Tuesday, January 19, 2021
Lesson From The Tax Court: The CDP Silver Linings Playbook
Tax practitioners tend not to know much about bankruptcy. Today’s lesson is for them. In Wiley Ramey v. Commissioner, 156 T.C. No. 1 (Jan. 14, 2021), Judge Toro held that a CDP notice properly sent to a taxpayer’s last known address triggers the time period for the taxpayer to request a CDP hearing, even if the CDP notice is actually delivered to a different person who shares that address. That is the tax lesson most folks will see in this case, and it’s a good one.
I see an additional lesson, a bankruptcy lesson. While the taxpayer’s failure to timely request a CDP hearing meant no he received no Tax Court review of the administrative hearing, the news is not all bad. The lesson for today is about silver linings: the taxpayer’s equivalent hearing still got the delay benefits of CDP, and that delay did not count against Mr. Ramey should he file bankruptcy and seek a discharge of the tax liabilities at issue. Practitioners would not be crazy to put this lesson in a Playbook, a CDP Silver Linings Playbook. Yeah, it was a good movie, too. More below the fold.
Law: Of Collection Due Process (CDP) Hearings and Equivalent Hearings
The IRS has some pretty awesome collection powers that it implements mostly through the ACS, its collection machine. Those powers include the power to file a Notice of Federal Tax Lien (NFTL), which helps the IRS beat out competing creditors, and the power to seize any of the taxpayer’s property it can find, including amounts that others are obligated to pay the taxpayer, such as wages, financial accounts, and social security payments. That's the levy power.
Before the IRS fully cranks up its collection machine, however, §6320 and §6330 require it to give taxpayers an opportunity for a hearing before the Office of Appeals. The hearing is called a Collection Due Process (CDP) hearing. To ensure that taxpayers know about the opportunity §6330(a)(2) requires the IRS to give taxpayers a CDP Notice, either by personal delivery, by leaving it at the taxpayer’s dwelling or usual place of business, or by mailing it to the taxpayer’s last known address. If the IRS mails the CDP Notice it must do so by certified or registered mail, return receipt requested.
Taxpayers have a very, very, very small window of time within which to ask for a CDP hearing. Section 6330 gives the taxpayer only 30 days, and Treas. Reg. 301.6330-1(b)(1) cuts that down even more by providing that the 30 day window starts “on the day after the date of the CDP Notice.” So USPS transit time counts against those 30 days.
The regulation emphasizes that the IRS has a duty only to mail the CDP Notice to the taxpayer’s last known address. It does not matter whether the taxpayer actually receives the CDP Notice so long as it was properly mailed. The regulation gives an example of where the IRS properly mails the CDP Notice to the taxpayer’s last known address but the taxpayer does not actually receive the CDP Notice until after the 30 days have run out. The regulation says that the taxpayer in that situation may not ask for a CDP hearing. See Treas. Reg. 201.6330-1(c)(3), Example 3.
To somewhat ameliorate the harshness of the 30-day rule, the regulation provides that even if the taxpayer misses the opportunity for a CDP hearing, the IRS will give the taxpayer what it calls “an equivalent hearing.” Thus, in the regulation’s example above, the taxpayer could ask for and receive an equivalent hearing. Id. See generally Treas. Reg. 301-6330-1(i). Both CDP hearings and equivalent hearings give the taxpayer an opportunity to work out a deal with the IRS before the IRS engages in enforced collection measures. We saw that in Lesson From The Tax Court: Using CDP To Stop The Collection Train, TaxProf Blog (Oct. 15, 2018).
But CDP hearings and equivalent hearings have two potentially important differences. First is the ability to seek Tax Court review. Taxpayers unhappy with the results of their CDP hearing can petition the Tax Court to review. Taxpayers unhappy with the result of their equivalent hearing have no such recourse. Treas. Reg. 301.6330-1(i)(2), Q&A 16.
The second potentially important difference is that a timely CDP hearing request triggers a prohibition on certain collection actions. See §6330(e). In contrast the CDP regulation explains there is no guarantee that the IRS will suspend collection actions for an equivalent hearing. Look at what Treas. Reg. 301.6330-1(i)(2), Q&A i-4 says:
“Collection action is not required to be suspended. Accordingly, the decision to take collection action during the pendency of an equivalent hearing will be determined on a case-by-case basis.”
Notice however that language suggests that, absent an affirmative decision to collect, the IRS will indeed put collection on hold. You see that idea more explicitly stated in IRM 126.96.36.199.5.1 (08-30-2018)(“Levy Action during the Period of the CDP or EH”) which explains: “Levy action is generally suspended...[on] tax periods subject to an equivalent hearing...unless Collection determines it to be appropriate in the situation. Levy action may be appropriate if: Collection is at risk, e.g., dissipating assets, pyramiding additional liabilities; Taxpayer raises only frivolous issues; Taxpayer is requesting an installment agreement or offer in compromise solely to delay the collection process.”
The Law: Discharging a Debt In Bankruptcy
One critical function of bankruptcy is to give debtors that famous “fresh start.” Bankruptcy does that mainly by discharging debtors from personal liability for their pre-bankruptcy debts. Bankruptcy Code (“BC”) §727, §1141, or §1328.
But not all debts are discharged. BC §523 lists various exceptions to discharge. On exception is for any tax debt that is classified as a priority claim under BC §507(a)(8). Trotting over to that section, we see it describes two types of tax debts relevant to today’s lesson. First are taxes “for which a return, if required, is last due, including extensions, after three years before the date of the filing of the petition.” BC §507(a)(8)(A)(i). Call that the 3-year lookback period. Second are are taxes actually assessed within the 240 days before the petition’s filing date. BC §507(a)(8)(A)(ii). Call that the 240 day lookback period.In 2005 Congress modified BC §507(a)(8) in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) 119 Stat. 23 (which many bankruptcy attorneys still refer to as "BARF" for "Bankruptcy Attempted Reform Fiasco.") It tacked this unnumbered paragraph at the very end of subsection (a)(8):
“An otherwise applicable time period specified in this paragraph shall be suspended for any period during which a governmental unit is prohibited under applicable nonbankruptcy law from collecting a tax as a result of a request by the debtor for a hearing and an appeal from any collection action taken or proposed against the debtor, plus 90 days; plus any time during which the stay of proceedings was in effect in a prior case under this title or during which collection was precluded by the existence of 1 or more confirmed plans under this title, plus 90 days.”
Most bankruptcy courts read this flush language as tolling both the 3-year lookback period and the 240-day lookback period to account for time in a CDP hearing. See e.g. In Re Alexander (Bankr. D. Conn) (2020) (taxpayer’s CDP hearing tolled 3-year lookback period, resulting in no discharge of otherwise dischargeable tax liability). Such courts reason that because §6330(e) prohibits the use of levies while a CDP hearing is pending, that prohibition satisfies the condition in BC §508(a)(8)(flush language).
Mr. Ramey is a lawyer, specializing in traffic tickets in California. Here is his website. You will notice that he says his mailing address is “9520 Castillo Dr., San Simeon, CA.” That is the address the IRS used to send him a CDP Notice, dated July 13, 2018. And everyone agrees that was his last known address, so we do not have that particular issue to worry about. At that time Mr. Ramey owed the government over $247,000 in unpaid taxes for tax years 2012 through 2016.
Mr. Ramey mailed his request for a CDP hearing on August 20, 2018, about a week after the 30-day period ended. The IRS treated his request as one for an equivalent hearing. It is not clear from the opinion what, if any, collection alternatives Mr. Ramey proposed, but about 8 months later, on April 9, 2019, Appeals issued a decision document telling Mr. Ramey to pound sand. That’s pretty quick work, especially considering the intervening epic government shutdown.
Mr. Ramey then petitioned the Tax Court, asking the Court to invalidate Appeals decision because because the IRS failed to send a proper CDP notice. While the IRS mailed his CDP Notice to the right address, some random dude signed for it. Since said random dude was not Mr. Ramey, nor anyone who had any legal relationship to him, Mr. Ramey argued that the CDP notice was not properly mailed “return receipt requested” as required by §6330(a)(2). Thus, even though he did actually receive the CDP Notice within the 30-day period—the opinion is silent on whether that was the next day or some longer time—the CDP Notice was invalid because it was not properly delivered by the USPS.
Tax Lesson: Return Receipt Signature Does Not Affect Validity of CDP Notice.
Judge Toro rejected the idea—implicit in Mr. Ramey’s argument—that the IRS must ensure that receipt of a CDP Notice is made by “the taxpayer.” The responsibility was instead on Mr. Ramey to give a reasonable address. Writes Judge Toro:
“Mr. Ramey is free to organize his business affairs as he sees appropriate, including by choosing to share a business address with other businesses. But, having made that choice, and having provided to the IRS an address shared by multiple businesses, he cannot properly complain when the IRS uses that very address to reach him. In short, the IRS correctly followed one of the methods of service provided by the statute, thereby starting the 30-day period for seeking a hearing.... The fact that Mr. Ramey's address was used by multiple businesses and that (as we assume for purposes of this Opinion) the USPS left the notice with a person at that address who neither worked for Mr. Ramey nor was authorized to receive mail on his behalf does not change this conclusion.”
Bankruptcy Lesson: The Silver Linings Playbook
Mr. Ramey’s request for a CDP hearing got to the IRS on August 24, 2018. It gave him an equivalent hearing, using up 8 months. He then petitioned Tax Court in April of 2019 and Judge Toro’s opinion issued on January 14, 2021. This is very quick work considering some of the other timelines we have seen in CDP cases. See Lesson From The Tax Court: The Long and The Short of CDP, TaxProf Blog (Apr. 6, 2020). Still, all told, Mr. Ramey delayed enforced collection for some 875 days.
To see the benefit, we can just look at the 2016 tax liabilities subject to collection. I will assume Mr. Ramey timely filed a return on that year’s due date of April 18, 2017 and there is no fraud involved in the return.
If Mr. Ramey had done nothing to stop IRS collection action, but has instead run to bankruptcy immediately after receiving the CDP Notice, the 2016 taxes would have fallen within the 3-year lookback period in BC 507(a)(8)(A)(i). That exception to discharge would prevent discharge and he would still be personally on the hook for the taxes after coming out of bankruptcy.
Likewise, if Mr. Ramey had successfully obtained a CDP hearing on August 24, 2018, thus triggering the §6330(e) prohibition on levy, then that 3-year lookback period would have been tolled until last week. Those 875 days are 2 years, 4 months, and 22 days including the end date. Thus, the 3-year period would be tolled until September 10, 2022. That means that if Mr. Ramey filed bankruptcy immediately after the adverse Tax Court decision affirming a CDP result, the 2016 taxes would again not be discharged because of the BC 507(a)(8) tolling provision.
So here's the silver lining: Mr. Ramey got that 875 day delay in collection action without it affecting his ability to discharge taxes in bankruptcy. He can file a bankruptcy petition tomorrow and tolling rules would not sweep the 2016 taxes into the 3-year lookback period. Absent application of other exceptions, the 2016 taxes would be discharged. Whether that is in his best interest or not is beyond the scope of this post. The lesson is simply that the delay a taxpayer gets in an equivalent hearing can help stave off collection without affecting the taxpayer’s ability to discharge taxes in bankruptcy.
It is unlikely Mr. Ramey planned this. Properly done, however, the move can benefit a taxpayer, albeit only by the amount of time Appeals takes to work the case because there is no Tax Court review. Some taxpayers have put this move into their payment avoidance playbook and have deliberately filed defective CDP hearing requests. In Weiss v. Commissioner, 147 T.C. 179 (2016), the collection limitation period was coming to an end when the IRS sent the taxpayer a CDP Notice. The taxpayer deliberately attempted to file his CDP request late. The story of how he inadvertently ended up filing it timely—thus tolling the CSED—is a sadly amusing tale that you can read about in Keith Fogg’s blog post on the case and Les Book’s follow up here. It involves a dog.
Bryan Camp is the George H. Mahon Professor of Law at Texas Tech University. He invites readers to return every Monday (excepting Holidays) for a new Lesson From The Tax Court.