Opinion
21117-22L
05-24-2023
KENNY D. KIM & MARY K. KIM, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Joseph Robert Goeke Judge
On March 23, 2023, respondent filed a Motion for Summary Judgment in this collection due process (CDP) case that respondent has not abused his discretion to sustain a proposed levy. On May 19, 2023, petitioners filed an opposition to respondent's Motion asserting that there is a genuine dispute of material facts making summarily adjudication improper.
Unless otherwise indicated, all statutory references are to the Internal Revenue Code, Title 26 U.S.C, in effect at all relevant times, all regulation references are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times, and all Rule references are to the Tax Court Rules of Practice and Procedure.
Standards for Summary Judgment
The purpose of summary judgment is to expedite litigation and avoid costly, time-consuming, and unnecessary trials. Fla. Peach Corp. v. Commissioner, 90 T.C. 678, 681 (1988). Under Rule 121(b) the Court may grant summary judgment when there is no genuine dispute as to any material fact and a decision may be rendered as a matter of law. Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), aff'd, 17 F.3d 965 (7th Cir. 1994). In deciding whether to grant summary judgment, we construe factual materials and inferences drawn from them in the light most favorable to the nonmoving party. Id. The nonmoving party may not rest upon mere allegations or denials but instead must set forth specific facts showing that there is a genuine dispute for trial. Rule 121(d); see Celotex Corp. v. Catrett, 477 U.S. 317, 324 (1986).
Background
The following background is stated solely for purposes of ruling on respondent's Motion and not as a statement of facts. When the petition was timely filed, petitioners resided in California.
Petitioners are retired. They live on a fixed income consisting of a pension and social security benefits, and their monthly living expenses exceed their monthly income by approximately $6,500. Petitioner-husband is in poor health and resides in an assisted living facility. Petitioner-wife also has health issues.
Petitioners have unpaid tax that they reported on their 2018 return, unpaid penalties, and interest of approximately $300,000. Petitioners had granted a durable power of attorney (POA) to their eldest daughter to assist with their financial affairs and were unaware that the 2018 tax was not paid with the return. Petitioners removed their daughter as POA in 2021 immediately upon learning the 2018 tax was unpaid and appointed their younger daughter as POA.
Petitioners own two residences with combined equity of approximately $1.9 million; petitioner-wife resides in one and petitioners are currently involved in a lawsuit to evict their eldest daughter (former POA) from the other residence (rental property). Petitioners intend to sell the rental property once the eviction is completed and use the proceeds to pay the 2018 tax in full.
Petitioners have not filed tax returns for taxable years 2019, 2020, and 2021 (unfiled years). They understood that they were not required to file tax returns for those years.
On August 16, 2021, respondent sent petitioners a Notice of Intent to Seize Your Assets (levy notice) for 2018. Petitioners requested a CDP hearing and indicated that they wanted an installment agreement. They did not dispute the underlying tax liability. By letter dated June 13, 2022, the appeals officer (AO) requested that petitioners provide financial information and tax returns for 2019 and 2020. The letter stated "If you didn't file a return because your yearly income was below the amount for which a return is required to be filed, please let me know." Petitioners submitted the requested financial information but did not submit the unfiled returns on the basis of their understanding that they did not filing obligations for the unfiled years.
A CDP hearing was held on August 1, 2022. During the CDP hearing petitioners' representative, enrolled agent Jeff Warren, proposed an installment agreement for partial payment or, alternatively, having the account designated as currently not collectible (CNC). The AO informed Mr. Warren that she determined that petitioners had the ability to pay the full amount owed on the basis of their equity in the real estate. The AO further advised Mr. Warren that petitioners were not eligible for a collection alternative (i.e., an installment agreement or CNC status) because they had not filed tax returns for the unfiled years. The AO indicated that she determined that returns were required for the unfiled years because there had been estimated tax payments for those years.
Mr. Warren stated that petitioners would pay the tax in full upon the sale of their rental property after the eviction lawsuit concluded and suggested that liens be filed on petitioners' two residences in lieu of the levy. A reverse mortgage was also discussed as a way to pay the tax.
With respect to the unfiled returns, Mr. Warren explained that he understood that petitioners did not owe tax for the unfiled years and did not need to file returns except to claim refunds of tax withheld from their social security benefits. The AO disagreed and informed Mr. Warren that petitioners were required to file returns for the unfiled years but did not provide any additional time after the CDP hearing for petitioners to submit the unfiled returns or ask petitioners to substantiate that they were owed refunds for the unfiled years.
On August 9, 2022, respondent issued a Notice of Determination sustaining the proposed levy. Petitioners have not contested the underlying liability.
Discussion
We review Appeals' determination on nonliability issues for abuse of discretion. Goza v. Commissioner, 114 T.C. 176, 182, (2000). A determination is an abuse of discretion if it is arbitrary, capricious, or without sound basis in fact or law. Murphy v. Commissioner, 125 T.C. 301, 320 (2005), aff'd, 469 F.3d 27 (1st Cir. 2006).
Section 6343(a)(1)(D) requires the IRS to release a levy when it determines that the levy is creating an economic hardship, i.e., the levy will cause the taxpayers to be unable to pay their reasonable necessary living expenses. See Treas. Reg. § 301.6343-1(b)(4)(i). When a taxpayer establishes in a CDP hearing that the proposed levy would create an economic hardship, it is unreasonable for the AO to determine to proceed with the levy which section 6343(a)(1)(D) would require the IRS to immediately release. Vinatieri v. Commissioner, 133 T.C. 392, 400 (2009). Rather than proceed with the levy, the AO should consider alternatives to the levy. Id. The IRM instructs Appeals to consider whether the collection action would cause "hardship" by preventing the taxpayers from meeting necessary living expenses when determining whether to place the account in CNC status. IRM pt. 5.16.1.2.9 (Sept. 18, 2018).
Nothing in section 6343 or the regulations thereunder condition a release of a levy that is creating an economic hardship on the taxpayers' compliance with their filing obligations. Vinatieri, 133 T.C. at 401. A determination in a hardship case to proceed with a levy that must immediately be released is unreasonable and undermines public confidence that tax laws are being administered fairly. Id. In a section 6330 pre-levy hearing, if the taxpayer has provided information that establishes the proposed levy will create an economic hardship, the AO cannot sustain the levy and must consider an alternative. Id.
Petitioners have established that they will experience a hardship if the levy action is sustained because their medical expenses and living expenses exceeds their income. They also assert that the levy is more intrusive than necessary because the AO failed to consider their proposal to file liens on their residences and to pay the tax owed from the sale proceeds of the rental property once the eviction lawsuit is concluded. See § 6330(c)(3)(C). They further assert that if the AO had provided them with additional time after the CDP hearing, they could have easily filed the unfiled returns to correct their purported misunderstanding that they did not have filing obligations for the unfiled years. See Shanley v. Commissioner, T.C. Memo. 2009-17, slip op. at 12 (An AO's "unreasonable denial of a request for more time to submit . . . evidence would . . . be an abuse of discretion.").
The AO was aware of petitioners' age and health conditions and the lawsuit over the rental property. The AO did not consider whether the levy would create an economic hardship. Rather, the AO determined that CNC status was not available because petitioners were not in compliance with their filing obligations. On the basis of the facts viewed in the light most favorable to petitioners, proceeding with the levy would be unreasonable because section 6343 would require its immediate release. Petitioners have established that there is a genuine dispute of material facts with respect to whether the determination to sustain the levy was arbitrary and incorrect as a matter of law and therefore an abuse of discretion. Respondent is not entitled to summary judgment.
Upon due consideration, it is
ORDERED that respondent's Motion for Summary Judgment, filed March 23, 2023, is denied. It is further
ORDERED that this case is calendared for trial on the Court's San Francisco, California Special Session commencing on August 28, 2023, at a time and date certain of 1:00 p.m., on Thursday, August 31, 2023, in Room 2-1408, Burton Federal Bldg. & U.S. Courthouse, 450 Golden Gate Avenue, San Francisco, California 94102. It is further
ORDERED that the Court's Standing Pretrial Order, served January 24, 2023, remains in full force and effect.
This Order constitutes official notice of the same to the parties herein.