Jeopardy assessment cases can end up in the Tax Court. I have written on the long running jeopardy case of former Pennsylvania Senator Fumo’s on numerous occasions that you can find here with links to other posts going back almost nine years to the beginning of this blog site. That case, however, took the traditional route of jeopardy cases to the Tax Court by passing through the district court first. Jeopardy cases are relatively rare, but jeopardy cases arising while a case is pending in Tax Court are very rare indeed. Read this post by Bob Kamman for a very old and interesting jeopardy case.
The case of Yerushalmi v. Commissioner, Dk. No. 5520-08 (docket entry 161 on December 28, 2021) has got to be one of the oldest cases still open in the Tax Court’s inventory. It concerns liabilities from 1999 and 2000. While I am prone to complain when I think the Tax Court has taken too long to get out an opinion, this case presents a situation in which the delays stem from matters outside of the Tax Court’s control. While this 14-year old Tax Court case was pending, the IRS came across information that made it believe the collection of the liability was in jeopardy. So, we get a rare opinion from the Tax Court on whether jeopardy exists rather than the more normal Tax Court opinion in a jeopardy case where it is following after the district court. On top of that we get a case with interesting facts in an opinion written by Judge Holmes. The opinion comes out in the form of an order.
The IRS read something in a stipulation in the divorce proceedings of petitioner and her ex-husband that made it think that petitioner
is or appears to be designing quickly to place her 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
Once the IRS makes the jeopardy assessment, the person against whom the IRS makes the assessment has 90 days to contest the assessment. The court reviews the jeopardy determination de novo, looking at two issues as part of its scope of review:
(1) Is the jeopardy assessment “reasonable under the circumstances,” and (2) is the amount assessed “appropriate under the circumstances.”
The IRS has the burden to prove jeopardy. The Tax Court has the choice to agree – allowing the assessment to stand; to order abatement of the tax in full causing the IRS to go through the deficiency process as in the Fumo case; to redetermine the amount of tax at jeopardy, letting the assessment stand on that amount; or to take other action it deems appropriate. Whatever the Tax Court decides in a jeopardy case is final. Neither party can appeal the jeopardy determination. The Tax Court can base its determination on evidence that normally would not come into the record. In short, jeopardy cases are the court equivalent of a Wild West proceeding but one normally followed by a deficiency proceeding which takes place either while the IRS is out collecting on the assets it feared it might lose or while the IRS stands around tapping its toe awaiting the deficiency determination, as it has been doing in the Fumo case now for almost nine years.
The Tax Court’s standard of review in a jeopardy case requires it to sustain the jeopardy determination if it was reasonable. After setting the legal scene, the Court gets into the facts of the case which, as you might imagine, are interesting and unusual.
The happy couple got married in 1971. He was a tax attorney and she, after 1983, did not work outside the home. They bought their marital residence in Great Neck in 1983. In 1989 he created the Yerushalmi Family Trust with his wife as the grantor and a friend as the trustee. In 1995 he set up a qualified personal residence trust (QPRT) with his wife as the grantor. They took large losses on their 1999 and 2000 returns that resulted in the Tax Court deficiency case. In 2002 she sued for divorce. In 2007 he filed bankruptcy for himself and his law firm starting with a chapter 11 case but converting to a chapter 7. The divorce case lasted for 17 years which explains part of the delay in the Tax Court case.
The trustee in the husband’s bankruptcy case tried to bring some of the value of the marital residence into the estate but the bankruptcy court ruled that the QPRT was valid, preventing the trustee from getting value from the house for general unsecured creditors.
I don’t know anything about QPRTs, but Judge Holmes cites to 26 C.F.R. § 25.2702-5(b)(1) in support of the view that they expire after a set term. This one was set to expire in September of 2018, at which time the property was supposed to be transferred into the Yerushalmi Family Trust I, but nothing was recorded. In 2019 they created the Yerushalmi Family Trust II for their children and grandchildren and a notice was issued to transfer the assets from I to II, listing someone as the trustee of I different from the person originally listed.
Meanwhile, the 17-year-old divorce proceeding was finalized in 2019 in which the parties stipulated that Mr. and Mrs. Yerushalmi owned the marital residence with no mention of trust I or II.
They also bought a condo in New York City in 1997 listing trust I as the owner but listing a third person as the trustee. No record of the retirement of any previous trustees, just a new trustee each time. In the divorce finalization, this property was also listed as owned by Mr. and Mrs. Yerushalmi.
These were not the only two properties they owned, but other properties also had issues with the title or with consideration. He also filed a statement of net worth in the divorce proceeding listing the properties as owned by the QPRT or trust I.
Having analyzed the property transfers, titles, lack of recordation and shifting trustees, the Court finds that the IRS has made a “good case.” Taxpayers’ actions here appear designed to conceal ownership of the property. So, the motion to review the jeopardy assessment is denied.
Given the small number of jeopardy cases the Tax Court sees, I am a little surprised that the decision comes out in the form of an order. The speed with which a jeopardy determination must occur may have played a role in issuing an order rather than a memorandum opinion.
The facts here remind me in some ways of the Fumo case, where the bulk of the assets at issue were real property which was also being transferred about. There the district court judge did not find jeopardy, in part, because of the nature of the assets. Real property is not going anywhere but transfers can occur before the IRS gets to make an assessment following a Tax Court case and, of course, a sale of the property could occur, allowing the dissipation of proceeds. In cases involving real property that the taxpayer is playing with as here and as in the Fumo case, I think that if the reviewing court is not going to let the jeopardy assessment stand, it should use its ability to “take other action it deems appropriate” to tie up the property even if it does not let the assessment stand. It’s easier to think of jeopardy when a taxpayer has an airplane ticket and a bag full of cash or a history of transfers to a tax haven. The situation here does put the IRS at jeopardy of getting paid once the Tax Court cases reaches its conclusion and jeopardy or some other action seems appropriate to keep the proceeds available.