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Tax Court Holds Benefits Exempt from Levy Are Part of a Taxpayer’s Ability to Pay

Posted on May 1, 2015

The Ligman Tax Court case from earlier this month is a CDP case involving an Installment Agreement (IA). In Ligman, the Tax Court sustained the proposed levy and declined to find that Appeals abused its discretion in rejecting the taxpayer’s IA. What interests me is the court’s discussion (or more precisely lack of discussion) regarding accepting the treatment of railroad benefits as income available for an IA even though the benefits are generally exempt from levy.

I will simplify the facts and briefly describe what I found interesting about the case.

Taxpayer Walter Ligman owed an unspecified amount of tax from 2008. In a timely response to a notice of intent to levy, Ligman stated he disagreed with the levy and requested either an IA or OIC on the basis that “he was disabled, financially distressed, and receiving Railroad Retirement Board benefits(Railroad benefits) and that some of these benefits were exempt from levy.”

After some back and forth with the SO and the taxpayer’s representative, the taxpayer requested a partial pay installment agreement of $25 per month; the SO countered and said that Ligman’s monthly disposable income was $946 and calculated an installment agreement with a payment of $765 per month.

At the time of Appeals’ rejection of the IA, the railroad benefits were the only source of Ligman’s income.

The wide variance in the taxpayer’s and Appeals’ calculation on ability to pay turned on how to characterize the railroad benefits. The railroad benefits are generally exempt from levy, though subject to the 15% continuous levy under Section 6331(h). Ligman and his rep thus based the IA on excluding the benefits from his ability to pay calculation; Appeals said that while the benefits may be exempt from levy, they are available to Ligman absent showing offsetting expenses and should be part of the calculation as to what Ligman could afford monthly.

The Tax Court resolved this in favor of the IRS. Here is what the court said:

IRM pt. 5.15.1 (Oct. 2, 2012) instructs IRS collection personnel on how to analyze a taxpayer’s financial condition. It states that “[g]enerally all household income will be used to determine the taxpayer’s ability to pay.” Id. pt. The IRM does not carve out any exceptions for levy-proof benefits. For example, it instructs that income consists of pensions, including Social Security benefits. Id. pt. Certain Social Security payments, like Railroad benefits, are subject to a maximum 15% levy under the Federal Payment Levy Program. See sec. 6331(h)(2)(B); see also IRM pt., (j) (Aug. 28, 2012).

Although the IRM does not specifically state that Railroad benefits are included in income, it does not specifically exempt them. The IRM specifically includes other analogous partial or fully levy-proof benefits in the income calculation, such as Social Security benefits. We find that the settlement officer did not act arbitrarily, capriciously, or without sound basis in fact or law by including petitioner’s Railroad benefits to analyze petitioner’s financial condition and calculate his monthly disposable income. (emphasis added).

Brief Analysis

I do not think the Tax Court’s conclusion as a policy matter is off the mark. Congress’ determination to exempt railroad benefits from levy does not equate necessarily to exempting those funds from use in a collection alternative. I have not researched the issue  but what strikes me as potentially troubling with the IRS and court’s approach is that whether railroad benefits are considered as part of available income is a legal conclusion. In this case, apart from an analogous IRM provision, there appears to be no guidance IRS or Treasury issues to help Appeals and taxpayers understand what should be part of the available pool of funds that enters into a collection alternative analysis. In the current landscape, ability to pay largely turns on IRM provisions. As taxpayer’s collection rights have increasingly become statutorily protected (including consideration of collection alternatives) leaving the ability to pay determination in less than precise IRM provisions strikes me as bad as a matter of policy and law. In effect, the IRM provisions especially if accepted on an abuse of discretion basis transform guidance to IRS personnel into legal conclusions. There is no opportunity for notice and comment. Moreover, absent CDP, many of the collection determinations are not even subject to limited judicial review.

Some may say so what, especially when the conclusion as in Ligman seems right. I am aware of cases in the Villanova Tax Clinic where settlement officers and managers insisted that a family member’s discretionary gifts that were used by the taxpayer for living expenses were properly part of that taxpayer’s ability to pay. The absence of authority discussing the contours of ability to pay makes it difficult for taxpayers to overcome Appeals when its decisions seem wrong. In fact,that absence backstopped by in many cases an absence of judicial review can lead to effectively unreviewable erroneous IRS determinations. That is not a recipe for good tax administration.

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