It was a light week for designated orders, with only two being issued. Since one of them was a fairly perfunctory take-down of a petitioner’s argument that the Affordable Care Act is unconstitutional (here), we’ll devote the entirety of this post to the second order. And though that order itself doesn’t break any new ground, it gives us a chance to look at the confluence of two topics that frequently arise on these august pages: primarily, Collection Due Process and summary judgment.
American Limousines, Inc. v. C.I.R., Dkt. # 4795-18L (order here)
One of the goals of my tax clinic is for students to learn how to manage deadlines and multiple clients. With regards to deadlines, I tell my students (1) if you need more time, you should tell me sooner than later, and (2) borrowing from something told me by a fellow professor, the closer you get to the deadline the better the final product better be. To me, the order in American Limousines exemplifies the perils those two pieces of advice are meant to forestall.
The Collection Due Process (CDP) hearing in American Limousines should be about as straightforward as they get: no tricky issues about whether petitioner is precluded from arguing the underlying liability (see here, among many others), no deep dives into the record about whether a Notice of Deficiency was properly mailed (here), no questions about application of payments (here). Nope, just your typical argument between the taxpayer and the IRS about how much they can afford to pay.
The IRS thinks that the issues have been sufficiently hammered out in the CDP hearing and there was no abuse of discretion, setting the table for its summary judgment motion.
And yet the motion is denied. And because of this, a trial is quite likely.
Background
It didn’t have to be this way.
Granted, there is quite a fair sum of money at issue in this case: $1,170,103 in unpaid employment taxes. The two sides are also quite far apart in their estimations of how much can be paid via an installment agreement. Petitioners proposed $2,000 a month -the most (actually more than) they say they could possibly afford. If interest rates were zero the liability would be fully paid after a mere 70 years -presumably when limousines are all self-driving. Of course, absent an explicit agreement to extend the collection statute, the IRS only has 10 years from the date the tax was assessed (see IRC 6502(a)(2)), so this plan is really a proposal to the IRS to let a lot of the debt go unpaid after the CSED stops (a “partial pay” installment agreement, in IRS parlance: see IRM 5.14.2). But hey, the IRS would get $2K a month for a while, which is better than nothing -nothing being the other proposal put forward by the petitioner (in the form of Currently Not Collectible).
The IRS isn’t opposed to the idea of an installment agreement, only on slightly different terms. Rather than $2,000 the IRS believes that an acceptable amount is in the ballpark of $22,877 a month. The difference between the two sides, it appears, mostly boils down to what should and should not be considered in the calculation of expenses and income.
When the IRS looks at 4 months of financial statements, they believe there is money to be found. Money that can be put to back taxes. For starters, the money paid to the owner ($202,800 per year), and the somewhat artificial loss from “noncash depreciation” ($412,224 per year) could allow the company to continue to operate while paying the back taxes. Taking these numbers at face value, it would mean that petitioner has $51,252 to put towards back taxes every month. But the IRS isn’t that naive about the profitability of the limo business, so they allow an “annualized loss” of $65,953. Then, to account for “tight margins,” the IRS basically cuts in half what would otherwise be the amount of money left over each month. The result: $22,877 per month. That is the lowest they are willing to go.
But petitioner has a ready answer for this: “you forgot the $506,148 yearly principal payment I make on my fleet! And drivers tips are expenses! And limousines are a seasonable business [apparently]! And all of these are disputes about material facts, so no summary judgment!”
But is the petitioner correct? Are those the sorts of issues that can’t be addressed in a summary judgment motion in a collection due process hearing?
The IRS Motion for Summary Judgment
The IRS wanted to keep it simple in its motion for summary judgment: “Look Judge, here are the four paragraphs of reasoning Appeals provided for proposing a vastly higher monthly payment and sustaining the levy. There is no abuse of discretion in the reasoning and the outcome, so let’s just move along. Further, the Court is confined to the administrative record in reviewing the Appeals determination because of the Robinette, which should make this all-the-more summary-judgment appropriate.”
(As a side-note, potentially an important one, I couldn’t quite make-out why the IRS was arguing that Robinette applied since the case is taking place in Maryland, which would be in the 4th Circuit. As I understand it, the 4th Circuit isn’t one that follows the Robinette 8th Circuit decision. So either the IRS is mistaken that the Court should be bound by the administrative record, or they are pushing it in the hopes that they get the 4th Circuit to rule on the issue. Or, I suppose less exotically, the appellate court for American Limousines actually is one of the Robinette following circuits, and petitioners simply chose Maryland as their place of trial. See IRC 7482(b) and Les’s post here.)
The Court’s Response to the IRS Motion
One might wonder why the issues raised by petitioner in the objection to summary judgment weren’t already hammered out in the Appeals hearing, and are not therefore part of the administrative record. After all, questions about what is and is not necessary expenses seems like the very essence of what Appeals and the petitioner should have been arguing over, in a hearing that solely looked at collection alternatives.
And yet, here we are.
In the immortal words of Cool Hand Luke (actually, the Captain) what we have here is a failure to communicate. Judge Halpern refuses to grant the motion because it isn’t entirely clear what the parties’ positions really are: does the IRS object to Petitioner bringing up these installment agreement calculation arguments as being outside the administrative record? Are these arguments (and the facts relied on) outside the record? Were they properly addressed by Appeals if they were raised?
The boilerplate explanation for the purpose of summary judgment is to “expedite litigation and avoid unnecessary and expensive trials.” (Frequently, Florida Peach Corp. v. C.I.R., 90 T.C. 678 (1988)) is cited to for this proposition.) Query whether this motion for summary judgment would advance that purpose. A timeline may be helpful to see why not.
On May 30, 2019 the Court set trial for October 28, 2019. Three months later, on August 29, 2019, the IRS filed its motion for summary judgment on -essentially two months before trial. Under the Tax Court rules, this is a timely motion for summary judgment, but the absolute latest you can make it without the Court’s leave. See Tax Court Rule 121(a). One problem with such a late motion is that it doesn’t give the Court a lot of time to consider both the motion and any objection before the parties would be in Court anyway -potentially obviating the purpose of “avoiding unnecessary trials.”
And because not everything is properly sorted out in this motion (as is often the case), it makes the most sense to Judge Halpern to have the parties explain the issues at trial. This case has actually been kicking around the Tax Court docket since March 2018. After an initial remand to Appeals (on the IRS’s own motion), it was restored to the general docket more than a year ago -September 25, 2018. Then, from roughly December 2018 through the end of August, 2019, the case appears more-or-less dormant. At least from the perspective of the Tax Court docket… there is almost always other work between the parties going on beyond the scenes.
To be fair, it appears that more of the confusion in this case comes from petitioner’s objection than the IRS motion for summary judgment. Why is petitioner advocating for a $2,000 a month payment plan when they also claim they have negative cash-flow? Does the petitioner really think the error was denying Currently Not Collectible? Is the petitioner raising arguments based on what is in the administrative record? There really isn’t time to sort this out before trial would take place (roughly 2 weeks later), so continuing down the summary judgment path just doesn’t make much sense.
It is strange to me that it took the IRS this long to make the motion. Usually in CDP cases where the issue is collection, and not the underlying liability or attacks on assessment the IRS attorney’s role is essentially limited to a Summary Judgment machine. The IRM for counsel in CDP cases basically gives two instructions: (1) try to resolve the case on a pretrial motion, likely summary judgment (see esp. IRM 35.3.23.1(1) and IRM 35.3.23.8.3) and/or (2) file a motion to remand if it looks like Appeals isn’t giving you the record you need to succeed (see IRM 35.3.23.7).
In this case, the IRS had previously filed a motion to remand, way back on May 11, 2018. I’m inferring that a supplemental notice of determination was issued late in 2018, because the Court ordered the IRS to file another answer in December. This means the table should have been set for a motion for summary judgment shortly thereafter. But because the motion wasn’t filed “sufficiently in advance of trial” (like the IRM tells its attorneys to do), it was met with rejection.
It should be noted that in the not-too-distant past the Tax Court deadline to file a motion for summary judgment simply provided that it should be made “within such time as not to delay the trial.” (See footnote 1 for Rule 121(a).) There is reason to believe that this change came about in part because of research conducted by Keith and Carl, which raised concerns about how (needlessly) long many collection cases took to reach resolution. (See “Tax Court Collection Due Process Cases Take too Long,” 130 Tax Notes 403 (Jan. 24, 2011).) Because the petitioner may not care about the case dragging on in levy cases (generally, their goal is simply not to pay the tax anyway), the onus is really on the IRS to make appropriate summary judgment motions as early as possible when it is clear that trial isn’t needed. There isn’t much of a reason for the government to wait in such cases, and waiting only increases the likelihood of failure for exactly the reasons present in American Limousines.
Again, as I tell my students, if you wait until the last second it better be perfect. And this motion wasn’t.