Last week in Heyl v Commissioner the Tax Court rejected a taxpayer’s request for a partial pay installment agreement (PPIA). We have not discussed that collection tool and the case provides a chance to do so.
Heyl filed returns for three years but failed to pay the tax; he owed about $15,000, including penalties. After receiving a notice of intent to levy and a notice of federal tax lien filing, he requested a CDP hearing. In the hearing request he stated that he could not pay the balance; there was no issue as to the amount he owed. There was a telephone hearing and correspondence; the settlement office requested (and received) other delinquent income tax returns, and Heyl submitted a collection information statement. The collection information statement (the Form 433 series) showed negative monthly income as well as few assets, with one exception: an unoccupied and unleveraged house in Maine that was worth $87,500. It was Heyl’s hope that he could live in retirement at the Maine house, and continue to keep it unleveraged despite the federal tax debt.
IRS had different views, and the order in this case discusses generally what a taxpayer with equity in an asset must demonstrate to keep that asset out of the collection mix.
In one of the letters to the settlement officer (SO), Heyl requested to pay IRS about $100/year for five years. The SO recognized this as a partial pay installment agreement request. A PPIA allows for IRS to accept essentially on a payment plan a series of payments that will result in IRS receiving less than the full amount of the assessed liability. Congress amended the installment agreement and offer statutes in 2004 to allow IRS and taxpayers to enter into those. They are in effect offers in compromise which use the installment agreement process for a mutually agreed upon lesser amount than both the taxpayer and IRS agree is owed. The idea behind the PPIA is that it is better to get something rather than nothing.
The SO rejected the request based on the view that Hoyle should liquidate or leverage the Maine house and use those proceeds to fully pay the tax. Heyl appealed to Tax Court, and the Tax Court sustained the determination on summary judgment. Here’s how the court got there.
As with most installment agreements and with all offers, the IRS has wide discretion in granting an alternative to enforced collection. The discretion is not absolute, however.
The Internal Revenue Manual provides guidance:
[b]efore a PPIA may be granted, equity in assets must be addressed and, if appropriate, be used to make payment. In some cases taxpayers will be required to use equity in assets to pay liabilities.” IRM 126.96.36.199.2(2) (Sept. 19, 2014).
Taxpayers can push back on a request to use the equity in assets and withstand requests to leverage or liquidate assets if liquidating or selling would cause “economic hardship.” That is a term of art, and sweeps in standards in the regs under Section 6343 and the IRM. To show economic hardship Heyl would have to demonstrate that the sale or leveraging of the asset would render him unable to meet his necessary living expenses. Those relate to the health, welfare or production of income.
The order in Heyl provides some detail on those concepts:
Necessary expenses are those representing “the minimum a taxpayer and family needs to live.” See Thompson v. Commissioner 140 T.C. 173 (2013) (PPIA only allows for necessary expenses); IRM pt. 188.8.131.52(1) (Oct. 2, 2009). The regulations and administrative guidance reflect an understanding of economic hardship placing the taxpayer into “dire circumstances,” not merely being forced to change one’s accustomed to or desired lifestyle. See Speltz v. Commissioner, 454 F.3d 782, 786 (8th Cir. 2006) affg 124 T.C. 165 (2005).
Heyl argued that his was a hardship case because “his future retirement will bring a meager social security check, and that living rent or mortgage free upon retirement may make the difference between ‘misery and subsistence.’”
The Tax Court disagreed, though in so doing suggested ways that a taxpayer might be able to show hardship in differing circumstances:
Petitioner failed to allege any specific fact suggesting the sale or leveraging of the unoccupied Maine home will alter his income expense estimates and render him unable to meet his current necessary living expenses…
We also note that petitioner’s filing status is single and he has no dependents. Petitioner is in his early sixties and operates a sole proprietorship. In addition, he does not allege any disability or extraordinary circumstance prevents him from working, or continuing to operate his business. Petitioner argued that the economic downturn impeded his earning potential, but expresses a belief that his “piece of the economy won’t be weak forever.”
The case reminds me that while this did not work out for Heyl, installment agreements generally are a good tool for taxpayers who may have equity in assets but who wish to avoid enforced collection, especially if there are circumstances that support economic hardship. For example, Keith previously discussed the power of installment agreements in our last discussion of the Antioco case in Appeals Fumbles CDP Case and Resulting Resolution Demonstrates Power of Installment Agreement. The PPIA can be a good option, though when there is an asset that can satisfy the liability the taxpayer will have to offer specific evidence as to why selling or borrowing against the asset jeopardizes the taxpayer’s ability to meet current or likely future necessary expenses. The taxpayer will have to put in evidence on, for example, health issues for the taxpayer or a dependent, or an imminent down the road downturn in income. General statements about the difficulties of a future life in retirement are insufficient. Given that in some circuits (as here) the taxpayer was bound to the record below, the offering of that specific evidence has to be done at Appeals, and not at Tax Court. Even with those good bad facts, when a taxpayer has a history of noncompliance, the IRS still has significant discretion to reject the alternative.