Kelly v. Comm’r, No. 13353-21L, T.C. Memo 2022-73 | July 13, 2022 | Lauber |

Short Summary:  At issue in this collection due process (CDP) case is the propriety of the IRS’s collection actions and their refusal to grant the taxpayer’s leniency requests and requests for acceptance of a partial payment installment agreement.  Ultimately, the IRS mostly prevailed.

Key Issues:

• Whether the taxpayer was eligible for “first time abatement” of penalties.
• Whether the taxpayer established “reasonable cause” for his failure-to-file and failure-to-pay additions to tax that would warrant waiver.
• Did the IRS err in rejecting the taxpayer’s proposed installment agreement?

Facts and Primary Holdings: 

• The taxpayer in this case is a securities broker in New York City, where he resided when he petitioned the Tax Court. During 2013–2015 he earned between $1 million and $2 million annually. But he did not file timely Federal income tax returns reporting this income.
• On December 22, 2017, the taxpayer filed a delinquent return for 2013 reporting adjusted gross income (AGI) of $1,919,000 and tax of $689,923. He did not enclose full payment with his return. The IRS duly assessed the reported tax and additions to tax under sections 6651(a)(1) (failure to file timely) and (2) (failure to pay) and 6654 (failure to pay estimated tax), plus interest.
• On December 26, 2017, the taxpayer filed a delinquent return for 2014 reporting AGI of $1,496,287 and tax of $514,875. He made no payments toward his 2014 liability. The IRS duly assessed the reported tax and additions to tax under sections 6651(a)(1) and (2) and 6654, plus interest.
• On January 17, 2018, the taxpayer filed a delinquent return for 2015 reporting AGI of $1,205,400 and tax of $403,096. He made no payments toward his 2015 liability. The IRS duly assessed the reported tax and additions to tax under section 6651(a)(1) and (2), plus interest.

• As of September 2019 taxpayer’s outstanding liabilities for 2013–2015 exceeded $2.5 million. On September 4, 2019, in an effort to collect these liabilities, the IRS issued a levy notice. One week later, on September 12, 2019, the IRS issued a lien notice, informing him that the IRS had filed two Notices of Federal Tax Lien (NFTLs). The taxpayer timely requested a CDP hearing for the levy notice and the lien notice. He expressed interest in an installment agreement, withdrawal of the NFTL filings, and abatement of the additions to tax for all three years.
• Petitioner’s account transcripts show that for 2012 the IRS assessed additions to tax under sections 6651(a)(1) and (2) and 6654, and that none of these assessments was abated or reversed. Therefore, the Tax Court found that the IRS correctly determined that the taxpayer did not qualify for “first time abatement.”
• Because of the COVID-19 pandemic, the CDP hearing was delayed until February 10, 2021. During the conference the taxpayer urged two grounds for abatement of the additions to tax. He initially asserted that he qualified for “first time abatement” under an IRS administrative policy. The IRS agent explained that taxpayer was ineligible for such relief, as he had been non-compliant with his tax obligations in prior years, and the IRS had assessed the same additions to tax for 2012, the year immediately preceding the first year in issue.
• Alternatively, the taxpayer urged that he had “reasonable cause” for failing to file and pay on time. He alleged that his wife, beginning in 2007, had been spending lavishly on luxury goods, causing marital and financial problems. He stated that in 2015 his wife filed for divorce, necessitating that he pay an “exorbitant” amount of money on legal fees and spousal support. These events, petitioner said, caused “financial hardship, emotional problems, and depression.” The IRS agent rejected his request for abatement on this ground, noting his history of nonfiling, his “consistent high income,” and his “lack of payment protocol.”
• Petitioner also urged that the NFTL filings be withdrawn, urging that these filings might adversely affect his business and result in “significant hardship.” The IRS agent declined to withdraw the NFTL filings, concluding that the taxpayer’s assertions were insufficient to justify withdrawal under section 6323(j).
• Finally, the taxpayer proposed a partial payment installment agreement (“PPIA”) offering payments of $30,000 per month. The IRS agent determined that he did not qualify for a PPIA under collection guidelines set forth in the Internal Revenue Manual (“IRM”). At that time the taxpayer had an unpaid tax liability of $250,000 for 2019 and was not current on his estimated tax payments for 2020. Rather than pay these liabilities, taxpayer requested that they be “rolled into” the PPIA. The IRS agent rejected this request, explaining that this would result in the “pyramiding” of taxpayer’s tax liabilities.
• On June 3, 2021, the IRS issued a notice of determination sustaining the collection actions, and he timely petitioned the Tax Court. On February 10, 2022, the IRS filed a Motion for Summary Judgment urging that the IRS agent had correctly sustained the collection actions. Taxpayer timely opposed the Motion, contending that the agent erred in declining to abate the additions to tax, in upholding the NFTL filings, and in rejecting the proposed PPIA.
• The Tax Court found that the IRS agent did not abuse his discretion, as he satisfied all of the statutory requirements pursuant to § 6320(c), which incorporates § 6330(c)(3).
• The Court rejected the taxpayer’s argument that the IRS did not timely notify him of the filing of the notice of federal tax lien, as required by § 6320(a)(2)
• The Court also rejected the taxpayer’s argument that the IRS agent abused his discretion in refusing to accept the PPIA, as approval of a PPIA requires that a taxpayer be in compliance with “filing, withholding, federal tax deposit and estimated tax payment requirements,” and taxpayer in this case was not. The IRS agent’s rejection of the proposal, therefore, was appropriate.
• The Court rejected the taxpayer’s argument that the IRS agent abused his discretion in refusing to withdraw the NFTL.
• Although the Tax Court stated that the taxpayer faces a “decidedly uphill battle” in attempting to show “reasonable cause,” the Court noted that this defense “usually entails questions of fact ill-suited to summary adjudication. See Estate of Wilbanks v. Commissioner, 94 T.C. 306, 315 (1990) (noting that “reasonable cause” is “a matter for decision after trial and not on . . . motions for summary judgment”). Therefore, the Court denied summary judgment on the issue of “reasonable cause.”

Key Points of Law:

• Where the validity of a taxpayer’s underlying liability is properly at issue, the Tax Court reviews the IRS determination de novo. Goza v. Commissioner, 114 T.C. 176, 181–82 (2000).
• Where the taxpayer’s underlying liability is not properly at issue, the Tax Court reviews the IRS decision for abuse of discretion only. See id. at 182. 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 Cir. 2006).
• In deciding whether an IRS agent abused their discretion, the court looks at whether he (1) properly verified that the requirements of applicable law or administrative procedure were met, (2) considered any relevant issues petitioner raised, and (3) considered “whether any proposed collection action balances the need for the efficient collection of taxes with the legitimate concern of [petitioner] that any collection action be no more intrusive than necessary.” § 6330(c)(3); see 6320(c).
• To qualify for “first time abatement” of penalties, a taxpayer must not have had any unreversed additions to tax for any of the preceding three years. I.R.M. 20.1.1.3.3.2.1(4) (Nov. 21, 2017); see Love v. Commissioner, T.C. Memo 2019-92, 118 T.C.M. (CCH) 94, 96.
• To prove reasonable cause for failure to file, a taxpayer must show that he “exercised ordinary business care and prudence and was nevertheless unable to file the return within the prescribed time.” Treas. Reg. § 301.6651-1(c)(1).
• To prove reasonable cause for failure to pay, the taxpayer must show that he “exercised ordinary business care and prudence in providing for payment of his tax liability and nevertheless was either unable to pay the tax or would suffer undue hardship if he paid the tax on the due date.” Hardin v. Commissioner, T.C. Memo. 2012-162, 103 T.C.M. (CCH) 1861, 1863 (citing Treas. Reg. § 301.6651-1(c)(1)).
• Financial hardship “generally does not affect a person’s ability to file.” IRM 20.1.1.3.3.3(1)(a) (Aug. 5, 2014).
• Notice of the filing of a federal tax lien must be given not more than 5 business days after the date of the filing of the notice of lien. 6320(a)(2).
• Section 6159 authorizes the Commissioner to enter into an installment agreement if he determines that it will facilitate full or partial collection of a taxpayer’s unpaid liability. See Thompson v. Commission, 140 T.C. 173, 179 (2013). Subject to exceptions not relevant here, the decision to accept or reject an installment agreement lies within the Commissioner’s discretion. See Reg. § 301.6159-1(a), (c)(1)(i); see also Kuretski v. Commissioner, T.C. Memo. 2012-262, aff’d, 755 F.3d 929 (D.C. Cir. 2014).
• A prerequisite for approval of a PPIA is that the taxpayer be “in compliance with filing, withholding, federal tax deposit and estimated tax payment requirements.” IRM 5.14.2.2.4(1) (Apr. 26, 2019). The requirement of current compliance as a condition of executing a PPIA “ensures that current taxes are paid and avoids ‘the risk of pyramiding tax liability.’” Hull v. Commissioner, T.C. Memo. 2015-86, 109 T.C.M. (CCH) 1438, 1441 (quoting Schwartz v. Commissioner, T.C. Memo. 2007-155, 109 T.C.M. (CCH) 1377, 1379).
• Section 6323(j) authorizes withdrawal of a notice of federal tax lien if (1) “the filing of such notice was premature or otherwise not in accordance with administrative procedures,” (2) the taxpayer has entered into an installment agreement that renders the NFTL unnecessary, (3) withdrawal of the NFTL “will facilitate the collection of the tax liability,” or (4) withdrawal of the NFTL “would be in the best interests of the tax-payer (as determined by the National Taxpayer Advocate) and the United States.” § 6323(j)(1). Note that even if a taxpayer establishes eligibility for withdrawal of the NFTL, § 6323(j)(1) is permissive, not mandatory.  Berkery v. Commissioner, T.C. Memo. 2011-57, 101 T.C.M. (CCH) 1258, 1260; see Treas. Reg. § 301.6323(j)-1(c) (“If the Commissioner determines conditions for withdrawal [of an NFTL] are present, the Commissioner may (but is not required to) authorize the withdrawal.”).

Insight:  As demonstrated by this case, a taxpayer with substantial income that has repeatedly failed to comply with filing and payment obligations is unlikely to find any leniency from the IRS or the Tax Court.  Here, where the taxpayer was making between $1 million and $2 million in income each year, the IRS and Tax Court rightfully refused his proposals.