In Budish v. Commissioner, T.C. Memo. 2014-239, the U.S. Tax Court held that the IRS erred in insisting on a tax lien being filed before it would accept an installment agreement. This case serves as a reminder that a tax lien does not have to be filed if it creates a hardship that would make it more difficult for the taxpayer to pay its tax debt.
Facts & Procedural History
Mr. Budish is a sculptor who works in cast bronze and sells his artwork through his wholly owned S corporation, Jim Budish Sculptor, Ltd. (Sculptor, Ltd.), for which he is a salaried employee.
Mr. Budish filed his 2007 Federal income tax return late, reported a tax liability of $164,928 on the return, and failed to remit the balance due with his return. The IRS issued a notice of intent to levy and Mr. Budish requested a collection due process or CDP hearing.
In the CDP hearing, Mr. Budish argued that collection by levy was inappropriate since less intrusive methods of collection, including an installment agreement, were available.
Mr. Budish provided the IRS with information showing that he had personal assets consisting of $1,691 in cash, negative equity in his personal residence, an automobile worth $4,000, and various personal assets worth $1,000. It also showed monthly income of $19,816 and monthly living expenses of $21,785.
Mr. Budish offered to pay $5,500 per month until his tax liability was discharged, but on the condition that the IRS refrain from filing a notice of tax lien. Mr. Budish argued that a notice of lien would hamper rather than facilitate collection of his liability by effectively putting him out of business, thereby terminating the flow of income necessary to honor the installment agreement and, ultimately, to discharge petitioner’s outstanding liability. More specifically, Mr. Budish told the IRS that if it filed a notice of lien, his longstanding business relationship with the foundry, from which he normally received 30%-50% discounts from market pieces, would be drastically altered in that he would be required to immediately pay for all work previously produced and make “up front” payments for all future work. Mr. Budish furnished a copy of a letter from the foundry’s president to him, which confirmed this situation.
The Appeals officer responded that it was in the Government’s best interest to file a notice of lien because Mr. Budish’s tax liability exceeded $200,000. The IRS agreed to the $5,500 a month installment agreement, but not to the restriction on filing a lien. Since the parties did not agree, the IRS closed the case.
The IRS attached the appeals case memo to the IRS closing letter. The appeals case memo indicated that the IRS believed it had to file the lien before the IRS could enter into an installment agreement.
Mr. Budish asked the tax court to review the IRS determination, arguing that the IRS “ignored the statutory mandate of I.R.C. § 6330(c)(3)(C) to legitimately balance and weigh the interests of efficient governmental collection of taxes against the taxpayer’s legitimate concern that collection action be no more intrusive than necessary.”
The IRS argued that it had “discretionary authority” under Section 6159(a) to enter into an installment agreement and that Treas. Reg. 301.6159- 4 1(c)(3)(iii)(B) authorizes the filing of a notice of lien as a condition thereof.
The court agreed with Mr. Budish, saying:
We agree with petitioner that, in both cases, the Appeals officer misinterpreted and, in fact, overstated the directives set forth in the cited IRM provisions in determining that the filing of a notice of lien was required. In IRM pt. 188.8.131.52.1, the term “in general” in describing the circumstances, including the existence of large, outstanding liabilities, under which a notice of lien “should be filed” clearly indicates that there may be occasions in which it is not necessary to file a notice of lien, even where such circumstances exist. As petitioner suggests, the filing of a notice of lien might not be in the Government’s best interests in this case if, as petitioner argues, the lien would hamper rather than foster collection of his outstanding liability. In arguing that this case presents one of those occasions in which a notice of lien would be counterproductive for respondent, petitioner points to the nominal amount of his net assets as compared with that liability and also to the fact that a notice of lien filing would put him out of business, thereby cutting off the only source of funds sufficient to discharge his liability and making it impossible for him to honor his commitment under the installment agreement. As discussed infra, the record does not establish the Appeals officer’s basis for rejecting those arguments and opting to enforce the levy.
It is also clear that IRM pt. 184.108.40.206 (Oct. 30, 2009) lists circumstances under which an “NFTL filing determination must be made”, not circumstances under which a notice of lien must be filed. Thus, pursuant to IRM pt. 220.127.116.11, the Appeals officer was required to make a lien filing “determination”, which petitioner does not dispute; but she was not required, by that provision, to determine that a notice of lien be filed.
We also note that IRM pt. 18.104.22.168.2 (Oct. 30, 2009), which the Appeals officer does not discuss in her recommendation, states, in paragraph 4, that “[a] decision may be made to defer the filing of a[n] NFTL when the revenue officer can document a reasonable certainty that filing the NFTL will hamper collection.” (Emphasis added.) Thus, contrary to the Appeals officer’s apparent belief to the contrary, the IRM does not require the filing of a notice of lien.
Installment Agreement Rejected
Thus, the IRS appeals officer rejected the installment agreement as she felt that she had no other choice under the IRM, not because the evidence of potential financial hardship Mr. Budish provided was rejected as unsubstantiated. The court found this to be in error and remanded the case back to appeals to consider whether the potential financial hardship was substantiated.