SCOTUS Reports

Tag: 2013

  • Simpson v. Comm’r, 141 T.C. 331 (2013): Exclusion of Settlement Proceeds from Gross Income under IRC Sections 104(a)(1) and 104(a)(2)

    Simpson v. Commissioner, 141 T. C. 331 (2013) (United States Tax Court, 2013)

    In Simpson v. Commissioner, the U. S. Tax Court ruled that settlement proceeds from a workers’ compensation claim not approved by the California Workers’ Compensation Appeals Board are not excludable under IRC Section 104(a)(1). However, 10% of the settlement was deemed excludable under Section 104(a)(2) as damages for physical injuries. This case highlights the necessity of state approval for workers’ compensation settlements and the broader scope of tax exclusions for physical injury damages.

    Parties

    Kathleen S. Simpson and George T. Simpson were the petitioners, filing as individuals. The respondent was the Commissioner of Internal Revenue. The case was heard in the United States Tax Court.

    Facts

    Kathleen Simpson worked for Sears, Roebuck & Co. and alleged that her job led to physical injuries and mental health issues. After her termination, she filed a lawsuit against Sears under California’s Fair Employment and Housing Act (FEHA), alleging discrimination and retaliation. Following a partial dismissal of her claims, Simpson’s attorney discovered her eligibility for workers’ compensation benefits, which formed the basis for settlement negotiations. The settlement agreement, which did not mention workers’ compensation explicitly, was not submitted for approval to the California Workers’ Compensation Appeals Board (WCAB). The settlement allocated $98,000 to Simpson’s emotional distress and physical disabilities, with 10% to 20% attributed to physical injuries.

    Procedural History

    The Simpsons filed a timely petition in the United States Tax Court to redetermine the Commissioner’s determination of a federal income tax deficiency of $73,407 for 2009. The Commissioner had also imposed an accuracy-related penalty of $14,681, which was later conceded. The Tax Court’s decision addressed the taxability of the $250,000 settlement received from Sears, excluding the $12,500 for lost wages that was already reported as income.

    Issue(s)

    Whether any portion of the $250,000 settlement received by the Simpsons in 2009 from Sears is excludable from their gross income under IRC Sections 104(a)(1) or 104(a)(2)?

    Whether the portion of the settlement allocated to attorney’s fees and court costs is deductible under IRC Section 62(a)(20)?

    Rule(s) of Law

    IRC Section 104(a)(1) excludes from gross income “amounts received under workmen’s compensation acts as compensation for personal injuries or sickness. ” IRC Section 104(a)(2) excludes “the amount of any damages (other than punitive damages) received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal physical injuries or physical sickness. ” IRC Section 62(a)(20) allows a deduction for attorney’s fees and court costs paid in connection with any action involving a claim of unlawful discrimination.

    Holding

    The Tax Court held that none of the settlement proceeds were excludable under IRC Section 104(a)(1) because the settlement was not approved by the WCAB as required by California law. However, 10% of the $98,000 allocated to physical injuries and sickness was excludable under IRC Section 104(a)(2). The court also held that the $152,000 allocated to attorney’s fees and court costs was deductible under IRC Section 62(a)(20).

    Reasoning

    The court’s reasoning included the following points:

    – The settlement was not valid under California’s workers’ compensation laws because it was not approved by the WCAB, thus not qualifying for exclusion under IRC Section 104(a)(1).

    – The new regulations under IRC Section 104(a)(2) removed the requirement that damages be based on tort or tort-type rights, allowing for the exclusion of damages for personal physical injuries or sickness regardless of the statutory basis for the claim.

    – The court relied on credible testimony to determine that 10% of the $98,000 was attributable to Simpson’s physical injuries and sickness, qualifying for exclusion under IRC Section 104(a)(2).

    – The court applied the Cohan rule to estimate the deductible amount of attorney’s fees and court costs under IRC Section 62(a)(20), based on credible evidence provided by Simpson’s attorney.

    – The court considered the legislative intent behind the IRC sections and the relevant case law, including Commissioner v. Schleier and United States v. Burke, to interpret the scope of exclusions and deductions.

    Disposition

    The Tax Court entered a decision under Rule 155, allowing the exclusion of 10% of the $98,000 under IRC Section 104(a)(2) and the deduction of $152,000 for attorney’s fees and court costs under IRC Section 62(a)(20).

    Significance/Impact

    This case clarifies the importance of state approval for workers’ compensation settlements to qualify for tax exclusion under IRC Section 104(a)(1). It also reflects the broader application of IRC Section 104(a)(2) following regulatory changes, allowing for the exclusion of damages for physical injuries even if not based on tort or tort-type rights. The decision impacts how settlements involving physical injuries are structured and reported for tax purposes, emphasizing the need for clear allocation and documentation of damages attributable to physical injuries.

  • Simpson v. Commissioner, 141 T.C. No. 10 (2013): Taxation of Settlement Proceeds under I.R.C. §§ 104(a)(1), 104(a)(2), and 62(a)(20)

    Simpson v. Commissioner, 141 T. C. No. 10 (2013)

    In Simpson v. Commissioner, the U. S. Tax Court ruled that a settlement payment received by Kathleen Simpson was not excludable from gross income under I. R. C. § 104(a)(1) as a workers’ compensation benefit due to lack of required state approval. However, 10% of the settlement was excludable under § 104(a)(2) for personal physical injuries. The court also allowed a deduction for attorney’s fees and costs under § 62(a)(20). This decision highlights the complexities of tax treatment of settlement proceeds and the importance of statutory compliance.

    Parties

    Kathleen S. Simpson and George T. Simpson, Petitioners, v. Commissioner of Internal Revenue, Respondent. The Simpsons were the taxpayers challenging the IRS’s determination of tax deficiency. The Commissioner of Internal Revenue represented the government’s position on the tax treatment of the settlement proceeds received by Kathleen Simpson.

    Facts

    Kathleen Simpson, an employee of Sears, Roebuck & Co. , suffered physical and mental health issues due to her work conditions. After her employment was terminated, she sued Sears for employment discrimination under California’s Fair Employment and Housing Act (FEHA). After the court dismissed most of her claims, Simpson’s attorney pursued a settlement based on her potential workers’ compensation claims, as Sears had failed to inform her of her eligibility for such benefits. The settlement agreement, which included payments for lost wages, emotional distress, physical and mental disabilities, and attorney’s fees, did not mention workers’ compensation explicitly nor was it submitted for approval by the California Workers’ Compensation Appeals Board (WCAB). The Simpsons excluded the settlement proceeds from their income on their tax return, leading to a tax deficiency notice from the IRS.

    Procedural History

    The IRS issued a notice of deficiency to the Simpsons, determining a tax deficiency and an accuracy-related penalty. The Simpsons petitioned the U. S. Tax Court to challenge this determination. The IRS later conceded the penalty. The Tax Court considered whether the settlement proceeds were excludable under I. R. C. §§ 104(a)(1) and 104(a)(2), and whether attorney’s fees and costs were deductible under § 62(a)(20).

    Issue(s)

    1. Whether any portion of the $250,000 settlement payment received by Kathleen Simpson is excludable from gross income under I. R. C. § 104(a)(1) as amounts received under workers’ compensation acts?
    2. Whether any portion of the $250,000 settlement payment is excludable from gross income under I. R. C. § 104(a)(2) as damages received on account of personal physical injuries or physical sickness?
    3. Whether the portion of the settlement allocated to attorney’s fees and court costs is deductible under I. R. C. § 62(a)(20)?

    Rule(s) of Law

    1. I. R. C. § 104(a)(1) excludes from gross income “amounts received under workmen’s compensation acts as compensation for personal injuries or sickness. “
    2. I. R. C. § 104(a)(2) excludes from gross income “the amount of any damages (other than punitive damages) received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal physical injuries or physical sickness. “
    3. I. R. C. § 62(a)(20) allows a deduction for attorney’s fees and court costs paid by, or on behalf of, a taxpayer in connection with any action involving a claim of unlawful discrimination, not exceeding the amount includible in the taxpayer’s gross income for the taxable year on account of a judgment or settlement resulting from such claim.

    Holding

    1. No portion of the settlement payment is excludable under I. R. C. § 104(a)(1) because the settlement agreement was not approved by the California Workers’ Compensation Appeals Board as required by state law.
    2. Ten percent of the $98,000 portion of the settlement payment allocated to “emotional distress, physical and mental disability” is excludable under I. R. C. § 104(a)(2) as damages received on account of personal physical injuries and physical sickness.
    3. The $152,000 allocated to attorney’s fees and court costs is deductible under I. R. C. § 62(a)(20).

    Reasoning

    The court’s reasoning focused on statutory interpretation and the factual context of the settlement:
    – Under § 104(a)(1), the settlement was not excludable because it did not meet California’s requirement for WCAB approval, rendering it invalid as a workers’ compensation settlement.
    – The court applied the new regulations under § 104(a)(2), which no longer required the underlying claim to be based on tort or tort type rights, to find that 10% of the $98,000 was excludable as it was intended to compensate for personal physical injuries and sickness.
    – The court allowed the deduction of attorney’s fees and court costs under § 62(a)(20) based on the settlement’s connection to an unlawful discrimination claim, despite the factual inconsistency with the claim that the entire settlement was for workers’ compensation.
    The court relied on extrinsic evidence, including the testimony of Simpson’s attorney, to interpret the intent behind the settlement and its allocation. It also used the Cohan rule to estimate the deductible amount of attorney’s fees and court costs when precise substantiation was lacking.

    Disposition

    The court held that the settlement payment was not excludable under § 104(a)(1), but 10% of the $98,000 portion was excludable under § 104(a)(2), and the $152,000 allocated to attorney’s fees and court costs was deductible under § 62(a)(20). A decision was to be entered under Rule 155.

    Significance/Impact

    The Simpson case underscores the necessity of complying with state workers’ compensation laws to secure tax exclusions under § 104(a)(1). It also demonstrates the impact of regulatory changes on the interpretation of § 104(a)(2), expanding its scope to include settlements not based on tort rights. This ruling provides clarity on the tax treatment of settlement proceeds and the deductibility of related legal expenses, influencing legal strategies in employment and discrimination cases. Subsequent courts have referenced Simpson in addressing similar tax issues, and it has practical implications for taxpayers and attorneys in structuring settlements to achieve favorable tax outcomes.

  • ADVO, Inc. & Subsidiaries v. Commissioner, 141 T.C. 298 (2013): Domestic Production Activities Deduction under I.R.C. § 199

    ADVO, Inc. & Subsidiaries v. Commissioner, 141 T. C. 298 (2013) (United States Tax Court, 2013)

    In ADVO, Inc. & Subsidiaries v. Commissioner, the U. S. Tax Court ruled that ADVO, a direct mail advertising company, could not claim a domestic production activities deduction under I. R. C. § 199 because it did not bear the benefits and burdens of ownership of the printed materials during production. This decision clarified the eligibility criteria for the deduction, emphasizing that only the party with ownership during the manufacturing process can claim it, impacting how companies structure their production agreements.

    Parties

    ADVO, Inc. & Subsidiaries, as the petitioner, challenged a decision by the Commissioner of Internal Revenue, the respondent, in the United States Tax Court. ADVO was the common parent of a consolidated group, and at the time of filing, its principal place of business was in Connecticut.

    Facts

    ADVO, Inc. was engaged in the distribution of direct mail advertising in the United States, offering both solo and cooperative mail packages to its clients, which included businesses such as supermarkets and retailers. ADVO either supplied the advertising materials itself or used client-supplied materials. When ADVO supplied the materials, it contracted third-party commercial printers to print them. ADVO’s advertising materials included a “Shopwise” wrap, inserts, and a detached address label (DAL). ADVO’s business model involved selling advertising space, assisting with graphic design, and ensuring the delivery of mail packages to targeted consumers. ADVO claimed a deduction under I. R. C. § 199 for the tax years 2006 and the short 2007 year, asserting that it manufactured the printed materials. The Commissioner disallowed these deductions, arguing that ADVO did not manufacture the materials.

    Procedural History

    ADVO filed a petition for redetermination of deficiencies in income tax determined by the Commissioner for the 2006 and short 2007 tax years. The case was bifurcated, with the sole issue in this opinion being whether ADVO was entitled to a § 199 deduction for the printed materials. The Tax Court conducted a trial and issued its opinion on October 24, 2013, ruling against ADVO’s entitlement to the deduction.

    Issue(s)

    Whether ADVO, Inc. & Subsidiaries is entitled to a deduction under I. R. C. § 199 for the tax years 2006 and the short 2007 year based on the production of qualifying production property?

    Rule(s) of Law

    I. R. C. § 199 allows a deduction for income attributable to domestic production activities, including the manufacture of tangible personal property within the United States. The regulations specify that when a taxpayer contracts with an unrelated party for manufacturing, the taxpayer must have the “benefits and burdens of ownership” of the qualifying production property during the period the manufacturing activity occurs. See 26 C. F. R. § 1. 199-3(e)(1).

    Holding

    ADVO, Inc. & Subsidiaries was not entitled to the § 199 deduction for the tax years in question because it did not have the benefits and burdens of ownership of the direct advertising materials during the printing process.

    Reasoning

    The Tax Court applied a fact-specific benefits and burdens test to determine ownership during the manufacturing process. Factors considered included legal title, the intention of the parties, right of possession and control, risk of loss, and profits from the operation and sale. The court found that the third-party printers had legal title to the printed materials during production, bore the risk of loss, and controlled the actual printing process. Despite ADVO’s involvement in specifying the design and materials, it did not exercise day-to-day control over the printing process. The court distinguished this case from Suzy’s Zoo v. Commissioner, noting that the § 199 test requires the benefits and burdens during manufacturing, a narrower scope than the § 263A test used in Suzy’s Zoo. The court concluded that only the third-party printers had the requisite ownership during the manufacturing activity, and thus, ADVO could not claim the § 199 deduction.

    Disposition

    The Tax Court issued an order denying ADVO’s claim for a § 199 deduction for the tax years 2006 and the short 2007 year.

    Significance/Impact

    The ADVO decision is significant for its clarification of the eligibility criteria for the § 199 domestic production activities deduction. It established that only the party bearing the benefits and burdens of ownership during the manufacturing process can claim the deduction, impacting how companies structure their production agreements. The ruling has implications for industries reliant on contract manufacturing, requiring careful consideration of ownership rights and responsibilities in production contracts. Subsequent cases and IRS guidance have referenced this decision to delineate the boundaries of the § 199 deduction, particularly in scenarios involving contract manufacturing arrangements.

  • ADVO, Inc. & Subsidiaries v. Commissioner of Internal Revenue, 141 T.C. No. 9 (2013): Application of Section 199 Domestic Production Deduction in Contract Manufacturing Arrangements

    ADVO, Inc. & Subsidiaries v. Commissioner of Internal Revenue, 141 T. C. No. 9 (2013)

    In ADVO, Inc. & Subsidiaries v. Commissioner, the U. S. Tax Court ruled that ADVO, a direct mail advertising company, was not entitled to a domestic production deduction under I. R. C. § 199 for its direct mail products. Despite ADVO’s extensive involvement in the design and distribution process, the court determined that ADVO did not possess the requisite benefits and burdens of ownership during the production phase, which was outsourced to third-party printers. This decision highlights the complexities of applying tax deductions in contract manufacturing scenarios, emphasizing the necessity of ownership during production for eligibility under Section 199.

    Parties

    ADVO, Inc. & Subsidiaries, the petitioner, was the common parent of a consolidated group and the plaintiff in the case. The Commissioner of Internal Revenue was the respondent and defendant. ADVO was represented by attorneys Michael P. Walutes, Craig A. Raabe, John R. Shaugnessy, Jr. , Gary D. Yeats, and Scott E. Sebastian, while the Commissioner was represented by Donald K. Rogers, Charles E. Buxbaum, and William T. Derick.

    Facts

    ADVO, Inc. distributed direct mail advertising in the United States, utilizing both solo and cooperative mail packages. For its operations, ADVO either used materials supplied by its clients or materials it supplied itself. When supplying its own materials, ADVO contracted third-party printers to produce the printed advertisements. The company also developed and marketed a portfolio of turnkey products, which included the ‘Shopwise’ wrap and various inserts, and managed the entire process from design to delivery. ADVO’s operations were substantial, distributing 60 to 80 million packages weekly and engaging in significant sales and design activities. The company’s contracts with clients and printers stipulated the specifics of the production and delivery process.

    Procedural History

    The Commissioner disallowed ADVO’s claimed deductions under I. R. C. § 199 for the tax years 2006 and the short 2007 tax year, asserting that ADVO did not manufacture, produce, grow, or extract qualifying production property with respect to its direct advertising mailings. ADVO petitioned the U. S. Tax Court for a redetermination of these deficiencies. The case was bifurcated, with the issue of the Section 199 deduction being addressed in the first trial, while a separate issue regarding a credit under I. R. C. § 41 for increasing research activities was to be resolved in a subsequent trial. The Tax Court’s decision was based on the application of the benefits and burdens of ownership test to determine eligibility for the Section 199 deduction.

    Issue(s)

    Whether ADVO, Inc. & Subsidiaries is entitled to a deduction under I. R. C. § 199 for the tax years 2006 and the short 2007 tax year, given that it contracted with third-party printers to produce its direct advertising mailings?

    Rule(s) of Law

    I. R. C. § 199 allows a taxpayer a deduction for income attributable to domestic production activities, but requires that the taxpayer have manufactured, produced, grown, or extracted qualifying production property. The Treasury Regulations under Section 199, specifically § 1. 199-3(e)(1), define ‘manufactured, produced, grown, or extracted’ to include activities such as manufacturing, producing, improving, and creating qualifying production property. The regulations further stipulate that when a taxpayer contracts with an unrelated third party for manufacturing, the taxpayer must have the benefits and burdens of ownership of the qualifying production property during the period the manufacturing activity occurs, as per § 1. 199-3(f)(1).

    Holding

    The Tax Court held that ADVO, Inc. & Subsidiaries was not entitled to a deduction under I. R. C. § 199 for the tax years in question. The court determined that ADVO did not have the benefits and burdens of ownership of the direct advertising materials during the period of production by the third-party printers, as required by the regulations under Section 199.

    Reasoning

    The Tax Court applied the benefits and burdens of ownership test, which is based on various factors including legal title, possession, control, risk of loss, and active participation in the production process. The court analyzed these factors in the context of ADVO’s relationship with its third-party printers and found that ADVO did not have the requisite control or ownership during the manufacturing process. Specifically, the court noted that legal title to the printed materials did not transfer to ADVO until after production was complete, and ADVO did not have day-to-day control over the printing process. Additionally, the third-party printers bore the risk of loss during production and enjoyed the economic gain from the sales, further supporting the conclusion that they, not ADVO, had the benefits and burdens of ownership during the production phase. The court also distinguished this case from previous cases like Suzy’s Zoo, which involved a different section of the tax code (Section 263A) and a broader test for ownership. The court emphasized that under Section 199, only one taxpayer may claim the deduction, and the facts did not support ADVO’s claim to that status.

    Disposition

    The court denied ADVO’s petition for a redetermination of the deficiencies in income tax determined by the Commissioner for the tax years 2006 and the short 2007 tax year, affirming the disallowance of the Section 199 deduction.

    Significance/Impact

    The ADVO case is significant for its clarification of the application of the domestic production deduction under I. R. C. § 199 in the context of contract manufacturing arrangements. It underscores the necessity for a taxpayer to have the benefits and burdens of ownership during the manufacturing process to be eligible for the deduction. This decision has implications for companies engaged in similar arrangements, potentially affecting their tax planning and the structuring of contracts with third-party manufacturers. The case also illustrates the fact-intensive nature of the benefits and burdens test, which requires a careful examination of each specific relationship between the taxpayer and the contract manufacturer. Subsequent cases and IRS guidance may further refine the application of this test, but ADVO remains a key precedent for understanding the limits of Section 199 in contract manufacturing scenarios.

  • Steinberg v. Comm’r, 141 T.C. 258 (2013): Consideration in Net Gift Agreements and Section 2035(b) Estate Tax Liability

    Steinberg v. Commissioner, 141 T. C. 258 (2013) (United States Tax Court, 2013)

    In Steinberg v. Commissioner, the U. S. Tax Court rejected the IRS’s motion for summary judgment, holding that a donee’s assumption of potential estate tax liability under Section 2035(b) could be considered as part of the consideration for a gift. This decision impacts how gift tax liability may be calculated in net gift agreements, allowing for potential discounts based on the donee’s assumption of estate tax risks.

    Parties

    Jean Steinberg, as the donor and petitioner, filed against the Commissioner of Internal Revenue as the respondent. Steinberg was the petitioner throughout the proceedings in the U. S. Tax Court.

    Facts

    Jean Steinberg, aged 89, entered into a binding gift agreement on April 17, 2007, with her four adult daughters (the donees). Under the agreement, Steinberg transferred cash and securities to her daughters. In exchange, the daughters agreed to assume and pay any resulting federal gift tax liability and any potential federal or state estate tax liability under Section 2035(b) if Steinberg died within three years of the gift. An appraiser calculated the fair market value of the “net gift” by reducing the value of the transferred assets by the gift tax the daughters paid and the actuarial value of their assumption of potential Section 2035(b) estate tax liability. Steinberg reported taxable gifts of $71,598,056 on her Form 709 for 2007, which included a discount of $5,838,540 for the daughters’ assumption of the potential estate tax liability. The IRS issued a notice of deficiency, increasing the value of the gifts and disallowing this discount.

    Procedural History

    After receiving the notice of deficiency on July 25, 2011, Steinberg timely filed a petition with the U. S. Tax Court. The Commissioner moved for summary judgment on the issue of whether the donees’ assumption of potential Section 2035(b) estate tax liability constituted consideration in money or money’s worth under Section 2512(b). The Tax Court reviewed the motion, with several judges agreeing with the Court’s opinion, others concurring in the result only, and one judge dissenting.

    Issue(s)

    Whether a donee’s promise to pay any Federal or State estate tax liability that may arise under Section 2035(b) if the donor dies within three years of the gift may constitute consideration in money or money’s worth within the meaning of Section 2512(b)?

    Rule(s) of Law

    The amount of a gift is the value of the property transferred minus any consideration received in money or money’s worth. Section 2512(b) states that the amount of a gift is determined by the value of the property transferred minus the value of any consideration received. Section 2035(b) provides that the gross estate shall be increased by the amount of gift taxes paid on any gift made by the decedent during the three-year period preceding the decedent’s death. The IRS regulation at Section 25. 2512-8, Gift Tax Regs. , specifies that consideration in money or money’s worth must be reducible to a value in money or money’s worth.

    Holding

    The U. S. Tax Court held that the donees’ assumption of potential Section 2035(b) estate tax liability could constitute consideration in money or money’s worth under Section 2512(b). Therefore, the fair market value of Steinberg’s taxable gift may be determined with reference to the daughters’ assumption of the potential Section 2035(b) estate tax liability.

    Reasoning

    The Tax Court rejected the IRS’s arguments based on its prior decision in McCord v. Commissioner, which had held that such an assumption was too speculative to be valued for gift tax purposes. The Court distinguished McCord, noting that the contingency in this case (the donor’s survival for three years) was simpler and more ascertainable than the complex contingency in McCord. The Court also rejected the IRS’s argument that the donees’ assumption of potential estate tax did not replenish Steinberg’s estate, citing the estate depletion theory. The Court reasoned that the donees’ assumption of the potential estate tax liability could have a tangible monetary value that benefits the donor’s estate. Furthermore, the Court found that the donees’ assumption was not necessarily a gift between family members, as it was a bona fide agreement negotiated at arm’s length with separate counsel. The Court also noted that potential tax liabilities, such as capital gains tax, are considered in valuations despite their speculative nature, suggesting a similar treatment for potential estate tax liabilities.

    Disposition

    The Tax Court denied the Commissioner’s motion for summary judgment and declined to follow McCord v. Commissioner to the extent it held otherwise regarding the consideration of potential Section 2035(b) estate tax liability in net gift agreements.

    Significance/Impact

    The Steinberg decision is significant for its departure from McCord, allowing taxpayers to potentially reduce the value of a gift by the actuarial value of a donee’s assumption of potential Section 2035(b) estate tax liability. This ruling impacts the calculation of gift tax in net gift agreements and may encourage such arrangements. It reflects a broader judicial trend towards considering potential tax liabilities in valuation exercises, which could influence future tax planning and litigation. The decision also underscores the importance of factual determinations in assessing whether a contingency is too speculative to be valued, which may lead to more detailed evidentiary presentations in similar cases.

  • Reed v. Commissioner, 141 T.C. 248 (2013): Jurisdiction and Authority in Collection Due Process Hearings

    Reed v. Commissioner, 141 T. C. 248 (U. S. Tax Court 2013)

    In Reed v. Commissioner, the U. S. Tax Court upheld the IRS’s decision to sustain a levy notice against Tom Reed, who failed to file timely tax returns for years 1987-2001. Reed argued that the IRS abused its discretion by not reopening a 2008 offer-in-compromise (OIC) based on doubt as to collectibility. The court clarified its jurisdiction in collection due process hearings and ruled that the IRS cannot be compelled to reopen a previously returned OIC, emphasizing the importance of current financial data in such assessments. This decision reinforces the procedural boundaries of IRS authority in handling tax collection disputes.

    Parties

    Tom Reed, the Petitioner, was the individual taxpayer who failed to file timely Federal income tax returns for the years 1987 through 2001 and subsequently sought to settle his tax liabilities through offers-in-compromise. The Respondent, the Commissioner of Internal Revenue, was represented by the Internal Revenue Service (IRS) and was responsible for the administration and collection of Reed’s tax liabilities.

    Facts

    Tom Reed failed to file his Federal income tax returns timely for the years 1987 through 2001. He later submitted delinquent returns but did not fully satisfy his outstanding tax liabilities. In 2004, Reed submitted his first offer-in-compromise (OIC) to settle these liabilities, proposing to pay $22,000 based on doubt as to collectibility. The IRS rejected this offer, determining that Reed’s reasonable collection potential was higher due to his dissipation of $258,000 from a 2001 real estate sale through high-risk day trading. In 2008, Reed submitted another OIC for $35,196, which the IRS returned as unprocessable because Reed was not in compliance with his current tax obligations. After the IRS issued a final notice of intent to levy, Reed requested a collection due process hearing, during which he contested the handling of his OICs.

    Procedural History

    Reed’s first OIC in 2004 was rejected by the IRS’s Houston Offer in Compromise Unit and upheld on appeal by the Internal Revenue Service Appeals Office in Houston, Texas. His 2008 OIC was returned as unprocessable due to non-compliance with current tax obligations. Following the issuance of a final notice of intent to levy, Reed requested a collection due process hearing, which was conducted by Settlement Officer Liana A. White. After the hearing, White issued a determination notice sustaining the levy notice. Reed then filed a timely petition with the U. S. Tax Court, challenging the determination on the grounds that the IRS abused its discretion by not reopening the 2008 OIC and by rejecting the 2004 OIC. The court reviewed the case de novo, applying an abuse of discretion standard.

    Issue(s)

    Whether the U. S. Tax Court has jurisdiction to review the IRS’s determination to sustain a notice of intent to levy when the taxpayer challenges the handling of prior offers-in-compromise?

    Whether the IRS can be required to reopen an offer-in-compromise based on doubt as to collectibility that was returned to the taxpayer years before the collection due process hearing commenced?

    Whether the IRS abused its discretion in sustaining the notice of intent to levy based on its handling of the taxpayer’s 2004 and 2008 offers-in-compromise?

    Rule(s) of Law

    The U. S. Tax Court has jurisdiction over collection due process hearings under 26 U. S. C. § 6330(d) when the Commissioner issues a determination notice and the taxpayer timely files a petition. The IRS has the authority to compromise unpaid tax liabilities under 26 U. S. C. § 7122(a), but an offer-in-compromise must be based on current financial data. An offer-in-compromise may be considered during a collection due process hearing if proposed by the taxpayer, as per 26 U. S. C. § 6330(c)(2)(A)(iii). The IRS may return an offer-in-compromise if the taxpayer fails to meet current tax obligations, as outlined in 26 C. F. R. § 301. 7122-1(f)(5)(ii).

    Holding

    The U. S. Tax Court held that it had jurisdiction to review the IRS’s determination to sustain the notice of intent to levy. The court further held that the IRS cannot be required to reopen an offer-in-compromise based on doubt as to collectibility that was returned to the taxpayer years before the collection due process hearing commenced. Finally, the court held that the IRS did not abuse its discretion in sustaining the notice of intent to levy based on its handling of Reed’s 2004 and 2008 offers-in-compromise.

    Reasoning

    The court reasoned that its jurisdiction to review the IRS’s determination in collection due process hearings is expressly authorized by Congress under 26 U. S. C. § 6330(d). The court rejected the IRS’s argument that it lacked jurisdiction because Reed did not propose a new offer-in-compromise during the hearing, clarifying that the court’s jurisdiction is triggered by the issuance of a determination notice and a timely filed petition.

    Regarding the reopening of the 2008 offer-in-compromise, the court emphasized that such offers must be based on current financial data, as required by 26 U. S. C. § 7122(d)(1) and IRS procedures. The court found that compelling the IRS to reopen an offer based on outdated financial information would impermissibly expand its authority and interfere with the statutory scheme created by Congress.

    The court upheld the IRS’s rejection of the 2004 offer-in-compromise, finding that the inclusion of dissipated assets in calculating Reed’s reasonable collection potential was proper under IRS guidelines. The court also upheld the IRS’s return of the 2008 offer-in-compromise, noting that Reed’s failure to comply with current tax obligations justified the IRS’s action.

    The court concluded that the IRS did not abuse its discretion in sustaining the levy notice, as it verified compliance with legal and administrative requirements, considered all relevant issues raised by Reed, and balanced the intrusiveness of the proposed collection actions against the need for effective tax collection.

    Disposition

    The U. S. Tax Court entered a decision for the respondent, the Commissioner of Internal Revenue, sustaining the final notice of intent to levy.

    Significance/Impact

    Reed v. Commissioner is significant for clarifying the jurisdictional scope of the U. S. Tax Court in collection due process hearings and the IRS’s authority to handle offers-in-compromise. The decision underscores the importance of current financial data in assessing offers based on doubt as to collectibility and reinforces the IRS’s discretion in rejecting or returning such offers. This case impacts taxpayers seeking to settle tax liabilities through offers-in-compromise by emphasizing the need for compliance with current tax obligations and the limited judicial review available for returned offers. Subsequent cases have cited Reed for its analysis of the interaction between 26 U. S. C. §§ 7122 and 6330, further solidifying its doctrinal importance in tax law.

  • Reed v. Commissioner, 141 T.C. No. 7 (2013): Jurisdiction and Discretion in Collection Due Process Hearings

    Reed v. Commissioner, 141 T. C. No. 7 (U. S. Tax Ct. 2013)

    In Reed v. Commissioner, the U. S. Tax Court ruled that it has jurisdiction to review the IRS’s decision to sustain a levy notice, but it cannot compel the IRS to reopen an offer-in-compromise (OIC) that was returned as unprocessable years before a collection hearing. The court affirmed the IRS’s discretion in handling OICs and upheld the levy notice, emphasizing the importance of current financial data in evaluating OICs based on doubt as to collectibility.

    Parties

    Tom Reed, the petitioner, was represented by George W. Connelly, Jr. , Heather M. Pesikoff, and Renesha N. Fountain. The respondent was the Commissioner of Internal Revenue, represented by David Baudilio Mora and Gordon P. Sanz.

    Facts

    Tom Reed failed to timely file Federal income tax returns for the years 1987 through 2001. He later submitted delinquent returns but did not fully satisfy his tax liabilities. Reed made two separate offers-in-compromise (OICs) to settle his outstanding tax liabilities. The first OIC in 2004 was rejected by the IRS, which found that Reed had dissipated real estate proceeds and included them in calculating an acceptable offer amount. The second OIC in 2008 was returned as unprocessable because Reed was not in compliance with current tax obligations. After the IRS issued a final notice of intent to levy, Reed requested a collection due process hearing, arguing that the IRS should reopen the returned 2008 OIC and reconsider the rejected 2004 OIC.

    Procedural History

    Reed’s 2004 OIC was rejected by the IRS, and he appealed to the IRS Appeals Office, which upheld the rejection. His 2008 OIC was returned as unprocessable, and despite Reed’s subsequent attempts to have it reconsidered, the IRS maintained its position. After the IRS issued a final notice of intent to levy, Reed requested a collection due process hearing. The Appeals officer sustained the levy notice, and Reed petitioned the U. S. Tax Court, arguing that the IRS abused its discretion in handling the OICs and sustaining the levy notice.

    Issue(s)

    Whether the U. S. Tax Court has jurisdiction to review the IRS’s decision to sustain a levy notice?

    Whether the IRS can be required to reopen an OIC based on doubt as to collectibility that was returned as unprocessable years before a collection hearing commenced?

    Whether the IRS abused its discretion in sustaining the final notice of intent to levy?

    Rule(s) of Law

    The IRS has the authority to compromise unpaid tax liabilities under 26 U. S. C. § 7122(a). Doubt as to collectibility is one ground for compromise, where a taxpayer’s assets and income are less than the unpaid tax liability (26 C. F. R. § 301. 7122-1(b)(2)). The IRS may consider an OIC proposed during a collection hearing under 26 U. S. C. § 6330(c)(2)(A)(iii). However, taxpayers must submit current financial data when proposing an OIC based on doubt as to collectibility.

    Holding

    The U. S. Tax Court held that it has jurisdiction to determine whether the IRS abused its discretion in sustaining the final notice of intent to levy. The court further held that the IRS cannot be required to reopen an OIC based on doubt as to collectibility that was returned to the taxpayer years before the collection hearing commenced. Finally, the court held that the IRS did not abuse its discretion in sustaining the final notice of intent to levy.

    Reasoning

    The court’s reasoning focused on the interaction between 26 U. S. C. § 7122 and § 6330. The court noted that the IRS must evaluate an OIC proposed during a collection hearing based on its authority to compromise unpaid tax liabilities. The court rejected Reed’s theory that the IRS could be compelled to reopen an OIC returned years before a collection hearing, as it would impermissibly expand the IRS’s authority by allowing the evaluation of an OIC based on outdated financial data. The court also found that such a theory would interfere with the statutory scheme by creating additional layers of review for returned OICs. The court upheld the IRS’s decisions on both the 2004 and 2008 OICs, finding that they were based on a reasoned analysis of the facts and applicable law. The court concluded that the IRS did not act arbitrarily, capriciously, or without a sound basis in fact or law in sustaining the levy notice.

    Disposition

    The court entered a decision for the respondent, affirming the IRS’s decision to sustain the final notice of intent to levy.

    Significance/Impact

    Reed v. Commissioner clarifies the scope of the U. S. Tax Court’s jurisdiction in collection due process hearings and the IRS’s discretion in handling OICs. The decision emphasizes the importance of current financial data in evaluating OICs based on doubt as to collectibility and limits the ability of taxpayers to challenge the IRS’s decisions on returned OICs. The case also underscores the IRS’s broad discretion in collection matters and the limited judicial review available to taxpayers in such cases.

  • Snow v. Commissioner, 141 T.C. 238 (2013): Calculation of Underpayment for Accuracy-Related Penalty Under I.R.C. § 6662

    Snow v. Commissioner, 141 T. C. 238 (2013)

    In Snow v. Commissioner, the U. S. Tax Court ruled on the correct computation of an underpayment for the purposes of applying the 20% accuracy-related penalty under I. R. C. § 6662. The court upheld the validity of regulations used to determine underpayment and clarified how to calculate it when a taxpayer overstates withholdings. This case is significant for establishing the method of calculating underpayments that include overstated withholding credits, impacting how penalties are assessed in similar situations.

    Parties

    Glenn Lee Snow (Petitioner) was the taxpayer and filed his case pro se. The Commissioner of Internal Revenue (Respondent) was represented by Martha J. Weber.

    Facts

    Glenn Lee Snow, a musician, filed his 2007 federal income tax return claiming zero tax liability and reported $16,684. 65 in federal income tax withholdings. However, this amount included $5,562. 13 in Social Security and Medicare taxes, which were incorrectly reported as federal income tax withholdings. The correct amount of federal income tax withheld was $11,117. 65. Consequently, Snow received a refund of $16,684. 65, which included $5,567 for which no federal income tax had been withheld. The IRS determined that Snow was liable for a $12,968 tax and a $3,707 accuracy-related penalty under I. R. C. § 6662(a) due to negligence and substantial understatement of income tax.

    Procedural History

    Snow’s case was initially addressed in a memorandum opinion, Snow v. Commissioner, T. C. Memo 2013-114, where the court found that Snow’s wages were includable in his income and held him liable for the accuracy-related penalty and an additional penalty under I. R. C. § 6673(a). Following this, the parties disputed the computation of the underpayment for the accuracy-related penalty, leading to the supplemental opinion in 141 T. C. 238. The Tax Court applied de novo review to the legal issues concerning the computation of the underpayment.

    Issue(s)

    Whether the Commissioner correctly calculated Snow’s underpayment for the purposes of applying the accuracy-related penalty under I. R. C. § 6662(a)?

    Rule(s) of Law

    I. R. C. § 6662(a) imposes a 20% accuracy-related penalty on any underpayment attributable to negligence or substantial understatement of income tax. I. R. C. § 6664(a) defines “underpayment” as the amount by which any tax imposed exceeds the excess of the sum of the amount shown as tax on the return plus amounts not shown but previously assessed, over the amount of rebates made. Treasury Regulation § 1. 6664-2 provides the formula for calculating underpayment, which includes adjustments for overstated withholding credits.

    Holding

    The Tax Court held that the Commissioner correctly calculated Snow’s underpayment for purposes of applying the accuracy-related penalty under I. R. C. § 6662(a). The court determined that Snow’s underpayment was $18,535, which included his tax liability of $12,968 plus the $5,567 overstatement of withholding credits.

    Reasoning

    The court’s reasoning centered on the application of Treasury Regulation § 1. 6664-2, which was upheld as valid in Feller v. Commissioner, 135 T. C. 497 (2010). The regulation provides that the amount shown as tax on the return is reduced by the excess of the amount shown as withheld over the amount actually withheld. In Snow’s case, this resulted in a negative $5,567 shown as tax on his return. The court further clarified that amounts collected without assessment under § 1. 6664-2(d) must not have been refunded to the taxpayer. Since Snow received a refund of $16,684. 65, which included the overstated withholding, there were no amounts collected without assessment. The court also interpreted “rebates previously made” to mean rebates issued before the return was filed, and since no such rebates were made to Snow, the amount of rebates was $0. The court’s calculation of the underpayment aligned with the regulation and ensured that the penalty was based on the actual revenue loss to the government due to Snow’s actions.

    Disposition

    The Tax Court issued an order and entered a decision in favor of the Commissioner, affirming the calculation of the underpayment and the resulting accuracy-related penalty of $3,707.

    Significance/Impact

    Snow v. Commissioner is significant for its clarification of the calculation of underpayments under I. R. C. § 6662, particularly in cases involving overstated withholding credits. The decision reinforces the validity and application of Treasury Regulation § 1. 6664-2, providing a clear method for computing underpayments in such scenarios. This ruling has practical implications for tax practitioners and taxpayers, as it establishes a precedent for assessing accuracy-related penalties when withholdings are misreported. Subsequent cases have referenced Snow to guide the calculation of underpayments, emphasizing its doctrinal importance in tax law.

  • Snow v. Commissioner, 141 T.C. No. 6 (2013): Calculation of Underpayment for Accuracy-Related Penalty

    Snow v. Commissioner, 141 T. C. No. 6 (U. S. Tax Ct. 2013)

    In Snow v. Commissioner, the U. S. Tax Court upheld the IRS’s computation of an underpayment for the purpose of imposing a 20% accuracy-related penalty under I. R. C. § 6662(a). The court clarified how to calculate an underpayment when a taxpayer overstates tax withholdings, affirming that such overstatements increase the underpayment. This ruling follows the precedent set in Feller v. Commissioner and emphasizes the importance of accurately reporting tax withholdings on returns, impacting how tax liabilities and penalties are assessed.

    Parties

    Glenn Lee Snow, the petitioner, represented himself pro se. The respondent was the Commissioner of Internal Revenue, represented by Martha J. Weber.

    Facts

    Glenn Lee Snow filed his 2007 federal income tax return, claiming a refund of $16,684. 65 based on reported federal income tax withholdings of the same amount. However, Snow incorrectly included $5,562. 13 of Social Security and Medicare tax withholdings as federal income tax withholdings on his return. The IRS determined that only $11,117. 65 had been withheld as federal income tax, resulting in Snow receiving an erroneous refund of $5,567. Snow’s actual tax liability for the year was $12,968, leading the IRS to calculate an underpayment of $18,535, which included the tax liability plus the erroneous refund, and assessed a 20% accuracy-related penalty of $3,707 under I. R. C. § 6662(a).

    Procedural History

    Snow filed his 2007 tax return and received a refund of $16,684. 65. The IRS issued a notice of deficiency, asserting that Snow owed additional taxes due to the overstatement of withholdings and was liable for an accuracy-related penalty. Snow petitioned the U. S. Tax Court to challenge the computation of his underpayment for the penalty. The court had previously found Snow liable for the tax and penalties in a Memorandum Opinion (T. C. Memo. 2013-114). In this case, the Tax Court was tasked with reviewing the IRS’s computation of the underpayment for the accuracy-related penalty under Rule 155. Snow did not dispute his tax liability or the section 6673(a) penalty but objected to the computation of the section 6662(a) penalty.

    Issue(s)

    Whether the IRS correctly calculated the underpayment for purposes of imposing the accuracy-related penalty under I. R. C. § 6662(a) when the taxpayer overstated federal income tax withholdings on his return?

    Rule(s) of Law

    Under I. R. C. § 6662(a), a 20% accuracy-related penalty is imposed on any portion of an underpayment attributable to negligence or substantial understatement of income tax. The term “underpayment” is defined in I. R. C. § 6664(a) and further clarified by Treasury Regulation § 1. 6664-2. Specifically, Treasury Regulation § 1. 6664-2(c)(1) reduces the amount shown as tax on the return by the excess of the amount shown as withheld over the amounts actually withheld. The court in Feller v. Commissioner, 135 T. C. 497 (2010), upheld the validity of this regulation.

    Holding

    The U. S. Tax Court held that the IRS correctly calculated Snow’s underpayment for purposes of the accuracy-related penalty under I. R. C. § 6662(a). The underpayment was determined to be $18,535, which included Snow’s tax liability of $12,968 plus the $5,567 overstatement of withholdings. Consequently, the accuracy-related penalty of $3,707 (20% of $18,535) was upheld.

    Reasoning

    The court’s reasoning focused on the application of Treasury Regulation § 1. 6664-2, which provides a formula for calculating an underpayment. The court emphasized that the amount shown as tax on Snow’s return was reduced by the excess of the amount he claimed as withheld over the amounts actually withheld, resulting in a negative figure of $5,567. This negative amount was then added to the tax imposed to determine the underpayment. The court’s decision followed the precedent set in Feller v. Commissioner, which upheld the validity of the regulation. The court reasoned that Snow’s overstatement of withholdings increased the underpayment, and thus the accuracy-related penalty was correctly computed. The court also clarified the meaning of “rebates” and “amounts collected without assessment” under the regulation, finding that Snow had no such amounts that would reduce the underpayment. The court’s interpretation ensured that the penalty was based on the actual amount of revenue the government was deprived of due to Snow’s return.

    Disposition

    The court affirmed the IRS’s computation of the underpayment for the accuracy-related penalty and entered a decision for the respondent.

    Significance/Impact

    Snow v. Commissioner reinforces the importance of accurately reporting tax withholdings on returns, as overstatements can significantly impact the calculation of underpayments and subsequent penalties. The decision follows and expands upon the precedent set in Feller v. Commissioner, providing further guidance on the application of Treasury Regulation § 1. 6664-2. This ruling affects tax practitioners and taxpayers by clarifying how the IRS computes underpayments for penalty purposes, particularly when errors in withholding amounts are involved. The case underscores the need for meticulous attention to detail in tax reporting to avoid increased liabilities and penalties.

  • BMC Software Inc. v. Commissioner, 141 T.C. 224 (2013): Interpretation of Related Party Indebtedness Under I.R.C. § 965

    BMC Software Inc. v. Commissioner, 141 T. C. 224 (2013) (United States Tax Court, 2013)

    In BMC Software Inc. v. Commissioner, the U. S. Tax Court ruled that accounts receivable established under a closing agreement to adjust transfer pricing could be considered related party indebtedness under I. R. C. § 965. This decision impacted the eligibility of dividends for a one-time deduction, affirming that such accounts receivable did not need to be part of an intentionally abusive transaction to reduce the deduction amount. The ruling clarified the scope of related party indebtedness, affecting how multinational corporations handle repatriated dividends and transfer pricing adjustments.

    Parties

    BMC Software Inc. (Petitioner) and Commissioner of Internal Revenue (Respondent) were the parties involved in this case. BMC Software Inc. was the plaintiff at the trial level, and the Commissioner of Internal Revenue was the defendant. On appeal, BMC Software Inc. remained the petitioner, and the Commissioner of Internal Revenue remained the respondent.

    Facts

    BMC Software Inc. , a U. S. corporation, developed and licensed computer software and was the parent of a group of subsidiaries, including BMC Software European Holding (BSEH), a controlled foreign corporation (CFC). BMC Software Inc. and BSEH had cost-sharing agreements (CSAs) for software development, which were terminated in 2002, resulting in BMC Software Inc. paying royalties to BSEH for distribution rights. The IRS audited BMC Software Inc. ‘s royalty payments for the years 2002 through 2006 and determined they were not at arm’s length under I. R. C. § 482. Consequently, BMC Software Inc. and the IRS entered into a closing agreement in 2007, adjusting BMC Software Inc. ‘s income for those years and requiring secondary adjustments. BMC Software Inc. elected to establish accounts receivable from BSEH under Rev. Proc. 99-32 to avoid the tax consequences of deemed capital contributions. Separately, BMC Software Inc. repatriated $721 million from BSEH and claimed a one-time dividends received deduction under I. R. C. § 965. The IRS determined that the accounts receivable established during the testing period constituted increased related party indebtedness, reducing the eligible deduction amount by $43 million.

    Procedural History

    The IRS issued a deficiency notice to BMC Software Inc. for the tax year ending March 31, 2006, disallowing $43 million of the claimed dividends received deduction due to increased related party indebtedness. BMC Software Inc. filed a petition for redetermination with the United States Tax Court. The Tax Court reviewed the case de novo, examining the legal issues and the facts as presented.

    Issue(s)

    Whether accounts receivable established under a closing agreement pursuant to Rev. Proc. 99-32 constitute increased related party indebtedness for the purpose of reducing the dividends received deduction under I. R. C. § 965(b)(3)?

    Whether the related party debt rule under I. R. C. § 965(b)(3) applies only to increased indebtedness resulting from intentionally abusive transactions?

    Rule(s) of Law

    I. R. C. § 965 provides a one-time dividends received deduction for U. S. corporations repatriating dividends from controlled foreign corporations, subject to certain limitations, including a reduction for increased related party indebtedness under I. R. C. § 965(b)(3). The statute does not specify an intent requirement for the related party debt rule. Rev. Proc. 99-32 allows taxpayers to establish accounts receivable in lieu of deemed capital contributions following a primary adjustment under I. R. C. § 482, avoiding certain tax consequences.

    Holding

    The Tax Court held that accounts receivable established under Rev. Proc. 99-32 may constitute increased related party indebtedness for the purposes of I. R. C. § 965(b)(3). The court further held that the related party debt rule under I. R. C. § 965(b)(3) does not apply only to increased indebtedness resulting from intentionally abusive transactions.

    Reasoning

    The court’s reasoning focused on the statutory interpretation of I. R. C. § 965(b)(3). The court applied general principles of statutory construction, emphasizing the plain language of the statute, which defines increased related party indebtedness as the difference in indebtedness between the end of the testing period and October 3, 2004. The court found no intent requirement in the statutory text. The court also considered the legislative history and regulatory authority granted under the statute, concluding that the related party debt rule’s scope was not limited to abusive transactions. The court rejected BMC Software Inc. ‘s argument that the accounts receivable should be exempt as trade payables, as they were established post-audit and not in the ordinary course of business. The court’s analysis of the closing agreement under Rev. Proc. 99-32 determined that the accounts receivable were established for all federal income tax purposes during the testing period, thus qualifying as related party indebtedness. The court referenced prior case law, such as Schering Corp. v. Commissioner, to support its conclusion that the closing agreement did not preclude all federal income tax consequences but allowed BMC Software Inc. to avoid the consequences of a deemed capital contribution.

    Disposition

    The Tax Court sustained the IRS’s determination, ruling in favor of the Commissioner of Internal Revenue. The court’s decision affirmed the deficiency notice, reducing the dividends received deduction by $43 million due to increased related party indebtedness.

    Significance/Impact

    This case significantly clarifies the application of the related party debt rule under I. R. C. § 965, establishing that accounts receivable established pursuant to Rev. Proc. 99-32 can be considered related party indebtedness, even if not part of an intentionally abusive transaction. The ruling impacts multinational corporations’ strategies for repatriating dividends and managing transfer pricing adjustments, as it affects the eligibility for the one-time dividends received deduction. Subsequent courts have followed this interpretation, and the decision has influenced IRS guidance on the application of I. R. C. § 965. The case underscores the importance of understanding the full scope of federal income tax consequences when entering into closing agreements with the IRS.