Sell Today And Pay Tax in Thirty Years

Sometimes I am amazed to the extent people will go to minimize, defer or avoid taxes altogether.

I get it, though. When that alarm clocks goes off in the morning, there is no government bureaucrat there to prepare your breakfast or drive you to work. Fair share rings trite when yours is the only share visible for miles.

I am looking at an IRS Chief Council Advice.

Think of the Chief Counsel as the attorneys advising the IRS. The Advice would therefore be legal analysis of an IRS position on something.

This one has to do with something called Monetized Installment Sale Transactions.

Lot of syllables there.

Let’s approach this from the ground floor.

What is an installment sale?

This is a tax provision that allows one to sell approved asset types and spread the tax over the years as cash is collected. Say you sell land with the purchase price paid evenly over three calendar years. Land is an approved asset type, and you would pay tax on one-third of your gain in the year of sale, one-third the following year and the final third in the third year.

It doesn’t make the gain go away. It just allows one to de-bunch the taxation on the gain.

Mind you, you have to trust that the buyer can and will pay you for the later years. If you do not trust the buyer’s ability (or intention) to do so, this may not be the technique for you.

What if the buyer pays an attorney the full amount, and that attorney in turn pays you over three years? You have taken the collection risk off the table, as the monies are sitting in an attorney’s escrow account.

You are starting to think like a tax advisor, but the technique will almost certainly not work.

Why?

Well, an easy IRS argument is that the attorney is acting as your agent, and receipt of cash by your agent is the equivalent of you receiving cash. This is the doctrine of “constructive receipt,” and it is one of early (and basic) lessons as one starts his/her tax education.

What if you borrow against the note? You just go down to Fifth Third or Truist Bank, borrow and pledge the note as collateral.

Nice.

Except that Congress thought about this and introduced a “pledging” rule. In short, a pledge of the note is considered constructive receipt on the note itself.

Not to be deterred, interested parties noticed a Chief Council’s Memorandum from 2012 that seemed to give the OK to (at least some of) these transactions. There was a company that need cash and needed it right away. It unloaded farm property in a series of transactions involving special purpose entities, standby letters of credit and other arcane details.

The IRS went through 11 painful pages of analysis, but wouldn’t you know that – at the end – the IRS gave its blessing.

Huh?

The advisors and promoters latched-on and used this Memorandum to structure future installment sale monetization deals.

Here is an example:

(1)  Let’s say I want to sell something.

(2)  Let’s say you want to buy what I am selling.

(3)  There is someone out there (let’s call him Elbert) who is willing to broker our deal – for a fee of course.

(4)  Neither you or I are related to Elbert or give cause to consider him our agent.

(5)  Elbert buys my something and gives me a note. In our example Elbert promises to pay me interest annually and the balance of the note 30 years from now.

(6)  You buy the something from Elbert. Let’s say you pay Elbert in full, either because you have cash in-hand or because you borrow money.

(7)  A bank loans me money. There will be a labyrinth of escrow accounts to maintain kayfabe that I have not borrowed against my note receivable from Elbert.

(8)  At least once a year, the following happens:

a.    I collect interest on my note receivable from Elbert.

b.    I pay interest on my note payable to the bank.

c.    By some miraculous result of modern monetary theory, it is likely that these two amounts will offset.

(9)  I eventually collect on Elbert’s note. This will trigger tax to me, assuming someone remembers what this note is even about 30 years from now.

(10)      Having cash, I repay the bank for the loan it made 30 years earlier.

There is the monetization: reducing to money, preferably without taxation.

How much of the original sales price can I get using this technique?

Maybe 92% or 93% of what you paid Elbert, generally speaking.

Where does the rest of the money go?

Elbert and the bank.

Why would I give up 7 or 8 percent to Elbert and the bank?

To defer my tax for decades.

Do people really do this?

Yep, folks like Kimberly Clark and OfficeMax.

So what was the recent IRS Advice that has us talking about this?

The IRS was revisiting its 2012 Memorandum, the one that advisors have been relying upon. The IRS lowered its horns, noting that folks were reading too much into that Memorandum and that they might want to reconsider their risk exposure.

The IRS pointed out several possible issues, but we will address only one.

The company in that 2012 Memorandum was transacting with farmland.

Guess what asset type is exempt from the “pledging” rule that accelerates income on an installment note?

Farmland.

Seems a critical point, considering that monetization is basically a work-around the pledging prohibition.

Is this a scam or tax shelter?

Not necessarily, but consider the difference between what happened in 2012 and how the promoters are marketing what happened.

Someone was in deep financial straits. They needed cash, they had farmland, and they found a way to get to cash. There was economic reality girding the story.   

Fast forward to today. Someone has a big capital gain. They do not want to pay taxes currently, or perhaps they prefer to delay recognizing the gain until a more tax-favorable political party retakes Congress and the White House. A moving story, true, but not as poignant as the 2012 story.   

For the home gamers, this time we have been discussing CCA 2019103109421213.

IRS Collection Statute Expiration Date (CSED)

 I consider it odd.

I have two files in my office waiting on the collection statute of limitations to expire.

It is not a situation I often see.

Audits, penalty abatements, payment plans, offers and innocent spouse requests are more common.

Let’s talk about the running of the collection statute of limitations.

COMMENT: I do not consider this to be valid tax planning, and I am quite reluctant to represent someone who starts out by intending to do the run. That said, sometimes unfortunate things happen. We will discuss the topic in the spirit of the latter.

Let’s set up the two statutes of limitations:

(1) The first is the statute on assessment. This is the familiar 3-year rule: the IRS has 3 years to audit and the taxpayer has 3 years to amend.

COMMENT: I do not want to include the word “generally” every time, as it will get old. Please consider the modifier “generally” as unspoken but intended.

(2)  The second is the statute on collections. This period is 10 years.

We might conversationally say that the period can therefore go 13 years. That would be technically incorrect, as there would be two periods running concurrently. Let’s consider the following example:

·      You filed your individual tax return on April 15, 2020. You owed $1,000 above and beyond your withholdings and estimates.

·      The IRS audited you on September 20, 2022. You owed another $4,000.

·      You have two periods going:

o  The $1,000 ends on April 15, 2030 (2020 + 10 years).

o  The $4,000 ends on September 20, 2032 (2022 + 10 years).

Alright, so we have 10 years. The expiration of this period is referred to as the “Collection Statute Expiration Date” or “CSED”.

When does it start?

Generally (sorry) when you file the return. Say you extend and file the return on August 15. Does the period start on August 15?

No.

The period starts when the IRS records the return.

Huh?

It is possible that it might be the same date. It is more possible that it will be a few days after you filed. A key point is that the IRS date trumps your date.

How would you find this out?

Request a transcript from the IRS. Look for the following code and date:

                  Code          Explanation

                    150           Tax return filed

Start your 10 years.

BTW if you file your return before April 15, the period starts on April 15, not the date you filed. This is a special rule.

Can the 10 years be interrupted or extended?

Oh yes. Welcome to tax procedure.

The fancy 50-cent word is “toll,” as in “tolling” the statute. The 10-year period is suspended while certain things are going on. What is going on is that you are probably interacting with the IRS.

OBSERVATION: So, if you file your return and never interact with the IRS – I said interact, not ignore – the statute will (generally – remember!) run its 10 years.

How can you toll the statute?

Here are some common ways:

(1)  Ask for an installment payment plan

Do this and the statute is tolled while the IRS is considering your request.

(2)  Get turned down for an installment payment plan

                  Add 30 days to (1) (plus Appeals, if you go there).

(3)  Blow (that is, prematurely end) an installment payment plan

Add another 30 days to (1) (plus Appeals, if you go there).

(4)  Submit an offer in compromise

The statute is tolled while the IRS is considering your request, plus 30 days.

(5)  Military service in a combat zone

The statute is tolled while in the combat zone, plus 180 days.

(6)  File for bankruptcy

The statute is tolled from the date the petition is filed until the date of discharge, plus 6 months.

(7)  Request innocent spouse status

The statute is tolled from the date the petition is filed until the expiration of the 90-day letter to petition the Tax Court. If one does petition the Court, then the toll continues until the final Court decision, plus 60 days.

(8)  Request a Collections Due Process hearing

The statute is tolled from the date the petition is filed until the hearing date.

(9)  Request assistance from the Taxpayer Advocate

The statute is tolled while the case is being worked by the Taxpayer Advocate’s office.

Unfortunately, I have been leaning on CDP hearings quite a bit in recent years, meaning that I am also extending my client’s CSED. I have one in my office as I write this, for example. I have lost hope that standard IRS procedure will resolve the matter, not to mention that IRS systems are operating sub-optimally during COVID. I am waiting for the procedural trigger (the “Final Notice. Notice of Intent to Levy and Notice of Your Rights to a Hearing”) allowing the appeal. I am not concerned about the CSED for this client, so the toll is insignificant.

There are advanced rules, of course. An example would be overlapping tolling periods. We are not going there in this post.

Let’s take an example of a toll.

You file your return on April 15, 2015. You request a payment plan on September 5, 2015. The IRS grants it on October 10, 2015. Somethings goes wobbly and the IRS terminates the plan. You request a Collection Due Process hearing on June 18, 2019. The hearing is resolved on November 25, 2019.

Let’s assume the IRS posting date is April 15, 2015.

Ten years is April 15, 2025.

It took 36 days to approve the payment plan.

The plan termination automatically adds 30 days.

The CDP took 161 days.

What do you have?

April 15, 2025 … plus 36 days is May 21, 2025.

Plus 30 days is June 20, 2025.

Plus 161 days is November 28, 2025.

BTW there are situations where one might extend the CSED separate and apart from the toll. Again, we are not going there in this post.

Advice from a practitioner: do not cut this razor sharp, especially if there are a lot of procedural transactions on the transcript. Some tax practitioners will routinely add 4 or 5 weeks to their calculation, for example. I add 30 days simply for requesting an installment payment plan, even though the toll is not required by the Internal Revenue Manual.  I have seen the IRS swoop-in when there are 6 months or so of CSED remaining, but not when there are 30 days.

Talking Frankly About Offers In Compromise

I am reading a case involving an offer in compromise (OIC).

In general, I have become disinclined to do OIC work.

And no, it is not just a matter of being paid. I will accept discounted or pro bono work if someone’s story moves me. I recently represented a woman who immigrated from Thailand several years ago to marry an American. She filed a joint tax return for her first married year, and – sure enough – the IRS came after her when her husband filed bankruptcy. When we met, her English was still shaky, at best. She wanted to return to Thailand but wanted to resolve her tax issue first. She was terrified.   

I was upset that the IRS went after an immigrant for her first year filing U.S. taxes ever, who had limited command of the language, who was mostly unable to work because of long-term health complications and who was experiencing visible - even to me - stress-related issues.

Yes, we got her innocent spouse status. She has since returned to Thailand.

Back to offers in compromise.

There are two main reasons why I shy from OIC’s:

(1) I cannot get you pennies-on-the-dollar.

You know what I am taking about: those late-night radio or television commercials.

Do not get me wrong: it can happen. Take someone who has his/her earning power greatly reduced, say by an accident. Add in an older person, meaning fewer earning years remaining, and one might get to pennies on the dollar.

I do not get those clients.

I was talking with someone this past week who wants me to represent his OIC. He used to own a logistics business, but the business went bust and he left considerable debt in his wake. He is now working for someone else.

Facts: he is still young; he is making decent money; he has years of earning power left.

Question: Can he get an OIC?

Answer: I think there is a good chance, as his overall earning power is down.

Can he get pennies on the dollar?

He is still young; he is making decent money; he has years of earning power left. How do you think the IRS will view that request?

(2) The multi-year commitment to an OIC.

When you get into a payment plan with the IRS, there is an expectation that you will improve your tax compliance. The IRS has dual goals when it makes a deal:

(a)  Collect what it can (of course), and

(b)  Get you back into the tax system.

Get into an OIC and the IRS expects you to stay out of trouble for 5 years. 

So, if you are self-employed the IRS will expect you to make quarterly estimates. If you routinely owe, it will want you to increase your withholding so that you don’t owe. That is your end of the deal.

I have lost count of the clients over the years who did not hold-up their end of the deal.  I remember one who swung by Galactic Command to lament how he could not continue his IRS payment plan and then asked me to step outside to see his new car.

Folks, there is little to nothing that a tax advisor can do for you in that situation. It is frustrating and – frankly – a waste of time.

Let’s look at someone who tried to run the five-year gauntlet.

Ed and Cynthia Sadjadi wound up owing for 2008, 2009, 2010, and 2011.

They got an installment plan.

Then they flipped it to an OIC.

COMMENT: What is the difference? In a vanilla installment plan, you pay back the full amount of taxes. Perhaps the IRS cuts you some slack with penalties, but they are looking to recoup 100% of the taxes. In an OIC, the IRS is acknowledging that they will not get 100% of the taxes.

The Sadjadis were good until they filed their 2015 tax return. They then owed tax.

The reasoned that they had paid-off the vast majority if not all of their 2008 through 2011 taxes. They lived-up to their end of the deal. They now needed a new payment plan.

Makes sense, right?

And what does sense have to do with taxes?

The Court reminded them of what they signed way back when:

I will file tax returns and pay the required taxes for the five-year period beginning with the date and acceptance of this offer.

The IRS will not remove the original amount of my tax debt from its records until I have met all the terms and conditions of this offer.

If I fail to meet any of the terms of this offer, the IRS may levy or sue me to collect …..

The Court was short and sweet. What part of “five-year period” did the Sadjadis not understand?

Those taxes that the IRS wrote-off with the OIC?

Bam! They are back.

Yep. That is how it works.

Our case this time was Sadjadi v Commissioner, T.C. Memo 2019-58.

Requesting A Payment Plan With Over $7 Million In The Bank

Sometimes I wonder how people get themselves into situations.

Let’s take a look at a recent Tax Court case. It does not break new ground, but it does remind us that – sometimes – you need common sense when dealing with the IRS.

The Strashny’s filed their 2017 tax return on time but did not pay the tax due.

COMMENT: In and of itself, that does not concern me. The penalty for failing to file a tax return is 10 ten times more severe than filing but not paying. If the Strashny’s were my client and had no money, I would have advised the same.

The 2017 return had tax due, including interest, of over $1.1 million.

COMMENT: Where did the money go? I am curious now.

In June, 2018 the IRS assessed the tax along with a failure-to-pay penalty.

In July, 2018 the Strashny’s sent an installment payment request. Because of the amount of money involved, they had to disclose personal financial information (Form 433-A). They wanted to stretch the payments over 72 months.

COMMENT: Standard procedure so far.

Meanwhile the IRS sent out a Notice of Intent to Levy letter (CP90), which seemed to have upset the Strashny’s.

A collection appeal goes before an IRS officer settlement officer (or “SO,” in this context). In April, 2019 she sent a letter requesting a conference in May.

COMMENT: Notice the lapsed time – July, 2018 to April, 2019. Yep, it takes that long. It also explains while the IRS sent that CP90 (Notice of Intent to Levy): they know the process is going to take a while.

The taxpayers sent and the SO received a copy of their 2018 tax return. They showed wages of over $200,000.

OK, so they had cash flow.

All that personal financial information they had sent earlier showed cryptocurrency holdings of over $7 million. Heck, they were even drawing over $19,000 per month on the account.

More cash flow.

COMMENT: Folks, there are technical issues in this case, such as checking or not checking a certain box when requesting a collection hearing. I am a tax nerd, so I get it. However, all that is side noise. Just about anyone is going to look at you skeptically if you cite cash issues when you have $7 million in the bank.

The SO said no to the payment plan.

The Strashny’s petitioned the Tax Court.

COMMENT: Notice that this case does not deal with tax law. It deals, rather, with tax procedure. Procedure established by the IRS to deal with the day-to-day of tax administration. There is a very difficult standard that a taxpayer has to meet in cases like this: the taxpayer has to show that the IRS abused its authority.

The Strashny’s apparently thought that the IRS had to approve their request for a payment plan.

The Court made short work of the matter. It reasoned that the IRS has (with limited exceptions) the right to accept or reject a payment plan. To bring some predictability to the process, the IRS has published criteria for its decision process. For example, economic hardship, ill health, old age and so on are all fair considerations when reviewing a payment plan.

What is not fair consideration is a taxpayer’s refusal to liquidate an asset.

Mind you, we are not talking a house (you have to live somewhere) or a car (you have to get to work). There are criteria for those. We are talking about an investment portfolio worth over $7 million.

The Court agreed with the IRS SO.

So do I.

Was there middle ground? Yes, I think so. Perhaps the Strashny’s could have gotten 12 or 24 months, citing the market swings of cryptocurrency and their concern with initiating a downward price run. Perhaps there was margin on the account, so they had to be mindful of paying off debt as they liquidated positions. Maybe the portfolio was pledged on some other debt – such as business debt – and its rash liquidation would have triggered negative consequences. That approach would have, however, required common sense – and perhaps a drop of empathy for the person on the other side of the table – traits not immediately apparent here.

They got greedy. They got nothing.

Our case this time was Strashny v Commissioner.

Taxpayer Fail On Discharging Taxes Through Bankruptcy

I have an IRS notice sitting on my desk. I meant to call the IRS about it on Friday, but it got away from me. I will call on Monday. It disgruntles me, as I have already called and considered the matter resolved.

There you have why practitioners get upset with the IRS about hair-trigger or bogus notices: one has only so much time.

My partner brought in this client. They were chronic nonfilers, and we prepared the better part of a decade’s worth of returns for them. I lost humor with them when the husband insulted one of my accountants. Granted, it is unlikely that a younger accountant would know what I know, but the incident was uncalled for. The husband and I had a very different and blunt conversation.

They spoke with my partner about discharging the taxes through bankruptcy, which is one reason I was brought in.

Short answer: forgetaboutit, at least for a while.

There are four basic requirements to discharging taxes in bankruptcy. I have not often seen the fourth reason, but I was recently reading a case involving that elusive fourth.

Here are the four requirements:

(1)  The taxes were due at least three years ago. Obtain an extension and you must include the extension period in the three years.

(2)  Fail to file and the taxes are not dischargeable until at least two years after filing.

(3)  The IRS must have assessed the taxes at least 240 days before filing for bankruptcy.

(4)  The return must not be fraudulent, and the taxpayer(s) cannot willfully have attempted to avoid the tax.

Let’s go through an example.

(1)  Let’s say we are talking about your 2016 tax return. If you filed on April 15, 2017, the first rule gives you a minimum date of April 15, 2020.

(2)  Let’s say you filed that 2016 return on July 21, 2018. The second rule gives you a minimum date of July 21, 2020.

(3)  Let’s say the IRS posted (that is, assessed) the 2016 return shortly after filing – perhaps July 31, 2018. There is no problem with the 240-day rule.

(4)  Let’s also say there was no attempt to evade tax. It was irresponsible not to file, but there is nothing there other than irresponsibility.

Seems to me that the earliest you can file for discharge via bankruptcy would be July 22, 2020 – the latest of the above dates.

Let’s talk about a case involving the fourth requirement.

There is a doctor. Her husband was a CPA – he lost his license after a conviction for tax evasion.

She let her husband prepare the returns for years 2004 through 2014.

I would not have done that, but - to me – a CPA losing his license for tax evasion is a HUGE dealbreaker, husband or not.

The entered into a payment plan. They missed some payments.

Like night follows day.

They were living the high life. They had an expensive house (Newport), but they wanted a more expensive house (Dwight). They bough Dwight on a land contract, hoping to sell Newport.

They then carried two houses, as Newport did not sell.

Now they were tight on cash, and they fell behind with the IRS.

Mind you, that did not stop them from sending their kids to a private school, racking up $325,000 in the process. They also took trips to Mexico and Puerto Rico, as well as parking a Jaguar and a Lexus in the driveway.

Newport was foreclosed.

In 2016 we have the bankruptcy.

The IRS moved to exercise its lien on the Dwight property.

Husband came up with a brilliant scheme.  He sold Dwight for a swan song to a former client.  He would pay the IRS the few dollars that came his way from the “sale,” and he and his wife would rent the Dwight property back from the former client.

Puuhleeeese, said the IRS.

The Court agreed with the IRS. It spotted a willful attempt to evade or avoid, thereby nixing any discharge of taxes although the couple had filed for bankruptcy.

Why? They failed the fourth requirement.

The case for the home gamers is re Harold 2020 PTC 58 (Bankr. E.D. Michigan 2020)

Memphian Appeals An Offer In Compromise

I am looking at a case dealing with an offer in compromise.

You know these from the late-night television and radio advertisements to “settle your IRS debts for pennies on the dollar.”

Yeah, right.

If it were so easy, I would use it myself.

Don’t get me wrong, there are fact patterns where you probably could settle for pennies on the dollar. Unfortunately, these fact patterns tend to involve permanent injury, loss of earning power, a debilitating illness or something similar.

I will just pay my dollar on the dollar, thank you.

What caught my attention is that the case involves a Memphian and was tried in Memphis, Tennessee. I have an interest in Memphis these days.

Let’s set it up.

Taxpayer filed tax returns for 2012 through 2014 but did not pay the full amount of tax due, which was about $40 grand. A big chunk of tax was for 2014, when he withdrew almost $90,000 from his retirement account.

Why did he do this?

He was sending his kids to a private high school.

I get it. I cannot tell you how many times I have heard from Memphians that one simply cannot send their kids to a public school, unless one lives in the suburbs.

In December, 2016 he received a letter from the IRS that they were going to lien.

He put the brakes on that by requesting a Collection Due Process (CDP) hearing.

Well done.

In January he sent an installment agreement to the IRS requesting payments of $300 per month until both sides could arrive at a settlement.

The following month (February) he submitted an Offer in Compromise (OIC) for $1,500.

That went to a hearing in April. The IRS transferred the OIC request to the appropriate unit.

In late August the IRS denied the OIC.

Let’s talk about an OIC for a moment. I am thinking about a full post (or two) about OICs in the future, but let’s hit a couple of high spots right now.

The IRS takes a look at a couple of things when reviewing an OIC:

(1)  Your net worth, defined as the value of assets less any liabilities thereon.

There are certain arcane rules. For example, the IRS will probably allow you to use 80% of an asset’s otherwise fair market value. The reason is that it is considered a forced sale, meaning that you might accept a lower price than otherwise.

(2) Your earning power

This is where those late-night IRS settlement mills dwell. Have no earning power and near-zero net worth and you get pennies on the dollar.

There are twists here. For example, the IRS is probably not going to spot you a monthly Lexus payment. That is not how it works. The IRS provides tables for certain categories of living expenses, and that is the number you use when calculating how much you have “left over” to pay the IRS.

Let’s elaborate what the above means. If the IRS spots you a lower amount than you are actually spending, then the IRS sees an ability to pay that you do not have in real life.

You can ask for more than the table amount, but you have to document and advocate your cause. It is far from automatic, and, in fact, I would say that the IRS is more inclined to turn you down than to approve any increase from the table amount. I had a client several years ago who was denied veterinary bills and prescriptions for his dog, for example.

The IRS workup showed that the taxpayer had monthly income of approximately $12,700 and allowable monthly expenses of approximately $11,000. That left approximately $1,700 monthly, and the IRS wanted to get paid.

But there was one expense that made up the largest share of the IRS difference. Can you guess what it was?

It was the private school.

The IRS will not spot you private school tuition, unless there is something about your child’s needs that requires that private school. A special school for the deaf, for example, would likely qualify.

That is not what we have here.

The IRS saw an ability to pay that the taxpayer did not have in real life.

Taxpayer proposed a one-time OIC of $5,000.

The IRS said No.

They went back and forth and agreed to $200 per month, eventually increasing to $700 per month.

COMMENT: This is not uncommon for OICs. The IRS will often give you a year to rework your finances, with the expectation that you will then be able to pay more.

The taxpayer then requested abatement of interest and penalties, which was denied. Generally, those requests require the taxpayer to have a clean filing history, and that was not the case here.

The mess ended up in Tax Court.

Being a court, there are rules. The rule at play here is that the Court was limited to reviewing whether the IRS exercised abuse of discretion.

Folks, that is a nearly impossible standard to meet.

Let me give you one fact: he had net assets worth approximately $43 thousand.

His tax was approximately $40 thousand.

Let’s set aside the 80% thing. It would not take a lot of earning power for the IRS to expect him to be able to repay the full $40 grand.

He lost. There really was no surprise, as least to me.

I do have a question, though.

His monthly income was closer to $13 grand than to $12 grand.

It fair to say that is well above the average American monthly household income.

Private school is expensive, granted.

But where was the money going?

Our case this time was Love v Commissioner, T.C. Memo 2019-92.