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. 

Fraudulent Transfer,Alter Ego and Nominee

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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.

Offer in Compromise

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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.

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. 

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. 

Sale of property owned by Third Parties where tax lien attached

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I.R.C. 7403(c)

The United States District Court for the Western District of Michigan, Southern Division, in Case No.: 1:00-CV-885, Decided December 20, 2019 ruled that the government could sell a property that was sold to buyers other than the taxpayer, if the federal tax lien was attached at the time of the lien, unless the third party had a prior lien or comes within one of the exceptions of section 6323.  The taxpayer in this case put forth a handful of futile arguments regarding improper assessment of tax and invalidity of the federal tax lien.  The Court ruled on the plain language of the statutes and found that the assessment was proper, and that the lien arises at the time of assessment and continues until the liability is satisfied or becomes unenforceable due to the statute of limitations.  Therefore, the government had an interest in the property at issue before it was transferred, and the government’s interest remained intact.  The Court ordered the property sold.

Fraudulent Transfers, Alter Ego, Nominee and Successor Liability

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I.R.C. Section 6321

The United States Bankruptcy Court for the District of Arizona explores the extent to which the federal tax lien remains attached to assets transferred to others through alleged fraudulent transfers in Bullseye Holdings, LLC v. Internal Revenue Service, Case Number 4:16-ap-00449-BMW dated October 15, 2018. This action was essentially one for Declaratory relief filed by Bullseye Holdings, LLC asking the Court to determine that assets owned by the related entity Bullseye Feeders, LLC, were not encumbered by the federal tax lien. The entities at issue are owned by a variety of individuals in the same immediate family. At the time of trial, those members did not exactly know who held precise interests in the various LLC’s. The United States may impose a lien on property or rights to property belonging to a taxpayer in order to satisfy a taxpayer’s tax deficiency. Property that is fraudulently transferred remains subject to the federal tax lien against it. Additionally, where property is placed in the name of another as the taxpayer’s alter ego, nominee, or successor, federal tax liens remain attached to the property. The Court ruled that the IRS failed to prove by a preponderance of the evidence that the property was fraudulently transferred. The court went through numerous factors relating to required provisions of substantiating fraudulent transfers. It seemed the IRS simply did not do their job in Court. They did a better job relating to the Alter Ego Theory – possibly because it is easier to prove. The IRS had to prove that there was a unity of control and observing the corporate form would sanction fraud or promote injustice. Some of the factors causing the alter ego theory to be upheld were: 1) close family membership of all entities, 2) One person essentially in charge of both, 3) neither entity held formal meetings, 4) no corporate records, 5) one entity did not have a bank account, 6) no payments made on obligations from one entity to the other, 7) no consideration paid on the transfer of a few promissory notes, 8) operating agreements stated the purpose was exactly the same, 9) at the time of the transfer, one entity could not pay its debts as they become due and the property transferred was the only remaining asset of the entity. Unity of control was clearly met. As for whether or not justice requires recognizing substance over corporate form, the Court found that to invalidate the IRS lien against the Property would promote injustice. Ultimately, the lien stood against the property.

Fraudulent Transfers, Alter Ego, Nominee and Successor Liability

Posted on by katemley

I.R.C. Section 6321

The United States Bankruptcy Court for the District of Arizona explores the extent to which the federal tax lien remains attached to assets transferred to others through alleged fraudulent transfers in Bullseye Holdings, LLC v. Internal Revenue Service, Case Number 4:16-ap-00449-BMW dated October 15, 2018. This action was essentially one for Declaratory relief filed by Bullseye Holdings, LLC asking the Court to determine that assets owned by the related entity Bullseye Feeders, LLC, were not encumbered by the federal tax lien. The entities at issue are owned by a variety of individuals in the same immediate family. At the time of trial, those members did not exactly know who held precise interests in the various LLC’s. The United States may impose a lien on property or rights to property belonging to a taxpayer in order to satisfy a taxpayer’s tax deficiency. Property that is fraudulently transferred remains subject to the federal tax lien against it. Additionally, where property is placed in the name of another as the taxpayer’s alter ego, nominee, or successor, federal tax liens remain attached to the property. The Court ruled that the IRS failed to prove by a preponderance of the evidence that the property was fraudulently transferred. The court went through numerous factors relating to required provisions of substantiating fraudulent transfers. It seemed the IRS simply did not do their job in Court. They did a better job relating to the Alter Ego Theory – possibly because it is easier to prove. The IRS had to prove that there was a unity of control and observing the corporate form would sanction fraud or promote injustice. Some of the factors causing the alter ego theory to be upheld were: 1) close family membership of all entities, 2) One person essentially in charge of both, 3) neither entity held formal meetings, 4) no corporate records, 5) one entity did not have a bank account, 6) no payments made on obligations from one entity to the other, 7) no consideration paid on the transfer of a few promissory notes, 8) operating agreements stated the purpose was exactly the same, 9) at the time of the transfer, one entity could not pay its debts as they become due and the property transferred was the only remaining asset of the entity. Unity of control was clearly met. As for whether or not justice requires recognizing substance over corporate form, the Court found that to invalidate the IRS lien against the Property would promote injustice. Ultimately, the lien stood against the property.

Notice of Deficiency

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I.R.C. section 6213

The United States Tax Court in Jeffrey D. Gregory v. Comm’r, Docket No. 1090-16L, filed November 20, 2018, held that a “reprint” of a notice of deficiency is evidence of the creation of the notice before assessment, even though the reprint was prepared more than two years after the alleged mailing of the original notice and omitted or misstated information that would have appeared on any notice actually mailed. Further, the Court ruled, that the omission from a notice of deficiency of the last day to timely file a petition for re-determination does not invalidate the notice. This case was before the Tax Court for review of a determination by IRS Appeals Office to sustain the filing of a notice of Federal Tax Lien for unpaid income tax liabilities. The Petitioner conceded all aspects of the case except the validity of the notice of deficiency issued by the IRS. The IRS asserted that they issued the petitioner a notice of deficiency for the relevant tax period but admitted there was no copy of the original notice that could be reproduced. The Court ultimately ruled that it did not see why the reprints couldn’t serve as evidence that the IRS prepared the notice of deficiency, even if they were not deemed duplicates. The Court inferred from the inclusion in the IRS database of the information about the taxpayer on the reprint that it had created the notice of deficiency in accordance with its “customary practice.” As for the lack of a date to file the Petition in Tax Court, the reprint would not reflect that information as the IRS had explained this information is entered by hand when the original is issued.

Professional Assistance With Long-Term Tax Delinquencies Can Be Key To A Turn Around

Posted on by katemley

If you have experienced a continuing struggle with handling your ongoing employment and income tax filings and payments, you may be facing the stark reality that managing these obligations is getting more and more difficult.  Some businesses have operated off the premise that the federal and state government will perpetually respond to their tax problems in a certain way.  That response by the government, through a series of notices, delayed responses, and payment plans, is changing faster than ever.  This is especially true at the state level.  Businesses should not make what was once predictability of tax collections by the government a part of how they manage their ongoing business expenses.

While the government may not upgrade their technologies as quickly as the private sector, the actions being taken are making a difference in closing the Tax Gap. This is true at the federal level and even more so at the State level.  As Bloomberg Business Week reports, states are taking much more aggressive action to capture lost sources of tax revenue.  States are using better resources of data collection along with other enforcement tools to prevent businesses, large and small, from operating in a non-compliant tax status.

From a business perspective, the stark reality is that there are some businesses on the fringe of existence that may simply be forced to cease operations as the tax collection activity described here intensifies.  It’s my opinion that this is not necessary.  Rather, if these businesses spend less time juggling some of these obligations and direct their time towards the expertise they have related to their primary business function, their likelihood of success is much greater.  We have seen the most success for clients who have long-term tax delinquencies when that client acquires proper legal and accounting assistance.  For a long-term problem, a long term solution is necessary. 

Certified Public Accountants and other tax return specialists can provide a level of service that is invaluable to any business.  Assistance from a tax lawyer can be an important tool which allows for a delinquent taxpayer to create a long term plan for tax debt resolution which is then executed upon by the taxpayer, its accountant and lawyer.  Most clients find that the support of professionals that can readily provide expert guidance on stressful tax matters are invaluable.  The relief provided to the business owner typically gives them the breathing room they finally need from a stressful situation to focus on the reason they entered their business to begin with.  It is highly rewarding for the tax lawyer and accounting professional to observe this process.  No business operation will ultimately succeed with the passion of its owners for the services or products it provides. 

As a tax lawyer I have observed that the combination of a Certified Public Accountant or other tax return professional with the guidance of a tax lawyer is a highly beneficial combination for a delinquent business taxpayer.  The reality is that the Certified Public Accountant or tax return professional likely has all the expertise to resolve these issues, but due to the reality of the tax season, that person lacks the time to provide the level of assistance demanded from a Revenue Officer or other collection agent.  Without the obligations of providing return preparation services for clients, I have found the ongoing demands of dealing with delinquent tax matters for clients to be manageable. 

Ideally, the long term is a viable business with a plan to manage ongoing tax obligations while addressing delinquencies in a manner that does not effectively shut down the business.  Once that plan is in place, the taxpayer’s Certified Public Accountant or return preparation professional can provide services to manage current tax filing and payment obligations.  Should the government return for review of the client’s ability to address the tax delinquencies, the tax lawyer can return to representation to assist with that issue. 

As a business owner with a long term delinquency a critical perspective to have when acquiring professional assistance is that there is no “quick fix.”  A multi-year problem will likely take many months, if not years, to resolve.  But it can, and does, happen.  Feel free to contact us to discuss these issues if you have them.