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Trust Fund Recovery Penalty 

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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

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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

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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

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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

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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. 

Installment Agreements and Tax Liens

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I.R.C. Section 6320

Federal Tax liens may remain in place where a taxpayer’s liability during her installment agreement period is above the amount the IRS requires in the Internal Revenue Manual (IRM), the U.S. Tax Court ruled in Jill Beth Savedoff v. Comm’r of Internal Revenue, filed August 31, 2020 at Docket No. 4346-18L. The taxpayer created liabilities from self-employment on two different tax periods. She established a payment agreement, but defaulted. The IRS filed a Notice of Federal Tax Lien (NFTL). The taxpayer filed a Collection Due Process (CDP) hearing request on the basis that her installment agreement was wrongfully terminated and the lien notice was not properly served. Apparently, the taxpayer moved and did not receive a notice of the filing of the lien. The Court ruled that the taxpayer did not provide the IRS with a clear and concise notification of a different address. As for the lien withdrawal, the Court reviewed the guidelines allowing for the withdrawal of a NFTL. The taxpayer essentially argues that the lien should have been withdrawn if a second installment agreement was established. Both the Tax Court and Treasury Regulations provide that nothing requires the IRS to withdraw the NFTL because of the establishment of an installment agreement. While there are provisions to withdraw the NFTL if the balance is less than $25,000 and the taxpayer establishes a direct debit installment agreement, the taxpayer in this situation simply owed more and when offered to establish a direct debit installment agreement, passed on that option. 

Civil Contempt and Employment Taxes

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I.R.C. Section 3111

The United States District Court for the Southern District of New York ruled in USA v. Jiffy Cleaners of Hartsdale, Inc. and Wilton Calderon at case number 16 CV 2428 (VB) filed July 27, 2020, that civil contempt requested by the Government was appropriate since a prior judgment for $110,853.48 was clear and unambiguous setting forth the taxpayer’s responsibilities regarding making employment tax payments and the government sufficiently detailed taxpayer’s noncompliance. The taxpayer operated a dry cleaning business. The government alleged that the taxpayer failed to pay over employment taxes and opened a court case to collect. One of the owners of the business was present in court when a judgment was entered ordering them to pay the government for monies owed, timely file and pay current returns. Further, the judgment enjoined the taxpayer from assigning or transferring money or assets to any other person or entity. Monthly affidavits were to be delivered to the IRS to substantiate compliance.  A short time later, the spouse of the owner incorporated a business to operated as a dry cleaners one mile away. The original business was closed. The IRS learned that certain equipment had been transferred from the old business to the new one. The government contended that the taxpayer had not complied in many ways, one of which was transferring property. Additionally, they failed to pay current taxes and file returns from the time of judgment to shut down of operations. The taxpayer made what the Court deemed to be a handful of frivolous arguments. Ultimately, the Court deemed the taxpayers to be in contempt. The Court entered an order prohibiting the owner from occupying any position within any business for which he would be responsible for collecting, truthfully accounting for, paying, withholding, or filing any taxes pursuant to the IRC, including employment taxes. 

Federal Tax Lien Valid in Collection Due Process

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I.R.C. Section 6320

The United States Tax Court handed down an opinion on July 30, 2020 at Docket No. 15274-17L, Carol Joy Biggs-Owen v. Comm’r of Internal Revenue, in which it ruled that a Notice of Federal Tax Lien (NFTL) was properly upheld where underlying tax liabilities were not properly challenged and the IRS Settlement Officer (SO) didn’t abuse her discretion in sustaining the NFTL filing. The Taxpayer owned two home healthcare businesses during the years at issue – 2013 and 2014. In both years the tax withholdings were not enough to cover the liabilities. The taxpayer established an installment agreement that defaulted. The IRS then issued a NFTL, which triggers appeal rights in the form of a Collection Due Process (CDP) hearing. When setting the CDP hearing, the SO requested copies of the 2015 and 2016 returns and proof of estimated tax payments, among other things. After reviewing financial information and documentation submitted by the taxpayer, the SO said she would sustain the NFTL filing because the taxpayer was not in compliance with her estimated tax obligations and her withholdings were insufficient. Further, the taxpayer did not accept the SO’s calculation of ability to pay. With no collection alternative deemed acceptable by the taxpayer, the SO closed her case. The Court ruled that it was not an abuse of discretion for the SO to reject a proposal for a collection alternative where a taxpayer fails to comply with current estimated tax obligations. The taxpayer argued she did not have enough time to fix her estimated tax issues and propose actual terms of a collection alternative. The Court disagreed. The Court said that the SO provided an opportunity in both her initial letter and call, along with two extensions of time to address the issue. This was a two-month time period. The Court ruled that the SO had not abused her discretion in upholding the NFTL and returning the case to IRS collections. 

Offer in Compromise

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I.R.C. Section 7122

The United States Tax Court in Swanberg v. Comm’r of Internal Revenue handed down an opinion on August 25, 2020, as docket No. 10266-19L, in which it ruled that the IRS had properly included taxpayer’s Veterans Affairs benefit and excluded his life insurance premium in calculating an ability to pay for Offer in Compromise purposes. This matter was started in a Collection Due Process hearing filed as a result of the issuance of a Final Notice of Intent to Levy. The taxpayer submitted a collection information statement reflecting monthly income of $6,352 and expenses of $6,854. On review, the Settlement Officer noted that the taxpayer’s bank statements reflected a disability benefit from the VA. The Officer increased his income by the amount of this benefit. Further, she disallowed a $600 per month expense for whole life insurance. The Taxpayer argued that his VA benefit should not be included since it was not taxable. The Court ruled that the Settlement Officer had abided by the provisions of the Internal Revenue Manual (IRM) regarding these issues. The IRM provides that all household income will be used to determine taxpayer’s ability to pay. Income is included even if not subjected to taxation. Furthermore, the IRM supports disallowance of the whole life insurance expense. No abuse of discretion was found by the Court. 

Tax Lien Attachment

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I.R.C. Section 6321

The Federal District Court for the Western District of Washington in USA v. Elmer Buckardt, Case No. 2:19-cv-00052-RAJ, entered an order on September 18, 2020 that a tax liability cannot be avoided with frivolous arguments and the IRS may foreclose property for tax liens when the entity owning the property is a taxpayer’s alter ego. Though a W-2 earner until retirement, the taxpayer created a religious society for the purpose of transferring property to his family. It was meant to be a trust, of sorts. The taxpayer and his wife transferred properties they purchased to the entity without consideration. They personally paid the mortgage on these properties. Around the same time, the taxpayer ceased filing tax returns because of the belief that the tax system was not valid. The taxpayer began reporting his tax liability as zero. After a variety of litigation in the Tax Court, the taxpayer ultimately ended up owing around $739,000.  The government then filed the instant action seeking to foreclose the tax liens and set aside the transfers to the religious society that the taxpayer executed years before. The Court ruled that it was clear Mr. Buckardt owed the taxes. The taxpayer offered no argument other than his belief that he was not required to pay federal income taxes, along with a variety of well-known arguments the Courts have deemed frivolous over the years. The Court ruled those arguments were without merit. The Court concluded that the religious society the taxpayer created and transferred property to was his alter ego. It based its decision on Washington law recognizing the nominee or alter-ego doctrine where one individual so dominates and controls a corporation that such corporation is the individual’s alter ego, and therefore, one in the same. The fact that the taxpayer had complete control over the entity, that he and his wife were the only ones making decisions for the entity, that the taxpayer and his wife live in a home owned by the entity, but do not pay rent, were all determining factors. They maintained the properties with personal funds. The taxpayer allowed his children to reside in the properties rent free. The Court deemed the lien to be a valid lien against the properties of the entity and authorized the Government to foreclose.