The Tax Court in Brief – April 4th- April 8th, 2022
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Tax Litigation: The Week of April 4th, 2022, through April 8th, 2022
- Middleton v. Comm’r, T.C. Memo. 2022-28 | April 4, 2022 |Kerrigan, J. | Dkt. No. 8158-19L
- Scholz v. Comm’r, T.C. Summary Opinion 2022-5 |April 4, 2022 |Panuthos, J. | Dkt. No. 20743-19S
- Salter v. Comm’r, T.C. Memo. 2022-9 |April 5, 2022 |Lauber, J. | Dkt. No. 10776-20
- Continuing Life Communities Thousand Oaks LLC v. Comm’r, T.C. Memo. 2022-31 |April 6, 2022 |Holmes, J. | Dkt. No. 4806-15
- Metz v. Comm’r, T.C. Memo. 2022-33 | April 7, 2022 | Weiler, J. | Dkt. No. 16784-19
- Webert v. Comm’r, T.C. Memo. 2022-32 | April 7, 2022 | Gustafson, J. | Dkt. No. 15981-17
Norberg v. Comm’r, | April 5, 2022 | Lauber, A. | Dkt. No. 12638-20L
Short Summary: Robert and Debra Norberg (the Norbergs) filed their 2016 tax return in 2019 and did not pay the balance due reported on the return. In time, the IRS mailed the Norbergs a CDP levy notice. During the hearing, the Norbergs raised only one issue, that payment of their unpaid tax would cause financial hardship. They wanted their 2016 tax account to be designated as currently not collectible (CNC). In support of their request, they submitted a collection information statement (Form 433-A). Based on income and expenses reported on the form, the appeals settlement officer (SO) determined that the Norbergs could pay the IRS $62 a month and did not qualify for hardship relief. In calculating the amount the Norbergs could afford, e.g., the excess of their monthly income over their allowable monthly expenses, the SO reduced the Norbergs’ claimed expenses to conform to the expenses allowable for their county of residence. The Norbergs made no effort to show why the prevailing “local standards” should not apply. The SO offered them a partial pay installment agreement (PPIA) with payments of $62 a month, which they declined. After verifying that the IRS had met all legal and administrative requirements, Appeals issued a notice of determination sustaining the proposed levy, and the Norbergs petitioned. In the petition, they alleged that their costs of living exceeded their income and a levy would cause a financial hardship. Shortly after filing the petition, the Norbergs filed for bankruptcy, resulting in a discharge. The discharge did not cover the Norbergs’ 2016 tax liability (except for additions to tax) because they had filed their 2016 return late and within two years of the date they filed for bankruptcy. After the bankruptcy stay was lifted, the Commissioner (IRS) filed a motion for summary judgment. Granting the motion, the Court observed that the Norbergs were free to pursue another collection alternative (outside of CDP), such as an installment agreement or offer-in-compromise.
Primary Holdings:
- The Norbergs’ underlying liability was not at issue in this case. Therefore, the proper standard of judicial review was abuse of discretion.
- The SO did not abuse his discretion in rejecting the Norbergs’ request to place their 2016 tax account in CNC status and sustaining the proposed levy to collect their 2016 tax liability.
Key Points of Law:
- To be entitled to CNC status, a taxpayer must demonstrate that, on the basis of his or her assets, equity, income and allowable expenses, the taxpayer has no apparent ability to make payments on his or her outstanding tax liability. See Foley v. Commissioner, T.C. Memo. 2007-242.
- A taxpayer’s “ability to pay” is determined by calculating the excess of the taxpayer’s monthly income over necessary living expenses. Rosendale v. Commissioner, T.C. Memo. 2018-99.
- Certain expenses taken into account in calculating “ability to pay” are dictated by either national or local standards. Maximum allowances for monthly housing and utilities and transportation, known as the local standards, vary by location (generally, where taxpayer lives). In most cases, the taxpayer is allowed the amount actually spent, or the local standard, whichever is less. See IRM 5.15.1.8.
- If the IRS determines that the facts and circumstances of a taxpayer’s situation indicate that using the standards is inadequate to provide for basic living expenses, the IRS may allow for actual expenses. However, taxpayers must provide documentation that supports a determination that using national and local expense standards leaves them an inadequate means of providing for basic living expenses. See IRM 5.15.1.8.
- Where the taxpayer’s underlying liability is at issue, the Court reviews the SO’s determination de novo. If underlying liability is not properly before the Court, it reviews the determination for abuse of discretion. Goza v. Commissioner, 114 T.C. 176, 182 (2000).
- Abuse of discretion exists when a determination is arbitrary, capricious, or without sound basis in fact or law. See Murphy v. Commissioner, 125 T.C. 301, 320 (2005), aff’d, 469 F.3d 27 (1st 2006).
- An SO does not abuse his or her discretion when he employs local and national expense standards to calculate the taxpayer’s expenses and ability to pay. See Friedman v. Commissioner, T.C. Memo. 2013-44 (nothing that the burden is on the taxpayer to justify departure from local standards).
- In reviewing for abuse of discretion, the Court does not substitute its judgment for that of the SO or recalculate a taxpayer’s ability to pay. See O’Donnell v. Commissioner, T.C. Memo. 2013-247.
- A PPIA is an installment agreement in which the taxpayer agrees to pay only part of the total liability. IRC §§ 6159(a), 7122.
- Under a PPIA, the taxpayer must agree to pay the maximum monthly payment based upon the taxpayer’s ability to pay. IRM 5.14.2.2.1(9) (Apr. 26, 2019). A taxpayer’s ability to pay is reassessed every two years. IRC § 6159(d).
- If a debtor files an untimely federal income tax return within the two years preceding the filing of the bankruptcy petition, the tax debt associated with the untimely return is nondischargeable. See 11 U.S.C. § 523(a)(1)(B)(ii); Washington v. Commissioner, 120 T.C. 114, 121-22 (2003).
Insights: The key take-away here is – don’t look a gift horse in the mouth. By accepting the SO’s PPIA offer, the Nordbergs would have avoided a levy and reduced their 2016 tax liability in exchange for paying $62 a month for a certain number of months. Had the Tax Court cooperated and the Nordbergs achieved their goal, CNC status, they would still owe the amount of tax shown on their return, plus interest and penalties; albeit, collection efforts would have been deferred. As Judge Lauber observed, the Nordbergs remain free to pursue alternatives to enforced collection. But there are no guarantees the taxpayers will get the same good deal, so to speak.
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