Jeopardy assessments are relatively unusual and have not been heavily covered on PT, with the exception of the District Court and Tax Court cases of former Pennsylvania state Senator Vincent J. Fumo. I first wrote about the government’s attempted jeopardy assessment against Mr. Fumo early in the life of this blog, here and here, with the second link containing links to even earlier discussions of the case and of jeopardy assessment. Caleb Smith wrote a more recent post about the case. Mr. Fumo is a former powerful state senator in Pennsylvania who was convicted of abusing his position and spent time in prison as a result. His tax liability relates to his use and alleged abuse of a tax exempt organization for personal gain. In May 2021, only eight years after the filing of the Tax Court petition following the denial of a jeopardy assessment against him, the Tax Court granted partial summary judgment to the IRS, leaving the balance of the issues to be decided after a trial to be held at a future date. This is not the normal time trajectory for a jeopardy assessment case. The blog posts above provide background regarding the denial of the jeopardy assessment.
A recent jeopardy decision in the case of Kalkhoven v. United States, No. 2:21-cv-01440 provides a much more normal case for taking another look at jeopardy assessment for those readers who did not follow PT in 2013 when I provided an earlier explanation of the provision.
Jeopardy stands as an exception to the normal path of making an assessment. The IRS’s authority to make assessments is set out in the Code. In our income tax system, described as a self-assessment system, the vast majority of assessments made by the IRS result from the filing of a tax return on which the taxpayer tells the IRS the amount of tax owed and grants permission thereby for the IRS to make the assessment. IRC section 6201(a)(1).
In cases in which the IRS challenges the amount of tax reported on the return, the person auditing the return seeks the taxpayer’s permission to assess additional tax by asking the taxpayer to sign a form consenting to an additional assessment. If the taxpayer does not consent to the additional assessment, the statute provides for the IRS to send a notice of deficiency giving the taxpayer the chance to contest the additional taxes prior to assessment, resulting in statutory permission for the IRS to make the additional assessment either because of default of the taxpayer in petitioning the Tax Court or a Tax Court decision document entered after settlement or judicial opinion. (Math error assessments are another part of this path to assessment; they involve consent by default or the opportunity for a notice of deficiency.) See IRC sections 6212 and 6213.
Standing outside this normal path to assessment is jeopardy assessment. Congress recognized that the ability of the IRS to assess additional taxes could take time. It may not have envisioned the amount of time the Fumo case is taking, but it knew that the taxpayer could delay assessment by slowing down the audit and by going to Tax Court, and that the delay of assessment could create opportunities for dissipation of assets which would ultimately prevent the IRS from collecting the correct amount of tax. So, in extraordinary circumstances, it permits the IRS to assess the additional income taxes (or other taxes subject to the deficiency procedure) first and only later give the taxpayer a chance to contest the correctness of the assessment. (See sections 6851, 6852, 6861, and 6862.) The IRS employed this procedure successfully in the Kalkhoven case.
Mr. Kalkhoven participated in tax shelters, held money in offshore accounts and controlled businesses that sold valuable real estate. The IRS calculated he owed about $350 million in taxes, penalties, and interest. As in the Fumo case, he brought suit in district court seeking a review of the jeopardy assessment. This type of case is usually fast moving because the IRS has tied up the taxpayer’s assets without the normal formality of permission or a Tax Court case.
a taxpayer may seek judicial review of a jeopardy assessment. See id. § 7429(b)(1)–(2) (“[T]he taxpayer may bring a civil action against the United States for a determination under this subsection — district courts of the United States shall have exclusive jurisdiction over any civil action for a determination under this subsection). The court’s review is de novo. Olbres, 837 F. Supp. at 21; Fumo v. United States, No. 13-3313, 2014 WL 2547797, at *16 (E.D. Pa. June 5, 2014) (“The district court’s review . . . gives the IRS’s administrative determination regarding the jeopardy assessment no deference whatsoever.”). The district court’s consideration is limited to determining only 1) whether the jeopardy assessment was reasonable under the circumstances, and 2) whether the amount assessed was appropriate. 26 U.S.C. § 7429(b)(3); Olbres, 837 F. Supp. at 21. The government bears the burden on the first issue, while the taxpayer bears the burden of proof on the second. 26 U.S.C. § 7429(g)(1)–(2).
Mr. Kalkhoven did not challenge the amount of the assessment. He only challenged the appropriateness of using the jeopardy process. The court noted that the standard of reasonableness of the IRS actions requires it to show that collection might be jeopardized by a delay caused by using the normal procedures for assessment and collection and not that collection would actually be jeopardized. It also noted that because of the nature of the proceeding it can hear information that might not come into evidence in a trial on the merits and that parties can present affidavits. The object here is to have the court make a swift decision on the basic correctness of allowing the IRS to bypass the ordinary assessment and collection process. (The taxpayer will still get the opportunity to go to Tax Court to contest the amount of the assessment, but the Tax Court’s review will be post-assessment and possibly post-collection.) The district court must make this decision within 20 days after the suit contesting the jeopardy assessment is brought (unless the taxpayer requests an extension), and the decision of the district court, like the decision of the Tax Court in a small tax case proceeding, is final and not reviewable.
The court first addressed a jurisdictional issue raised by the IRS that Mr. Kalkhoven failed to exhaust administrative remedies prior to bringing the jeopardy action. The IRS argued that he needed to make an administrative request to undo the jeopardy assessment before he could jump into court. The court skirts the issue, finding that it has jurisdiction to decide if the jeopardy assessment was reasonable. It points out that Mr. Kalkhoven did send correspondence to the IRS prior to bringing suit and did have a virtual conference with Appeals days before filing suit. Perhaps the court did not want to fully address this issue because of the way it intended to rule in the case. Holding against the taxpayer on this issue might allow an appeal and delay the process. Courts have allowed an appeal of the denial of jurisdiction in this context. The Tax Clinic at Harvard cited to the allowance of an appeal in this context, discussed here, in its failed attempt to appeal the denial of jurisdiction in the small tax case context. The circumstances seem parallel.
In looking at the reasonableness of the IRS actions, the court noted that some disagreement among reviewing courts existed regarding reviewing for reasonableness or reviewing based on the preponderance of the evidence. It sided with the majority on this issue, reviewing for reasonableness. Citing the Fumo decision at the district court, the court stated that it looks to see if one of three conditions exist:
(i) The taxpayer is or appears to be designing quickly to depart from the United States or to conceal himself or herself.
(ii) The taxpayer is or appears to be designing quickly to place his, her, or its property beyond the reach of the Government either by removing it from the United States, by concealing it, by dissipating it, or by transferring it to other persons.
(iii) The taxpayer’s financial solvency is or appears to be imperiled.
The court also noted that finding one of those three conditions does not serve as a precondition to sustaining the jeopardy assessment and that other actions by the taxpayer could also support a finding that the jeopardy assessment was reasonable:
“[p]ossession of, or dealing in, large amounts of cash,” “[p]ossession of . . . evidence of other illegal activities,” “[p]rior tax returns reporting little or no income despite the taxpayer’s possession of large amounts of cash,” “[d]issipation of assets through forfeiture, expenditures for attorneys’ fees, appearance bonds, and other expenses,” “[t]he lack of assets from which potential tax liability can be collected,” “[u]se of aliases,” “[f]ailure to supply appropriate financial information when requested,” and “[m]ultiple addresses”) (citations omitted)). Several courts have considered additional factors such as whether:
the taxpayer travels abroad frequently, . . . the taxpayer is leaving or may be expected to leave the country, . . . the taxpayer has recently conveyed real estate, . . . or discussed such conveyance, . . . the taxpayer controls bank accounts containing liquid funds, . . . the taxpayer has not supplied public agencies with appropriate forms or documents when requested to do so, . . . the taxpayer controls numerous business entities, . . . the taxpayer attempts to make sizable bank account withdrawals at the time of the assessment, . . . the taxpayer maintains foreign bank accounts, . . . the taxpayer takes large amounts of money offshore, . . . the taxpayer has many business entities which can be used to hide his assets.
Bean v. United States, 618 F. Supp. 652, 658 (N.D. Ga. 1985)
Here, the court finds that the IRS met the second test. Mr. Kalkhoven argued that he was not removing his assets quickly. I guess, without looking at his brief, that he argued he was doing so with all deliberate speed but not quickly. The court found his actions to warrant concern by the IRS and support the reasonableness of its jeopardy assessment. It then spent several paragraphs detailing his actions and how they appeared designed to place his assets beyond the reach of the IRS despite his large outstanding liability. It contrasted Mr. Kalkhoven’s case with the Fumo case in a footnote:
Kalkhoven argues he disclosed the existence of all his assets on his tax returns and the fact of disclosure also renders the assessment unreasonable. However, it is unclear what underlying assets were disclosed. Gov. Suppl. Br at 4; compare Fumo, 2014 WL 2547797, at *21 (“Defendant knows the location and amount of the proceeds from [p]laintiff’s real estate sales. . . . Moreover, the IRS was able to trace the transfers using only public records, which does not tend to show an appearance of trying to hide assets from the government”). Although Kalkhoven may have disclosed the entities that hold certain assets “the mere disclosure of entity names does not negate the added complexity and collection difficulty that attends such schemes. To find otherwise would reward those who engage the most sophisticated advisors and encourage taxpayers to establish complex asset-holding schemes that they can disclose on the surface to escape potential jeopardy assessment or collection.”
Certainly, the size of his liability also matters in a case like this, although the court does not expressly mention it.
In the Fumo case, the IRS lost the jeopardy hearing, throwing it into the “normal” deficiency process, though eight years into its Tax Court proceeding I am not sure that this would be called the normal process. Whether normal or not, the deficiency process does not provide the IRS with the immediate opportunity to seize assets to satisfy a liability. In essence, the district court in the Fumo case felt that the assets would still be around to satisfy the tax at the end of the deficiency process, where the district court in the Kalkhoven case was concerned that they would not. This abbreviated proceeding takes on great significance when you contrast the difference in outcomes between the two cases and see the IRS standing on the sidelines unable to take any collection action against Mr. Fumo for almost a decade while it has immediately taken possession of Mr. Kalkhoven’s assets and has the green light to go after any others it can locate.