Statute of Limitations on Collection Extended by Taxpayer Bankruptcy, Offer in Compromise. Fields, (DC NM 3/17/2016) 117 AFTR 2d

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1 Statute of Limitations on Collection Extended by Taxpayer Bankruptcy, Offer in Compromise Fields, (DC NM 3/17/2016) 117 AFTR 2d A district court has approved IRS's calculation of an extension of the statute of limitations (SOL) on collection based on the taxpayer's bankruptcy and his submission of an offer in compromise. It also approved IRS's foreclosing on its liens on the taxpayer's property that arose from its assessment of employment taxes, interest, and penalty. Code Sec. 6502(a) provides that the SOL for collection expires ten years after the date of assessment. However, under Code Sec. 6503(a)(1), the SOL is suspended anytime IRS is unable to collect the tax by levy or proceeding in Court, and the SOL is further extended by an additional six months for cases under Title 11 (Bankruptcy) of the United States Code. ( Code Sec. 6503(h) ) The period of limitations on levies or collection suits is suspended for the period during which IRS is prohibited from making a levy during the pendency of a refund suit for divisible taxes. ( Code Sec. 6331(i)(5) ). The term "divisible tax" includes any tax imposed by subtitle C of the Code-i.e., FICA (Social Security and Medicare) taxes, the Railroad Retirement Act tax, the federal unemployment tax, and income tax withholding ( Code Sec. 6331(i)(2) ) IRS cannot make any levies to collect a liability that is the subject of an offer in compromise during the period an offer is pending with IRS (i.e., while IRS is evaluating whether the offer will be accepted or rejected) or for 30 days immediately following the rejection of the offer. ( Code Sec. 6331(k)(1) ) If a proceeding in court begins within the time limits prescribed, the period during which the tax may be collected by levy is extended until the liability for 1

2 the tax, or a judgment against the taxpayer arising from the tax liability, is satisfied or becomes unenforceable. ( Code Sec. 6502(a) ) If a person refuses or fails to pay federal taxes owed after demand for payment, a statutory tax lien arises and attaches to all property and rights to property owned by such person on the dates the taxes are assessed and acquired thereafter. ( Code Sec ) Certain claimants against a delinquent taxpayer are given protection against a filed tax lien. Under these "superpriority" rules, the qualifying claimant is protected even though his interest in the taxpayer's property arose after IRS had filed a notice of its tax lien. ( Code Sec. 6323(b) ) Samuel Fields (Samuel) operated a dry cleaning business, Master Cleaners. He filed employment tax returns (Form 941) and unemployment tax returns (Form 940) from the fourth quarter of '93 through June 30, 2009 but never paid the taxes due with those returns. IRS made assessments against Samuel over several years, beginning with '93 tax assessments on Sept. 25, '95. And, IRS' tax liens attached to his property, both real and personal, beginning on Sept. 25, '95. Samuel filed a Chapter 13 petition on Mar. 22, '96. The Chapter 13 proceeding was dismissed on Feb. 27, Additionally, Samuel submitted an offer in compromise to IRS, which was processible by IRS on Mar. 26, 2004 and rejected on Jan. 5, Samuel was the sole owner of his residence and of Master Cleaners' property from '93 through January On or about Jan. 14, 2005, Samuel executed deeds to the residence and Master Cleaners property, stating that he and his wife, Johnette Fields, were the joint owners of these properties. Johnette did not pay any consideration to Samuel in exchange for being added as a joint owner of the residence or the Master Cleaners property. IRS filed its complaint to foreclose on the liens on Feb. 3,

3 IRS argued, and the court agreed, that the SOL had not run when IRS's complaint was filed and was further extended under Code Sec while the suit was pending and until any judgment obtained in this suit was paid. On Oct. 23, '95, IRS made assessments against Samuel for his unpaid employment taxes for the fourth quarter of '93. The 10-year SOL period for the collection of the assessment would have expired on Oct. 23, 2005 without any extensions or suspensions. But, the bankruptcy proceeding filed by Samuel prevented IRS from taking any collection actions for four years, 11 months, and five days. Therefore, under Code Sec. 6503(a)(1), the SOL was extended for that period. And, under Code Sec. 6503(h), it was extended an additional six months. IRS then argued that an offer in compromise prohibits IRS from collecting the tax by levy or proceeding in court while the offer in compromise is pending, and thus, suspends the SOL for that time period under the rule of Code Sec. 6331(i)(5) and Code Sec. 6331(k)(1)(A). Here, Samuel submitted an offer in compromise that was processible by IRS on Mar. 26, 2004 and was rejected on Jan. 5, Consequently, the offer in compromise extended the SOL for collection of the taxes included in the Offer by 285 days, plus the additional thirty days under Code Sec. 6331(k)(1)(B). Thus, the SOL for collection of the fourth quarter of '93 employment tax assessments against Samuel was calculated as follows:... Original assessment: Oct. 23, '95... Plus ten years on the original collection statute: Oct. 23, Plus four years, 11 months, and five days due to the Chapter 13 proceeding: Sept. 28, Plus six months due to Chapter 13 per Code Sec. 6503(h)(2) : Mar. 28,

4 ... Plus 285 days for the offer in compromise per Code Sec. 6331(i)(5) and Code Sec. 6331(k)(1) : Jan. 7, Plus 30 days for the offer in compromise per Code Sec. 6331(i)(5) and Code Sec. 6331(k)(1)(B) : Feb. 6, The court approved similar calculations with respect to the other unpaid taxes (with respect to which later assessments were made). The court then ruled that IRS could foreclose on its liens. When IRS made assessments against Samuel for unpaid federal employment and unemployment taxes, statutory federal tax liens arose against all of Samuel's property under Code Sec IRS argued that the statutory tax liens arising from assessments made before Jan. 14, 2005 (when Samuel transferred a joint interest to Johnette), attached to Samuel's 100% ownership in these properties. IRS's liens would defeat a taxpayer's interest in the property and would also defeat a third party's interest in property unless that third party qualified for one of the protections found in Code Sec. 6323(b). Under Code Sec. 6323, certain secured interest holders, judgment lien creditors, and purchasers are given priority over unfiled tax liens. However, in this case, Johnette held no lien or judgment on the properties, and the deeds giving Johnette a joint interest did not make her a "purchaser" within the meaning of Code Sec. 6323(b). Although IRS did not perfect its statutory tax liens against third party purchasers and other lien holders by filing a public notice of its tax liens in the county records until Jan. 15, 2010, these statutory liens were nonetheless superior to any interest held by Samuel as the taxpayer and any interest given to Johnette without consideration. Thus, the court said, IRS is entitled to foreclose its tax liens arising from assessments made before Jan. 14, 2005 against the residence and the Master 4

5 Cleaners property, and is entitled to sell those properties free and clear of all interests to apply 100% of the net proceeds after costs of sale to Samuel's employment and unemployment tax liabilities. And, IRS is entitled to foreclose its tax liens arising from assessments made after Jan. 14, 2005 against Samuel's 50% interest in the residence and the Master Cleaners property, and is entitled to sell those properties free and clear of all interests to apply 50% of the net proceeds after costs of sale to Samuel's employment and unemployment tax liabilities. 5

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