenses as well as to pay his tax liability in full. Petitioner basically wants the Government to permit him to use his current and expected future earnings to maintain a lifestyle more lavish than the standard for the Chicago area (petitioner's living expenses are more than twice those of the average national and local standards) plus $4,000 per month for "business expenses" without having to fully satisfy his past due tax obligations. The record does not disclose any special circumstances that warrant acceptance of petitioner's offer-in-compromise ($70,000 to extinguish a tax liability over $200,000).
As for the impact that petitioner's bankruptcy might have had on respondent's considerations, respondent contends that he applied the provisions of the Internal Revenue Manual, which advises:
When a taxpayer threatens bankruptcy, the impact of bankruptcy on the Service's ability to collect must be considered. If the Offer Investigator believes, based upon factual information, that the taxpayer is seriously considering filing bankruptcy, the employee should discuss the benefits of filing an administrative offer instead. Internal Revenue Manual , sec. 5.8.10.2.2(1),
The record shows that respondent considered the possibility that petitioner might file a petition in bankruptcy. Respondent's correspondence to petitioner is specific in explaining that petitioner had the ability to pay his total tax liability in full and "in light of the recently passed bankruptcy law which takes more into consideration an individual's income production", respondent did not believe that petitioner would be able to avoid paying the total tax liability by filing for bankruptcy. In other words, respondent believed that the impact of petitioner's filing for bankruptcy on respondent's ability to collect petitioner's unpaid tax would be minimal. We are not prepared to find that respondent's rejection of petitioner's offer-in-compromise was arbitrary, capricious, or without sound basis in fact or law.
On the basis of this record, we conclude that petitioner is liable for the additions to tax as determined by respondent for all years at issue and that respondent did not abuse his discretion in rejecting petitioner's offer-in-compromise. Respondent's determination that the Federal tax levies were appropriate in these cases is sustained.
To reflect the foregoing,
Decisions will be entered for respondent.
1 These cases were assigned to Judge Julian I. Jacobs for disposition by order of the Chief Judge on August 20, 2007.2 Unless otherwise indicated, all section references are to the Internal Revenue Code (Code) as amended, and all Rule references are to the Tax Court Rules of Practice and Procedure.3 Respondent assessed $1,337 of additional tax for 1997 in May of 2003 and $1,927 of additional tax for 2000 in December of 2003. By the time he filed the petitions, petitioner had paid approximately $30,700 of his tax liability for the 4 years in issue.4 On or about Nov. 14, 2003, a Federal tax lien was obtained on petitioner's property with respect to all tax years at issue. Petitioner does not contest the propriety of the tax lien filing.5 The income tax assessments include additions to tax under sec. 6651(a)(1) and (2) for all tax years at issue and under sec. 6654 for 1997, 1998, and 1999.6 References to penalties in various places in the record actually are to additions to tax under sec. 6651(a)(1) and (2) and sec. 6654. References in this opinion to additions to tax relate to one or more, as appropriate. Petitioner does not seek abatement of interest.7 Tax year 2001 is not at issue herein.8 Where the sec. 6651(a)(2) addition also applies, the sec. 6651(a)(2) addition is reduced as provided in sec. 6651(c)(1).9 In response to a question on Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, requesting a list of "the dependents you can claim on your tax return", petitioner listed his son aged 24 and his daughter aged 22, neither of whom lived with him. Petitioner signed and dated the Form 433-A on Oct. 25, 2004. In petitioner's 2003 tax return, dated Oct. 14, 2004, neither child (or anyone else) had been claimed as a dependent.10 The parties stipulated that "petitioner filed an income tax return for 1996, reporting tax liability in the amount of $29,980." In addition, for 1996, petitioner reported self-employment tax of $15,430.11 Respondent allowed $194 per month for transportation; it appears that the published guidelines allow $329, or a similar amount, for ownership of one car in Chicago. Petitioner contends that he should be allowed "the actual expense for his car loan ($870 per month)" instead.12 The record shows that respondent did not consider the value of dissipated assets in evaluating petitioner's offer-incompromise, although respondent was concerned that such consideration might have been warranted. See 1 Administration, Internal Revenue Manual (CCH), sec. 5.8.5.4. at 16,339-6.
Compromises: BankruptcyThe IRS did not violate 11 U.S.C. §525 when it returned a corporation's offer in compromise (OIC) as nonprocessable during the pendency of its chapter 11 bankruptcy proceeding. IRS policy and procedures provided that, because the corporation was in bankruptcy, processing its OIC was not in the government's best interest. Moreover, mandamus relief was not available to the corporation as an alternative means to compel the government to consider its OIC. The IRS owed no clear duty to the corporation to act as required for mandamus relief. Its discretion to compromise carried with it the discretion not to exercise that discretion.1900 M Restaurant Associates, Inc., 2007-1 USTC ¶50,116; aff'g, BC-DC D.C., 2005-1 USTC ¶50,313, 319 BR 302.The IRS was not required to process an offer-in-compromise submitted by debtors in bankruptcy. That type of requirement would be a remedy in the nature of mandamus and that remedy was not appropriate. The IRS owed no clear duty to the debtors and its decision to not process offers-in-compromise submitted by debtors in bankruptcy was solely within its discretion. The plan confirmation process was an adequate alternative remedy to obtain a compromised tax liability from the IRS. Requiring the IRS to negotiate with the debtors outside of the plan confirmation process would not further the provisions of the Internal Revenue Code nor would it foster the ultimate goal of achieving a confirmed plan. The reasoning of 1900 M Restaurant Associates, Inc., BC-DC D.C., 2005-1 USTC ¶50,313, was adopted.W. Uzialko, BC-DC Pa., 2006-1 USTC ¶50,297.The District Court affirmed a Bankruptcy Court order requiring the IRS to consider an offer in compromise made by an individual in bankruptcy. The Bankruptcy Court had jurisdiction to make such an order under 11 U.S.C. §105, which states that a bankruptcy court can issue any order necessary to carry out the provisions of the Bankruptcy Code. W.K. Holmes, DC Ga., 2005-1 USTC ¶50,230.The IRS was ordered to process and consider an offer in compromise submitted by a debtor despite the agency's published policy of not considering offers in compromise from taxpayers who have filed for bankruptcy. The IRS position of not accepting less than what is required to be paid by a Chapter 13 reorganization plan, as set forth in Rev. Proc. 2003-71, was not required by the Tax Code or Treasury Regulations and did not carry the force and effect of law. Also, the IRS determination not to entertain offers in compromise from those in bankruptcy was not exempt from judicial review as an "agency action."C. Peterson, BC-DC Neb., 2005-1 USTC ¶50,142, 317 BR 532.A federal district court upheld a bankruptcy court order compelling the IRS to consider an individual debtor's offer in compromise. The bankruptcy court properly reasoned that the IRS could not dismiss the debtor's offer without processing and considering it, as the IRS does with non-debtor offers. The court reasoned that the offer was not submitted as a request for a discharge of taxes, but rather as a reflection of what the debtor was able to pay. The IRS's policy of mechanically disregarding the debtor's offer in compromise did not allow a "fresh start", as generally promoted by the Bankruptcy laws. Moreover, the rejection of such offers contradicted the IRS's general practice of being flexible in negotiating with debtors. The court rejected the government's claim that the order exceeded the bankruptcy court's jurisdiction pursuant to Bankruptcy Code sections 1129(a)(9) and 1129(a)(7). It was determined that Congress only intended to bar consideration of offers during Chapter 11 proceedings where a debtor did not agree to different treatment of his claim. Finally, the court was not persuaded that the order violated the Anti-Injunction Act. R.H. Macher, DC Va., 2004-1 USTC ¶50,114, aff'g BC-DC Va., 2003-2 USTC ¶50,537.The IRS has announced its nonacquiescence with respect to In re Macher, in which a federal district court upheld a bankruptcy court's order compelling the IRS to consider an individual debtor's offer in compromise. The district court found that the IRS's policy of mechanically rejecting a debtor's offer in compromise did not allow the "fresh start," generally promoted by the bankruptcy laws. The district court also found that the IRS's rejection of such offers contradicted the IRS's general practice of being flexible in negotiating with debtors.Nonacquiescence Announcement, I.R.B. 2004-32, August 9, 2004.The Chief Counsel has recommended nonacquiescence with respect to In re Macher. In Macher a federal district court upheld a bankruptcy court's order compelling the IRS to consider an individual debtor's offer in compromise. The district court found that the IRS's policy of mechanically rejecting a debtor's offer in compromise did not allow the "fresh start," generally promoted by the bankruptcy laws. The district court also found that the IRS's rejection of such offers contradicted the IRS's general practice of being flexible in negotiating with debtors.AOD 2004-03, August 5, 2004.An individual failed to prove that he entered into a contract with the IRS to release a federal tax lien on his real property. Since an IRS agent lacked statutory authority to release the lien prior to the taxpayer's discharge in bankruptcy, he could not accept the taxpayer's offer to release the lien for payment and, thus, there was no mutual assent to a settlement agreement. Moreover, even if a contract had been formed, the existence of a material misrepresentation on the part of the taxpayer would have made the contract voidable.G.J. Buesing, FedCl, 2000-2 USTC ¶50,724, 228 FSupp2d 908.An IRS policy not to consider offers in compromise from taxpayers who had filed for bankruptcy was impermissibly discriminatory because it was based solely on the bankruptcy status of the taxpayer and not on the merits of the offer. Failure to consider offers in compromise made by bankruptcy debtors denied the debtors access to procedures set forth in Code Sec. 7122 that were available to all other taxpayers. Further, investigation of offers in compromise did not violate the automatic stay. It was also irrelevant that a bankruptcy filing might transfer the IRS's authority to accept a compromise offer to the Department of Justice. Therefore, married taxpayers who had filed for bankruptcy were entitled to have their offer in compromise considered by the IRS under the same standards as non-debtor taxpayers.G.E. Chapman, BC-DC W.Va., 99-2 USTC ¶50,690.Similarly.D.A. Mills, BC-DC W.Va., 2000-1 USTC ¶50,103, 240 BR 689.The IRS has issued the 2007 allowable living expense standards. Allowable living expense standards, also known as collection financial standards, are used to determine the ability of a taxpayer to pay a delinquent tax liability. The standards are effective October 1, 2007. For bankruptcy purposes, the effective date for the standards will be January 1, 2008.IRS News Release, IR-2007-163, October 1, 2007.
Alvin S. Brown, Esq.
Tax attorney
703 425-1400
http://www.irstaxattorney.com/
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Carl Klein v. Commissioner.Dkt. Nos. 7162-06L ; 7163-06L , TC Memo. 2007-325, October 30, 2007.
[Code Sec. 6651]
Penalties, civil: Failure to file: Failure to pay: Reasonable cause. --
A taxpayer was liable for additions to tax as determined by the IRS for failure to file tax returns and pay taxes for all tax years at issue. The taxpayer was an attorney and was fully aware of his obligation to file returns and that he had unpaid tax liabilities. In spite of personal adversity that he encountered, including a divorce and the collapse of his employer, he succeeded in generating substantial income. Consequently, his personal obstacles did not rise to a level amounting to reasonable cause for failure to file his return or pay the tax liabilities.
[Code Sec. 7122]
Offer-in-compromise: Allowable living standards: Bankruptcy. --
The IRS did not abuse its discretion in rejecting a taxpayer's offer-in-compromise of his outstanding tax liabilities. In evaluating his reasonable collection potential, the taxpayer argued that the IRS failed to make an allowance for his basis living expenses greater than provided in published guidance and that the IRS failed to take into consideration his option to file for bankruptcy and potentially discharge some of the tax liabilities. However, the taxpayer had not disclosed any special circumstances that would warrant allowing him a standard of living more lavish that the standard for the area where he lived. The evidence also indicated that the IRS did consider the possibility that the taxpayer might file for bankruptcy; however, in light of the changes to the bankruptcy law, the IRS believed that the taxpayer would not be able to avoid paying the total tax liability by filing for bankruptcy..
.
MEMORANDUM OPINION
JACOBS, Judge:1 The petitions in these consolidated cases were each filed in response to a Notice of Determination Concerning Collection Action(s) Under Section 6320 and/or 6330(notice of determination).2 Pursuant to section 6330(d), petitioner seeks our review of respondent's determination upholding the proposed use of a levy to collect petitioner's income tax liabilities for tax years 1997, 1998, 1999, and 2000. The issue for decision is whether respondent's proposed levy actions may proceed.
Background
These consolidated cases were submitted fully stipulated pursuant to Rule 122. The case at docket No. 7163-06L pertains to tax years 1997 and 1998. The case at docket No. 7162-06L pertains to tax years 1999 and 2000. The stipulations of fact and the attached exhibits are incorporated herein by this reference. At the time he filed the petitions, petitioner resided in Chicago, Illinois.
Petitioner, who was born in 1946, is an attorney who practiced law with various Chicago law firms at different times during the years at issue. Petitioner filed income tax returns for the years at issue as follows:
Adjusted
Gross
Date Return Income Income Self-Employment
Due (After Date Return per Tax per Tax per
Year Extensions) Filed Return Return Return
Oct. 15, July 25,
1997 1998 2001 $163,286 $25,692 $15,431
Oct. 15, Aug. 15,
1998 1999 2001 213,864 40,918 16,684
Aug. 15, Apr. 15,
1999 2000 2003 102,994 47,963 19,208
Aug. 15, Aug. 28,
2000 2001 2002 151,475 28,949 17,792
Respondent assessed the tax for each year and demanded payment for the unpaid balances.3 When petitioner failed to pay the balances, respondent determined that enforced collection action would be required. On November 12, 2003, respondent mailed petitioner a Letter 1058, Final Notice of Intent to Levy and Notice of Your Right to a Hearing for 1997 and 1998, and a separate such notice for 1999 and 2000.4 According to respondent's notices of levy, petitioner's total unpaid tax liability, including additions to tax and interest, exceeded $200,000.5 In response to each notice of levy, petitioner, by means of a Form 12153, Request For a Collection Due Process Hearing, timely requested a hearing under section 6330. In his requests for a hearing, petitioner claimed: (1) He was entitled to abatement of the "penalties"6 assessed against him because he had reasonable cause for his failure to pay the taxes; (2) the Internal Revenue Service (IRS) should have accepted his offer-incompromise based on doubt as to collectibility because of the possibility of discharge of his taxes in the event he filed for bankruptcy; and (3) alternatively, in the event his offer-incompromise was not accepted, the IRS should have allowed him to pay his tax liability in installments.
Petitioner's section 6330 hearing was conducted by means of a face-to-face meeting, correspondence, and telephone conversations with a settlement officer in respondent's Appeals Office (the settlement officer). On November 2, 2004, the IRS received petitioner's offer to compromise his total tax liability for 1997, 1998, 1999, 2000, and 2001 for $70,000.7 On December 8, 2005, following petitioner's submission of additional information in response to requests by respondent, the settlement officer advised petitioner that petitioner was ineligible for an offer-in-compromise because petitioner had the ability to fully pay his income tax liability over 48 months. On December 22, 2005, the settlement officer wrote a letter to petitioner explaining, among other things: (1) That petitioner had not as yet provided any verification of reasonable cause for abatement of additions to tax and that respondent would assume that there was none unless such was provided within the next 15 days; (2) that consideration of petitioner's bankruptcy assertion must be made in the light of the new bankruptcy laws which take "a harder look at future income than the old law did". The settlement officer noted that "You have significant income potential, as you have displayed through past performance, and I do not think that you would avoid paying all the taxes if you file [for bankruptcy]"; and (3) that if petitioner wished to enter into an installment agreement, he should, through his representatives, contact respondent within 15 days.
Petitioner responded to the settlement officer's December 22, 2005, letter by reiterating his position that respondent had not given adequate consideration to his potential bankruptcy because respondent had not considered that his future earnings were uncertain because petitioner was aging and was at that time practicing law without associates and without a formal office or support staff. In addition, petitioner contested the settlement officer's calculation of petitioner's realizable collection potential, claiming that increased allowances should have been made for petitioner's basic living expenses. Petitioner did not attempt to enter into an installment agreement and did not respond to the invitation to submit verification of reasonable cause for abatement of the additions to tax. The settlement officer ultimately recommended rejection of petitioner's offer-in-compromise, and on March 15, 2006, respondent's Appeals Office issued notices of determination sustaining the levy actions for the tax years in issue.
Petitioner timely filed his petitions, in which he seeks review of respondent's determinations. Petitioner contends that respondent acted impermissibly: (1) In denying petitioner's requests for abatement of additions to tax, (2) in rejecting petitioner's offer-in-compromise, and (3) in sustaining the proposed levy actions.
Discussion
The parties are not at odds regarding the technical provisions of section 6330. Further, petitioner does not claim that respondent failed to satisfy any of the mechanical or procedural obligations contemplated by that statute. Nor does petitioner contest the propriety of the assessments of tax as a procedural matter. Consequently, we immediately turn our attention to petitioner's complaints and begin with his first contention that respondent acted impermissibly in denying petitioner's requests for abatement of additions to tax due to reasonable cause. We construe petitioner's position in this regard to be that he should not be held liable for the additions to tax.
Section 6330(c)(2)(B) provides that a person may challenge "the existence or amount of the underlying tax liability for any tax period if the person did not receive any statutory notice of deficiency for such tax liability or did not otherwise have an opportunity to dispute such tax liability." Petitioner did not receive a notice of deficiency for 1998 or for 1999 or otherwise have an opportunity to dispute those additions. Therefore, petitioner is entitled to challenge the existence or amount of the tax liabilities with respect to those returns, which he did in his section 6330 hearing. See Montgomery v. Commissioner [Dec. 55,501], 122 T.C. 1 (2004). We review de novo respondent's determinations with respect to 1998 and 1999. See Davis v. Commissioner [Dec. 53,969], 115 T.C. 35, 39 (2000); Goza v. Commissioner [Dec. 53,803], 114 T.C. 176, 181 (2000).
The record is not entirely clear as to whether petitioner received a statutory notice of deficiency for 1997 or for 2000, and if he did, the extent to which additions to tax were determined therein. Assuming they are subject to review, and regardless of which standard we use to review respondent's determinations (de novo or for an abuse of discretion), we find no basis on which to relieve petitioner from liability for any of the additions to tax.
The Commissioner bears the burden of production regarding the additions to tax. Sec. 7491(c); Higbee v. Commissioner [Dec. 54,356], 116 T.C. 438 (2001). In order to meet this burden, the Commissioner must produce sufficient evidence indicating that it is appropriate to impose an addition to tax. Higbee v. Commissioner, supra at 446. Once the Commissioner has met this burden, the taxpayer must come forward with evidence sufficient to persuade the Court that the Commissioner's determination is incorrect or an exception applies. Id. at 447.
As relevant here, in general, section 6651(a)(1) provides for an addition to tax that can amount to 25 percent of the tax (net amount) required to be shown on the return if the return is filed more than 4 months after the due date of the return, including extensions.8 See sec. 6651(b). Section 6651(a)(2), in general, provides for an addition to tax that can amount to 25 percent of the unpaid portion of the tax shown on a return if the unpaid portion remains unpaid for more than 49 months after the tax is due to be paid. A taxpayer can be absolved of liability from the aforementioned additions to tax if the taxpayer demonstrates that the failure to file, or the failure to pay, as appropriate, is due to reasonable cause and not due to willful neglect. Sec. 6651(a); Higbee v. Commissioner, supra.
Reasonable cause for the failure to file a return may be shown where the taxpayer has made a satisfactory showing that he exercised ordinary business care and prudence but nevertheless was unable to file the return within the prescribed time. Reasonable cause for the failure to pay the tax may be shown where the taxpayer has made a satisfactory showing that he exercised ordinary business care and prudence in providing for payment of his tax liability and was nevertheless either unable to pay the tax or would suffer an undue hardship if he paid on the due date. Sec. 301.6651-1(c)(1), Proced. & Admin. Regs.
Petitioner does not dispute that he filed his returns late and that the taxes shown on the returns remained unpaid as reflected in respondent's records. Petitioner contends that his failure to file returns timely and timely pay taxes was due to personal circumstances during the years at issue and that these circumstances constituted reasonable cause for purposes of section 6651(a). Specifically, petitioner claims that his
marriage was ending, the firms he was associated with were collapsing around him, or not following through on promised remuneration, and he was in the midst of a significantly over-budget rehabilitation project on a dream home that almost immediately upon completion he was forced to sell due to the divorce. This occurred all while trying to assure his family's needs were met.
The record shows that petitioner requested extensions of time to file in each of the tax years at issue. Thus, there is no doubt but that petitioner knew of his obligation to file returns and knew the dates on which they were due. Moreover, he knew that he had an unpaid tax liability.
In spite of the personal adversity he encountered, petitioner succeeded in generating substantial income for the years at issue and apparently chose to spend this income to maintain an elevated lifestyle and to "assure his family needs were met"9 as opposed to paying his taxes. Petitioner is an attorney and obviously knew he had an obligation to obey the tax laws, including the obligation to file timely returns and pay the taxes when due. The obstacles petitioner describes simply do not rise to a level amounting to reasonable cause. After reviewing the record and applying the de novo standard of review for all years at issue, we hold that petitioner is liable for the additions to tax under section 6651(a)(1) and (2) for all of the years at issue.
Section 6654(a) imposes an addition to tax for failure to pay estimated income tax where prepayments of such tax, either through withholding or by making estimated quarterly tax payments during the course of the year, do not equal the percentage of total liability required under the statute. The amount required to be paid through each such estimated quarterly payment is 25 percent of the required annual payment. Sec. 6654(d)(1)(A). The required annual payment is, in turn, the lesser of 90 percent of the tax shown on the return for that taxable year or 100 percent of the tax shown on the return for the preceding taxable year (or a greater percent for individuals with adjusted gross income exceeding $150,000). Sec. 6654(d)(1)(B) and (C). There is no broadly applicable reasonable cause exception to the section 6654 addition to tax.
The record shows that petitioner did not make sufficient estimated tax payments for 1997, 1998, or 1999, the years for which respondent seeks to impose the section 6654 addition. None of the statutory exceptions to imposition of the addition applies. We conclude that respondent has met his burden of production under section 7491(c) regarding petitioner's liability for the additions to tax under section 6654 and that petitioner is liable for those additions.10
Petitioner's second contention is that respondent abused his discretion in rejecting petitioner's offer-in-compromise on the basis of doubt as to its collectibility.
Section 7122(a) authorizes the Secretary to compromise any civil case arising under the internal revenue laws and requires him to prescribe guidelines for officers and employees of the IRS to determine whether an offer-in-compromise is adequate and should be accepted to resolve a dispute. Sec. 7122(a), (c)(1).
The contemplated guidelines and schedules pertaining to evaluating offers-in-compromise on the basis of collectibility have been published in the regulations interpreting section 7122. See sec. 301.7122-1(c)(2), Proced. & Admin. Regs.; 1 Administration, Internal Revenue Manual (CCH), sec. 5.8.4.4 at 16,306. Under this administrative guidance, the Secretary will generally compromise a liability on the basis of doubt as to collectibility only if the liability exceeds the taxpayer's reasonable collection potential. Cf. Murphy v. Commissioner [Dec. 56,232], 125 T.C. 301, 308-310 (2005), affd. [2007-1 USTC ¶50,115] 469 F.3d 27 (1st Cir. 2006). A taxpayer's reasonable collection potential is determined, in part, using the published guidelines for certain national and local allowances for basic living expenses and essentially treating income and assets in excess of those needed for basic living expenses as available to satisfy Federal income tax liabilities. See 2 Administration, Internal Revenue Manual (CCH), exh. 5.15.1-3 at 17,668, exh. 5.15.1-8 at 17,686, exh. 5.15.1-9 at 17,742. Application of the standard allowances for housing and utility expenses (rather than the taxpayer's actual expenses) is not an abuse of discretion where use of the standard allowances does not result in the taxpayer's not having adequate means to provide for basic living expenses. See McDonough v. Commissioner [Dec. 56,665(M)], T.C. Memo. 2006-234.
The foregoing formulaic approach is disregarded, however, upon a showing by the taxpayer of special circumstances that may cause an offer to be accepted notwithstanding that it is for less than the taxpayer's reasonable collection potential (e.g., the taxpayer is incapable of earning a living because of a long-term illness, and it is reasonably foreseeable that the taxpayer's financial resources will be exhausted providing for care and support during the course of the condition). Sec. 301.7122-1(b)(3), (c)(3), Proced. & Admin. Regs.; 1 Administration, Internal Revenue Manual (CCH), sec. 5.8.11.2.1 at 16,375, sec. 5.8.11.2.2 at 16,377. Petitioner does not allege, and it does not appear, that any such special circumstances are present.
According to petitioner, respondent did not properly apply the published guidelines because he failed to make an allowance for petitioner's basic living expenses which were greater than that indicated in the published guidelines. Petitioner contends that a greater amount should have been allowed to reflect the cost of his living in the downtown Chicago area because of his need to entertain clients in his home. Further, petitioner claims that respondent failed to evaluate petitioner's option to file for bankruptcy and the potential discharge of some of the taxes that respondent seeks to collect by levy.
Respondent, in applying the published guidelines, allowed petitioner $2,474 per month for basic living expenses, which petitioner agrees was substantially the same as the amount provided for under the published guidelines.11 When subtracted from the $22,000 gross monthly income that petitioner disclosed in his offer-in-compromise, and in the light of respondent's records which showed that petitioner had $302,400 in wages and $13,400 in nonemployee compensation for tax year 2004,12 respondent concluded that petitioner would be able to pay his by-then $252,462 tax liability in full over 48 months.
We agree with respondent that petitioner had sufficient income to meet his basic living expenses as well as to pay his tax liability in full. Petitioner basically wants the Government to permit him to use his current and expected future earnings to maintain a lifestyle more lavish than the standard for the Chicago area (petitioner's living expenses are more than twice those of the average national and local standards) plus $4,000 per month for "business expenses" without having to fully satisfy his past due tax obligations. The record does not disclose any special circumstances that warrant acceptance of petitioner's offer-in-compromise ($70,000 to extinguish a tax liability over $200,000).
As for the impact that petitioner's bankruptcy might have had on respondent's considerations, respondent contends that he applied the provisions of the Internal Revenue Manual, which advises:
When a taxpayer threatens bankruptcy, the impact of bankruptcy on the Service's ability to collect must be considered. If the Offer Investigator believes, based upon factual information, that the taxpayer is seriously considering filing bankruptcy, the employee should discuss the benefits of filing an administrative offer instead. Internal Revenue Manual , sec. 5.8.10.2.2(1),
The record shows that respondent considered the possibility that petitioner might file a petition in bankruptcy. Respondent's correspondence to petitioner is specific in explaining that petitioner had the ability to pay his total tax liability in full and "in light of the recently passed bankruptcy law which takes more into consideration an individual's income production", respondent did not believe that petitioner would be able to avoid paying the total tax liability by filing for bankruptcy. In other words, respondent believed that the impact of petitioner's filing for bankruptcy on respondent's ability to collect petitioner's unpaid tax would be minimal. We are not prepared to find that respondent's rejection of petitioner's offer-in-compromise was arbitrary, capricious, or without sound basis in fact or law.
On the basis of this record, we conclude that petitioner is liable for the additions to tax as determined by respondent for all years at issue and that respondent did not abuse his discretion in rejecting petitioner's offer-in-compromise. Respondent's determination that the Federal tax levies were appropriate in these cases is sustained.
To reflect the foregoing,
Decisions will be entered for respondent.
1 These cases were assigned to Judge Julian I. Jacobs for disposition by order of the Chief Judge on August 20, 2007.2 Unless otherwise indicated, all section references are to the Internal Revenue Code (Code) as amended, and all Rule references are to the Tax Court Rules of Practice and Procedure.3 Respondent assessed $1,337 of additional tax for 1997 in May of 2003 and $1,927 of additional tax for 2000 in December of 2003. By the time he filed the petitions, petitioner had paid approximately $30,700 of his tax liability for the 4 years in issue.4 On or about Nov. 14, 2003, a Federal tax lien was obtained on petitioner's property with respect to all tax years at issue. Petitioner does not contest the propriety of the tax lien filing.5 The income tax assessments include additions to tax under sec. 6651(a)(1) and (2) for all tax years at issue and under sec. 6654 for 1997, 1998, and 1999.6 References to penalties in various places in the record actually are to additions to tax under sec. 6651(a)(1) and (2) and sec. 6654. References in this opinion to additions to tax relate to one or more, as appropriate. Petitioner does not seek abatement of interest.7 Tax year 2001 is not at issue herein.8 Where the sec. 6651(a)(2) addition also applies, the sec. 6651(a)(2) addition is reduced as provided in sec. 6651(c)(1).9 In response to a question on Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, requesting a list of "the dependents you can claim on your tax return", petitioner listed his son aged 24 and his daughter aged 22, neither of whom lived with him. Petitioner signed and dated the Form 433-A on Oct. 25, 2004. In petitioner's 2003 tax return, dated Oct. 14, 2004, neither child (or anyone else) had been claimed as a dependent.10 The parties stipulated that "petitioner filed an income tax return for 1996, reporting tax liability in the amount of $29,980." In addition, for 1996, petitioner reported self-employment tax of $15,430.11 Respondent allowed $194 per month for transportation; it appears that the published guidelines allow $329, or a similar amount, for ownership of one car in Chicago. Petitioner contends that he should be allowed "the actual expense for his car loan ($870 per month)" instead.12 The record shows that respondent did not consider the value of dissipated assets in evaluating petitioner's offer-incompromise, although respondent was concerned that such consideration might have been warranted. See 1 Administration, Internal Revenue Manual (CCH), sec. 5.8.5.4. at 16,339-6.
Compromises: BankruptcyThe IRS did not violate 11 U.S.C. §525 when it returned a corporation's offer in compromise (OIC) as nonprocessable during the pendency of its chapter 11 bankruptcy proceeding. IRS policy and procedures provided that, because the corporation was in bankruptcy, processing its OIC was not in the government's best interest. Moreover, mandamus relief was not available to the corporation as an alternative means to compel the government to consider its OIC. The IRS owed no clear duty to the corporation to act as required for mandamus relief. Its discretion to compromise carried with it the discretion not to exercise that discretion.1900 M Restaurant Associates, Inc., 2007-1 USTC ¶50,116; aff'g, BC-DC D.C., 2005-1 USTC ¶50,313, 319 BR 302.The IRS was not required to process an offer-in-compromise submitted by debtors in bankruptcy. That type of requirement would be a remedy in the nature of mandamus and that remedy was not appropriate. The IRS owed no clear duty to the debtors and its decision to not process offers-in-compromise submitted by debtors in bankruptcy was solely within its discretion. The plan confirmation process was an adequate alternative remedy to obtain a compromised tax liability from the IRS. Requiring the IRS to negotiate with the debtors outside of the plan confirmation process would not further the provisions of the Internal Revenue Code nor would it foster the ultimate goal of achieving a confirmed plan. The reasoning of 1900 M Restaurant Associates, Inc., BC-DC D.C., 2005-1 USTC ¶50,313, was adopted.W. Uzialko, BC-DC Pa., 2006-1 USTC ¶50,297.The District Court affirmed a Bankruptcy Court order requiring the IRS to consider an offer in compromise made by an individual in bankruptcy. The Bankruptcy Court had jurisdiction to make such an order under 11 U.S.C. §105, which states that a bankruptcy court can issue any order necessary to carry out the provisions of the Bankruptcy Code. W.K. Holmes, DC Ga., 2005-1 USTC ¶50,230.The IRS was ordered to process and consider an offer in compromise submitted by a debtor despite the agency's published policy of not considering offers in compromise from taxpayers who have filed for bankruptcy. The IRS position of not accepting less than what is required to be paid by a Chapter 13 reorganization plan, as set forth in Rev. Proc. 2003-71, was not required by the Tax Code or Treasury Regulations and did not carry the force and effect of law. Also, the IRS determination not to entertain offers in compromise from those in bankruptcy was not exempt from judicial review as an "agency action."C. Peterson, BC-DC Neb., 2005-1 USTC ¶50,142, 317 BR 532.A federal district court upheld a bankruptcy court order compelling the IRS to consider an individual debtor's offer in compromise. The bankruptcy court properly reasoned that the IRS could not dismiss the debtor's offer without processing and considering it, as the IRS does with non-debtor offers. The court reasoned that the offer was not submitted as a request for a discharge of taxes, but rather as a reflection of what the debtor was able to pay. The IRS's policy of mechanically disregarding the debtor's offer in compromise did not allow a "fresh start", as generally promoted by the Bankruptcy laws. Moreover, the rejection of such offers contradicted the IRS's general practice of being flexible in negotiating with debtors. The court rejected the government's claim that the order exceeded the bankruptcy court's jurisdiction pursuant to Bankruptcy Code sections 1129(a)(9) and 1129(a)(7). It was determined that Congress only intended to bar consideration of offers during Chapter 11 proceedings where a debtor did not agree to different treatment of his claim. Finally, the court was not persuaded that the order violated the Anti-Injunction Act. R.H. Macher, DC Va., 2004-1 USTC ¶50,114, aff'g BC-DC Va., 2003-2 USTC ¶50,537.The IRS has announced its nonacquiescence with respect to In re Macher, in which a federal district court upheld a bankruptcy court's order compelling the IRS to consider an individual debtor's offer in compromise. The district court found that the IRS's policy of mechanically rejecting a debtor's offer in compromise did not allow the "fresh start," generally promoted by the bankruptcy laws. The district court also found that the IRS's rejection of such offers contradicted the IRS's general practice of being flexible in negotiating with debtors.Nonacquiescence Announcement, I.R.B. 2004-32, August 9, 2004.The Chief Counsel has recommended nonacquiescence with respect to In re Macher. In Macher a federal district court upheld a bankruptcy court's order compelling the IRS to consider an individual debtor's offer in compromise. The district court found that the IRS's policy of mechanically rejecting a debtor's offer in compromise did not allow the "fresh start," generally promoted by the bankruptcy laws. The district court also found that the IRS's rejection of such offers contradicted the IRS's general practice of being flexible in negotiating with debtors.AOD 2004-03, August 5, 2004.An individual failed to prove that he entered into a contract with the IRS to release a federal tax lien on his real property. Since an IRS agent lacked statutory authority to release the lien prior to the taxpayer's discharge in bankruptcy, he could not accept the taxpayer's offer to release the lien for payment and, thus, there was no mutual assent to a settlement agreement. Moreover, even if a contract had been formed, the existence of a material misrepresentation on the part of the taxpayer would have made the contract voidable.G.J. Buesing, FedCl, 2000-2 USTC ¶50,724, 228 FSupp2d 908.An IRS policy not to consider offers in compromise from taxpayers who had filed for bankruptcy was impermissibly discriminatory because it was based solely on the bankruptcy status of the taxpayer and not on the merits of the offer. Failure to consider offers in compromise made by bankruptcy debtors denied the debtors access to procedures set forth in Code Sec. 7122 that were available to all other taxpayers. Further, investigation of offers in compromise did not violate the automatic stay. It was also irrelevant that a bankruptcy filing might transfer the IRS's authority to accept a compromise offer to the Department of Justice. Therefore, married taxpayers who had filed for bankruptcy were entitled to have their offer in compromise considered by the IRS under the same standards as non-debtor taxpayers.G.E. Chapman, BC-DC W.Va., 99-2 USTC ¶50,690.Similarly.D.A. Mills, BC-DC W.Va., 2000-1 USTC ¶50,103, 240 BR 689.The IRS has issued the 2007 allowable living expense standards. Allowable living expense standards, also known as collection financial standards, are used to determine the ability of a taxpayer to pay a delinquent tax liability. The standards are effective October 1, 2007. For bankruptcy purposes, the effective date for the standards will be January 1, 2008.IRS News Release, IR-2007-163, October 1, 2007.
Alvin S. Brown, Esq.
Tax attorney
703 425-1400
http://www.irstaxattorney.com/
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