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Installment Agreement 

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IRC 6159

The Tax Court held that an IRS Settlement Officer did not abuse her discretion in sustaining collection action against a taxpayer in Michael J. Stevens and Alexis M. Stevens v. Comm’r of Internal Revenue, Docket No. 15761-21L, filed July 24, 2023.  The IRS filed notices of intent to levy against the taxpayers for tax years 2015 and 2016 to collect over $100,000 owed in income taxes.  As a result, the taxpayers requested a Collection Due Process hearing.  During the course of the hearing, the Settlement Officer explained to the taxpayers that she would need a Collection Information Statement disclosing assets, income and expenses, in order to entertain an installment agreement or Offer in Compromise.  While the taxpayers attended the hearing, they never provided complete financials.  Rather, they provided an incomplete financial with little supporting documentation that showed they could pay $93 per month.  The IRS then used information they had to make adjustments to the financials, which ultimately showed the taxpayers could pay $746 per month.  This was offered as an installment agreement a couple of times, but the taxpayers refused to accept it or respond with more documentation to support their proposal.  IRC Section 6159 authorizes the Secretary of the Treasury to enter into a written agreement to pay tax in installments if it determines it will ultimately facilitate collection of the liability.  The IRS generally has discretion to accept or reject an installment agreement proposal.  The Court ruled there was no abuse of discretion by the IRS since the Settlement Officer based many of her calculations on IRS standardized expenses and income on tax returns and a paystub that was provided by the taxpayers.  

Levy on Right to Property in Trust 

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IRC 6331

The United States District Court for the District of Massachusetts ruled in Marshall F. Newman, trustee of the Angelo C. Todesca, Jr. Family Trust II v. United States of America v. Albert M. Todesca, filed August 9, 2023 as Civil Action No. 20-10632-FDS, that pursuant to IRC 6331, a Trustee’s failure to subdivide property in accordance with trust terms does not impair the IRS’s ability to levy taxpayer’s right to distribution. In 2009, Albert Todesca pleaded guilty to tax evasion for failing to remit taxes withheld from employee wages to the IRS.  He was then assessed the trust fund recovery penalty, along with assessments for personal income tax liabilities. The IRS then placed two levies on family trust assets for which he was a beneficiary held at Santander Bank, N.A. The trustee of the trust, Marshall F. Newman, then sued the bank and the U.S. government arguing the levies were illegal.  The trust at issue was established by the taxpayer’s father, who was now deceased. Taxpayer and his brother were beneficiaries. The trustee was to divide the trust into two separate trusts at the death of taxpayer’s father.  However, he never did so. Both trusts were to provide net income, or principal distributions, at the beneficiary’s request or at the trustee’s discretion. The trust held cash and real property, primarily. The IRS ultimately issued levies to the bank for the approximate total of $379,000.00  The bank froze the funds in the accounts and turned them over to the Court. Pursuant to IRC section 6331, after notice and demand, the IRS may collect tax by “levy upon all property and rights to property,” of the taxpayer who owes the government taxes. The Court took up the issue of whether or not the lien attached to an interest of the taxpayer, in the Trust. The Court explained that the language of the statute is broad and that Congress meant to reach every interest in property that a taxpayer might have.  In this case, the Court applied Massachusetts law to determine what interest the taxpayer has in the trust, and ultimately what interest the federal tax lien attaches to. This was a fact specific analysis that looked at the following factors: transferability, pecuniary value, control and enjoyment. While this may not be the rule in all jurisdictions, it is extremely difficult for a trust to protect assets from the reach of the federal tax lien, while the beneficiary retains some level of control. The Court even comments on spendthrift provisions…generally used to protect beneficiaries from creditors. Fundamentally, the Court explained that a beneficiary’s interest is not immunized from the federal tax lien by using this common tool. Ultimately, the Court allowed the government to succeed on its relevant actions in this matter. 

Trust Fund Recovery Penalty

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IRC 6672

The United States Court of Appeals for the Fifth Circuit held that the taxpayer was a responsible person who willfully failed to pay over employment taxes on behalf of her employer in Pamela Cashaw v. Comm’r of Internal Revenue, filed May 31, 2023, and as such was liable for the Trust Fund Recovery Penalty (TFRP). The TFRP is equal to 100% of the unpaid income taxes, Social Security and Medicare withheld from employee’s paychecks, but not paid over to the government.  In this case, the employer was Riverside General Hospital.  The person held liable was initially hired as a pharmacist, but ultimately took over as hospital administrator after the chief administrative officer of the hospital was indicted for Medicare fraud. Cashaw, the taxpayer in this matter, was directed to take over as administrator temporarily by a federal judge.  She was given nonexclusive signatory authority and oversaw the functionality of the hospital.  That included payroll and operations.  During her time, the hospital had serious financial distress as Medicare and Medicaid funding had been withdrawn due to the prior administrator’s alleged fraud. During this time, the hospital failed to pay its payroll taxes.   The law at issue, set out in IRC Section 6672, states in summary that a penalty equal to the unpaid portion of the trust fund taxes may be assessed against “any person,” required to collect, account for, or pay over the withheld taxes who “willfully” fails to do so.  The Court ultimately ruled that Capshaw “falls within the sweeping net of Section 6672 responsibility.” The record showed she was presented with checks to sign, reviewed them to see what they were for and even declined to sign one when she disagreed with the purpose of the check.  While the Court indicated that she may not be the most responsible for payment of the taxes, she need only be “a” responsible person under the statute.  For the “willful” component, the Court explained that the statute requires only a “voluntary, conscious, and intentional act, not a bad motive or intent.”  The taxpayer’s testimony at trial established that she was aware the hospital was not paying its taxes and she made a choice to prioritize essential patient services above paying payroll taxes.  The Court ruled that once she was aware the hospital was paying other creditors before the IRS, then she reached the standard of willfulness under the statute.  This is a tough conclusion, but given the very broad nature of this statute, the correct conclusion. 

Innocent Spouse Relief

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IRC 6015

The Tax Court in Keri A. deGuzman and Brian deGuzman v. Comm’r of Internal Revenue, at Docket No. 13230-20, issued an opinion after trial on May 2, 2023 finding that it was appropriate to grant Innocent Spouse Relief under IRC section 6015 (c). In this case, Brian deGuzman was a cardiothoracic surgeon. He met his wife, Keri, at a hospital where she was a nurse.  They married in 2004.  They ultimately adopted four children and Ms. deGuzman ceased working.   Dr. DeGuzman was not only a surgeon, but also the co-founder of two medical device related companies and the chief medical officer of one of the companies.  The DeGuzman’s lived a “lavish,” lifestyle per the Court. Ms. DeGuzman enjoyed as much of the lavish lifestyle as her husband. During the 2013 to 2018 time period, the taxpayers either failed to timely file their income tax returns, or failed to properly pay their taxes.  They ultimately owed hundreds of thousands of dollars to the IRS. Interestingly, it was also Ms. DeGuzman who regularly communicated with the CPA regarding preparation of the family tax returns…including at least some information about Dr. DeGuzman’s businesses. She also participated in meetings with the CPA about the tax issues.  While the 2016 and 2017 returns were filed late, 2018 was timely filed.  All were examined by the IRS and ultimately adjusted.  Ms. DeGuzman requested relief from the exam assessments under the Innocent Spouse statutory sections and the IRS allowed it. Ultimately, Dr. DeGuzman disagreed and the matter ended up before the Tax Court.   All of the above is mentioned because it normally negates the success of a taxpayer seeking innocent spouse relief.  However, in this case, the IRS had granted the relief and the Appeals division sustained it.  In this case, the spouse has brought the matter before the Court.  The statute indicates that it is the requirement of the government to prove that the requesting spouse (Ms. DeGuzman) had actual knowledge of the items that gave rise to the deficiency.  Remember, it wasn’t the IRS arguing that Ms. DeGuzman should be held liable here, it was her husband.  As such, nothing before the Court reflected the IRS arguing that Ms. DeGuzman had actual knowledge of these items giving rise to the deficiency. Because of that issue, the Court could not conclude that Ms. DeGuzman had actual knowledge of the understatement items and therefore the relief granted under the Innocent Spouse provisions of Section 6015(c) stood.  Regardless of the reasons, this case is a bit of an outlier when it comes to relief for someone that seemingly benefited so much personally from non-payment of tax deficiencies. 

Frivolous Return Penalty

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IRC 6702(a)

The Tax Court ruled in Srbislav B. Stanojevich, 160 T.C. No. 7, filed April 10, 2023 that the Petitioner, in his capacity as trustee of a grantor-type trust, filed frivolous income tax returns for four tax periods.  As such, he was held liable for penalties because the law provides at IRC 6702(a) that a penalty is imposed on a “person [who] files what purports to be a return of the tax imposed by this title,” and Petitioner’s filing of the frivolous returns on behalf of the trust falls within the meaning of that provision.  The IRS assessed a $5,000 per return penalty in this case.  In January of 2013, Petitioner submitted a request to the IRS for an employer tax identification number for the Source Financial Trust (SFT) and represented that the trust was a grantor-type trust and that he was the trustee. Petitioner later filed a Form 1041, U.S. Income Tax Return for Estates and Trusts for each relevant year. The total taxable income on each return was from interest income. Each return also reported that SFT had federal income tax withheld in an amount equal to the amount of interest/total taxable income reported on the return.  The total tax on each return was then put at zero and an overpayment equal to the amount of tax withheld was claimed.  Forms 1099 were attached reflecting income paid to SFT. Some of the 1099s reflected tax withholdings.  The IRS determined the 1099s were false. The IRS deemed the returns to be frivolous and assessed the Petitioner with the penalty referenced above.  The Petitioner argued that he should not be assessed the penalty because these were not his personal returns. This was the issue the Court decided – could a taxpayer be assessed a section 6702(a) penalty for filing a frivolous return that is not his personal return?  The Court indicated that it was appropriate for the IRS to make this assessment.  The Court saw nothing in the statute that prevented its application in this instance and cited IRC section 6102(b)(4) as further support because it has a mandate that the return of a trust “shall be made by the fiduciary thereof.”  So, its trustee. The Court explained that the fact that Congress placed on the trustee the duties and responsibilities associated with the filing of the trust’s income tax return supports its conclusion that Congress considered it appropriate to impose section 6702(a) liability on a trustee who files a frivolous income tax return on behalf of a trust. 

Tax Liens

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IRC 6321

In the case of Julie Dinwiddie v. United States of America, Internal Revenue Service, the Ninth Circuit Court of Appeals illustrates the reach of the federal tax lien. This case is No. 21-35368 filed May 11, 2023. The action in this case was an allegation by Julie Dinwiddie that her personal bank account was wrongfully levied by the IRS.  In 2007 the IRS assessed Julie Dinwiddie’s husband, Jeffrey, with $3.7 million in tax liabilities.  And a tax lien attached in favor of the government to his property.  At that time, Jeffery was sole shareholder of Evergreen Nursery Incorporated (“ENI”). As the court explains, a tax lien broadly reaches every interest in property that a taxpayer might have.  As such, the lien attached to the stock and any monetary distribution associated with that stock.  At some point after the lien is filed, Jeffrey transferred his stock to Julie.  Julie then distributed funds from ENI’s bank account to her personal account as the new sole stockholder.  Because the lien attached to ENI and the money that flowed from it, the IRS properly levied her personal bank account. There are methods to transfer property to another free of the federal tax lien, but none of those situations existed in this matter. 

Passport Notice

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IRC 7345

The Tax Court ruled in Guy Alvarez Gayou v. Comm’r of Internal Revenue, T.C. Memo 2023-61, Filed May 16, 2023 that the IRS properly certified the taxpayer’s account as seriously delinquent under the law for action by the Secretary of State as it relates to the denial, revocation or limitation of a taxpayer’s passport.  This ruling is representative of the rather straightforward effect of the now 7-year-old law. As the Court explains, a taxpayer may be notified that they have a “seriously delinquent tax debt,” and that certification shall be transmitted to the Department of State so that the Secretary of State may act, as reflected above, relating to the taxpayer’s passport.  The assessment amount for this process must be higher than $50,000 – which has adjusted for inflation and currently stands at $59,000. The Court analyzed the exceptions to the definition of “seriously delinquent tax debt,” to support the taxpayer’s position.  Those exceptions are: 1) that the debt is being paid in a timely manner pursuant to an installment agreement under IRC section 6159, 2) that the debt is being paid properly under an Offer in Compromise, 3) that collections is suspended because the taxpayer asked for a Collection Due Process hearing, or 4) that collections is suspended while the IRS reviews an application for innocent spouse relief.  While the taxpayer previously had an installment agreement in place, he did not have one in place at this time. This is the most common way to decertify the seriously delinquent debt and put one’s passport in good standing.  

Offer in Compromise 

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IRC 7122

The Tax Court ruled in Duane Whittaker and Candace Whittaker v. Comm’r of Internal Revenue, T.C. Memo 2023-59, filed May 15, 2023 that an IRS Settlement Officer had abused her discretion when calculating the Reasonable Collection Potential (RCP) of the taxpayers while reviewing an Offer in Compromise as a collection alternative in the context of a Collection Due Process hearing. The Court remanded the matter to the Appeals Office to consider updated financials and other directives of the Court in resolution of the matter. Taxpayers owed approximately $50,000 at submission of the Offer in Compromise.  The issue before the Court was whether the IRS abused its discretion by failing to adequately consider: 1) the taxpayers’ reliance on their retirement account for income, 2) the special circumstances that they raised – specifically that they were near retirement and unable to borrow against their home, and 3) the change in their financial situation due to the pandemic.  In regards to the retirement income, the taxpayers argued that under the Internal Revenue Manual (IRM) and under Treasury Regulation section 301.7122-1(c)(3)(iii)(example 2), that the IRS may characterize retirement funds as income, rather than equity, when the taxpayer is within one year of retirement and they need the funds for necessary living expenses.  The Court indicated that even though the Settlement Officer made reference to this issue in the administrative record, the analysis did not make it into the determination notice from the Settlement Officer.  On the issue of home equity, the taxpayers indicated they would have problems borrowing because the assessed value was not reflective of the appraised value based on the condition of the home. They offered to obtain more information for the Settlement Officer,  but instead of asking for that information, the Settlement Officer merely indicated that she would not remove the equity in the home from the calculation of RCP. The Court concluded that the Settlement Officer’s conclusion that the taxpayers could tap the equity of the home was erroneous as their evidence was not, in fact, reviewed. And therefore, the Settlement Officer’s reliance on the equity to calculate the Reasonable Collection Potential was an abuse of discretion. Though the Court did not necessarily indicate that the taxpayers had sound positions on the issues they raised, this opinion should have a beneficial effect on how closely Settlement Officers address Reasonable Collection Potential in that it would be detrimental to the IRS to not inquire further about issues like these and document the provision, or lack of provision, of further evidence by the taxpayer.  

Penalty Abatement—Preparer Reliance

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IRC 6662

The Tax Court held in Lucell Trammer, III & Sharonda M. Trammer v. Comm’r of Internal Revenue, Docket No. 6615-22, issued March 14, 2023 that the taxpayers had met the reasonable cause exception of IRC Section 6664(c)(1) that provides relief from the accuracy related penalties assessed against them under IRC Section 6662.  The taxpayers filed returns for 2019 and 2020 – taking their receipts to a return preparer who decided how and where to report items on their returns.  As it turned out, some personal expenses, like mortgage interest, were reported multiple times.  Some personal expenses were claimed as business expenses. Ultimately, the IRS issued a notice of deficiency assessing tax and accuracy related penalties under IRC 6662(a). The Court indicated that relief from an accuracy-related penalty only applies if the taxpayers’ reliance on the return preparer meets Treasury Regulation Section 1.6664-4(b), as follows: (1) the advisor was a competent professional who had sufficient expertise to justify reliance, (2) the taxpayer provided necessary and accurate information to the advisor, and (3) the taxpayer actually relied in good faith on the advisor’s judgment.  Though the taxpayer was held liable for the tax adjustment, the Court ruled that the accuracy related penalties would not apply to the years at issue. 

Offer in Compromise

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IRC Section 7122(f) Deemed Acceptance review

The United States Tax Court in Michael D. Brown v. Comm’r of Internal Revenue, at 158 T.C. No. 9, filed on June 23, 2022 ruled that the time during which the IRS Appeals Office reviews the return of an Offer in Compromise is not included as part of the 24-month “deemed acceptance” period of IRC 7122(f).  The rule at issue states that “[a]ny offer-in-compromise submitted under this section shall be deemed to be accepted by the Secretary if such offer is not rejected by the Secretary before the date which is 24 months after the date of the submission of the offer.”  See IRC section 7122(f).  In this case, taxpayer filed for a Collection Due Process (CDP) hearing after the filing of a tax lien.  Right away, the taxpayer filed for an Offer through IRS Appeals.  The collection specialist that reviewed his file returned the Offer because other investigations of the taxpayer were pending. He owed about $50 million in taxes.  During the actual CDP hearing, the taxpayer urged the Settlement Officer to override this decision.  The Settlement Officer would not do it and proceeded to close the CDP case.  It was approximately 28 months from the time the CDP hearing was filed until the IRS issued a notice of determination.  Taxpayer argued that the IRS exceeded the rule for deemed acceptance and the Offer should be accepted.  The Court analyzed the statute and regulations associated with it.  In part, the taxpayer tried to argue that even though the Offer unit “returned,” the Offer, it was only Appeals that can make the determination to return the Offer. As such, it should be deemed accepted.  The Court didn’t buy it. Rather, they point out that the relevant procedures explaining the deemed accepted provision specifically state that the “period during which the IRS Office of Appeals considers a rejected offer-in-compromise is not included as part of the 24-month period.” The Court explained that this would be true even outside of the CDP setting. In other words, if an Offer is rejected and a taxpayer Appeals that rejection, nothing about the Appeal extends the 24-month period in the rule.