Tuesday, June 21, 2011

Tucker v. Commissioner of Internal Revenue

I came across an interesting tax case: Tucker v Commissioner of Internal Revenue. This thing is virtually a case study in IRS procedure. It also involved a taxpayer that (a) owed monies to the IRS and (b) decided to day trade before remitting monies to the IRS. You can probably anticipate that things did not go as planned for Mr. Tucker.

Let’s go through some of the detail.

Tucker had filed returns for 2000, 2001 and 2002 but did not pay the tax. In 2003 he decided to pave his way to gold by day-trading. He owed the IRS approximately $15,000. He lost almost $23,000.

In May, 2004 the IRS sent him a Notice of Intent to Levy. He did not request a hearing.

In July, 2004 the IRS sent a Notice of Federal Tax Lien Filing (NTLF).

However, before he received the NTLF he submitted in July, 2004 a request for an Offer in Compromise. His total tax was approximately $24,000; with penalties and interest it was approximately $35,000. He proposed an OIC of $100 monthly for 60 months.

The OIC was rejected.

However, after he received the NTLF notice but before learning that the IRS rejected his OIC, Tucker filed in August, 2004 a Request for Collection Due Process (CDP) Hearing.

Note: The IRS generally notifies a taxpayer of a right to a hearing when it sends a levy. If the taxpayer requests the CDP hearing, the IRS may not file a levy until after the hearing. At that hearing the taxpayer may ask for an installment agreement, an offer in compromise or another collection alternative. The taxpayer may also dispute the amount of the tax liability.

With the request for a CDP, Tucker also requested an OIC.

Note: So Tucker requested an OIC in July and then again in August. This caused some confusion at the IRS. Tucker’s attorney withdrew the July OIC and offered instead an installment agreement.

Note: an OIC is not an alternative to the filing of an NFTL. It is an alternative to the filing of a levy. This tells me that Tucker missed the deadline for the May notice and was trying to catch up.

So now we are in May, 2005 and the CDP hearing was held over the telephone. Tucker’s attorney stated that Tucker no longer wanted the July, 2004 OIC with payments totaling $6,000. So, the following month (June, 2005) Tucker submitted new financials. The attorney proposed an installment payment arrangement of $326 a month.

The IRS reviewed the numbers, revised it to $316 and requested Tucker to sign and review a partial payment installment agreement (PPIA).

Hey, now we are getting somewhere.

Wait! The attorney now wanted to switch from a PPIA to an OIC.

Note: Why would he do this, you ask? There is a technical reason, as an OIC would (assuming Tucker adhered to all of the conditions) fix the liability to the IRS. A PPIA would be reexamined every two years for possible increases.

Tucker tried to sweeten the pot by proposing payments of $317 monthly. I guess he figured that that extra $1 per month would help his cause.

In November, 2005 the IRS rejected Tucker’s OIC.

Question: Why would the IRS do this? There can be several reasons, but one reason is that a lot of time was left on Tucker’s statute of limitations (SoL) period for collections. You may remember that there is a SoL of three years for the IRS to audit your return. There is a second, and less known, SoL on how long the IRS has to collect, assuming that it has audited or otherwise assessed your return. That second SoL is ten years. Tucker had more than five years left on this SoL, and the IRS was reluctant to give it up. Remember, under an OIC the IRS cannot revisit the numbers unless the taxpayer fails to comply.

In January, 2006 Tucker filed with the Tax Court. The Tax Court sent the case back to IRS Appeals to reconsider Tucker’s July, 2005 OIC. This second (supplemental) hearing was held September, 2006.

Here is the magic language by IRS Appeals:

Upon review, * * * [this settlement officer] believes that the stock sales are dissipated assets and believes the amounts dissipated should be included in a minimum offer calculation. As such, the minimum offer is actually full payment. These stock transactions in 2003 occurred * * * [after] the due dates of the 1999, 2000, and 2001 1040 returns. If you simply sold a little less than you bought, which was your option, you could have already paid the taxes in full.

So… the IRS is arguing that Tucker “dissipated” his assets and therefore refused his OIC.

In November, 2006 Tucker filed again with the Tax Court. He of course disagreed that he “dissipated” anything. The IRS responded in November, 2007. Tucker filed a motion in February, 2008.

Are we FINALLY getting to court?

Here is what the Tax Court had to say:

Mr. Tucker also argues that the Office of Appeals erred in determining that his day trading in 2003 constituted a dissipation of assets. We disagree in part.

Mr. Tucker was aware of his unpaid tax obligations for 1999 through 2001 when he transferred the $44,700 into his E*TRADE account. Despite having known tax obligations, Mr. Tucker still transferred the money and for nearly four months engaged in the highly speculative and volatile activity of day trading.

Mr. Tucker maintains that he did so in an effort to make enough money to pay off his delinquent taxes and other creditors, as well as pay his tax liability for 2002 that would be coming due.

The losses that Mr. Tucker sustained were not due to an unforeseeable event but rather were commonplace (especially for a neophyte) in such a highly volatile activity. Mr. Tucker knew he owed outstanding taxes; and he had the cash in hand that would have paid in full the taxes and accruals he owed as of early 2003 (i.e., for tax years 1999, 2000 and 2001); and yet he chose instead to devote that money to a risky investment. Mr. Tucker’s foray into day trading was purely speculative, and his already slim chances of success were undermined by his inexperience. In short, Mr. Tucker’s circumstances were of his own making.

Well, this is not going well for Tucker.

In the supplemental notice of determination, the settlement officer concluded that Mr. Tucker had dissipated $44,700 in assets, measured by his deposits into the E-Trade account. For purposes of summary judgment, we find that that conclusion was excessive. The mere act of depositing the money into the E-Trade account did not rise to the level of dissipation, but the day trading and the losing of the money in the account did. Because at the time in April 2003 that Mr. Tucker lost a total of $22,645 from his day trading activities, he had outstanding Federal tax liabilities of at least $14,975, we hold for purposes of summary judgment that Mr. Tucker dissipated assets of $14,975.

The parties agree that Mr. Tucker’s disposable income (i.e., monthly income over allowable monthly expenses) was $316 per month, and that there were 116 months remaining before his collection period expiration date.

As a result, Mr. Tucker’s future income subject to collection would be $316 x 116 months, or $36,656--an amount slightly less than the total of the payments he proposed in his OIC. However, as we determined above, the value of assets that Mr. Tucker dissipated through his day trading activities was $14,945. Under IRS guidelines, Mr. Tucker’s reasonable collection potential would therefore be $51,601--i.e., the sum of his future income stream ($36,656) plus the value of any dissipated assets (at least $14,945). Given that Mr. Tucker’s reasonable collection potential thus exceeded his outstanding tax liabilities, the settlement officer did not err in determining Mr. Tucker could fully pay his Federal income tax liabilities.

The part of this case that has attracted professional interest is the stern disapproval of the Tax Court (or, at least, of Judge Gustafson) of day trading while owing the IRS monies. Dissipated assets will not reduce the amount the IRS will accept in an installment agreement or offer. The risk therefore is one-sided: if you make money, you can pay the IRS sooner; if not, then you will owe the same as before, but with fewer assets at your disposal.

As For Tucker, he now owes the better part of $45,000 to the IRS. As too often happens, the taxpayer should have settled for the best available deal and carried on with his/her life.

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