I suspect
that I am one of few people who know where Palatka, Florida is.
When I came
out of graduate school I worked as an accountant in Tampa. The firm that I was
with was quite aggressive in pursuing contracts for government audits, and one
of the accountants there would go to Palatka on a routine enough basis. I
remember him not being overly excited about it.
In case you
are curious, draw a line from Gainesville (where the University of Florida is)
to St Augustine and one (sort of) crosses Palatka.
The reason
we are talking about it is that I am reading a Tax Court decision about a
doctor in Palatka. It is a “pro se” decision, which means that the taxpayer
represented himself/herself before the Court. I can tell that the doctor tried
to ramp up on IRS procedure, but he might have been better advised to hire a
CPA experienced in this area.
MEMO: We have commented on this before, but many CPAs do not
practice tax, and those who do may not necessarily practice IRS procedure
(other than maybe answering the occasional tax notice).
Dr Darrell Wyatt
graduated from the University of Arkansas in 1978 and is board certified in obstetrics
and gynecology.
He is a baby
doctor.
In 2006 he
was wooed by Putnam Medical Center to move to rural Florida.
Nice thing
about being a doctor is that hospitals are willing to provide “incentive”
payments for things, such as moving to Putnam county Florida. The hospital made
a deal with the doctor - move here and we will subsidize (read: “loan”) your
practice up to $32,953 per month. That will go on for one year, and then we
stop subsidizing you. At that time we would like for you to stay here and work
for another 3 more years. Every month that you stay we will forgive 1/36 of the
loan. Stay for 3 years and we will forgive the entire loan. Leave before then
and you have to pay back whatever is still due on the loan.
He spent the
year, and then he easily spent 3 more years.
The loan was
forgiven in monthly increments.
The deal with
Putnam Medical Center started in July, 2006. Spot the doctor a year. The 36
month period would then run from August, 2007 through July, 2010.
He filed his
2009 return. He reported the amount forgiven in 2009. He paid no estimated
taxes. He owed the IRS a boat. The IRS came in and wanted taxes and several
varieties of penalties.
Let talk a
little procedure.
The IRS
issued a Final Notice of Intent to Levy for 2009.
OBSERVATION: The IRS had sent a lot of correspondence to the
doctor, as this is pretty far along. Levy means that the IRS can go in and tap
your bank account, among other things. It is a step up from a Lien and is not a
good thing.
Dr. Wyatt in
turn requested a Due Process Hearing.
NOTE: The taxpayer has 30 days from the issuance of the Final
Notice of Intent to Levy to request an Appeals hearing. One is still inside the
IRS, but one is moving the file from Collections to Appeals. This is important as
Collections truly does not care whether you owe the tax or can pay the tax, it
just wants money. Appeals might cut one some slack on the amount or period over
which the tax can be paid.
So far I
understand. He did not pay 2009 taxes, so I presume he was under some financial
distress. Surely he wanted to propose some payment alternative, and he
requested the hearing because the IRS machine was going to run him over
otherwise.
Wrong. The
doctor presented an offer in compromise based on doubt as to liability.
OBSERVATION: The common offer in compromise is based on collectability:
one does not have two nickels to rub together and is trying to get the IRS to
accept some greatly reduced amount. This second type is based on the assertion:
“IRS, I do not owe you, period.”
This tells
me the doctor has done some homework. He submitted amended tax returns and proposed
to pay approximately what his tax would have been, excluding the loan
forgiveness, for tax years 2007 through 2010.
COMMENT: He evidently did not pay
tax for four years.
The doctor did
not follow certain procedural formalities, which we will spare ourselves for
the time being.
The IRS did
not accept his offer. The IRS issued its Statutory Notice of Deficiency (a/k/a “SNOD”)
and off they went to Tax Court.
The IRS did
not his accept his offer because he did not establish doubt as to liability. In
and of itself that does not bother me, as convincing the IRS on that point is
like expecting your dog to not want the leftovers from your T-bone steak.
In Court the
doctor leads off his argument with:
(1) The loan was nonrecourse.
Huh?
He is hanging
his hat on that fact that the hospital never reduced the employment incentive
to a promissory note. No note equals no personal liability, right?
Wrong. You can be liable and not have a
written note. Granted, the written note makes it easier to prove the existence
of debt, but the absence of a note does not mean that there is no debt. Had he
failed to stay for 36 months, the hospital would have had right to sue under
the paperwork that did exist.
He had no argument
(2).
What was he
thinking? Did he really believe …?
And then it
dawned on me.
The IRS
proceeded against the doctor for one year only – 2009. He would have had debt
discharge income in 2007 and 2008 also, but those years were not before the
Court.
But there is
a logical fallacy here: The absence of something does not necessarily mean the
presence of something else. The Court was looking only at 2009, which does not
mean that the IRS flubbed 2007 and 2008.
However, consider
the following language by the Court:
In his Form 12153 petitioner referenced three taxable years:
2007, 2008, and 2009. The record in the instant case does not include a copy of
the final notice that prompted petitioner to file Form 12153, nor does the record
include a transcript of account for any year other than 2009. As discussed infra
in the text, the offer-in-compromise based on doubt as to liability that
petitioner subsequently submitted referenced 2007 through 2010, i.e., the four
taxable years for which amounts were forgiven and canceled by the hospital. However
… the notice of determination upon which the instant case is based was issued
solely in respect of petitioner’s outstanding liability for 2009.”
The doctor
lost on all counts for 2009.
But I cannot
help but wonder if the doctor was not so much practicing procedure for 2009 as
much as running out the statute of limitations for 2007 and 2008.
