Our system of income taxes is based on arbitrary deadlines. Income and expense are counted and tax computed on a set interval, whether calendar year, fiscal year, or a 52-53 week tax year.
Tax returns are filed three, four, nine or ten months later.
Audits have to be done within three years usually unless extended by consent or if an exception applies.
Unpaid taxes have to be collected within ten years of assessment unless extended by the IRS filing suit.
The list goes on and on. Arbitrary deadlines have next to no meaning outside of the tax process.
This brings us to Williams v. Commissioner, T.C. Memo. 2009-159. In Williams, the taxpayer asked the IRS Appeals Office to hold open a collection due process or CDP hearing request pending the assessment of tax in and consolidation of other tax years with the current CDP hearing request.
Facts & Procedural History
The Hoyt family organized, promoted, and operated numerous cattle and sheep-breeding partnerships, which the Williams referred to as tax shelters.
Michael and Sheryl Williams participated in Shorthorn Genetic Engineering 1982-1 (SGE) in 1996. GSE was a Hoyt partnership that owned partnership interests in operating-tier Hoyt partnerships.
The Williams’ joint Federal income tax return for 1996 included a Schedule E, Supplemental Income and Loss, reporting a partnership loss of $216,497 from SGE.
The IRS determined that SGE was subject to provisions of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) and disallowed the partnership’s claimed loss for 1996.
The IRS eventually started collections and issued an IRS Levy Notice.
The IRS’s CDP Hearing Review
The Williams submitted a Form 12153, Request for a Collection Due Process Hearing (section 6330 hearing), to review the levy action. In their request, the Willaims asserted that a levy would be improper because of equity and hardship concerns and that an offer-in-compromise was warranted.
The Willaims informed the settlement officer that they had additional TEFRA-related assessments that involved Hoyt partnerships pending for other years as a result of court proceedings. They proposed that an offer-in-compromise encompassing all their assessments would be an appropriate resolution.
The IRS held the CDP hearing open for two months, but cautioned that he would not hold the case indefinitely.
The IRS closed the case after the two-month period, noting that a review of their financial documents showed that petitioners had the ability to pay in full this tax liability.
The IRS also granted petitioners a 120-day extension to pay before collection actions would resume.
The Tax Court’s Review
The Williams asked the U.S. Tax Court to review the IRS’s determination.
The tax court described the dispute and its reasoning as follows:
Petitioners argue that the settlement officer abused his discretion in not holding their case open until the pending liabilities from other years were assessed. Petitioners, however, present neither evidence nor authority that supports their view. To the contrary, the Appeals Office shall “attempt to conduct a [section 6330] hearing and issue a Notice of Determination as expeditiously as possible under the circumstances.” Sec. 301.6330-1(e)(3), Q&A-E9, Proced. & Admin. Regs.; see Murphy v. Commissioner, 125 T.C. 301, 322 (2005) (citing Clawson v. Commissioner, T.C. Memo. 2004-106), affd. 469 F.3d 27 (1st Cir. 2006). The settlement officer held petitioners’ Appeals case open for over 2 months in a cooperative effort regarding the tax liabilities outside of the section 6330 hearing. The settlement officer did not abuse his discretion by declining to delay further his determination.
The court upheld the IRS’s determination.
One is left wondering why Williams wanted the additional years included in the current year’s CDP hearing when the IRS employee had already determined that they could fully pay the liability. It may have been that they intended to propose an offer in compromise based on effective tax administration rather than doubt as to collectibility, and needed all years included in one offer. At the same time, they probably needed to stay collection actions in the current year.
This case shows that IRS Appeals and the CDP Hearing are not set up to consider creative collection solutions (click here for further explanation).