IRS Correctly Refused to Reinstate Credit After Check Bounced, DOJ Says

DAVID H. MELASKY; AUDREY MELASKY,
Petitioners-Appellants
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent-Appellee

IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT

ON APPEAL FROM THE DECISION OF THE UNITED STATES TAX COURT

BRIEF FOR THE APPELLEE

RICHARD E. ZUCKERMAN
Principal Deputy Assistant Attorney General

BRUCE R. ELLISEN (202) 514-2929
PAUL A. ALLULIS (202) 514-5880
Attorneys
Tax Division
Department of Justice
Post Office Box 502
Washington, D.C. 20044

STATEMENT REGARDING ORAL ARGUMENT

Counsel for the Commissioner of Internal Revenue believe that oral argument might be helpful to this Court given the novelty of the issues presented and the various opinions filed in the Tax Court.

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TABLE OF CONTENTS

Statement regarding oral argument

Table of contents

Table of authorities

Statement of jurisdiction

Statement of the issues

Statement of the case

Summary of argument

Argument

The Tax Court correctly concluded that the Office of Appeals did not abuse its discretion in denying taxpayers' request to apply to their 2009 income tax liability the proceeds of a levy made in respect of their liabilities for other tax years, or in rejecting taxpayers' proposed installment agreement

Conclusion

Certificate of service

Certificate of compliance

TABLE OF AUTHORITIES

Cases:

Adolphson v. Commissioner, 842 F.3d 478 (7th Cir. 2016)

Arede v. Commissioner, T.C. Memo. 2014-29, 2014 WL 657772 (2014)

Atlantic Pacific Management Group LLC v. Commissioner, 152 T.C. No. 17, 2019 WL 2550693 (2019)

In re Bliss College, 39 A.F.T.R.2d 77-1529 (D. Me. 1977)

Boulware v. Commissioner, 816 F.3d 133 (D.C. Cir. 2016)

Christopher Cross, Inc. v. United States, 461 F.3d 610 (5th Cir. 2006)

Citizens to Preserve Overton Park v. Volpe, 401 U.S. 402 (1971)

Commissioner v. Sunnen, 333 U.S. 591 (1948)

Dalton v. Commissioner, 682 F.3d 149 (1st Cir. 2012)

Estate of Duncan v. Commissioner, 890 F.3d 192 (5th Cir. 2018)

Eagleton v. Commissioner, 35 B.T.A. 551 (1937), aff'd, 97 F.2d 62 (8th Cir. 1938)

Fifty Below Sales and Marketing, Inc. v. United States, 497 F.3d 828 (8th Cir. 2007)

Giamelli v. Commissioner, 129 T.C. 107 (2007)

Hosie v. Commissioner, T.C. Memo. 2014-246, 2014 WL 6994748 (2014)

Estate of Hubbell v. Commissioner, 10 T.C. 1207 (1948)

Matter of Johnson, 146 F.3d 252 (5th Cir. 1998)

Jones v. Commissioner, 338 F.3d 463 (5th Cir. 2003)

Keller v. Commissioner, 568 F.3d 710 (9th Cir. 2009)

Leshin v. Commissioner, 436 F. App'x 791 (9th Cir. 2011)

Living Care Alternatives of Utica, Inc. v. United States, 411 F.3d 621 (6th Cir. 2005)

Marascalco v. Commissioner, 420 F. App'x 423 (5th Cir. 2011)

Masat v. United States, 745 F.2d 985 (5th Cir. 1984)

Marks v. Commissioner, 947 F.2d 983 (D.C. Cir. 1991)

Orum v. Commissioner, 412 F.3d 819 (7th Cir. 2005)

Pierson v. Commissioner, 115 T.C. 576 (2000)

Robinette v. Commissioner 439 F.3d 455 (8th Cir. 2006)

Robinson v. Commissioner, T.C. Memo. 2015-57, 2015 WL 1322668 (2015)

SEC v. Chenery, 332 U.S. 194 (1947)

Shanley v. Commissioner, T.C. Memo. 2009-17, 2009 WL 195929 (2009)

Thorpe v. Commissioner, T.C. Memo. 1998-115, 1998 WL 129000 (1998)

Tillery v. Commissioner, T.C. Memo. 2015-170, 2015 WL 5049673 (2015)

Totten v. United States, 298 F. App'x 579 (9th Cir. 2008)

United States v. Energy Resources Co., Inc., 495 U.S. 545 (1990)

United States v. Zarra, 477 F. App'x 859 (3d Cir. 2012)

Weber v. Commissioner, 70 T.C. 52 (1978)

Wood v. United States, 808 F.2d 411 (5th Cir. 1987)

Statutes:

Internal Revenue Code (26 U.S.C.):

Tex. Prop. Code Ann. § 113.029(b)(1) (2014)

Regulations:

Treasury Regulations (26 C.F.R.):

Other Authorities:

Internal Revenue Manual:

Rev. Proc. 2002-26, 2002-1 C.B. 746 Sec. 3.01

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STATEMENT OF JURISDICTION

On January 31, 2011, the IRS sent Audrey and David Melasky (“taxpayers”) a notice of intent to levy with respect to their unpaid federal income tax liabilities for 2006, 2008, and 2009. (ROA.13, ROA.14.) In February 2011, taxpayers timely requested a collection due process (“CDP”) hearing pursuant to I.R.C. § 6330 (26 U.S.C.). (ROA.14.) Taxpayers were afforded a CDP hearing, and on April 20, 2012, the IRS Office of Appeals issued a notice of determination sustaining the proposed levy. (ROA.11.) On May 21, 2012, taxpayers filed a timely petition in the Tax Court challenging the notice of determination. (ROA.3.) The Tax Court had jurisdiction under I.R.C. § 6330(d)(1).

On October 11, 2018, the Tax Court entered its order and decision upholding the notice of determination (ROA.767), as set forth in its opinion (151 T.C. No. 9) entered on October 10, 2018 (ROA.659). The decision disposed of all claims of all parties and therefore was final and appealable. On January 28, 2019, taxpayers filed a notice of appeal. (ROA.768.) Although (because of the federal government shutdown) the Clerk of the Tax Court did not enter the notice of appeal on the court's docket until January 28, 2019 (see ROA.2), it was postmarked on January 4, 2019 (see ROA.772). Accordingly, the notice of appeal was filed timely within 90 days after entry of the decision pursuant to I.R.C. § 7483. This Court has jurisdiction under I.R.C. § 7482(a)(1).

STATEMENT OF THE ISSUES

1. Whether the Tax Court correctly concluded that the IRS Office of Appeals did not abuse its discretion in denying taxpayers' request to apply to their 2009 income tax liability the proceeds of a levy made in respect of their liabilities for other tax years.

2. Whether the Tax Court correctly determined that the Office of Appeals did not abuse its discretion in rejecting an installment agreement proposed by taxpayers.

STATEMENT OF THE CASE

A. Statement of the facts

1. The history of taxpayers' income tax liabilities

Taxpayers filed joint returns for their 1995, 1996, 1999, 2000, 2001, 2002, 2003, 2004, 2006, 2008, and 2009 income tax years, and the IRS assessed taxes based on those returns, including interest and penalties. (See ROA.181-209.) The IRS also made an additional assessment of tax for the 2006 tax year, which taxpayers did not dispute. (See ROA.122.) Because taxpayers did not pay their tax liabilities for those years, at various times the IRS sent taxpayers notices of intent to levy pursuant to I.R.C. §§ 6330 and 6331. Between November 2001 and April 2009, the IRS sent notices of intent to levy with respect to taxpayers' 1995, 1996, 1999, 2000, 2001, 2002, and 2003, and 2004 tax liabilities. (See ROA.182, ROA.185, ROA.188, ROA.193, ROA.196, ROA.198, ROA.201, ROA.203.)

Between 1997 and 2006, taxpayers submitted four offers in compromise with respect to different combinations of their tax liabilities. (See, e.g., ROA.182, ROA.183.) Although the IRS initially accepted one of those offers, it later determined that taxpayers' had failed to comply with the offer's terms. (See ROA.182.)

In 2006, the IRS accepted taxpayers' offer to pay their 1996, 1999, 2000, 2001, 2002, 2003, and 2004 taxes through an installment agreement (see, e.g., ROA.185), but on April 23, 2009, determined that taxpayers' were no longer in installment agreement status (ROA.185). On April 23, 2009, the IRS sent taxpayers an additional notice of intent to levy with respect to their unpaid liabilities for those tax years. (ROA.185.)

In August 2009, the IRS accepted taxpayers' renewed offer to pay the above-referenced tax liabilities, as well as their tax liabilities for 2006, through an installment agreement (see ROA.186), but the IRS determined that taxpayer were no longer in installment status in March 2010 (ROA.186).

Despite the payments that taxpayers made pursuant to their installment agreements, as well as some additional payments, none of taxpayers' liabilities for any of the above-referenced years was fully satisfied as of January 2011. (See ROA.154, ROA.155.) As of January 31, 2011, taxpayers owed over $344,000 on account of their 1995, 1996, 1999, 2000, 2001, 2002, 2003, and 2004 tax liabilities. (See ROA.155.)

Taxpayers also had outstanding income tax liabilities for the years 2006, 2008, and 2009. As of January 31, 2011, taxpayers owed $724, $334, and $18,423 on account of their 2006, 2008, and 2009 income tax liabilities, respectively. (See ROA.154.) On January 31, 2011, the IRS sent taxpayers a notice of intent to levy with respect to taxpayers' 2001, 2002, 2004, 2006, 2008, and 2009 income tax liabilities (the “notice of intent for 2009”) (ROA.148-149.) Although the IRS had previously sent taxpayers notices of intent to levy with respect to their 2001, 2002, and 2004 income tax liabilities (see ROA.196, ROA.198, ROA.203), the notice of intent for 2009 was the first such notice for the years 2006, 2008, and 2009. (See ROA.124, ROA.139, ROA.145.)

2. The application of the levy proceeds

On January 27, 2011, taxpayers hand delivered to an IRS office in Houston a check in the amount of $18,000 (the “check for 2009”) drawn on their account at JPMorgan Chase, N.A. (“JPMorgan”). (ROA.144.) They requested that that check be applied against their 2009 income tax liability, and believed that that payment would fully satisfy that liability. (Id.) Immediately upon receipt of the check — although it had not yet been presented for payment — the IRS made an entry in taxpayers' account for 2009 showing a payment of $18,000. (Id.)

On January 31, 2011 (the same date that it sent the notice of intent for 2009), the IRS office in Philadelphia issued to JPMorgan a notice of levy with respect to taxpayers' 1995, 1996, 1999, 2000, 2001, 2002, 2003, and 2004 income tax liabilities (the “levy for 1995”), and sent a copy of that notice of levy to taxpayers. (ROA.155.) As a result of the levy, and before the IRS presented taxpayers' $18,000 check for 2009 for payment, JPMorgan put a hold on taxpayers' account.¹

On February 9, 2011, taxpayers submitted a request for a CDP hearing under I.R.C. § 6330 with respect to their outstanding income tax liabilities for 1995, 1996, 1999, 2000, 2001, 2002, 2003, 2004, 2006, 2008, and 2009. (ROA.150-156.) In an attachment to their request, taxpayers contended that the statute of limitations on collection of their 1995 and 1996 income tax liabilities may have expired.² (ROA.152.) They also noted that JPMorgan had placed a hold on their account as a result of the levy for 1995, and that their check for 2009 had not been deposited by the IRS as of that date. (ROA.152.) Accordingly, the taxpayers “request[ed] that the IRS apply the levy proceeds to the Form 1040 for 2009.” (ROA.152.)

On February 28, 2001, the IRS received from JPMorgan levy proceeds in the amount of $21,182 and applied that amount against taxpayers' 1995 income tax liabilities. (See ROA.183.)

In the interim, the IRS presented the check for 2009 to JPMorgan for payment. JPMorgan declined to honor the check, however, as a result of the levy. Accordingly, the IRS reversed the $18,000 credit that it had applied to taxpayers' 2009 account when they initially delivered the check for 2009 to the IRS. (See ROA.209.)

3. The CDP hearing and the rejection of taxpayers' proposed installment agreement

As noted above, taxpayers submitted a request for a CDP hearing with the IRS Office of Appeals on February 9, 2011. (ROA.150-156.) Although they requested a hearing with respect to their liabilities for the years 1995, 1996, 1999, 2000, 2001, 2002, 2003, 2004, 2006, 2008, and 2009, the IRS determined that taxpayers were entitled to a hearing only with respect to the years 2006, 2008, and 2009, because taxpayers had received earlier notices of intent to levy with respect to the other years but had not timely requested a CDP hearing after those notices.³

IRS Appeals Settlement Officer (“SO”) Bart Hill scheduled a face-to-face CDP hearing for August 25, 2011, to consider the proposed levy action with respect to taxpayers' 2006, 2008, and 2009 tax liabilities (i.e., the notice of intent for 2009), and requested that taxpayers provide certain documents to support their request for an installment agreement or offer in compromise, including in particular, a completed Form 433-A (collection information statement) with supporting documentation. (See ROA.176-178.) Taxpayers submitted their Form 433-A on June 21, 2011, and supporting documentation on July 27, 2011. (See ROA.164-175; ROA.210-382.)

At the CDP hearing, taxpayers' representative argued that the proceeds of the levy for 1995 should be applied against taxpayers' 2009 income tax liability, and stated their intention to submit an offer to compromise all of taxpayers' outstanding income tax liabilities. By letter dated August 26, 2011, SO Hill asked taxpayers to submit their offer in compromise by September 9, 2011, and asked them to (1) pay their estimated taxes for January through August 2011, (2) provide a copy of the will of Mrs. Melasky's father, Emery Farkas, and (3) answer certain questions regarding the income, assets, and expenses of their business. (ROA.384-385.)

Taxpayers did not submit an offer in compromise. Instead, on September 9, 2011, taxpayers submitted a request for a partial payment installment agreement, proposing to pay $750 per month in partial satisfaction of all of their then-outstanding income tax liabilities. (ROA.387-389.) With their letter, taxpayers provided a copy of the Farkas will. (ROA.393-421.) That will established various trusts, one of which was established for Mrs. Melasky's benefit, and which appointed her as trustee (the “Audrey Trust”). (ROA.399.) SO Hill subsequently requested information regarding the corpus of that trust. (ROA.423.)

On December 2, 2011, SO Hill sent taxpayers a letter stating that, in order to enter into an installment agreement, taxpayers would be required to liquidate, by December 16, certain assets identified during the parties' discussions, including (1) four individual retirement accounts (IRAs), (2) two 401(k) plan accounts, (3) the cash value of a life insurance policy, and (4) certain Exxon Mobil stock owned jointly by Mr. Melasky and his former wife. (ROA.458.)

On December 13, 2011, taxpayers' counsel telephoned SO Hill to request an extension of the deadline for liquidating those assets due to the illness of taxpayers' daughter. (ROA.161.) Counsel also stated that taxpayers intended to use certain of the assets identified in SO Hill's December 2 letter to pay for their daughter's medical expenses. (Id.) Taxpayers requested a second extension on January 24, 2012. (See ROA.473.) SO Hill agreed to extend the deadline to February 9, 2012. (See ROA.473.) By letter dated January 25, 2012, SO Hill requested that taxpayers provide proof that they had liquidated the assets identified in the December 2 letter to pay for their daughter's medical expenses, and also proof of Mrs. Melasky's claimed reduced income. (ROA.473.)

By letter dated February 9, 2012, taxpayers' counsel indicated that as of February 3, 2012, taxpayers had begun the steps to liquidate some of the identified assets. (ROA.475-478.) The letter indicated that it might take 25 more days to liquidate the various retirement accounts, and that Mr. Melasky could not sell the Exxon Mobil stock without his former spouse's permission. (ROA.477.) Taxpayers' counsel also enclosed receipts for certain medical expenses for taxpayers' daughter, and indicated that $9,239 had been withdrawn from the estate of Mr. Farkas to cover those expenses. (ROA. 477-478.) The letter also contained an enclosure showing the value of the assets held in the Farkas estate. (See ROA.484.) The estate had total assets of approximately $1.1 million, of which SO Hill calculated that $236,967 was available to Mrs. Melasky through the trust established for her in the Farkas will. (See ROA.505.)

On April 4, 2012, SO Hill wrote a letter to taxpayers regarding their request for an installment agreement. (ROA.504-505.) He first noted that taxpayers had not liquidated one IRA, one 401(k) account, the life insurance policy, and the Exxon Mobil stock, and requested that they do so by April 11, 2012. (ROA.504.)

SO Hill also offered taxpayers an installment plan requiring payments of $4,580 per month for 51 months, followed by payments of $1,017 per month. (ROA.505.) He calculated these payment amounts by comparing taxpayers' monthly income (as reported on their Form 433-A as well as Mrs. Melasky's 2011 Form W-2 wage information) with allowable expenses based on national and local standards. (ROA.504-505.) In addition to their reported monthly income, SO Hill took into account the value of the Audrey Trust (approximately $237,000 as of that date). (ROA.505.) He concluded that because Mrs. Melasky earned 68% of monthly household income, she should be charged with 68% of allowable monthly household expenses, totaling $4,580. He concluded that because the Audrey Trust authorized withdrawals for Mrs. Melasky's health, maintenance, support, and education, Mrs. Melasky (as trustee) could distribute those funds to herself to meet her household expenses, and taxpayers could use their monthly income to pay their tax liabilities under the installment agreement. (ROA.505.) He further concluded that the corpus of the trust would be exhausted after 51 monthly payments of $4,580, at which time he proposed that taxpayers' payments be reduced to $1,017 per month. (ROA.505.)

As noted, SO Hill's conclusion was based upon the terms of the Farkas will creating the Audrey Trust. Article 4.2 of the Farkas will provided (ROA.399):

During [Mrs. Melasky's] life, the Trustee [Mrs. Melasky] may distribute to [Mrs. Melasky], as primary beneficiary, and may distribute to her descendants (if any), as secondary beneficiaries, so much or all of the income and principal of [Mrs. Melasky's] trust (even though exhausting the trust) as the Trustee [Mrs. Melasky] determines to be appropriate to provide for their continued health, maintenance, support, and education (including college or vocational, graduate or professional school education).

Article 9.1 of the Farkas will further provided (ROA.408):

Except as otherwise provided, in making discretionary distributions under this Will, the Trustee making the distribution decision may consider all circumstances and factors the Trustee deems pertinent, including (i) the beneficiaries' accustomed standard of living and station in life; (ii) all other income and resources reasonably available to the beneficiaries and the advisability of supplementing their income or resources; (iii) the beneficiaries' respective character and habits, their diligence, progress and aptitudes in acquiring an education, and their ability to handle money usefully and prudently, and to assume the responsibilities of adult life and self-support in light of their particular abilities and disabilities; and (iv) the tax consequences of the Trustee's decision to make (or not to make) the distributions and out of which trust any distributions should be made. Except as otherwise provided, as to any trust with more than one beneficiary, the Trustee may make discretionary distributions in equal or unequal proportions and to the exclusion of any beneficiary. The Trustee shall not allow a beneficiary who reasonably should be expected to assist in securing his or her own economic support to become so financially dependent upon distributions from any trust that he or she loses an incentive to become productive in a manner that is reasonably commensurate with any other individual having the ability and being in the circumstances of the beneficiary. Whenever this Will provides that the Trustee 'may' make a distribution, the Trustee may, but need not, make the distribution.

Article 9.6 of the Farkas will provided (ROA.409):

Each trust created under this Will shall be a 'spendthrift trust,' as defined by the Texas Trust Code. Prior to actual receipt by any beneficiary, no income or principal distributable from a trust created under this Will shall be subject to anticipation or assignment by any beneficiary or to attachment by any creditor of, person seeking support from, person furnishing necessary services to, or assignee of any beneficiary.

In addition to the Audrey Trust, the Farkas will bequeathed $200,000 to each of her children, to be held in a separate trust and used for their educational expenses. (ROA.398, ROA.401.)

On April 11, 2012, taxpayers sent a letter in response to SO Hill's proposal. (ROA.509-513.) Taxpayers first indicated that they were awaiting checks from the liquidation of two of their retirement accounts. (ROA.509.) Taxpayers also requested that they be allowed to remit the cash value of the life insurance policy without liquidating it. (ROA.510.) And regarding the Exxon Mobil stock, taxpayers stated that Mr. Melasky could not “access” the stock without the consent of his ex-wife, with whom he had not communicated in 30 years. Accordingly, taxpayers stated that they had “no objection to the IRS seizing this property or to signing over whatever form the IRS presents to effectuate such transfer.” (ROA.510.)

Taxpayers rejected SO Hill's proposed installment agreement terms, offering instead to make monthly payments of $1,017 beginning in May 2012. (ROA.511.) They disputed SO Hill's conclusion that Mrs. Melasky should be charged with 68% of monthly household expenses, contending that they were each responsible for 50% of those expenses. (ROA.511.) They also disagreed with SO Hill's conclusion that Mrs. Melasky could make distributions to herself from the Audrey Trust to pay her share of household expenses, “because Mrs. Melasky already generates that amount from her earnings.” (ROA.511.) They argued, therefore, that it would violate Article 4.2 of the Will (quoted above) for her to make such distributions to herself. (ROA.511.) They also argued that doing so would violate the terms of the trust because it would leave no funds for Mrs. Melasky's children as secondary beneficiaries under the trust. (ROA.511.) They further argued that the proposed distributions would violate the trust's spendthrift provision. (ROA.512.)

SO Hill concluded that taxpayers' arguments regarding distributions from the trust were incorrect, and decided to close the case. (ROA.163.) Accordingly, on April 20, 2012, the Office of Appeals issued taxpayers a notice of determination sustaining the January 31 notice of intent to levy with respect to their 2006, 2008, and 2009 income tax liabilities. (ROA.560-570.) First, the Office of Appeals determined that the IRS had properly issued the notice of intent to levy pursuant to I.R.C. §§ 6330 and 6331. (ROA.563.) It further determined that taxpayers were incorrect in their assertion that the statute of limitations for collection of their 1995 and 1996 tax liabilities had expired. (ROA.564.) The Office of Appeals also determined that the IRS had properly applied the proceeds of the levy for 1995 to taxpayers' unpaid 1995 liability. Although taxpayers had previously delivered to the IRS a check drawn on the same bank account, and asked that the check be applied to their 2009 liability, the funds from taxpayers' account were obtained pursuant to the IRS's levy for 1995 and the check was dishonored. (ROA.564.) Accordingly, the levy proceeds were properly treated as an involuntary payment and applied by the IRS in the best interests of the United States. (ROA.564.)

The Office of Appeals also rejected taxpayers' proposed installment agreement because (1) taxpayers had not paid over the equity in all assets as requested, and (2) Mrs. Melasky was unwilling to take distributions from her trust to pay her portion of taxpayers' monthly household expenses. (ROA.562.) It rejected taxpayers' argument that Mr. Melasky was responsible for 50% of household expenses because his monthly income was insufficient to pay 50% of those expenses. (ROA.567.) It also rejected taxpayers' argument that Mrs. Melasky was prohibited from distributing trust funds to herself for her monthly living expenses because she earns wages sufficient to cover those expenses. (ROA.567.) It explained that nothing in the trust document conditions Mrs. Melasky's authority to distribute funds upon the amount of income she earns. (ROA.567.) Finally, as required by I.R.C. § 6330(c)(3)(C), the Office of Appeals determined that the proposed levy action “properly balances the need for efficient collection with the legitimate concern of the taxpayer that the collection action be no more intrusive than necessary.” (ROA.568.)

B. Disposition in the Tax Court

Taxpayers filed a petition for redetermination in the Tax Court. In a reviewed opinion, the Tax Court granted the Commissioner's motion for summary judgment and denied taxpayers' cross-motion for summary judgment. (ROA.659-767). The opinion of the court, by Judge Thornton, concluded that the Office of Appeals had not abused its discretion in either its decision not to apply the levy proceeds to taxpayers' 2009 income tax liability or its decision to reject taxpayers' proposed installment agreement. (ROA.659-704.) Judge Thornton's opinion was joined by eight of the Tax Court's other Judges: Gale, Gustafson, Paris, Kerrigan, Lauber, Nega, Pugh, and Ashford. Judge Lauber filed a concurring opinion, joined by Judges Thornton, Marvel, Gustafson, Kerrigan, Buch, Nega, Pugh, and Ashford. (ROA.705-715.) Judges Buch and Pugh filed a separate concurrence, joined by Judges Gustafson and Paris. (ROA.716-717.) Finally, Judge Holmes filed a dissent (ROA.718-766), joined by Judge Morrison, in which he disagreed with the majority's conclusion regarding the levy issue (ROA.740), but agreed with the majority that the Office of Appeals had not abused its discretion in rejecting the installment agreement (ROA.764-765). Thus, eleven of the Tax Court's judges agreed that the Office of Appeals had not abused its discretion with respect to the application of the levy proceeds (while two judges dissented on this issue), and all thirteen of the Tax Court's judges considering the case agreed that the Office of Appeals had not abused its discretion in rejecting taxpayers' proposed installment agreement.

1. Judge Thornton's majority opinion

a. The levy proceeds

The Tax Court first concluded that “there was no abuse of discretion in [the Office of Appeals'] determination to deny [taxpayers'] request to apply the proceeds of the January [31], 2011, levy against their 2009 income tax liability.” (ROA.687.) The court explained that while the IRS generally permits taxpayers to designate the liability to which a “voluntary” payment should be applied, “involuntary payments may generally be applied against whichever unpaid tax liabilities the Commissioner chooses.” (ROA.681-682.) It rejected taxpayers' contention that their January 27 check should be treated as a voluntary payment against their 2009 liability. (ROA.682.) To the contrary, there “was no payment on January 27, 2011.” (ROA.682.) Because a payment by check is “subject to the condition subsequent that the check be paid upon presentation to the drawee,” it is not considered an “absolute payment” until the fulfillment of that condition, in the absence of an agreement otherwise. (ROA.682.) Here, there was no evidence of any agreement to treat taxpayers' payment as an absolute payment, and taxpayers' check was not paid upon presentation to the bank. The check therefore “did not constitute payment,” and “any instructions [taxpayers] attached to the check are irrelevant.” (ROA.683.)

The Tax Court rejected taxpayers' invitation to “create an equitable exception to these straightforward rules for situations in which a taxpayer's check was dishonored following a lawful IRS levy on the bank account against which the check was drawn.” (ROA.684.) The court noted that taxpayers had cited no authority to support such a proposition. (ROA.684.) It also noted that the Texas Supreme Court had held, with respect to payment of state taxes, that “when a check given for taxes is properly presented and is dishonored for any reason, its subsequent payment operates to discharge the taxes as of the time of such payment and not before.” (ROA.685, quoting Muldrow v. Texas Frozen Foods, Inc., 157 Tex. 39, 299 S.W.2d 275, 278 (Tex. 1957)). The Tax Court saw no reason to treat taxpayers' check, drafted in Texas, any differently. (ROA.685.)

The court finally noted that there “is no dispute that the $21,182 payment at issue was a result of” the levy. (ROA.687.) Because “[a]mounts received as a result of levy are involuntary payments” that the Commissioner may apply “as he sees fit,” there was no abuse of discretion in the decision to deny taxpayers' request to apply the levy proceeds to their 2009 liability. (ROA.687.)

b. The installment agreement

The Tax Court also concluded that the Office of Appeals had not abused its discretion in rejecting taxpayers' proposed installment agreement for two independent reasons. First, the court found that taxpayers “had failed to liquidate certain assets and pay over the proceeds” within the time periods prescribed. (ROA.689.) The court explained (ROA.687-688) that the IRS may enter into an installment agreement if the “agreement will facilitate full or partial collection of such liability” (I.R.C. § 6159(a)). The court does not “reweigh the equities” or “make an independent determination of what would be an acceptable collection alternative.” (ROA.688.) It noted that taxpayers had requested and obtained three extensions on the deadline for liquidating the assets in question from December 2, 2011 to April 11, 2012, amid conflicting explanations as to the use to which those funds would be put. (ROA.690-691). Initially, taxpayers asserted that they would use the equity in those assets to pay their daughter's medical expenses, but they abandoned that assertion in February 2012. (ROA.690.) Taxpayers had paid over the equity in some of the subject assets, and had completed the paperwork for other assets by April 11, 2012. But, the court explained, “on December 2, 2011, [the IRS] asked [taxpayers] to liquidate their assets and pay over the proceeds; they had not done so as of April 20, 2012, when the notice of determination was issued.” (ROA.691.) On this record, the Tax Court could not “say that the SO abused his discretion in declining to extend the deadline yet again, after three previous extensions over a period of approximately 4.5 months.” (ROA.691.) The Tax Court also rejected taxpayers' argument that it was an abuse of discretion for the Office of Appeals to reject taxpayers' proposed agreement in light of their offer to allow the IRS to “seize” Mr. Melasky's interest in the Exxon Mobil stock. (ROA.692-693.) Seizure was not an option available to the IRS in the procedural posture of the case at that time, and in any event it was up to taxpayers to “address the equity in their assets” and they did “not contend that Mr. Melasky would have been unable to liquidate his interest in that stock by communicating with his former spouse.” (ROA.692.)

Second, the Tax Court explained that the Office of Appeals had not abused its discretion in rejecting taxpayers' proposed installment agreement for the independent reason that taxpayers could pay more than what they proposed. (ROA.695.) The court concluded that the Farkas will unambiguously “provides discretionary authority to the trustee, Mrs. Melasky, to distribute so much of the income or principal (i.e., the corpus) as appropriate to provide for the beneficiaries' 'continued health, maintenance, support, and education.'” (ROA.695.) And the Office of Appeals considered distributions from the trust only insofar as they might be used “to pay nontax necessary expenses” “that are clearly within the meaning of the terms 'health, maintenance, support, and education.'” (ROA.696.) The court further explained that under Texas law, where (as here) the same person is both trustee and beneficiary, the trustee may make distributions to herself only to the extent that such distributions would be for “health, education, support, or maintenance” as defined in I.R.C. §§ 2041(b)(1)(A) or 2514(c)(1). See Tex. Prop. Code Ann. § 113.029(b)(1) (2014). And here the trust distributions contemplated by the Office of Appeals would meet that definition. (ROA.696-697.)

The Tax Court rejected taxpayers' argument that Mrs. Melasky was prohibited from making such distributions to herself under the terms of the Farkas will and Texas law. (ROA.697-702.) It explained that the Farkas will did “not restrict Mrs. Melasky's discretion” to distribute funds to herself “in any relevant way,” notwithstanding that she earned income outside the trust which she could use to pay her living expenses. (ROA.699.) It also rejected the argument that taking distributions in this way would violate the trust's spendthrift clause, which prohibits attachment by a creditor of a beneficiary's interest in the trust before distribution to the beneficiary. (ROA.701.) Contrary to taxpayers' argument, the Office of Appeals' determination was not an “attempt[ ] to seize the trust assets” nor did it “seek to force distributions.” (ROA.701.) Rather, the determination “merely accounted for events which were likely to occur if the proposed installment agreement had become a reality” and the Office of Appeals “was not required to turn a blind eye to assets or income likely to be available to [taxpayers].” (ROA.701.)

Nor would it be a violation of Mrs. Melasky's fiduciary duties for her to distribute trust funds to herself for her own living expenses. (ROA.702.) By its own terms, the Farkas will “expressly provides” that the trustee (i.e., Mrs. Melasky) “'may distribute to Mrs. Melasky 'so much or all of the income and principal' of the Audrey Trust 'even though exhausting the trust.'” (ROA.702.) And the will further provides “that 'as to any trust with more than one beneficiary, the Trustee may make discretionary distributions in equal or unequal portions and to the exclusion of any beneficiary[.]'” (ROA.702 (emphasis added by the court).)

Accordingly, the Tax Court found “no abuse of discretion in any respect” of the Office of Appeals' determination.⁴ (ROA.704.)

2. Judge Holmes's dissent

Judge Holmes dissented on the question whether the Office of Appeals had abused its discretion in declining taxpayers' request to apply the levy proceeds to their 2009 tax liability. (ROA.718-766.) He opined that the question was controlled by I.R.C. § 6311(b), which provides that if a check “so received is not duly paid, or is paid and subsequently charged back to the Secretary, the person by whom such check . . . has been tendered shall remain liable for the payment of the tax . . . and for all legal penalties and additions, to the same extent as if such check . . . had not been tendered.” Because the notice of determination did not discuss § 6311(b), Judge Holmes would have remanded the matter to the Office of Appeals to consider whether taxpayers' check was “duly paid” when the IRS obtained, by levy, funds from the account on which the check was drawn. (ROA.737.) Judge Holmes was of the view that the “IRS caused [taxpayers'] check to bounce” (ROA.724) and, accordingly, the funds obtained by the levy should be treated as a “voluntary payment” by taxpayers and applied as they directed (ROA.738).

Citing various cases, Judge Holmes distilled “the general rule. . . that the date of a payment made by check is the tender date, [but] there's an exception if the check doesn't clear.” (ROA.731.) In that circumstance, Judge Holmes agreed, “the longstanding principle has been to ignore the tender date of the dishonored check” (ROA.730) and “no payment ever occurred” (ROA.730, quoting Weber v. Commissioner, 70 T.C. 52, 57 (1978)). Although “the IRS did nothing morally wrong or even negligent” (ROA.740), Judge Holmes believed that “a background principle of law . . . creates an exception to the exception to the general rule” (ROA.734). Because “[c]ommon law generally prohibits one party to a contract from interfering with the other party's performance” (ROA.736), Judge Holmes argued that the rule should be as follows: “[a] taxpayer can apply a voluntary payment to the tax liability of his choosing by tendering a check; if it bounces, the Commissioner does not need to honor that application; but if the Commissioner causes the bouncing, he must” (ROA.738-739). He accordingly would have held that the Office of Appeals abused its discretion by “commit[ing] an error of law” when it “concluded that the IRS received an involuntary payment” by levy from taxpayers' bank account. (ROA.740.)

Although Judge Holmes also disagreed with the majority's analysis of the Office of Appeals' rejection of taxpayers' proposed installment agreement, he nevertheless agreed that there was no abuse of discretion in that rejection because SO Hill's “legal conclusion was reasonable in light of the information available to him after a very informal adjudication[.]” (ROA.764.)

3. Judge Lauber's concurrence

Judge Lauber “agree[d] with the opinion of the Court” but wrote separately “in response to the dissent.” (ROA.705.) Specifically, he rejected the dissent's conclusion that the Office of Appeals “erred 'as a matter of law'” in its “failure to divine a new rule of law that the dissent would create out of whole cloth[.]” (ROA.706.) He noted that there was no basis to conclude that the principle of contract law on which Judge Holmes based his newly-created rule should apply in the context of taxpayers' payment of their federal income tax liabilities. (ROA.708.) And he explained that the Office of Appeals did not abuse its discretion on this question because it relied on accurate information in taxpayers' account transcripts and applied valid IRS rules and procedures. (ROA.711.)

4. Judges Buch and Pugh's concurrence

Judges Buch and Pugh “agree[d] with the result as applied to the facts of this case” (ROA.716), but wrote separately to emphasize their view that the opinion of the Tax Court did not “foreclose finding an abuse of discretion if evidence were to show that, through negligence or malfeasance, the Commissioner circumvented his own revenue procedure for designating payments” (ROA.717). They noted, however, that the instant case “does not present those facts.” (ROA.717.)

SUMMARY OF ARGUMENT

Taxpayers had outstanding federal income tax liabilities for multiple years. This CDP case concerns the IRS's proposal to collect some of those liabilities — for taxpayers' 2006, 2008, and 2009 tax years — through levy. Regarding that proposed levy, taxpayers sought, and received, a CDP hearing under I.R.C. § 6330 with the IRS Office of Appeals. During the hearing, taxpayers argued that the proposed levy for 2009 should not be sustained because their 2009 liability should be considered satisfied by funds that the IRS had seized from their bank account pursuant to a levy for other earlier tax years. Taxpayers also offered to partially pay all of their then-outstanding income tax liabilities through an installment agreement. The Office of Appeals determined that taxpayers were incorrect regarding their 2009 liability, and rejected their proposed installment agreement. Accordingly, the Office of Appeals sustained the proposed levy for 2006, 2008, and 2009. The Tax Court correctly determined that the Office of Appeals did not abuse its discretion in any way in either of these determinations.

1. Although IRS policy permits taxpayers to designate the application of voluntary tax payments, they may not designate the application of involuntary payments, such as payments received as a result of a levy. The IRS is free to apply levy proceeds in the best interests of the Government, subject to the constraint that levy proceeds must be applied against a liability in respect of which the levy was made. In this case, there is no dispute that the funds in question were obtained by the IRS as a result of a levy on taxpayers' bank account in respect of taxpayers' 1995, 1996, 1999, 2001, 2002, 2003, and 2004 income tax liabilities. Notwithstanding that fact, taxpayers asserted in the CDP hearing that the IRS should have treated those funds as a voluntary payment because a few days prior to the levy, taxpayers had written and delivered to the IRS a check drawn on the same bank account and requested that the proceeds of the check be applied to their 2009 income tax liability. Although that check was dishonored as a result of the intervening levy, taxpayers requested that the funds levied from the account be treated as if they were received through payment of the check, and accordingly that they be considered a voluntary payment in respect of their 2009 liability.

The Tax Court correctly determined that the Office of Appeals did not abuse its discretion in denying that request. Because, as all parties agree, the funds in fact were obtained pursuant to a levy, the funds constituted an involuntary payment that the IRS was required to apply to a tax liability in respect of which that levy was made. And the IRS did so, by applying the levy proceeds to taxpayers' 1995 income tax liability. Moreover, as the Tax Court explained, the mere delivery of a check — later dishonored — does not constitute payment at all, let alone a voluntary payment. Where a check is dishonored, taxpayers remain liable for payment of the tax as if the check had never been tendered. Because the funds in taxpayers' account were obtained by a levy in respect of, inter alia, their 1995 income tax liability, and because taxpayers' check for their 2009 income tax liability was dishonored, the Office of Appeals correctly denied taxpayers' request to apply those funds against taxpayers' 2009 liability. Thus, taxpayers remained liable for their 2009 liability, and the Office of Appeals did not abuse its discretion in sustaining the proposed levy for 2006, 2008, and 2009.

2. The IRS has broad discretion to accept or reject any proposed installment agreement. Guidelines in the Internal Revenue Manual indicate that taxpayers may be required to liquidate assets as a condition to acceptance of an installment agreement. They also indicate that taxpayers will be expected to pay the maximum monthly amount based on their ability to pay. Here, the Settlement Officer requested taxpayers to liquidate and pay over certain assets within a certain timeframe in order to qualify for an installment agreement. Taxpayers failed to do so, even after the Settlement Officer thrice extended the deadline for doing so. The Tax Court correctly determined that there was no abuse of discretion in the decision not to extend the deadline further.

Nor was there any abuse of discretion in the rejection of taxpayers' proposed installment agreement on the ground that taxpayers had the ability to make much larger monthly payments than they had proposed. Contrary to taxpayers' argument, the Office of Appeals did not abuse its discretion by taking into account Mrs. Melasky's ability to pay monthly household expenses through distributions from the Audrey Trust. Nothing in the Farkas will prevents Mrs. Melasky (as trustee of the Audrey Trust) from making distributions to herself (as primary beneficiary of the Audrey Trust) for her monthly living expenses. Nor is there any requirement that Mrs. Melasky first exhaust other sources of income before making such distributions to herself for her health, maintenance, support, or education. Although the will has a spendthrift clause that prohibits anticipation or assignment by a beneficiary, or attachment by a creditor, prior to distribution of trust funds, the Office of Appeals here did not seek to attach any of the trust's assets. The Office of Appeals simply took into account the possibility of trust distributions for purposes of determining taxpayers' ability to satisfy their monthly expenses. Nor would Mrs. Melasky violate any fiduciary duty to her children, secondary beneficiaries of her trust, because the will specifically authorizes Mrs. Melasky (as trustee) to distribute to herself (as beneficiary) as much of the income or principal as she decided for her health, maintenance, support, or education even though exhausting the trust. The will further provided that she could make distributions in unequal proportions and to the exclusion of any beneficiary. The Tax Court correctly concluded that there was no abuse of discretion in the rejection of taxpayers' proposed installment agreement.

ARGUMENT
The Tax Court correctly concluded that the Office of Appeals did not abuse its discretion in denying taxpayers' request to apply to their 2009 income tax liability the proceeds of a levy made in respect of their liabilities for other tax years, or in rejecting taxpayers' proposed installment agreement

Standard of review

Where, as here, the underlying tax is not in issue, the determination of the IRS Office of Appeals in a CDP hearing is reviewed by both the Tax Court and the Court of Appeals for “clear abuse of discretion.” Christopher Cross, Inc. v. United States, 461 F.3d 610, 612 (5th Cir. 2006) (internal quotation marks and citation omitted). See also Jones v. Commissioner, 338 F.3d 463, 466 (5th Cir. 2003). Normally, a court applying the abuse-of-discretion standard considers “whether [the agency's] decision was based on a consideration of the relevant factors and whether there has been a clear error of judgment.” Citizens to Preserve Overton Park v. Volpe, 401 U.S. 402, 416 (1971). In the case of CDP tax appeals, however, the abuse-of-discretion standard is more deferential than is the case of more formal agency actions. As this Court has explained, “Congress likely contemplated review for a clear abuse of discretion in the sense of clear taxpayer abuse and

unfairness by the IRS, lest the judiciary become involved on a daily basis with tax enforcement details that Congress intended to leave with the IRS.” Christopher Cross, 461 F.3d at 612 (internal quotation marks and citation omitted). See Dalton v. Commissioner, 682 F.3d 149, 155 (1st Cir. 2012) (“a court should set aside determinations reached by the IRS during the CDP process only if they are unreasonable in light of the record compiled before the agency”); Fifty Below Sales and Marketing, Inc. v. United States, 497 F.3d 828, 830 (8th Cir. 2007) (review is “markedly deferential”); Living Care Alternatives of Utica, Inc. v. United States, 411 F.3d 621, 625 (6th Cir. 2005) (“Congress must have been contemplating a more deferential review of these [CDP] tax appeals than of more formal agency decisions”).

A. The statutory framework for CDP determinations

When a taxpayer neglects or refuses to pay an assessed federal tax liability after notice and demand for payment, the amount due becomes a “lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person.” I.R.C. § 6321. The lien is not self-executing, however, and the IRS must take affirmative action to enforce the collection of delinquent taxes. For example, the IRS may collect the tax by levy under I.R.C. § 6331(a).

I.R.C. §§ 6320 and 6330 provide procedural safeguards for taxpayers in connection with tax liens and levies. See generally Robinette v. Commissioner 439 F.3d 455, 458 (8th Cir. 2006); Pierson v. Commissioner, 115 T.C. 576, 579 (2000). Under § 6330, prior to making a levy pursuant to § 6331(a), the IRS must notify a taxpayer of his right to request a CDP hearing. I.R.C. § 6330(a)(1); see also I.R.C. § 6331(d). If a timely request is made, the taxpayer is entitled to a hearing before the IRS Office of Appeals. I.R.C. § 6330(b)(1); Treas. Reg. § 301.6330-1(b)(2), (c)(1). A taxpayer is entitled to only one CDP levy hearing per tax period. I.R.C. § 6330(b)(2); Treas. Reg. § 301.6330-1(b)(1). The IRS is prohibited from proceeding with a proposed levy until the CDP proceeding, and any judicial review of that proceeding, is completed. I.R.C. § 6330(e).

During the CDP hearing, the Office of Appeals is to “obtain verification from the Secretary that the requirements of any applicable law or administrative procedure have been met.” I.R.C. § 6330(c)(1); see Treas. Reg. § 301.6330-1(e)(1). A taxpayer may also raise “any relevant issue relating to the unpaid tax or the proposed levy,” including challenges to the appropriateness of collection activities and offers of collection alternatives (e.g., an installment agreement). I.R.C. § 6330(c)(2)(A). Only if the taxpayer did not receive a notice of deficiency with respect to the underlying tax liability, and did not otherwise have an opportunity to dispute the liability, may he challenge at the hearing the existence or amount of the liability. I.R.C. § 6330(c)(2)(B).

After holding the CDP hearing, verifying the assessment, and considering any issues raised by the taxpayer, the Office of Appeals issues a notice of determination setting forth a determination whether the “proposed collection action balances the need for the efficient collection of taxes with the legitimate concern of the person that any collection action be no more intrusive than necessary.” I.R.C. § 6330(c)(3)(C); see Treas. Reg. § 301.6330-1(e) (Q&A E-8). The taxpayer may seek judicial review of an adverse determination in the Tax Court. I.R.C. § 6330(d)(1). A taxpayer may obtain judicial review only of an issue that was properly raised in the CDP hearing. Treas. Reg. § 301.6330-1(f)(2) (Q&A F3); Living Care, 411 F.3d at 625; Boulware v. Commissioner, 816 F.3d 133, 136 (D.C. Cir. 2016); Giamelli v. Commissioner, 129 T.C. 107, 112-15 (2007) (reviewed decision).

B. The Office of Appeals did not abuse its discretion in denying taxpayers' request to apply to their 2009 income tax liability the proceeds of a levy made in respect of their liabilities for other tax years

1. Application of tax payments generally

“IRS policy permits taxpayers who 'voluntarily' submit payments to the IRS to designate the tax liability to which the payment will apply.” United States v. Energy Resources Co., Inc., 495 U.S. 545, 548 (1990). See Wood v. United States, 808 F.2d 411, 416 (5th Cir. 1987). This policy is set forth in an IRS Revenue Procedure: “If additional taxes, penalty, and interest for one or more taxable periods have been assessed against a taxpayer (or have been mutually agreed to as to the amount and liability but are unassessed) at the time the taxpayer voluntarily tenders a partial payment that is accepted by the Service and the taxpayer provides specific written instructions as to the application of the payment, the Service will apply the payment in accordance with those directions.” Rev. Proc. 2002-26, Sec. 3.01, 2002-1 C.B. 746. In the absence of specific written instructions, the IRS will apply even voluntary payments “to periods in the order of priority that the Service determines will serve its best interest.” Id., Sec. 3.02.

Conversely, although “taxpayers may designate the application of tax payments that are voluntarily made,” they “may not designate the application of involuntary payments.” Matter of Johnson, 146 F.3d 252, 261 n.29 (5th Cir. 1998) (citations omitted). “'An involuntary payment traditionally has been defined as any payment received by agents of the United States as a result of distraint or levy or from a legal proceeding in which the Government is seeking to collect its delinquent taxes or file a claim therefor.'” Id., quoting United States v. Pepperman, 976 F.2d 123, 127 (3d Cir. 1992) (internal quotation marks and emphasis removed).

Indeed, the Internal Revenue Code specifically directs the IRS to apply levy proceeds in a specific order. I.R.C. § 6342. First, levy proceeds “shall be applied” to the expense of levy and sale. I.R.C. § 6342(a)(1). Second, if the property seized or sold is itself subject to a tax under the Code (e.g., an excise tax), the proceeds “shall be applied” against that specific tax liability. I.R.C. § 6342(a)(2). Third, any remaining amount “shall then be applied against the liability in respect of which the levy was made or the sale was conducted.” I.R.C. § 6342(a)(3) (emphasis added). See also Treas. Reg. § 301.6342-1(a)(3). Thus, where a levy is made in respect of a particular tax liability, the IRS “shall” apply the proceeds against that liability, and has no discretion to apply those levy proceeds to some different tax liability.

2. The Office of Appeals' determination was correct, and the Tax Court correctly found no abuse of discretion

a. Taxpayers do not dispute that the funds in question were obtained by levy; and funds obtained by levy must be applied to a liability in respect of which the levy was made

In this case, the Office of Appeals determined that the funds that the IRS received from JPMorgan constituted an involuntary payment because those funds were received pursuant to a valid levy. (ROA.564.) And, indeed, as the Tax Court correctly noted, “[t]here is no dispute that the $21,182 payment at issue was a result of [the] levy.” (ROA.687.) Taxpayers readily concede that that is so. In their request for a CDP hearing, taxpayers “request[ed] that the IRS apply the levy proceeds to” their 2009 liability. (ROA.152 (emphasis added).) In their Tax Court petition, they alleged that the Office of Appeals committed an abuse of discretion in “denying [taxpayers'] request to transfer levy proceeds of $21,182.01 from the year ending December 31, 1995 to the year ending December 31, 2009.” (ROA.4 (emphasis added); see ROA.9 (“Instead of applying the levy proceeds to the 2009 year, the IRS erroneously applied the proceeds to the 1995 year.”); ROA.591 (“the IRS applied the levy proceeds of $21,182.01 against the 1995 tax liability”); see also Br. 4, Br. 20.)

Nor is there any dispute that the execution of that levy itself was entirely proper. Although taxpayers argue in their brief on appeal that the levy “was clearly more intrusive than necessary to collect unpaid taxes” (Br. 21), the validity of the levy is not at issue in this case. In the Tax Court, taxpayers “[did] not allege[ ] that there was any procedural defect in [the IRS's] levy” (ROA.686), and accordingly have waived any argument in that regard for purposes of this appeal. See Masat v.United States, 745 F.2d 985, 988 (5th Cir. 1984).⁵

Taxpayers' dispute only concerns application of the funds that were obtained pursuant to that “lawful IRS levy[.]” (ROA.684.) But, this Court has held that taxpayers “may not designate the application of involuntary payments” which include payments received “as a result of distraint or levy.” Johnson, 146 F.3d at 261 & n.29. Because, as all parties agree, the funds in question were obtained by levy, the Office of Appeals correctly determined that those funds constituted an “involuntary payment” and taxpayers had no right to designate their application. Johnson, 146 F.3d at 261 n.29.

Moreover, as the Tax Court explained (ROA.682-683), although a taxpayer generally may designate the application of voluntary payments, taxpayers' mere delivery of a check — later dishonored — did not constitute a payment at all, let alone a voluntary payment. Indeed, the Internal Revenue Code provides that where a check is not “duly paid” the taxpayer “shall remain liable for the payment of the tax . . . to the same extent as if such check . . . had not been tendered.” I.R.C. § 6311(b); see also Treas. Reg. § 301.6311-1(b)(1). Furthermore, as a general principle of law that has been applied in various federal tax contexts, payment by check is conditional until the check is honored by the drawee. See, e.g., United States v. Zarra, 477 F. App'x 859, 861 (3d Cir. 2012); Weber v. Commissioner, 70 T.C. 52, 57 (1978); Thorpe v. Commissioner, T.C. Memo. 1998-115, 1998 WL 129000, at *7. “But where the checks were not presented and honored in due course . . . no payment ever occurred because the condition upon which the conditional payment rested was never satisfied.” Thorpe, 1998 WL 129000, at *7; see also Zarra, 477 F. App'x at 861; In re Bliss College, 39 A.F.T.R.2d 77-1529 (D. Me. 1977); Weber, 70 T.C. at 57; Estate of Hubbell v. Commissioner, 10 T.C. 1207 (1948); Eagleton v. Commissioner, 35 B.T.A. 551 (1937), aff'd, 97 F.2d 62 (8th Cir. 1938). Accord Fed. Tax Coordinator ¶ S-5756 (2d ed. 2019) (“To constitute payment, a check, money order, credit or debit card, or other method of payment of taxes, must be honored.”).

Taxpayers nevertheless argue that because the levied funds came from the JPMorgan bank account against which they had drawn a check (but before the check was presented for payment) the IRS should have applied the levied funds against their 2009 income tax liability as they directed. (Br. 19-23.) Taxpayers' argument is based on a fundamental misunderstanding of the record. They incorrectly argue, for example, that prior to executing the levy on taxpayers' bank account, the “IRS knew that taxes for one of the years which were the object of the levy had been satisfied” by their delivery of the check for 2009 to the IRS office in Houston. (Br. 21.) But that is wrong. Even if taxpayers' mere delivery of a check for their 2009 tax liability constituted a payment of that liability — it did not (see supra at pp. 43-44) — that would not have satisfied taxpayers' liability for “one of the years which were the object of the levy” (Br. 21). The year 2009 was notone of the years included in the levy. To the contrary, the notice of levy, which resulted in JPMorgan transferring $21,000 to the IRS, was in respect of taxpayers' 1995, 1996, 1999, 2000, 2001, 2002, 2003, and 2004 income tax liabilities. (See ROA.155.)

This misunderstanding matters, because as a general matter every tax year stands on its own. See Commissioner v. Sunnen, 333 U.S. 591, 598 (1948) (“[i]ncome taxes are levied on an annual basis [and] [e]ach year is the origin of a new liability and of a separate cause of action”). And, as explained supra at pp. 40-41, the Internal Revenue Code requires the IRS to apply funds seized pursuant to a levy to a tax liability “in respect of which the levy was made.” I.R.C. § 6342(a)(3). Thus, the IRS could not have lawfully applied the levied funds to the 2009 tax year; it could only apply the levied funds to taxpayers' 1995, 1996, 1999, 2000, 2001, 2002, 2003, or 2004 income tax liabilities, i.e., the liabilities “in respect of which the levy was made.” Id.

Taxpayers and the Tax Court dissent (see ROA.718-740) seek to avoid this result by arguing in essence that the facts of what actually happened (the IRS obtained funds by valid levy for some years and taxpayers' check for a different year was dishonored) should be re-written. Despite their agreement (1) that taxpayers' check for 2009 was dishonored (see Br. 4; ROA.721), and (2) that the funds paid to the IRS were as a result of the levy for 1995 (see Br. 20; ROA.721), they argue that the funds should be treated as not obtained by valid levy, but rather as if JPMorgan had honored taxpayers' check (see, e.g., Br. 20-22; ROA.737 (“the IRS did in fact get the money in the Melaskys' account” and “[i]n that sense the check was 'duly paid'”)). But they offer no legal basis for re-imagining the facts in this manner.

Taxpayers argue only that applying the law to the facts as they actually occurred results in “unfairness.” (Br. 22.) Judge Holmes would justify re-writing the facts because the “Melaskys had no reason to think they didn't have sufficient funds to cover their check when they wrote it” and the “Commissioner did in fact get the money the Melaskys intended for him to get when they delivered their check.” (ROA.733.) The only problem, according to Judge Holmes, is “that the IRS treated the check as having bounced and characterized the entire amount of money in the account as having been seized by levy.” (ROA.733.) But, the IRS did not merely “treat” the check as having bounced — the check in fact bounced. And the IRS did not merely “characterize” the funds as having been seized by levy — as all parties agree, the funds were in fact seized by levy.

Even Judge Holmes agreed that “there was [not] payment of the check in the ordinary course.” (ROA.737.) He also agreed that a dishonored check does not constitute payment of a tax liability. (ROA.730-731.) He nevertheless argued that the check for 2009 should be considered “duly paid” under I.R.C. § 6311(b) because the IRS ultimately obtained the funds in the account. (ROA.737.) But, “[a] check is 'duly paid'” under § 6311(b) only “if it is paid 'in a proper way, or regularly, or according to law.'” Zarra, 477 F. App'x at 861, quoting Robertson v. Perkins, 129 U.S. 233, 235 (1889). And here taxpayers' check was not paid at all. As taxpayers agree, it was “not honored[.]” (Br. 4.) Accordingly, the Tax Court correctly concluded that the Office of Appeals did not abuse its discretion in denying taxpayers' request to apply proceeds obtained by levy in respect of taxpayers' 1995, 1996, 1999, 2000, 2001, 2002, 2003, and 2004 income tax liabilities against taxpayers' 2009 income tax liability.

b. There is no Chenery issue here

Taxpayers and the dissent also invoke SEC v. Chenery, 332 U.S. 194, 196 (1947). (See Br. 19; ROA.724.) They contend that the Tax Court was required to judge the propriety of the Office of Appeals' determination solely by the grounds it invoked, and that the Tax Court cannot supply new justifications for that determination. (ROA.724.) The Tax Court agreed that it would “not supply a reasoned basis for the SO's determinations that the SO did not provide” (ROA.680), but it explained that the Office of Appeals' notice of determination stated reasons for the decision that “provide[d] a satisfactory basis for the SO's determinations” because the notice of determination “state[d] that the SO determined not to apply the levy proceeds against [taxpayers'] 2009 liability because the levy was an involuntary payment.” (ROA.681.) And the Tax Court confirmed that that reason was legally correct. (ROA.681-687.) As it explained, “[t]here is no dispute that the $21,182 payment at issue was a result of [the Commissioner's] levy. Amounts received as a result of levy are involuntary payments. . . . [T]he Commissioner may apply involuntary payments as he sees fit, and therefore [the Commissioner] was not required to apply the proceeds of the levy against [taxpayers'] 2009 income tax liability.” (ROA.687.) That conclusion by the Tax Court directly tracks the reason for the decision provided in the notice of determination and, accordingly, does not run afoul of Chenery. (See ROA.713-714 (Lauber, J., concurring) (explaining why there is no Chenery issue).

C. The Tax Court correctly concluded that the Office of Appeals did not abuse its discretion in rejecting taxpayers' proposed installment agreement

1. Review of installment agreements during CDP proceedings

Section 6159 of the Internal Revenue Code provides that “[t]he Secretary is authorized to enter into written agreements with any taxpayer under which such taxpayer is allowed to make payment on any tax in installment payments if the Secretary determines that such agreement will facilitate full or partial collection of such liability.” I.R.C. § 6159(a). “The Secretary's decision is discretionary, unless the taxpayer falls into certain categories not relevant here.” Marascalco v. Commissioner, 420 F. App'x 423, 424 (5th Cir. 2011); see I.R.C. § 6159(c); see Treas. Reg. § 301.6159-1(c) (“the Commissioner has the discretion to accept or reject any proposed installment agreement”).

The Internal Revenue Manual provides general guidelines for IRS employees to consider when determining whether to accept or reject a proposed installment agreement in certain situations. See IRM 5.14.1.4 (June 1, 2010). “[T]he provisions of the manual are directory rather than mandatory, are not codified regulations, and clearly do not have the force and effect of law.” Marks v. Commissioner, 947 F.2d 983, 986 n.1 (D.C. Cir. 1991). Although the Manual “is not legally binding and 'do[es] not create rights in the taxpayer'” (Estate of Duncan v. Commissioner, 890 F.3d 192, 200 (5th Cir. 2018), quoting Oxford Capital Corp. v. United States, 211 F.3d 280, 285 n.3 (5th Cir. 2000)), it is not “legal error for the Commissioner to be guided by his own guidelines” (Keller v. Commissioner, 568 F.3d 710, 721 (9th Cir. 2009) (emphasis omitted)). “Generally, it is not an abuse of discretion where an Appeals Office employee relies on guidelines published in the [Manual] when evaluating a proposed installment agreement.” Arede v. Commissioner, T.C. Memo. 2014-29, 2014 WL 657772, at *4 (2014); see also Keller, 568 F.3d at 725 (“the Commissioner did not abuse his discretion in rejecting offers-in-compromise that did not measure up under IRS guidelines and Treasury Regulations”).

Most relevant here, the Manual in effect during the relevant time period provided that “installment agreements will be recommended for rejection if there is sufficient equity or cash available to . . . partially pay the taxes, and the partial payment requested is not received by a set date.” IRM 5.14.1.4(5)(c) (June 1, 2010) (emphasis in original). With respect to partial payment installment agreements, like that proposed by taxpayers here, the IRM further provided that “[b]efore a PPIA may be granted, equity in assets must be addressed and, if appropriate, be used to make payment. In most cases taxpayers will be required to use equity in assets to pay liabilities. However, as discussed below, complete utilization of equity is not always required as a condition of a PPIA. . . .” IRM 5.14.2.1(2) (March 11, 2011). “A PPIA may be granted if a taxpayer does not sell or cannot borrow against assets with equity because[,]” inter alia, “the taxpayer is unable to utilize equity.” IRM 5.14.2.1.2(2)(b).

The Manual in effect at the time also provided that “[t]he taxpayer must agree to pay the maximum monthly payment based upon the taxpayer's ability to pay.” IRM 5.14.2.1.1(7) (March 11, 2011).

2. The Tax Court correctly upheld the determination of the Office of Appeals to reject taxpayers' proposed installment agreement

In this case, the partial payment installment agreement proposed by taxpayers was a collection alternative, which the Office of Appeals was required to, and did, consider. As the Tax Court concluded, the Office of Appeals thoroughly considered taxpayers' proposal and properly rejected it on two independent grounds: (1) because taxpayers failed to liquidate assets as requested; and (2) because taxpayers had the ability to make larger monthly payments than they proposed in their offer. (ROA.567.) This Court can affirm if it concludes that the Tax Court was correct on either ground.

a. Taxpayers failed to liquidate assets as requested

As the Tax Court correctly held, the Office of Appeals acted well within its discretion in requiring taxpayers to liquidate their equity in certain specific assets as one of the conditions for the installment agreement. (ROA.689.) The Internal Revenue Manual directs that “equity in assets must be addressed and, if appropriate, be used to make payment.” IRM 5.14.2.1(2). The courts have consistently found no abuse of discretion in a denial of a proposed collection alternative where a taxpayer did not liquidate assets as requested. See, e.g., Boulware, 816 F.3d at 135 (IRS “ordinarily does not abuse its discretion by rejecting an installment agreement because a taxpayer refuses to liquidate assets”); Tillery v. Commissioner, T.C. Memo. 2015-170, 2015 WL 5049673, at *7 (2015) (SO “acted within the bounds of his discretion in rejecting the installment agreement” although taxpayers “did make [unsuccessful] attempts to borrow against their assets”); Robinson v. Commissioner, T.C. Memo. 2015-57, 2015 WL 1322668, at *3 (2015); Hosie v. Commissioner, T.C. Memo. 2014-246, 2014 WL 6994748, at *4 (2014).

On December 2, 2011, SO Hill requested that taxpayers liquidate certain assets and pay over the proceeds by December 16, 2011, as a condition to any installment agreement. (ROA.458.) Taxpayers stated their intention to use the equity in those assets to pay their daughter's medical expenses. (ROA.161.) SO Hill initially agreed to that use (ROA. 161, 473), but taxpayers later abandoned that intention and agreed to pay over the equity in the particular assets to the IRS (ROA.477-78). At taxpayers' request, SO Hill thrice extended the deadline to April 11, 2012 (ROA.504). By that date, taxpayers had still not paid over the equity in four of the listed assets. (ROA.509.) Rather, on that date, taxpayers stated that they were awaiting checks for two of the assets (retirement accounts), and requested that they be allowed to pay over the cash surrender value of a life insurance policy. (Id.). They also stated that Mr. Melasky was unable to sell his interest in Exxon Mobil stock that he owned jointly with his ex-wife, because he had not spoken to her in 30 years. (ROA.510.) He offered, therefore, to sign his interest in the stock over to the IRS. (Id.)

As the Tax Court correctly concluded, as of April 20, 2012 (when the Office of Appeals issued its notice of determination), taxpayers had in fact “not paid over any amounts relating to these four assets,” and it cannot be said “that the SO abused his discretion in declining to extend the deadline yet again, after three previous extensions over a period of approximately 4.5 months.” (ROA.691.) Indeed, the regulations provide that the Office of Appeals will “attempt to conduct a CDP hearing and issue a Notice of Determination as expeditiously as possible under the circumstances.” Treas. Reg. § 301.6330-1(e)(3) (Q&A E-9). And, there “'is no requirement that the Commissioner wait a certain amount of time before making a determination as to a proposed levy.'” Shanley v. Commissioner, T.C. Memo. 2009-17, 2009 WL 195929, at *5 (2009), quoting Gazi v. Commissioner, T.C. Memo. 2007-342, 2007 WL 4119009, at *9 (2007).

On appeal, taxpayers generally do not challenge this holding by the Tax Court. They argue only that it was an abuse of discretion to require liquidation of the Exxon Mobil stock because Mr. Melasky “did not have a right to sell [it] legally.” (Br. 24; see also Br. 32-33.) But that is incorrect. Mr. Melasky owned the stock jointly with his ex-wife. (ROA.510.) During the CDP hearing, taxpayers stated only that Mr. Melasky was “unable to access the Exxon stock without his ex-wife's consent and has not communicated with her in 30 years.” (ROA.510.) They offered no explanation why he could not then contact his ex-wife to seek a disposition of his interest in that stock. As the Tax Court explained, taxpayers did “not contend that Mr. Melasky would have been unable to liquidate his interest in that stock by communicating with his former spouse[.]” (ROA.692.)

On this record, the Tax Court correctly concluded that there was no abuse of discretion, let alone a clear abuse of discretion, in the Office of Appeals' decision to reject the proposed collection alternative where taxpayers did not comply with the request that they liquidate certain assets and pay over the equity in those assets.

b. Taxpayers' proposed monthly payments did not reflect their ability to pay

As the Tax Court held, the Office of Appeals also acted well within its discretion in determining that taxpayers “would be able to rely on distributions from the Audrey Trust for purposes of paying a portion of their nontax expenses.” (ROA.695.)

The Manual provides that “[t]he taxpayer must agree to pay the maximum monthly payment based upon the taxpayer's ability to pay.” IRM 5.14.2.1.1(7) (March 11, 2011). Courts have routinely upheld exercise of the IRS's discretion to reject proposed installment agreements based upon an analysis of the taxpayer's ability to pay more than the proposed offer. See, e.g., Marascalco, 420 F. App'x at 424-25 (no abuse of discretion where Office of Appeals “determined that the [taxpayers] had the current ability to pay their liability in full”); Fifty Below Sales & Marketing, 497 F.3d at 830; Orum v. Commissioner, 412 F.3d 819, 820-21 (7th Cir. 2005); Totten v. United States, 298 F. App'x 579, 580 (9th Cir. 2008).

Taxpayers argue that the Office of Appeals abused its discretion insofar as it considered the availability of funds from the Audrey Trust to be used for taxpayers' monthly living expenses. (Br. 25-31.) They argue that consideration of these funds was error because it would “eliminate the discretion conferred upon” Mrs. Melasky to decide whether to make distributions from the trust; violate Mr. Farkas's intent in creating the trust; “deprive secondary beneficiaries of necessary funds when needed”; and violate the trust's spendthrift provisions. (Br. 28-30.) They are incorrect.

As the Tax Court correctly held, “there is nothing in the Farkas will to support a conclusion that Mrs. Melasky would not be permitted to make distributions to cover her share of nontax expenses, even if she had other resources available to pay such expenses.” (ROA.700.) Indeed, the terms of the trust specifically authorize Mrs. Melasky (as trustee) to distribute to herself (as beneficiary) “so much or all of the income and principal [of the trust] . . . (even though exhausting the trust) as the Trustee determines to be appropriate to provide for their continued, health, maintenance, support, and education. . . .” (ROA.399.) Although the trust restricts the power of a trustee who is also a beneficiary to make a distribution to herself, it specifically allows such a distribution “to the extent that” the distribution is for her “health, maintenance, support and education” (ROA.407).⁶ And although the will provides that Mrs. Melasky, as trustee, may consider all other resources and income reasonably available to the beneficiary (i.e., Mrs. Melasky) (ROA.408), there is no requirement that Mrs. Melasky, as beneficiary, must have exhausted other income or resources before distributing trust funds to herself for her health, maintenance, support, or education. Thus, the Office of Appeals' consideration of the availability of distributions from the Audrey Trust to pay taxpayers' monthly expenses was entirely proper and consistent with the terms of the trust itself.

This is true notwithstanding the will's spendthrift provision. (See ROA.409.) That provision provides only that trust assets, prior to distribution, are not subject to “anticipation or assignment by a beneficiary” or “attachment by a creditor.” (Id.) But the Office of Appeals did not seek any assignment or attachment of trust assets prior to distribution. It simply took into account the possibility of trust distributions for purposes of determining taxpayers' ability to satisfy their monthly living expenses. (ROA.567.) As the Tax Court explained, in considering whether taxpayers had the ability to pay more of their tax liabilities than they proposed, “the SO was not required to turn a blind eye to assets or income likely to be available to [them], nor was his forecast of trust distributions for purposes of calculating [taxpayers'] ability to pay in any way equivalent to invading or confiscating the trust corpus.” (ROA.701.)⁷

Nor would distributions to Mrs. Melasky violate any fiduciary duty to the secondary beneficiaries under the trust, her children. The Farkas will specifically provides that Mrs. Melasky (as trustee) could distribute to Mrs. Melasky (as beneficiary) “so much or all of the income and principal” of the Audrey Trust “even though exhausting the trust.” (ROA.399.) Making the point even clearer, the will further provides that “as to any trust with more than one beneficiary, the Trustee may make discretionary distributions in equal or unequal proportions and to the exclusion of any beneficiary.” (ROA.408.) As the Tax Court explained, there is nothing “in the Farkas will obligating Mrs. Melasky to refrain from distributing the entire corpus to herself to provide for her health, maintenance, support, and education.” (ROA.702.) For that reason, taxpayers' suggestion that distributions to Mrs. Melasky would somehow “frustrate the intent of the testamentary settlor” because it would “deprive the secondary beneficiaries of the satisfaction of any future needs” (Br. 30) is wide of the mark. Indeed, taxpayers fail to mention that Mrs. Melasky's children each individually received a bequest of $200,000 under the Farkas will, to be held in a separate trust for their education. (ROA.398, ROA.401.)⁸

Again, the Tax Court correctly determined that there was no abuse of discretion, let alone clear abuse of discretion, in the Office of Appeals' rejection of taxpayers' proposed installment agreement because Mrs. Melasky could rely upon trust distributions for her living expenses, and accordingly taxpayers could pay more toward their outstanding income tax liabilities than they offered.

CONCLUSION

The decision of the Tax Court should be affirmed.

Respectfully submitted,

RICHARD E. ZUCKERMAN
Principal Deputy Assistant Attorney General

BRUCE R. ELLISEN (202) 514-2929
PAUL A. ALLULIS (202) 514-5880
Attorneys
Tax Division
Department of Justice
Post Office Box 502
Washington, D.C. 20044

JUNE 2019