As mentioned in a previous post, the Service recently invoked the rarely used jeopardy assessment procedure against former state Senator Vince Fumo in connection with the activities leading to his criminal conviction. In doing so, the Service cited concerns about Senator Fumo’s financial activities, including the sale of properties to his son and fiancée, and the transfer of $2.8 million to his son between August 2009 and January 2010. The details of the cash transfers to Senator Fumo’s son came to light in a memo that accompanied the Service’s notice of jeopardy assessment and levy delivered to Senator Fumo in March of this year.
The sales of Senator Fumo’s properties and the cash transfers led the Service to conclude that its ability to collect unpaid additional taxes was in jeopardy causing it to make a jeopardy assessment four years after his conviction.
In this post, I will primarily provide the background of the statutory scheme relating to jeopardy. I will also summarily apply the statutory requirements to Fumo’s facts, revealing why the Service acted as it did in finding that there was jeopardy. In the next post I will go into greater detail with respect to the specific facts supporting the jeopardy determination as well as the response from Senator Fumo’s lawyer.
Summary of Jeopardy Rules
A jeopardy assessment allows the Service to forgo ordinary assessment and collection procedures designed to allow a taxpayer to contest most assessments and some collection procedures before they happen. The Service may only bypass these procedures where it concludes that following the ordinary procedures would threaten its ability to collect the taxes owed by the taxpayer. Exercising this option obviates the requirement that the Service provide the taxpayer with a formal notice of deficiency and instead allows the Service to immediately assess the taxes due. The Service has three types of immediate assessment processes at its disposal:
- Section 6851of the Internal Revenue Code, which authorizes a termination assessment of income tax
- Section 6861of the Code, which authorizes a jeopardy assessment of income, estate, or gift tax
- Section 6867 of the Code, which authorizes possessor-of-cash assessments
While all three of these provisions permit the Service to make immediate assessments of tax when collection will be jeopardized by delay, the ability of the Service to use these procedures is tempered by its ability to prove that jeopardy exists. Congress intended that the immediate assessment of federal taxes should be used sparingly and that the amount “should be limited to amounts which reasonably can be expected to protect the government.”
In Senator Fumo’s case the Service used the jeopardy assessment process. While all three immediate assessment procedures require that the Service show that it faces jeopardy in the collection of the tax due, only one of the three processes carries the name jeopardy assessment. The jeopardy assessment process occurs when the taxes at issue stem from a prior tax year. Here, the Service used the jeopardy assessment process because the tax years at issue came prior to the year in which the assessment occurred. The Service assessed taxes for the tax years 2002 through 2004 for the excise tax, 2001 through 2005 for the income tax, and 2009 for the gift tax. If the Service had assessed taxes for 2013, it would have used the termination process. The termination process gets its name from the fact that the Service actually terminates the tax year in the middle of a calendar year and immediately assesses the taxes for the newly created, partial year tax period. The Service did not do that in Senator Fumo’s case.
The final immediate assessment procedure occurs when a taxpayer possesses cash in which he disclaims an interest. The typical possessor-of-cash case involves a drug dealer caught with a large amount of cash on his person, in his car or in his house during a search and seizure. The individual knows (or soon learns from his lawyer) that the cash could provide evidence supporting the conclusion that the individual had engaged in an illegal activity. The individual disclaims any interest in the cash. The statute gives the Service the right to make an immediate assessment of tax related to this cash giving it the further right to take the cash in satisfaction of the assessment. The possessor-of–cash basis for assessment played no part in the immediate assessment against Senator Fumo.
Collection is deemed to be in jeopardy, thus warranting immediate assessment using the jeopardy or termination process, where:
(i) The taxpayer is or appears to be designing quickly to depart from the United States or to conceal him or herself.
(ii) The taxpayer is or appears to be designing quickly to place his, her, or its property beyond the reach of the Government either by removing it from the United States, by concealing it, by dissipating it, or by transferring it to other persons.
(iii) The taxpayer’s financial solvency is or appears to be imperiled.
If any one of these conditions exists and the Service makes an immediate assessment against the taxpayer, the assessed amount “shall become immediately due and payable and the district director shall serve upon such taxpayer notice and demand for immediate payment of such tax.”
Once the Service makes the jeopardy assessment, it must provide notice of the assessment to the taxpayer and provide the taxpayer with the opportunity to contest the jeopardy assessment in district court. The district court proceeding focuses on the correctness of the jeopardy determination in order to make what is ordinarily a relatively quick decision regarding the correctness of the determination by the Service that the collection of the tax is in jeopardy. The Service also sends to the taxpayer a statutory notice of deficiency allowing the taxpayer to contest the underlying liability in Tax Court.
Bringing it Back to Fumo
In the case of Senator Fumo, the Service’s decision to implement the jeopardy assessment procedure appears to primarily stem from the transfer of assets from Senator Fumo to his fiancée and son; however, as I will discuss in the next post, the Service also found some statements by Senator Fumo that support the determination of jeopardy. The Service found that Senator Fumo’s actions placed his property beyond the reach of the Government or imperiled his financial solvency.
After making the jeopardy assessment of $2.9 million dollars, the Service immediately sought to protect its ability to collect on the assessment by filing notices of federal tax lien against Senator Fumo in five jurisdictions in which he owned real property. The notice of federal tax lien serves an important function in establishing the priority of the tax lien vis a vis other creditors, makes it difficult to further transfer the property in a manner that can defeat the payment of taxes and makes public the existence of the tax liability. In addition to filing the notices of federal tax lien the Service also began serving levies on various financial institutions thereby freezing access to his bank accounts. Paragraph 37 of the complaint, discussed below, states that Senator Fumo and the Service reached an agreement concerning the levies allowing the bank to continue to hold the funds reached by the levies. Such an agreement is unusual but, as with the liens, fixes the rights of the parties until the Court can make a determination concerning the underlying liability. It also filed nominee liens against his son and his fiancée seeking to tie up the specific pieces of real property transferred to them.
These actions led Senator Fumo’s tax lawyer, Mark Cedrone, to criticize the Service on the grounds that it lacked a “plausible, legitimate justification supporting its decision to employ the draconian and infrequently used jeopardy assessment process” against Senator Fumo. As permitted by the jeopardy process, Senator Fumo filed a complaint in district court on June 13, 2013. See the 92 page complaint, including exhibits, here, here, here, here, here, and here. In addition to contesting the determination of jeopardy, the complaint also alleged collusion between the Service and U.S. Attorney’s Office “in retaliation for exercising his constitutional right to proceed to trial.” According to Cedrone, Senator Fumo was essentially forced to sue because frozen assets rendered him unable to pay court-ordered restitution. Further, Senator Fumo’s suit claims that none of the conditions precedent to a jeopardy assessment or levy was present as Senator Fumo was imprisoned at the time the assessment was implemented, had no plans to leave the country, and did not transfer real estate in an effort to place such property beyond the reach of the government.
Ordinarily, the District Court must decide whether jeopardy exists with 20 days of the petition. Senator Fumo specifically waived the 20 day period in the complaint. The statutorily contemplated quick determination of jeopardy status has slowed way down. The Service has filed a motion for summary judgment in the district court case, which is currently pending. Senator Fumo’s response to the motion is due next week and a reply by the Service due in December.
Because the Service found that Senator Fumo owed three different types of federal taxes, it sent him three separate statutory notices of deficiency. He timely filed three Tax Court cases (one each for the gift, income, and excise taxes.) The answer in the Tax Court cases must be filed shortly. The district court and Tax Court cases present an opportunity to witness implementation of the jeopardy assessment procedure. We will continue to track the development of Senator Fumo’s district court and Tax Court activities and welcome your input as we dig deeper into the tax issues that arise.