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The Tax Court in Brief – July 11th – July 15th,
2022
Freeman Law’s “The Tax Court in Brief” covers every
substantive Tax Court opinion, providing a weekly brief of its
decisions in clear, concise prose.
For a link to our podcast covering the Tax Court in Brief,
download here or check out other episodes of
The Freeman Law Project.
Tax Litigation: The Week of July 11th, 2022, through July 15th,
2022
- Colbert v Commissioner,
T.C. Memo. 2022-74 | July 13, 2022 |Wells, J.| Dkt. No.
8395-16. - Knight v. Comm’r, T.C. Memo. 2022-76|
July 14, 2022?| Lauber, A. | Dkt. No.
11719-20L - Larochelle v. Commissioner, T.C. Summary
Opinion 2022-12 | July 12, 2022 | Leyden | Dkt.
10416-20S - TBL Licensing LLC f.k.a. The Timberland
Company, and Subsidiaries (A Consolidated Group), v. Comm’r,
T.C. Memorandum 2022-71| July 12, 2022 | Halpern, J. | Dkt. Nos.
21146-15.
Kelly v. Comm’r, No. 13353-21L, T.C. Memo 2022-73 |
July 13, 2022 | Lauber |
Short Summary: At issue in
this collection due process (CDP) case is the propriety of the
IRS’s collection actions and their refusal to grant the
taxpayer’s leniency requests and requests for acceptance of a
partial payment installment agreement. Ultimately, the IRS mostly
prevailed.
Key Issues:
- Whether the taxpayer was eligible for “first time
abatement” of penalties. - Whether the taxpayer established “reasonable cause”
for his failure-to-file and failure-to-pay additions to tax that
would warrant waiver. - Did the IRS err in rejecting the taxpayer’s proposed
installment agreement?
Facts and Primary
Holdings:
- The taxpayer in this case is a securities broker in New York
City, where he resided when he petitioned the Tax Court. During
2013–2015 he earned between $1 million and $2 million
annually. But he did not file timely Federal income tax returns
reporting this income. - On December 22, 2017, the taxpayer filed a delinquent return
for 2013 reporting adjusted gross income (AGI) of $1,919,000 and
tax of $689,923. He did not enclose full payment with his return.
The IRS duly assessed the reported tax and additions to tax under
sections 6651(a)(1) (failure to file timely) and (2) (failure to
pay) and 6654 (failure to pay estimated tax), plus interest. - On December 26, 2017, the taxpayer filed a delinquent return
for 2014 reporting AGI of $1,496,287 and tax of $514,875. He made
no payments toward his 2014 liability. The IRS duly assessed the
reported tax and additions to tax under sections 6651(a)(1) and (2)
and 6654, plus interest. - On January 17, 2018, the taxpayer filed a delinquent return for
2015 reporting AGI of $1,205,400 and tax of $403,096. He made no
payments toward his 2015 liability. The IRS duly assessed the
reported tax and additions to tax under section 6651(a)(1) and (2),
plus interest. - As of September 2019 taxpayer’s outstanding liabilities for
2013–2015 exceeded $2.5 million. On September 4, 2019, in an
effort to collect these liabilities, the IRS issued a levy notice.
One week later, on September 12, 2019, the IRS issued a lien
notice, informing him that the IRS had filed two Notices of Federal
Tax Lien (NFTLs). The taxpayer timely requested a
CDP hearing for the levy notice and the lien notice. He expressed
interest in an installment agreement, withdrawal of the NFTL
filings, and abatement of the additions to tax for all three
years. - Petitioner’s account transcripts show that for 2012 the IRS
assessed additions to tax under sections 6651(a)(1) and (2) and
6654, and that none of these assessments was abated or reversed.
Therefore, the Tax Court found that the IRS correctly determined
that the taxpayer did not qualify for “first time
abatement.” - Because of the COVID-19 pandemic, the CDP hearing was delayed
until February 10, 2021. During the conference the taxpayer urged
two grounds for abatement of the additions to tax. He initially
asserted that he qualified for “first time abatement”
under an IRS administrative policy. The IRS agent explained that
taxpayer was ineligible for such relief, as he had been
non-compliant with his tax obligations in prior years, and the IRS
had assessed the same additions to tax for 2012, the year
immediately preceding the first year in issue. - Alternatively, the taxpayer urged that he had “reasonable
cause” for failing to file and pay on time. He alleged that
his wife, beginning in 2007, had been spending lavishly on luxury
goods, causing marital and financial problems. He stated that in
2015 his wife filed for divorce, necessitating that he pay an
“exorbitant” amount of money on legal fees and spousal
support. These events, petitioner said, caused “financial
hardship, emotional problems, and depression.” The IRS agent
rejected his request for abatement on this ground, noting his
history of nonfiling, his “consistent high income,” and
his “lack of payment protocol.” - Petitioner also urged that the NFTL filings be withdrawn,
urging that these filings might adversely affect his business and
result in “significant hardship.” The IRS agent declined
to withdraw the NFTL filings, concluding that the taxpayer’s
assertions were insufficient to justify withdrawal under section
6323(j). - Finally, the taxpayer proposed a partial payment installment
agreement (“PPIA“) offering payments of
$30,000 per month. The IRS agent determined that he did not qualify
for a PPIA under collection guidelines set forth in the Internal
Revenue Manual (“IRM“). At that time the
taxpayer had an unpaid tax liability of $250,000 for 2019 and was
not current on his estimated tax payments for 2020. Rather than pay
these liabilities, taxpayer requested that they be “rolled
into” the PPIA. The IRS agent rejected this request,
explaining that this would result in the “pyramiding” of
taxpayer’s tax liabilities. - On June 3, 2021, the IRS issued a notice of determination
sustaining the collection actions, and he timely petitioned the Tax
Court. On February 10, 2022, the IRS filed a Motion for Summary
Judgment urging that the IRS agent had correctly sustained the
collection actions. Taxpayer timely opposed the Motion, contending
that the agent erred in declining to abate the additions to tax, in
upholding the NFTL filings, and in rejecting the proposed
PPIA. - The Tax Court found that the IRS agent did not abuse his
discretion, as he satisfied all of the statutory requirements
pursuant to § 6320(c), which incorporates §
6330(c)(3). - The Court rejected the taxpayer’s argument that the IRS did
not timely notify him of the filing of the notice of federal tax
lien, as required by § 6320(a)(2) - The Court also rejected the taxpayer’s argument that the
IRS agent abused his discretion in refusing to accept the PPIA, as
approval of a PPIA requires that a taxpayer be in compliance with
“filing, withholding, federal tax deposit and estimated tax
payment requirements,” and taxpayer in this case was not. The
IRS agent’s rejection of the proposal, therefore, was
appropriate. - The Court rejected the taxpayer’s argument that the IRS
agent abused his discretion in refusing to withdraw the NFTL. - Although the Tax Court stated that the taxpayer faces a
“decidedly uphill battle” in attempting to show
“reasonable cause,” the Court noted that this defense
“usually entails questions of fact ill-suited to summary
adjudication. See Estate of Wilbanks v. Commissioner, 94
T.C. 306, 315 (1990) (noting that “reasonable cause” is
“a matter for decision after trial and not on . . . motions
for summary judgment”). Therefore, the Court denied summary
judgment on the issue of “reasonable cause.”
Key Points of Law:
- Where the validity of a taxpayer’s underlying liability is
properly at issue, the Tax Court reviews the IRS determination de
novo. Goza v. Commissioner, 114 T.C. 176, 181–82
(2000). - Where the taxpayer’s underlying liability is not properly
at issue, the Tax Court reviews the IRS decision for abuse of
discretion only. See id. at 182. Abuse of discretion
exists when a determination is arbitrary, capricious, or without
sound basis in fact or law. See Murphy v. Commissioner,
125 T.C. 301, 320 (2005), aff’d, 469 F.3d 27 (1st Cir.
2006). - In deciding whether an IRS agent abused their discretion, the
court looks at whether he (1) properly verified that the
requirements of applicable law or administrative procedure were
met, (2) considered any relevant issues petitioner raised, and (3)
considered “whether any proposed collection action balances
the need for the efficient collection of taxes with the legitimate
concern of (petitioner) that any collection action be no more
intrusive than necessary.” § 6330(c)(3); see
6320(c). - To qualify for “first time abatement” of penalties, a
taxpayer must not have had any unreversed additions to tax for any
of the preceding three years. I.R.M. 20.1.1.3.3.2.1(4) (Nov. 21,
2017); see Love v. Commissioner, T.C. Memo
2019-92, 118 T.C.M. (CCH) 94, 96. - To prove reasonable cause for failure to file, a taxpayer must
show that he “exercised ordinary business care and prudence
and was nevertheless unable to file the return within the
prescribed time.” Treas. Reg. § 301.6651-1(c)(1). - To prove reasonable cause for failure to pay, the taxpayer must
show that he “exercised ordinary business care and prudence in
providing for payment of his tax liability and nevertheless was
either unable to pay the tax or would suffer undue hardship if he
paid the tax on the due date.” Hardin v.
Commissioner, T.C. Memo. 2012-162, 103 T.C.M. (CCH) 1861, 1863
(citing Treas. Reg. § 301.6651-1(c)(1)). - Financial hardship “generally does not affect a
person’s ability to file.” IRM 20.1.1.3.3.3(1)(a) (Aug. 5,
2014). - Notice of the filing of a federal tax lien must be given not
more than 5 business days after the date of the filing of the
notice of lien. 6320(a)(2). - Section 6159 authorizes the Commissioner to enter into an
installment agreement if he determines that it will facilitate full
or partial collection of a taxpayer’s unpaid liability. See
Thompson v. Commission, 140 T.C. 173, 179 (2013). Subject to
exceptions not relevant here, the decision to accept or reject an
installment agreement lies within the Commissioner’s
discretion. See Reg. § 301.6159-1(a), (c)(1)(i);
see also Kuretski v. Commissioner, T.C. Memo. 2012-262,
aff’d, 755 F.3d 929 (D.C. Cir. 2014). - A prerequisite for approval of a PPIA is that the taxpayer be
“in compliance with filing, withholding, federal tax deposit
and estimated tax payment requirements.” IRM 5.14.2.2.4(1)
(Apr. 26, 2019). The requirement of current compliance as a
condition of executing a PPIA “ensures that current taxes are
paid and avoids ‘the risk of pyramiding tax
liability.'” Hull v. Commissioner, T.C. Memo.
2015-86, 109 T.C.M. (CCH) 1438, 1441 (quoting Schwartz v.
Commissioner, T.C. Memo. 2007-155, 109 T.C.M. (CCH) 1377,
1379). - Section 6323(j) authorizes withdrawal of a notice of federal
tax lien if (1) “the filing of such notice was premature or
otherwise not in accordance with administrative procedures,”
(2) the taxpayer has entered into an installment agreement that
renders the NFTL unnecessary, (3) withdrawal of the NFTL “will
facilitate the collection of the tax liability,” or (4)
withdrawal of the NFTL “would be in the best interests of the
tax-payer (as determined by the National Taxpayer Advocate) and the
United States.” § 6323(j)(1). Note that even if a
taxpayer establishes eligibility for withdrawal of the NFTL, §
6323(j)(1) is permissive, not mandatory. Berkery v.
Commissioner, T.C. Memo. 2011-57, 101 T.C.M. (CCH) 1258, 1260;
see Treas. Reg. § 301.6323(j)-1(c) (“If the Commissioner
determines conditions for withdrawal (of an NFTL) are present, the
Commissioner may (but is not required to) authorize the
withdrawal.”).
Insight: As demonstrated by
this case, a taxpayer with substantial income that has repeatedly
failed to comply with filing and payment obligations is unlikely to
find any leniency from the IRS or the Tax Court. Here, where the
taxpayer was making between $1 million and $2 million in income
each year, the IRS and Tax Court rightfully refused his
proposals.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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