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Fraudulent Transfer,Alter Ego and Nominee

The United States District Court for the Western District of Washington ruled against the government in  United States of America v. Thomas Weathers, et al., Case No.: 3:18-cv-5189-BHS decided February 8, 2022 because the government failed to prove its alter ego and nominee claims by a preponderance of the evidence and failed to prove its fraudulent transfer claim by clear and satisfactory evidence. This case was commenced by the Government to reduce tax assessments to judgment and foreclose federal tax liens.  The Government alleged that three entities owned or controlled by the Weathers were their nominees or alter egos and that certain properties owned by the Weathers were transferred fraudulently for their purpose of avoiding the tax lien.  The Government simply got carried away on this claim. In part, the reason for that was because there were 8 other properties that the Government was successful in foreclosing through Summary Judgment Motion. In this case, however, the Court ruled that the taxpayers never had an ownership interest in the entity that owned the relevant property, they were never officers, never received personal benefit and the only funds flowing from the entity were for services that were legitimate.  There was no shifting of ownership from the Weathers to the entity/owner and no evidence of actual intent to hinder or delay.  This case details the factors of alter ego/nominee claims and fraudulent transfers carefully, then applies the facts of this case to those factors, clearly showing the Government fell far short of its burden to establish the claims.

Current Compliance and Installment Agreement

The Tax Court ruled in Warren Keith Jackson and Barbara Ann Jackson v. Comm’r of Internal Revenue, T.C. Memo 2022-50, filed May 12, 2022 that it is not an abuse of discretion for IRS Appeals to sustain a proposed levy and deny a proposal of an installment agreement  for a taxpayer that has failed to make required estimated tax payments.  Taxpayers timely filed and failed to pay multiple years of 1040 income tax liabilities that totaled $128,095 as of 2018.  Taxpayers submitted a proposal for an installment agreement.  A field Revenue Officer rejected the proposal of $556 per month for the installment agreement and cited that the taxpayers had “sufficient  cash or equity in assets to fully or partially pay the balance owed.” Further, that rejection stated that taxpayers needed to make estimated tax payments to qualify for an installment agreement. Given the amount of the debt and monthly proposal, this was a Partial Payment Installment Agreement which requires the IRS to address equity prior to establishment of the payment agreement.  After the IRS rejected the agreement, a levy notice with appeal rights was issued. On Appeal, the IRS noted that the taxpayers did not appear to be current on estimates and that they had equity equal to $98,000 in real property.  Ultimately Appeals sustained the levy because of non-response. The Tax Court in its review made clear that it has consistently held that an Appeals officer does not abuse their discretion by declining a collection alternative for taxpayers that fail to remain compliant with current taxes.  The fundamental take away is that the taxpayer must fix the problem by showing they are capable of paying their current taxes, prior to seeking a collection alternative.  

Passport: Seriously Delinquent Taxes

IRC 7345

The Tax Court ruled in Ifeoma Ezekwo v. Comm’r of Internal Revenue, T.C. Memo 2022-54 filed May 31, 2022 that there was no error in the Commissioner’s certification to the Department of State that the taxpayer had a “seriously delinquent tax debt,” and that her passport could be revoked, limited, or an application for the same could be denied.  IRC Section 7345 provides that if the IRS certifies that a taxpayer has a “seriously delinquent tax debt,” that certification is transmitted to the Department of State for action relating to a taxpayer’s passport.  A “seriously delinquent tax debt” is one that is unpaid, legally enforceable, and in excess of the current threshold adjusted for inflation – currently, $55,000. It is important to note that if a taxpayer is on an installment agreement, or in currently not collectible status, they are not seriously delinquent for this purpose.  This case is a straightforward fact pattern with a taxpayer seemingly in denial that they still owed the government money after levy.  As such, the Court disposed of the matter quickly.  Of note, the Court stated that the only determination they are allowed to make under the statute is whether the Commissioner’s certification of a taxpayer as seriously delinquent was “erroneous.”  They made this point to illustrate the fact that they cannot review the underlying liabilities in a review of the certification.  The Court also pointed out a couple of exclusions for debts that could be certified.  One was relating to a pending Collection Due Process hearing. If timely filed, the debt associated with the periods that triggered the hearing rights would not be included in the total debt for certification purposes.  Also, the Court explained that a debt for which innocent spouse relief is requested will not be part of the certification.   Taxpayers who have disagreements with the government, and are close to the threshold, could pay down the liability below the current amount that triggers the certification and de-certify.  Additionally, this author would note that if a case is assigned to a field Revenue Officer, there are provisions that allow them to expedite a request for decertification if a taxpayer meets an exemption – such as the placement of an installment agreement. During the pandemic, the certification process was paused.  That has since restarted and taxpayers are being certified at this time. 

Offer in Compromise

IRC 6320 Hearing

The United States Court of Appeals for the Seventh Circuit in Craig L. Galloway v. Comm’r of Internal Revenue, No. 21-2269 decided February 9, 2022 that because the issue at hand was outside of the authority of the Tax Court to decide, then the issue also fell outside of the authority of this Court to review.  

The Taxpayer in this case had an unpaid income tax liability of $64,315.43.  Taxpayer submitted an Offer in Compromise which was rejected by the IRS because they believed the taxpayer could pay the liability based on the reasonable collection potential.  Rather than appeal this decision, taxpayer filed another Offer in Compromise. It was rejected for the same reason.  He appealed, but the decision of the Offer unit was sustained.  After the appeal, the IRS issued a Notice of Federal Tax Lien Filing with rights to a Collection Due Process hearing under IRC 6320. Taxpayer requested a hearing and during that hearing the Officer advised that he could submit a new Offer directly to the Offer Unit, but that if it was the same Offer, it would be rejected.  No Offer was filed and the Tax Lien was sustained.  Taxpayer then appealed the decision to sustain the filing of the Notice of Federal Tax Lien to the Tax Court.  The IRS won in Tax Court by correctly arguing the taxpayer was prohibited from raising a challenge to the Offer in that setting – which he was trying to do.  Taxpayer then appealed to this Court.  This Court indicated that their review would be based on whether there was an abuse of discretion by the settlement officer in sustaining the federal tax lien – not a review of the underlying rejection of the Offer. This was because the taxpayer had participated meaningfully in his appeal of the Offer rejection.  Because the Tax Court was limited in reviewing the underlying debt, so too is this Court of Appeals.

Appeal Rights and Trust Fund Recovery Penalty

Letter 1153

The United States Tax Court in Mohammad A. Kazmi v. Comm’r of Internal Revenue, T.C. Memo 2022-13 filed March 1, 2022, ruled in favor of the IRS that a properly served and received Letter 1153 constitutes a prior opportunity to challenge the underlying liability and therefore a failure to appeal it prohibits the same challenge at a Collection Due Process hearing (CDP hearing). The taxpayer was issued a Letter 1153, Proposed Trust Fund Recovery Penalty, after interview by a Revenue Officer in his capacity as part-time hourly bookkeeper for his employer who had failed to pay over employment taxes.  A taxpayer has 60 days to challenge a Letter 1153 by submitting a written appeal.  Taxpayer did not make any effort to appeal and as such the IRS assessed him with the penalty.  After issuance of a Notice of Federal Tax Lien, taxpayer filed a timely CDP request and attempted to argue that he should not be held liable for the trust fund recovery penalty.  The settlement officer determined the taxpayer was prohibited from challenging the underlying liability in the CDP hearing.  Taxpayer argued that a Letter 1153 does not constitute a prior opportunity to address the liability because there is no ability to seek judicial review before the Tax Court if appeals would deny the requested relief. The Court agreed that it is correct there is no opportunity to seek Tax Court relief in this instance, but under the law, the taxpayer could get judicial review by paying the tax and seeking review in the Federal District Court.  As such, this does constitute a prior opportunity to seek judicial review.  Lesson  – always seek Appeal review after issuance of Letter 1153 if there are arguments to be made for relief from assessment.

Trust Fund Recovery Penalty 

IRC Section 6672

The United States Court of Appeals for the Fifth Circuit ruled in United States of America v. Charles I. Williams, DDS, as Executor of Mary C. Williams, at Case No. 20-10433 filed July 6, 2021 that Charles I. Williams, acted “willfully” within the meaning of the statute and that the district court’s ruling indicating the same was affirmed. As such, Mr. Williams was held personally liable for the trust fund recovery penalties under section 6672(a) of the Internal Revenue Code. Mr. Williams owned and operated several dentistry practices. After not paying employment taxes, the government pursued collections. The central issue in the case was whether Williams acted willfully to allow for personal liability under the statute. Personal liability against responsible persons can attach under the statute when the person is a responsible person who willfully fails to turn over the withheld taxes. Willfulness requires only a voluntary, conscious, and intentional act, not a bad motive or evil intent. The Court explained that evidence showed that the responsible person had knowledge of payments to other creditors after he was aware of the failure to pay withholding tax is sufficient to show willfulness. Mr. Williams had argued that he was in a mental fog and could not have willfully spurned his tax obligations. Further he argued that he had turned over his businesses’ tax duties to his bookkeeper and another individual. The Court ruled that he was in fact willful because he knew of the unpaid payroll taxes and yet decided to pay private creditors instead of the IRS. 

Worker Classification

IRC 3121(d)

The United States Tax Court ruled in Bell Capital Management, Inc. v. Comm’r of IRS at Docket No. 21714-07 filed June 14, 2021 that the IRS reclassification of Petitioner’s President, Ron H. Bell, as an employee was correct. The IRS used Code section 3121(d), which describes individuals who are considered employees regardless of their status under common law. In particular, the IRS and Court focused on the Treasury Regulations at Section 31.3121(d)-1(b) relating to Corporate Officers. That provision states that “[g]enerally, an officer of a corporation is an employee of the corporation. However, an officer of a corporation who as such does not perform any services or performs only minor services and who neither receives nor is entitled to receive, directly or indirectly, any remuneration is considered not to be an employee of the corporation.” In this case, the petitioner admitted he was an officer. However, many years before the periods associated with the case, the Petitioner moved Mr. Bell from an employee to a leased position and entered a contract for personal services. Mr. Bell continued to render the same services before and after the lease which could not be deemed to be minor services. The Court ruled that because of these factors and the fact that Mr. Bell received indirect remuneration through the leasing company, he could be appropriately classified as an employee. 

Administrative File Rule

RRA98 section 1001(a)(4)

The United States Court of Appeals for the Eighth Circuit ruled on June 8, 2021 in Jason Stewart, Kristy Stewart v. Comm’r of Internal Revenue at Docket No. 19-3786 that the taxpayer was not entitled to a new Appeals hearing because the Revenue Officer included notes and correspondence about a meeting with the taxpayers’ attorney in the official file that was later made available to the Appeals Settlement Officer who ultimately reviewed the case. Over time there has been an attempt to “preserve” the independence of settlement officers in appeals from other parts of the IRS, the Court explains. The IRS Restructuring and Reform Act of 1998 (RRA98), further attempted to secure this goal. Independence generally includes separation of investigation and adjudicative functions. It has been ruled that certain comments and statements, particularly about the credibility or demeanor of a taxpayer or their representative and their level of cooperation, are generally prohibited. In this case, the Revenue Officer appeared unannounced at the taxpayers’ attorney’s office. Notes about the meeting, including comments from the lawyer that he would not supply financial information to the Revenue Officer on request, but would only supply it to IRS Appeals, were included in the file for Appeal’s review. A letter from the Revenue Officer was placed in the administrative file the same day indicating that the lawyer refused to provide financial information and directed the IRS Officer to leave. The taxpayers argued that they should have a new hearing and further that the Collections Division should have ceased any continued pursuit of financial information once the Appeal’s request was submitted. The Court disagreed. Relying on an exception set out in Rev. Proc. 2012-18, the Court ruled that the inclusion of the notes was allowed because they were contemporaneous statements pertinent to consideration of the case. These statements were deemed reminders of the need to get financials and what kind of effort might be required to do so. Additionally, the Court ruled that it was not inappropriate to continue investigation after the filing of a due-process hearing. Rather, the Court ruled that even though Appeals was involved, it would be necessary for the field Revenue Officer to continue to gather financial information and work with the taxpayer, so that the IRS could properly evaluate matters during the Appeal’s hearing.

Fraud and Statute of Limitations

IRC Section 6501(c)(1)

The United States Tax Court in George S. Harrington v. Comm’r of Internal Revenue handed down an opinion on July 26, 2021 at Docket No. 13531-18, in which it ruled that the taxpayer fraudulently underreported his income for some years at issue and therefore, his argument that the three year statute of limitations found in IRC 6501(a) barred assessment was not valid. This case has an entertaining fact pattern that includes details of the European lumber exporting trade to Canada, bank arrangements in the Cayman Islands and deposit activity in Swiss Bank Accounts. The key transaction at issue, and its evolution over time, relates to the sale of taxpayer’s home that resulted in the availability of $350,000. Taxpayer invested these funds with his former employer’s lawyer into a Union Bank of Switzerland (UBS) account under the name of Reed International, Ltd., a Cayman Islands entity. In 2009, the United States entered into a deferred prosecution agreement with UBS based on charges of conspiracy to defraud the U.S. by impeding the IRS in the ascertainment, computation, assessment and collection of taxes during the period 2002-2007. The taxpayer’s account was closed by UBS, at which point, a UBS banker connected him with a Swiss National who suggested the taxpayer invest in a life insurance policy in Liechtenstein. Ultimately the life insurance policy was canceled and the assets were moved into a bank account in taxpayer’s wife’s name…also in Liechtenstein. Needless to say, none of the income attributable to the offshore accounts appeared on taxpayer’s self-prepared tax returns. The IRS examined taxpayer based on documentation from the deferred prosecution agreement obtained from UBS and proposed assessments. The taxpayer argued that the notice of deficiency was issued more than six years after the period of limitations began to run. However, IRC Section 6501(c)(1) provides that where the taxpayer filed a false or fraudulent return with the intent to evade tax, there is no statute of limitations on assessment. The last half of the opinion, some twenty pages, explores the details of the fraud provision and ultimately allows for partial assessment beyond the normal statutory timeframe. 

Passport Revocation

IRC Section 7345 

The United States Court of Appeals for the Tenth Circuit in Jeffrey T. Maehr v. United States Department of State, Case No. 20-1124, handed down an opinion on July 20, 2021 in which it ruled in a case of first impression nationwide that the federal government’s statute to force taxpayers to address their tax delinquencies or suffer withdrawal or revocation of their passport until the delinquency is addressed, was in fact constitutional. The taxpayer in the case attacked the law on three grounds: 1) that it violated substantive due process, 2) that is runs afoul of the principles announced in the Privileges and Immunities clauses, and 3) that it contradicts caselaw concerning the common law principle of ne exeat republica. The law at issue was passed by Congress as part of the Fixing America’s Surface Transportation Act (“FAST Act”) in 2015. A certification of delinquency must be transmitted by the IRS to the Department of State. Taxpayers may avoid or decertify by coming into compliance through the establishment of an installment agreement, a Partial Payment Installment Agreement, or even a determination of Currently Not Collectible. This case is an interesting read for the constitutional scholar but doesn’t change the statute at issue.