SCOTUS Reports

Tag: 26 U.S.C. 7122

  • Hinerfeld v. Commissioner, 139 T.C. 277 (2012): Ex Parte Communications and Abuse of Discretion in Offer-in-Compromise Decisions

    Hinerfeld v. Commissioner, 139 T. C. 277 (2012)

    In Hinerfeld v. Commissioner, the U. S. Tax Court ruled that communications between the IRS Appeals Office and Area Counsel regarding a taxpayer’s offer-in-compromise (OIC) were not prohibited ex parte communications. The court also upheld the IRS’s rejection of the taxpayer’s OIC, finding no abuse of discretion. This decision clarifies the scope of permissible communications within the IRS and the standards for reviewing OICs, impacting how taxpayers and their counsel approach settlement negotiations with the IRS.

    Parties

    Norman Hinerfeld, the petitioner, sought review of the IRS’s determination to proceed with a levy action. The respondent was the Commissioner of Internal Revenue.

    Facts

    Norman Hinerfeld was assessed trust fund recovery penalties totaling $471,696 for unpaid employment taxes of Thermacon Industries, Inc. , where he was a responsible person. After receiving a Final Notice of Intent to Levy, Hinerfeld requested a Collection Due Process (CDP) hearing and submitted an offer-in-compromise (OIC) of $10,000, later amended to $74,857. The settlement officer recommended acceptance of the amended OIC, but Area Counsel, upon review, discovered a pending lawsuit (Multi-Glass Atlantic, Inc. v. Alnor Assocs. , LLC) alleging fraudulent conveyance of Thermacon’s assets by Hinerfeld. Area Counsel recommended rejection of the OIC, and the Appeals Team Manager agreed, rejecting the OIC and proceeding with the levy.

    Procedural History

    The IRS issued a Final Notice of Intent to Levy to Hinerfeld, who requested a CDP hearing and submitted an OIC. The settlement officer recommended acceptance, but after Area Counsel’s review and recommendation to reject, the Appeals Team Manager rejected the OIC. Hinerfeld filed a timely petition with the U. S. Tax Court, which reviewed the case for abuse of discretion, considering the communications between Appeals and Area Counsel for the first time in posttrial briefs.

    Issue(s)

    Whether communications between the IRS Office of Appeals and Area Counsel regarding Hinerfeld’s amended OIC constituted prohibited ex parte communications?

    Whether the IRS Office of Appeals abused its discretion in rejecting Hinerfeld’s amended OIC and proceeding with the proposed levy?

    Rule(s) of Law

    The Internal Revenue Service Restructuring and Reform Act of 1998 (RRA 1998) directed the Commissioner to develop a plan to restrict ex parte communications between Appeals employees and other IRS employees to ensure Appeals’ independence. Revenue Procedure 2000-43 provides guidelines on permissible and prohibited ex parte communications. Section 7122(b) of the Internal Revenue Code mandates that the General Counsel or his delegate review compromises of tax liabilities over $50,000. The Internal Revenue Manual (IRM) provides that Counsel must determine whether fraudulent conveyance issues have been properly resolved when reviewing OICs based on doubt as to collectibility.

    Holding

    The U. S. Tax Court held that communications between the IRS Office of Appeals and Area Counsel regarding Hinerfeld’s amended OIC were not prohibited ex parte communications under RRA 1998 and Revenue Procedure 2000-43. The court also held that the IRS Office of Appeals did not abuse its discretion in rejecting Hinerfeld’s amended OIC and proceeding with the proposed levy.

    Reasoning

    The court reasoned that the communications between Appeals and Area Counsel were necessary to comply with the statutory requirement of Section 7122(b) for General Counsel review of compromises over $50,000. The court found that the communications did not fall within the limitations prescribed by Revenue Procedure 2000-43, as Area Counsel had not previously advised the employees who made the determination under review, and the Appeals Team Manager, not the settlement officer, made the final decision after exercising independent judgment. The court also noted that the IRM specifically allows Counsel to reexamine facts related to fraudulent conveyance issues in OICs based on doubt as to collectibility. The court rejected Hinerfeld’s argument that Area Counsel’s factual investigation constituted prohibited ex parte communications, finding that such investigations are contemplated by the IRM. Regarding abuse of discretion, the court found that the Appeals Team Manager’s decision to reject the OIC was supported by substantial evidence of a possible fraudulent conveyance and Hinerfeld’s inconsistent representations, and was not an abuse of discretion given the statutory time constraints and the taxpayer’s rejection of the alternative of placing his account in currently not collectible status.

    Disposition

    The U. S. Tax Court entered a decision for the respondent, upholding the IRS’s rejection of Hinerfeld’s amended OIC and the decision to proceed with the proposed levy.

    Significance/Impact

    This case clarifies that communications between the IRS Office of Appeals and Area Counsel necessary for compliance with statutory review requirements are not prohibited ex parte communications. It also underscores the importance of Counsel’s review of fraudulent conveyance issues in OICs based on doubt as to collectibility, and the deference given to the IRS’s exercise of discretion in such cases. The decision impacts how taxpayers and their counsel approach settlement negotiations with the IRS, particularly in cases involving large liabilities and potential fraudulent conveyances.

  • Kreit Mechanical Associates, Inc. v. Commissioner of Internal Revenue, 137 T.C. 123 (2011): Abuse of Discretion in Rejecting Offer-in-Compromise

    Kreit Mechanical Associates, Inc. v. Commissioner of Internal Revenue, 137 T. C. 123 (2011)

    In Kreit Mechanical Associates, Inc. v. Commissioner, the U. S. Tax Court upheld the IRS’s rejection of an offer-in-compromise for unpaid employment taxes, ruling that the IRS did not abuse its discretion. The taxpayer, a plumbing subcontractor, argued that its accounts receivable should be heavily discounted, but the court found the IRS’s valuation reasonable given the company’s financial growth and failure to provide complete documentation, affirming the IRS’s decision to proceed with collection actions.

    Parties

    Kreit Mechanical Associates, Inc. (Petitioner) v. Commissioner of Internal Revenue (Respondent). Kreit Mechanical Associates, Inc. was the plaintiff at the trial level in the U. S. Tax Court. The Commissioner of Internal Revenue was the defendant at the trial level and respondent on appeal.

    Facts

    Kreit Mechanical Associates, Inc. , a commercial plumbing subcontractor, owed employment taxes, penalties, and interest for the third quarter of 2005 and all four quarters of 2006. After receiving a Final Notice and Notice of Intent to Levy from the IRS on May 29, 2007, Kreit requested a collection due process (CDP) hearing and proposed an offer-in-compromise (OIC) based on doubt as to collectibility. The OIC offered $369,192. 27 payable over 120 months. Kreit listed its accounts receivable at $250,000, a significant discount from their face value of $1,065,408, arguing that the receivables were subject to industry-standard adjustments and joint check payments to suppliers. The IRS, represented by Settlement Officer Alicia A. Flores, reviewed Kreit’s financial information, including its profit and loss statements, which showed net income of $412,218 in 2008. Officer Flores rejected the OIC, citing Kreit’s failure to provide complete financial information, its net income, and the value of its accounts receivable at face value, which suggested more could be collected than the OIC amount. Kreit subsequently filed a petition with the U. S. Tax Court challenging the IRS’s determination.

    Procedural History

    After receiving the Final Notice and Notice of Intent to Levy on May 29, 2007, Kreit Mechanical Associates, Inc. requested a CDP hearing on June 26, 2007, and proposed an OIC. The IRS Appeals Office received the OIC on September 4, 2007, and after several requests for additional information, rejected the OIC on April 1, 2009. On May 22, 2009, the Appeals Office issued a Notice of Determination Concerning Collection Action(s), upholding the decision to proceed with the levy. Kreit timely filed a petition with the U. S. Tax Court on June 16, 2009. The Tax Court denied the IRS’s motion for summary judgment and motion in limine to exclude expert testimony, and after a trial on June 16, 2010, upheld the IRS’s determination on October 3, 2011.

    Issue(s)

    Whether the IRS Appeals Officer abused her discretion in rejecting Kreit Mechanical Associates, Inc. ‘s offer-in-compromise and determining that the proposed collection action was appropriate?

    Rule(s) of Law

    The court applies an abuse of discretion standard when reviewing an IRS determination to reject an offer-in-compromise. See Murphy v. Commissioner, 125 T. C. 301, 320 (2005), aff’d, 469 F. 3d 27 (1st Cir. 2006). An abuse of discretion occurs if the decision is arbitrary, capricious, or without sound basis in fact or law. See Woodral v. Commissioner, 112 T. C. 19, 23 (1999). The IRS may compromise a tax liability on the basis of doubt as to collectibility if the liability exceeds the taxpayer’s reasonable collection potential. See Murphy v. Commissioner, 125 T. C. 301, 309-310 (2005).

    Holding

    The U. S. Tax Court held that the IRS Appeals Officer did not abuse her discretion in rejecting Kreit Mechanical Associates, Inc. ‘s offer-in-compromise and determining that the proposed collection action was appropriate, given the taxpayer’s financial information, net income, and the valuation of its accounts receivable.

    Reasoning

    The court reasoned that the IRS’s rejection of Kreit’s OIC was not an abuse of discretion. The court found that Officer Flores considered all relevant financial information provided by Kreit, including its net income of $412,218 in 2008, which indicated that more than the OIC amount could be collected. The court also noted that Kreit failed to provide complete documentation, such as bank statements and personal financial information, which could have affected the valuation of its assets. Regarding the valuation of accounts receivable, the court observed that Kreit’s own billing methodology already accounted for adjustments like change orders and retention, and Officer Flores’s decision to value the receivables at face value was not arbitrary or capricious. The court further emphasized that the IRS has no binding duty to negotiate with a taxpayer before rejecting an OIC. The court concluded that Officer Flores’s determination was based on a reasonable evaluation of Kreit’s financial situation and did not constitute an abuse of discretion.

    Disposition

    The U. S. Tax Court entered a decision for the respondent, affirming the IRS’s determination to proceed with the proposed levy.

    Significance/Impact

    The Kreit Mechanical Associates, Inc. v. Commissioner case underscores the deference given to IRS determinations in rejecting offers-in-compromise under an abuse of discretion standard. It highlights the importance of taxpayers providing complete and accurate financial information to support their OIC proposals. The case also clarifies that the IRS’s valuation of a taxpayer’s assets, including accounts receivable, will be upheld if it has a sound basis in fact and law, even if the taxpayer disagrees with the valuation methodology. This decision has implications for tax practitioners advising clients on OIC submissions and underscores the need for thorough documentation and justification of proposed asset valuations. Subsequent cases have cited Kreit for its application of the abuse of discretion standard and its guidance on the IRS’s discretion in evaluating OICs.