IRS Wasn't Wrong to Reject Taxpayer Payment Plan that Didn't Pay Off Liability in Ten Years

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1 IRS Wasn't Wrong to Reject Taxpayer Payment Plan that Didn't Pay Off Liability in Ten Years Brown, TC Memo The Tax Court has held that IRS was not wrong to reject, based on several failings by the taxpayer, a taxpayer's proposal to pay off his $34 million tax debt over a period of 15 years, even though the taxpayer offered to extend the 10- year statute of limitations on collection. If a taxpayer fails to pay tax due after demand for payment, then IRS is authorized to file a lien notice and to collect the tax by levy against the taxpayer's property. ( Code Sec. 6321, Code Sec. 6323, Code Sec ) Code Sec and Code Sec provide that the IRS must give to a taxpayer notice of lien and levy matters and the opportunity for an administrative review in the form of a Code Sec (collection due process, CDP) hearing by the IRS Appeals Office. If dissatisfied, the taxpayer may seek judicial review of the administrative determination. ( Code Sec. 6320(c), Code Sec. 6330(d)(1) ) Code Sec. 6330(c)(3) provides that the determination of the Appeals officer must take into consideration, among other thing, the issues raised by the taxpayer, and whether the collection actions balance the need for the efficient collection of taxes with the legitimate concern of the taxpayer that any collection action be no more intrusive than necessary. To the extent that a taxpayer's underlying tax liability is an issue, the Tax Court reviews the Appeals officer's determination de novo. (Landry, (2001) 116 TC 60 ) Where there is no dispute as to the underlying tax liability properly before the Court, the Court reviews the actions of the settlement officer for abuse of discretion. (Swanson, (2003) 121 TC 111 ) Code Sec. 6502(a) provides that the statute of limitations for collection expires ten years after the date of assessment. A jeopardy assessment is a special assessment levied to collect an alleged 1

2 deficiency when the taxing officer believes that delay may jeopardize the collection of the claim. ( Code Sec ) Rev Proc 78-12, CB 590, sets forth IRS's procedures regarding the processing and authorization of jeopardy assessments. After the taxpayers, the Browns, a married couple filing jointly, brought a suit protesting IRS's notice of deficiency, the parties reached a settlement that the taxpayers owed $33.5 million in taxes, interest and penalty. Prompted by the amount of the Browns' liability and factors such as Mr. Brown's foreign bank accounts in tax haven jurisdictions, his concealment of assets through nominees, and his having listed the Browns' personal residence for sale at $17.7 million, IRS decided to make a jeopardy assessment regarding the years in issue. Form 2644, Recommendation for Jeopardy/Termination Assessment, was approved by several IRS employees but was not signed by the Area Director, California. IRS sent the taxpayers both a Notice of Jeopardy Assessment and Notice of Levy. The taxpayers timely sent to the Appeals Office Form 12153, Request for a Collection Due Process or Equivalent Hearing. In an attachment to the form, the Browns explained that they were concurrently appealing their jeopardy determinations with another IRS department and that this hearing request was being protectively filed in the event that the jeopardy determinations were ultimately sustained. In preparation for the CDP hearing, the IRS settlement officer noted that he had not yet received a completed Form 433-A, Collection Information Statement, that he requested from the Browns. At the CDP hearing, the taxpayers said that their only asset that would yield cash was their home, but that it was in a family trust that negatively affected their ability to borrow with respect to the home. They submitted a compact disc that contained 2000 pages of financial information; they also submitted a nearly- 300 page document explaining a complex scheme to raise the $33.5 million by borrowing $12 million and using it to buy life insurance policies from individuals 2

3 who were at least 82 years of age. The document indicated that this scheme would result in the tax liability being paid off in 15 years. The Browns offered to consent to an extension of the period of limitations under Code Sec The settlement officer testified that he read the proposal in an hour. Because of the case's complexity, including the Browns' protesting of the jeopardy assessment and the possibility of related issues being resolved with IRS Chief Counsel, he felt that this case was not ripe for a "payment alternative" at the Appeals Office-level and that it needed to "go into suspense." The settlement officer and the Browns' representative then discussed the Browns' current finances. The representative asserted that the Browns did not have regular income to make payments and that they probably would not be able to access the equity in their home. The settlement officer asked for written documentation supporting those statements. The representative left the settlement officer a voice message stating that the Browns could not "borrow or sell" with respect to their home and that he would send something in writing to that effect in the next couple of days. When he did not receive the promised information several months later, after repeated requests and after having spent a total of 28 hours on the case, the settlement officer finalized his determinations for the years at issue, and approved the levy. The Court held that IRS did not abuse its discretion when it rejected the taxpayer's offer. The Court first rejected the Browns' argument that the "abuse of discretion" standard did not apply to this case because the settlement officer "spent virtually no time reviewing over 2,200 pages of relevant, timely information." They cited Hoyle, (2008) 131 TC 197, as authority that "failure to conduct a hearing" is "subject to de novo review." The Court said that Hoyle does not address a "failure to conduct a hearing," much less what the appropriate standard of review is under such a circumstance. Moreover, the facts showed that the settlement officer had 3

4 conducted a Code Sec hearing, spending around 28 hours on the Browns' case, and that the Browns had already disputed their underlying tax liability for the years in issue through their earlier-settled tax deficiency cases before the Tax Court and their IRS appeal of the jeopardy assessment held separately from the Code Sec hearing. The standard of review, the Court said, was therefore abuse of discretion. The Browns next argued that the settlement officer failed to verify that proper procedures had been followed in the authorization of the jeopardy assessment. Relying on Rev Proc 78-12, they argued that IRS "railroaded" through the jeopardy assessment without the necessary signatures of either the "Director Field Operations, South/West or the Area Director for California" on Form They also cited Swegles, (DC CA 1987) 60 AFTR 2d , for the proposition that where Form 2644 does not "reflect that appropriate approvals were obtained, the jeopardy assessment itself is invalid." The Court said that Swegles never mentions Form 2644 and only, as background, refers to a jeopardy assessment that had been improperly approved. Likewise, Rev Proc does not reference Form 2644 and requires only approval, not a signature, by the "District Director of Internal Revenue." The Court noted that, when IRS was reorganized in '98, IRS abolished the position of district director; thus, while Rev Proc has not been updated to reflect this change, the duties of the position have been assumed by other employees, e.g., Area Directors, and collections procedures continue status quo. It cited Grunsted, (2011) 136 TC 455, for the principle that an assessment is not rendered invalid by the fact that there are no IRS district directors after IRS's reorganization. The Browns argued that, because the settlement officer took only an hour to read the proposal, he could not have understood its complexity and, thus, could not have fairly made his decision to reject it. However, the Court said, it was not self-evident that the settlement officer could not have read the proposal in an hour and understood it-or understood enough of it to realize that it was 4

5 unsuitable for the Government. The settlement officer determined that the offer could not be accepted because it would not result in full payment of their liability within the period of limitations for collection. That reason is a legitimate, nonarbitrary basis for his decision, and the Browns did not suggest any law or facts showing otherwise (including any law requiring IRS to extend the period of limitations when considering an installment agreement). The Browns also took exception to the settlement officer's determination that they failed to provide financial information so that their collection alternative could be considered. They alleged that the settlement officer requested Form 433-A, even though he already "had a complete Form 433-A and over 1,000 pages of supporting documentation." But the Court said that, contrary to the Browns' point of view, it could readily deduce what "missing" financial information the settlement officer was referring to in his determination. His case notes, made before his determination, focused on the Browns' representative's declarations that he would ask the Browns to provide loan rejection notices and that he would send written documentation of their inability to borrow against or sell their home. Similarly, and more definitively, the notice of determination addressed requested financial information only in the form of the Browns' inability to borrow against or sell their house-not Form 433-A. Given the context of the notice and the case notes, the more likely conclusion was that the missing information that the settlement officer referred to in his determination was the loan rejection notices or other such documentation. 5