In Riggs v. Commissioner,[i] issued May 26, 2015, the Tax Court held that an Appeals officer did not abuse its discretion in denying the petitioner currently not collectible (CNC) status, for the amount the petitioner owed under IRC section 6672, the trust fund recovery penalty. The Petitioner had timely requested a collection due process hearing when the IRS issued a final notice of intent to levy on petitioner’s personal assets and filed a federal tax lien. The petitioner was liable for the trust fund recovery penalty relating to the petitioner’s failure to collect and remit payroll taxes on behalf of Amber Construction, Co., a corporation of which she was the owner and president. The IRS had already filed a lien against the petitioner as the corporation’s nominee for the corporation’s employment tax liability, which attached to an office building the petitioner owned.
In the collection due process hearing, the petitioner argued to the Appeals officer that her account should be placed in CNC status, which is a collection alternative that suspends IRS collection efforts when the taxpayer has no apparent ability to make payments on the outstanding tax liability based on the taxpayer’ s assets, equity, income and expenses.[ii] In Riggs, the taxpayer’s salary had been cut by the bankruptcy court, after the successor-in-interest corporation to Amber Construction had filed for bankruptcy. The petitioner argued that her salary had been limited by the bankruptcy court to the minimum necessary to cover her basic expenses, leaving her with no disposable income with which to make payments on the trust fund recovery penalty.
The Appeals officer denied the petitioner’s request, on the grounds that although the petitioner’s income may have been limited, she had sufficient equity in assets she owned to be able to make payments on the liability. In particular, the petitioner owned a boat (with her husband) and an office building. In determining a taxpayer’s ability to pay, the IRS will consider assets that can be liquidated or borrowed against to satisfy the liability.[iii]
On appeal to the Tax Court, the Tax Court reviewed the Appeals officer’s denial of CNC status for abuse of discretion. The petitioner argued that the Appeals officer erred in denying her CNC status, on the basis that although she had equity in her assets, the lien that had been filed by the IRS against her as a corporate nominee prevented her from being able to sell or borrow against these assets to satisfy the liability, and therefore they should not be considered in determining whether the petitioner’s liability was noncollectible.
The Tax Court rejected this argument, agreeing with the IRS that pursuant to the Internal Revenue Manual, federal tax liens do not decrease the value of a taxpayer’s equity in an asset for purposes of determining whether a liability is currently not collectible. The court explained that collection potential and eligibility for collection alternatives should be based on the net realizable equity (“NRE”) in the petitioner’s assets, which takes into consideration only certain nontax liens under IRS policies. Only liens that have a priority over a federal tax lien may be taken into consideration in determining what the “quick sale” price of the taxpayer’s asset would be in an NRE determination.[iv] Because of the equity in the taxpayer’s assets, the Tax Court held that the Appeals officer’s denial of CNC status was not an abuse of discretion.
The Tax Court also rejected the taxpayer’s argument that other collection alternatives should be available to her, because the taxpayer had failed to argue for any other collection alternatives before the Appeals officer. Under IRC section 6330(c)(2), a taxpayer may raise various collection alternatives in a collection due process proceeding.[v] However, because the petitioner had not first raised the issue of other collection alternatives with the Appeals officer, the Tax Court would not consider them on appeal.
LACEY STRACHAN – For more information please contact Lacey Strachan at Strachan@taxlitigator.com. Ms. Strachan is a tax lawyer at Hochman, Salkin, Rettig, Toscher & Perez, P.C. and represents clients throughout the United States and elsewhere involving federal and state, civil and criminal tax controversies and tax litigation. Additional information is available at http://www.taxlitigator.com.
[i] Riggs v. Comm’r, TC Memo 2015-98 (05/26/2015).
[ii] Id. (citing Wright v. Comm’r, T.C. Memo. 2012-24 & Fangonilo v. Comm’r, T.C. Memo. 2008-75).
[iii] See Internal Revenue Manual 22.214.171.124.9 (08-25-2014) (“An account should not be reported as CNC if the taxpayer has income or equity in assets, and enforced collection of the income or assets would not cause hardship.”).
[iv] The Tax Court relies on Internal Revenue Manual 126.96.36.199.1(1) (Oct. 22, 2010).
[v] Other collection alternatives include the posting of a bond, the substitution of other assets, an installment agreement, or an offer-in-compromise. IRC § 6330(c)(2)(A)(iii).