Tax Court in Brief | Lipka v. Comm’r | Collection Alternatives, Economic Hardship, and Abuse of Discretion

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The Tax Court in Brief – November 28th – December 2nd, 2022

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Tax Litigation:  The Week of November 28th, 2022, through December 2nd, 2022

Lipka v. Comm’r, T.C. Memo. 2022-116 | December 1, 2022 | Gustafson, J. |Docket No. 11455-20L

Short Summary: This collection due process (“CDP”) opinion regards petitioners, Kevin and Shelly Lipkas’ request for collection alternative and the Tax Court’s review of a determination by the Independent Office of Appeals (“IRS Appeals”) denying the Lipkas’ request and sustaining a notice of intent to levy. The Lipkas filed their tax return for year 2017 and reported income tax liability of $466,076. But, they did not pay that liability. So, the IRS’s sent to the Lipkas a Notice CP 90, “Intent to seize your assets and notice of your right to a hearing. The Lipkas  submitted a timely Form 12153 and requested a hearing. In the Form 12153, the Lipkas checked the boxes for “Installment Agreement”, “Offer in Compromise”, and “I Cannot Pay Balance” and claimed they had “unusual financial circumstances”. For the hearing, the Lipkas were required to provide: (1) a completed Form 433–A, “Collection Information Statement for Wage Earners and Self-Employed Individuals”; (2) proof that estimated tax payments are paid in full for the year to date; and (3) a completed Form 656, “Offer In Compromise”. During the hearing, they represented that Mr. Lipka was under criminal indictment by the State of New Jersey and that they had neither money nor access to their assets to pay their 2017 tax liability. The IRS Appeals officer asked the Lipkas to submit a completed Form 433–A and additional documentation substantiating their purported inability to pay and their lack of access to their assets. The Lipkas submitted a completed Form 433–A and attached financial information containing partial bank statements. The IRS Appeals officer determined that the Lipkas had approximate net monthly income of $48,980 to satisfy their tax liability for 2017. The Lipkas later presented additional documentation. The IRS Appeals officer and the Lipkas participated in another telephone conversation. The Lipkas maintained that their monthly income would soon decrease and mentioned that they were incurring significant legal expenses relating to their criminal matter. The IRS Appeals officer requested records verifying as much, but the Lipkas did not provide the information. On the basis of additional documents provided, the IRS Appeals officer adjusted her calculation, which still resulted in net-positive income.  The IRS Appeals officer concluded that the Lipkas were not eligible for currently not collectible (“CNC”) status and proposed an installment agreement (“IA”) with monthly payments of $10,000 over a period of 72 months. The Lipkas timely filed their petition with the Tax Court, seeking review of IRS Appeals’ determination and intent to levy.

Key Issues: Whether, as a matter of law, the IRS Appeals did not abuse its discretion in denying CNC status to the Lipkas and sustaining the determination and intent to levy.

Primary Holdings: No, there was no abuse of discretion. The Lipkas put forward financial information concerning economic hardship and that IRS Appeals reasonably reviewed and fully accounted for this information in making its determinations. Lipka’s pending criminal case and the associated unquantified legal expenses did not create economic hardship within the meaning of Treas. Reg. § 301.6343-1(b)(4).

Key Points of Law:

Agency-Level Review in Levy Cases. At the CDP hearing, IRS Appeals must determine whether the proposed collection action may proceed. In the case of a notice of levy, the procedures for the agency-level CDP hearing before IRS Appeals are set forth in section 6330(c). IRS Appeals must verify that the requirements of any applicable law and administrative procedure have been met by IRS personnel. 26 U.S.C. § 6330(c)(1), (3)(A). Also, the taxpayer may “raise at the hearing any relevant issue relating to the unpaid tax or the proposed levy, including” challenges to the appropriateness of the collection action and offers of collection alternatives. Id. at § 6330(c)(2)(A). The taxpayer may also contest the existence and amount of the underlying tax liability, but only if the taxpayer did not receive a notice of deficiency or otherwise have a prior opportunity to dispute the tax liability. Id. at § 6330(c)(2)(B). IRS Appeals must determine “whether any proposed collection action balances the need for the efficient collection of taxes with the legitimate concern of the person that any collection action be no more intrusive than necessary.” Id. at § 6330(c)(3)(C).

Tax Court Review. Where the underlying tax liability is not at issue, the Tax Court reviews determinations of IRS Appeals for abuse of discretion. Goza v. Commissioner, 114 T.C. 176, 181–82 (2000). Applying that abuse-of-discretion standard, the Court decides whether IRS Appeals’ determination to deny a collection alternative and to sustain the proposed levy action was 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 Cir. 2006). The Tax Court “do[es] not recalculate a taxpayer’s ability to pay and substitute [the Court’s] judgment for that of the settlement officer.” O’Donnell v. Commissioner, T.C. Memo. 2013-247, at *15.

Economic Hardship. Section 6343(a)(1)(D) provides that “the Secretary shall release the levy . . . if . . . the Secretary has determined that such levy is creating an economic hardship due to the financial condition of the taxpayer”; and the regulations provide that a levy creates “economic hardship” when the taxpayer is rendered “unable to pay his or her reasonable basic living expenses.” Treas. Reg. § 301.6343-1(b)(4)(i).  “Hardship” is one of the considerations that IRS collections personnel consider in determining whether a taxpayer’s liability is “currently not collectible”. See Internal Revenue Manual (Sept. 18, 2018).

Factors to Consider for Hardship. Under the pertinent regulation implementing section 6343, IRS Appeals is to consider any information provided by the taxpayer, including the following: (1) the taxpayer’s age, employment status and history, ability to earn, number of dependents, and status as a dependent of someone else; (2) the amount reasonably necessary for food, clothing, housing, medical expenses, transportation, current tax payments, or other court-ordered payments; (3) the cost of living in the geographic area in which the taxpayer resides; (4) the amount of property exempt from the levy which is available to pay the taxpayer’s expenses; (5) any extraordinary circumstances such as special education expenses, a medical catastrophe, or a natural disaster; and (6) any other factor that the taxpayer claims bears on economic hardship. See Treas. Reg. § 301.6343-1(b)(4)(ii). Reasonable basic living expenses are based on the taxpayer’s circumstances but do not include amounts needed to maintain an affluent or luxurious standard of living. Treas. Reg. § 301.6343-1(b)(4)(i).

Collection Alternatives. An offer to compromise a tax liability must be submitted according to the procedures, and in the form and manner, prescribed by the IRS. See 26 U.S.C. § 7122; Treas. Reg. § 301.7122-1(d)(1). “[I]t is not an abuse of discretion where the taxpayer does not propose any terms for an installment agreement or propose a specific collection alternative”. See James A. Walker, P.A. v. Commissioner, T.C. Memo. 2014-187, at *10. The IRS Appeals officer does not abuse discretion by moving forward in a determination if the taxpayer fails to submit requested information. See Pough v. Commissioner, 135 T.C. 344, 351 (2010).

Insights: In seeking relief from levy based on economic hardship, taxpayers cannot rely on an unsubstantiated, unquantified claims that they would suffer economic hardship. Rather, taxpayers must submit complete and current financial information to the IRS Appeals office and collection agents so that the agency can effectively apply the regulatory collection alternative constructs. Failing to cooperate with the IRS, and failing to provide information relevant to the IRS’s determination will tend to show that the agency decisions, when in line with information that was provided by the taxpayer, are not an abuse of discretion.  See also Freeman Law’s Everything That You Need to Know About Federal Tax Liens