As discussed in three prior posts, the Tax Court issued two opinions in the Collection Due Process (CDP) case involving the Melaskys. In 151 T.C. No. 8 it issued a precedential opinion holding that a challenge to the crediting of payment is reviewed pursuant to an abuse of discretion standard and not de novo. In 151 T.C. No. 9 it issued a fully reviewed precedential opinion addressing the collection issues raised in the case before sustaining the determination of the Appeals employee and allowing the IRS to move forward toward levy. See our prior posts on the case here, here and here. In this third and final post on the second opinion, the issue discussed concerns the taxpayers proposed collection alternative. Even though the IRS rejected the taxpayers’ attempt to make a voluntary payment, they could still have reached an agreement had the IRS accepted their proposed partial pay installment agreement. The majority decided that the Appeals employee did not abuse his discretion in refusing to accept the proposed agreement.
From the prior posts you know that the Melaskys owe taxes for many years dating back to 1995. Over the years from 1996 until they filed their CDP request in 2011, they made various attempts to settle the debt through offers in compromise (OIC) and installment agreements (IA). When they filed their CDP request, they asked the IRS to give them a partial pay installment agreement. This type of IA allows the taxpayers to achieve a result similar to an OIC because it involves resolving the tax debt for less than full payment.
Appeals rejected the proposed IA because the Melaskys “have not paid over the equity in all of their assets” and because they declined to commit all of their monthly income to the IA. Either the failure to pay all assets or the failure to commit available income could provide a basis for rejecting the IA. The Tax Court concluded that Appeals had a sound basis based on both grounds. IRM 5.14.2.1 (March 11, 2011) provides that “Before a [partial payment installment agreement] may be granted, equity in assets must be addressed and, if appropriate, be used to make payment.” Generally, once the taxpayer gives the IRS all of their assets, the IA can be reached if the taxpayer will commit to paying the maximum monthly payment based on the taxpayer’s ability to pay taking into account the taxpayer’s necessary expenses and their income.
Before going into CDP the Melaskys had previously had two installment agreements. After meeting with Appeals in the CDP hearing, they were again told they had to provide the IRS with the equity in all of their assets. On December 2, 2011, they were given until December 16, 2011 to do this. By this point they had been in CDP 10 months. They came back on December 11 and said that they needed to use some of the assets to pay for the medical expense of their daughter. The Settlement Officer agreed to this as long as they provided proof and extended the time to provide payment from the assets until the first week of January 2012. On January 24, the Melaskys as for a further extension and the SO agreed while again requesting proof of the use of the funds for medical expenses. On February 9 they asked for another extension but this time they did not mention the need to use the funds for medical expenses. On April 4, the SO extended the deadline again to April 11. On April 20, 2012, the SO issued the determination letter and at that time the Melaskys still had not provided the equity in four of their assets: an IRA; a 401(k); a life insurance cash value and jointly owned stock.
The Tax Court found that in giving the taxpayers four and one-half months the SO gave them enough time to perform with respect to the assets and did not abuse his discretion in sending out the determination letter rejecting the IA. This is an unremarkable basis for sustaining a CDP determination.
With respect to the income side of the equation, the facts become more difficult because Mrs. Melasky had become the beneficiary of a trust under the will of her father. Based on the facts here it appears that her father died not long before petitioners made their CDP request. This raises strategy issues for individuals who stand to inherit property and who owe taxes. If you find yourself in that situation and you want to make a deal with the IRS either through an OIC or a partial pay installment agreement, you should strive to do so before the person dies. Her father’s death makes it hard for the Melaskys to get to the income number that they seek since the trust could provide funds for their support.
The court looked at the trust instrument and agreed with Appeals that it provided a source of funds which the IRS could use in calculating the Melaskys’ ability to pay a monthly amount to the IRS. The Melaskys disagreed with the IRS and the Court on this point but the Court goes through the trust document and determines what it allowed. If you represent someone with a trust who faces collection issues, you might the Court’s analysis helpful in deciding how much your client can pay.
As with the voluntary payment issue, Judge Holmes dissents. His dissent on this issue does not draw the same level of push back he received regarding his analysis of the voluntary payment issue but footnote 26 of the majority opinion does push back concerning the full payment issue. Judge Holmes again cites the Chenery rule because he finds that the majority have “saved” the SO by finding reasons for sustaining the determination that were not in the Appeals determination. Judge Holmes points out that partitioning the stock Mr. Melasky owned with his former spouse could have created real practical problems in terms of value. This is an issue that arises regularly when a taxpayer owns a partial interest in an asset of marginal value. How much effort and expense should the taxpayer expend to break free their fractional equity? Similarly with the cash value of the life insurance, its small value may have been outweighed by the fact it might cause the taxpayers to lose life insurance coverage altogether.
Because the SO did not consider, or did not record how he considered the difficulty in liquidation of certain assets, Judge Holmes would send the case back. On this point I think the taxpayers’ delays hurt them together with a failure to build out the record with proof of the difficulties. Judge Holmes makes good points about the difficulties with the two specific assets but the fact that the taxpayers changed their tune about the need to use the assets for medical expense and that after four and one-half months they still had not liquidated their IRA and 401(k) plans, something that should not take very long to do, left the taxpayers in a bad situation to defend against the decision of Appeals.
On the income side Judge Holmes does not agree with the way in which the Court sustained the decision of Appeals regarding Mrs. Melasky’s rights under the trust instrument. The SO had to determine what the trust instrument allowed her to withdraw in order to determine how much the couple could pay the IRS each month. Judge Holmes point here is one of administrative law and what role the Tax Court plays in the review of a determination by Appeals of the meaning of a trust instrument governed by state law. He states:
We have instead [instead of doing a full analysis of the intent of the trust document] a fact-intensive subsidiary (or “preludal”) legal issue that presented itself in a CDP hearing, before an SO incapable as a matter of training of deciding it as a trial judge would; and, more importantly, deprived of all the extensive and expensive fact finding weapons a trial judge could wield. This may harm taxpayers in some cases, while the lower cost of informal adjudication benefits them in others. It’s up to Congress to decide which is best; and here congress has opted for informal adjudication. That makes our review of such mixed questions an appropriate place to depart from the stricter standard that we would apply on purely legal issues. Doing so would also nudge us closer to the mainstream of administrative law.
In the end Judge Holmes states that he would not hold that the SO reached the right conclusion in deciding that the trust would allow the Melaskys to pay more money than they offer but that the SO “acted reasonably in answering this question and therefore did not abuse his discretion in rejecting the Melaskys’ proposed collection alternative on this ground. This makes good sense to me. Although it reaches the same result as the majority, I like this framing of the role of the Tax Court in these cases.