United States Tax Court Decision for the Week – You be the Judge

A recent Tax Court decision was reported that may be of interest to individuals potentially dealing with tax litigation. J. Frank Best, Certified Public Accountant and United States Tax Court Litigator works to stay current on all IRS decisions concerning tax litigation to ensure we are fully informed and prepared for our clients.

Former IRS Agent and Wife Liable for $73,000 in Fraud Penalties:In Langer v. Comm’r, T.C. Memo. 2017-92, the Tax Court held that a couple’s repeated concealment of income by overstating deductions on their 2011-2013 tax returns exemplified a pattern of fraudulent behavior and the couple was thus liable for fraud penalties of approximately $73,000. The court noted that the husband had been an IRS agent for more than 29 years and that the couple’s explanations regarding the deductions taken on their returns were implausible and unpersuasive.

UNITED STATES TAX COURT

T.C. Memo. 2017-92-CIVIL FRAUD

May 30, 2017.

HENRY LANGER AND PATRICIA LANGER, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 22719-15.

Thomas Edward Brever , for petitioners.

Christina L. Cook and John Schmittdiel , for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

NEGA, Judge : Respondent issued a notice of deficiency to petitioners determining deficiencies in income tax and fraud penalties as follows:1

[*2]

                           Penalty

Year     Deficiency1     sec. 6663(a)

2011       $36,595        $27,446.25

2012        27,386         20,539.50

2013        33,689         25,266.75

__________

1The amounts referred to herein reflect an agreement by the parties to
revised deficiencies in Federal income tax as reflected on Form 5278,
Statement–Income Tax Changes, and are less than respondent’s initial
determinations in the notice of deficiency.

Petitioners conceded in full the deficiencies for tax years 2011-13. The only issue for decision is whether petitioners are liable for fraud penalties under section 6663 for tax years 2011-13.

FINDINGS OF FACT

Some of the facts are stipulated and are so found. The stipulation of facts and the attached exhibits are incorporated herein by this reference. Petitioners resided in Minnesota when the petition was timely filed.

Henry Langer was an Internal Revenue Service revenue agent for over 29 years and received training in determining allowable business expense deductions; he was also a certified forensic examiner. Petitioners have a history of claiming [*3] business expense deductions for obvious personal expenses and expenses they could not substantiate. See, e.g. , Langer v. Commissioner (Langer I ), T.C. Memo. 2008-255, 96 T.C.M. (CCH) 334, 339 (2008) (“[P]etitioners claimed as business expense deductions many obviously personal items . A former Internal Revenue Service agent should have known better .” (Emphasis added.)), aff’d without published opinion , 378 F. App’x 598 (8th Cir. 2010); Langer v. Commissioner (Langer II ), T.C. Memo. 1992-46, 63 T.C.M. (CCH) 1900 (1992), aff’d , 989 F.2d 294 (8th Cir. 1993); Langer v. Commissioner (Langer III ), T.C. Memo. 1990-268, 59 T.C.M. (CCH) 740, 746 (1990) (holding petitioners liable for an addition to tax under section 6653(a) for negligence because petitioners’ conduct suggested a “pattern of carelessness” and because petitioners used methods for determining deductions that had “no basis in the law”), aff’d , 980 F.2d 1198 (8th Cir. 1992).

Respondent disallowed $113,194, $67,186, and $84,087 of petitioners’ claimed deductions on Schedules C, Profit or Loss From Business, for 2011-13, respectively, as personal expenses; many of petitioners’ claimed and disallowed expense deductions were identical to those disallowed as personal expenses in Langer I and Langer II , including expenses for parties, gifts, flowers, vases, and holiday decorations, to name a few.

[*4] OPINION

The Commissioner must establish by clear and convincing evidence that, for each year at issue, an underpayment of tax exists and that some portion of the underpayment is due to fraud. Secs. 6663(a), 7454(a); Rule 142(b). The Commissioner must show that the taxpayer intended to conceal, mislead, or otherwise prevent the collection of taxes. Katz v. Commissioner , 90 T.C. 1130, 1143 (1988). The taxpayer’s entire course of conduct may establish the requisite fraudulent intent. Stone v. Commissioner , 56 T.C. 213, 223-224 (1971).

Petitioners conceded in full the deficiencies for 2011-13, and therefore respondent satisfied his burden of proving an underpayment of tax for each year at issue. Respondent established that, for each year at issue, petitioners’ underpayment of tax was fraudulent and that they intended to conceal taxable income and prevent the collection of tax by overstating deductions and claiming nondeductible and obvious personal expenditures as business expenses. See Rahall v. Commissioner , T.C. Memo. 2011-101, 101 T.C.M. (CCH) 1486, 1492 (2011) (“An additional badge of fraud includes a taxpayer disguising nondeductible personal expenditures as business expenses.”). Mr. Langer’s nearly 30 years of experience as a revenue agent and petitioners’ history before this Court for identical issues are relevant considerations in determining whether they had [*5] fraudulent intent. See Beaver v. Commissioner , 55 T.C. 85, 93-94 (1970) (stating that petitioner’s business experience is a relevant consideration in determining whether he had fraudulent intent). Petitioners’ repeated concealment of income by overstating deductions exemplifies a pattern of fraudulent behavior, and their explanations are implausible and unpersuasive. See McGraw v. Commissioner , 384 F.3d 965, 971 (8th Cir. 2004) (“[A] consistent pattern of sizeable underreporting of income * * * and unsatisfactory explanations for such underreporting also can establish fraud.”), aff’g Butler v. Commissioner , T.C. Memo. 2002-314; Sanchez v. Commissioner , T.C. Memo. 2014-174, at *17 (stating that “a pattern of conduct that evidences an intent to mislead” is one of the “badges of fraud” from which fraudulent intent can be inferred), aff’d , ___ F. App’x ___, 2016 WL 7336626 (9th Cir. Dec. 19, 2016); Bruce Goldberg, Inc. v. Commissioner , T.C. Memo. 1989-582, 58 T.C.M. (CCH) 519, 529 (1989) (“[F]raud may sometimes be inferred from a pattern of overstating deductions.”). Accordingly, petitioners are liable for the fraud penalties under section 6663 for all years at issue.

[*6] To reflect the foregoing,

Decision will be entered under Rule 155 .

Footnotes

1Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the taxable years at issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.

[End of Document]

 

United States Tax Court Decision for the Week – You be the Judge

A recent Tax Court decision was reported that may be of interest to individuals potentially dealing with tax litigation. J. Frank Best, Certified Public Accountant and United States Tax Court LiItigator works to stay current on all IRS decisions concerning tax litigation to ensure we are fully informed and prepared for our clients.

UNITED STATES TAX COURT

T.C. Memo. 2017-60

APPEALS & HEARINGS

April 10, 2017

DENISE LLOYD, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent

 Docket No. 17559-15L.

Charles A. Ray, Jr. , for petitioner. Rachel L. Rollins , for respondent.

MEMORANDUM OPINION

LAUBER, Judge : In this collection due process (CDP) case, petitioner seeks review pursuant to section 6330(d)(1)1 of the determination by the Internal [*2] Revenue Service (IRS or respondent) to uphold a notice of intent to levy. The IRS served the levy notice to assist in collecting unpaid trust fund recovery penalties (TFRPs) from petitioner for 10 calendar quarters during 2010-2012. The sole issue for decision is whether the IRS settlement officer abused his discretion in declining to accept a $3,000 offer-in-compromise (OIC). Respondent has moved for summary judgment on this question, and we will grant his motion.

Background

The following facts are based on the parties’ pleadings, respondent’s motion, and petitioner’s opposition, including the attached affidavits and exhibits. Petitioner resided in Maryland when she filed her petition.

Petitioner was the sole shareholder of D.H. Lloyd & Associates, Inc. (D.H. Lloyd), a District of Columbia corporation engaged in the commercial insurance brokerage business. D.H. Lloyd became delinquent on its employment tax liabilities for the 10 quarters in question. The IRS subsequently assessed TFRPs against petitioner under section 6672, having determined that she was a “responsible person” required to collect, account for, and pay over the withheld employment taxes. The aggregate amount of the assessed penalties is approximately $100,000. [*3] On May 12, 2014, in an effort to collect these unpaid liabilities, the IRS sent petitioner a Letter 1058, Final Notice of Intent to Levy and Notice of Your Right to a Hearing. Petitioner timely requested a CDP hearing, indicating that she sought a collection alternative in the form of an installment agreement. She did not indicate an intention to challenge her underlying liability for any quarter in question.

After receiving petitioner’s case on July 18, 2014, a settlement officer (SO) from the IRS Appeals Office reviewed her administrative file and confirmed that the penalties in question had been properly assessed and that all other requirements of applicable law and administrative procedure had been met. The SO scheduled a telephone CDP hearing for August 22, 2014. He informed petitioner that, in order for him to consider a collection alternative, she needed to supply a completed Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, and a Form 656, Offer in Compromise, with supporting financial information.

Petitioner submitted a Form 656 on which she sought an OIC based on doubt as to collectibility, offering to pay $3,000 to compromise her outstanding liabilities for the 10 quarters in question. She included a Form 433-A showing monthly income of $16,621, monthly expenses of $16,847, assets of $980,000, and [*4] liabilities of $922,854. Her expenses included housing expenses of $6,964 per month and vehicle ownership expenses of $1,617 per month. The latter included a $1,200 monthly lease payment for a 2012 model Lexus.

A telephone CDP hearing was held with petitioner’s representative on August 22, 2014. During that call the SO advised that petitioner’s offer would be forwarded to the IRS OIC processing unit (unit) for evaluation. On March 30, 2015, the unit returned the OIC with a recommendation that it be rejected because it was less than petitioner’s “reasonable collection potential” (RCP), which the unit calculated to be $175,035. It determined this RCP solely on the basis of petitioner’s net income, excluding from its calculations her assets and liabilities. The unit determined that her reported monthly expenses, particularly for housing and vehicle expenses, exceeded the applicable local standards by more than $1,000 per month. Employing the local standard amounts, the unit concluded that petitioner could pay a total of $175,035 during the remainder of the collection limitations period.

After receiving the unit’s response the SO wrote petitioner’s representative to schedule another telephone call. During that call the SO explained that petitioner’s actual housing and vehicle expenses significantly exceeded the IRS local standards. Her representative then requested a deviation from these standards. [*5] With respect to housing expenses, petitioner contended that her primary residence was an essential business asset because she sometimes worked from home and that the IRS should allow a household size of four for purposes of computing housing costs. With respect to the vehicle expenses, she contended that her work as an insurance broker necessitated a high-quality vehicle.

The SO rejected these contentions. He concluded that petitioner’s house was not an essential business asset because she could work from other locations and that her household size was properly set at two on the basis of her last-filed Federal income tax return.2 And he concluded that petitioner’s work did not require use of any specialized vehicle. The SO accordingly rejected petitioner’s request for a deviation from IRS local standards.

The SO informed petitioner that he could consider a six-year installment agreement of $1,545 per month. Petitioner rejected this offer. The SO accordingly closed the case and, on June 10, 2015, issued petitioner a notice of determination sustaining the proposed levy for the 10 quarters in question. [*6] Petitioner timely petitioned this Court for review of the notice of determination. On October 13, 2016, respondent filed a motion for summary judgment, to which petitioner timely replied.

Discussion

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. Ibid. However, the nonmoving party may not rest upon the mere allegations or denials of her pleadings but instead must set forth specific facts showing that there is a genuine dispute for trial. Rule 121(d); see Sundstrand Corp. , 98 T.C. at 520. We find that no material facts are in dispute and that this case is appropriate for summary adjudication. [*7] Where (as here) there is no challenge to the amounts of the taxpayer’s underlying liabilities for the quarters in question,3 we review the IRS determination for abuse of discretion. Goza v. Commissioner , 114 T.C. 176, 181-182 (2000). Abuse of discretion exists when a determination is arbitrary, capricious, or without sound basis in fact or law. See Murphy v. Commissioner , 125 T.C. 301, 320 (2005), aff’d , 469 F.3d 27 (1st Cir. 2006). In deciding whether the SO abused his discretion in sustaining the levy, we review the record to determine whether he: (1) properly verified that the requirements of applicable law or administrative procedure have been met; (2) considered any relevant issues petitioner raised; and (3) considered “whether any proposed collection action balances the need for the effi[*8] cient collection of taxes with the legitimate concern of * * * [petitioner] that any collection action be no more intrusive than necessary.” See sec. 6330(c)(3).

Section 7122(a) authorizes the IRS to compromise an outstanding tax liability. The regulations set forth three grounds for such compromise: (1) doubt as to liability; (2) doubt as to collectibility; or (3) promotion of effective tax administration. Sec. 301.7122-1, Proced. & Admin. Regs. Petitioner based her OIC on doubt as to collectibility.

The Secretary may compromise a tax liability on the basis of doubt as to collectibility where the taxpayer’s assets and income render full collection unlikely. Id. para. (b)(2). Conversely, the IRS may reject an OIC when the taxpayer’s RCP exceeds the amount she proposes to pay. See Johnson v. Commissioner , 136 T.C. 475, 486 (2011), aff’d , 502 F. App’x 1 (D.C. Cir. 2013). Generally, Appeals officers are directed to reject offers substantially below the taxpayer’s RCP unless “special circumstances” justify acceptance of such an offer. See Fairlamb v. Commissioner , T.C. Memo. 2010-22; Rev. Proc. 2003-71, sec. 4.02(2), 2003-2 C.B. 517, 517.

We do not independently assess the reasonableness of the taxpayer’s proposed offer. Rather, our review is limited to ascertaining whether the decision to reject her offer was arbitrary, capricious, or without sound basis in fact or law. [*9] Murphy , 125 T.C. at 320. We do not substitute our judgment for the settlement officer’s as to the acceptability of any particular offer. See, e.g. , Johnson , 136 T.C. at 488.

The SO determined petitioner’s RCP on the basis of her monthly income of $16,621 less allowable expenses. In calculating allowable housing and vehicle expenses, he used the IRS local standard amounts, which were significantly lower than petitioner’s actual expenses. Petitioner concedes as much; her sole contention is that she was entitled to a deviation from those standards.

The Code provides that the IRS shall create and publish schedules of “national and local allowances” to ensure that taxpayers entering into OICs have adequate means to provide for basic living expenses. Sec. 7122(d)(1) and (2)(A). This Court has upheld the IRS’ use of published local standards to determine basic living expenses in the context of evaluating collection alternatives. See, e.g. , Speltz v. Commissioner , 124 T.C. 165, 179 (2005), aff’d , 454 F.3d 782 (8th Cir. 2006). Allowable housing and vehicle expenses are those that are “necessary to provide for a taxpayer’s and his or her family’s health and welfare and/or production of income.” Internal Revenue Manual (IRM) pt. 5.15.1.7(1) (Oct. 2, 2012).

Ordinarily, settlement officers are directed to allow the taxpayer the lesser of the local standards or the amounts actually paid monthly for housing and vehi[*10] cle expenses. See IRM pt. 5.15.1.9 (Nov. 17, 2014); IRM pt. 5.15.1.7(4) (Oct. 2, 2012). Only if the local standards are “inadequate to provide for a specific taxpayer’s basic living expenses” should the SO allow a deviation. IRM pt. 5.15.1.7(5). The taxpayer bears the burden of providing sufficient information to the SO to justify deviation from local standards. See Thomas v. Commissioner , T.C. Memo. 2015-182.

With respect to her monthly housing expenses of $6,964, petitioner contends that her primary residence was integral to her business and that her housing expenses should have been calculated for a four-person rather than a two-person household. On the first point the SO noted that petitioner’s business reported rental expenses for two distinct office locations. He reasonably concluded that, while she sometimes worked from home, her ability to work from those locations meant that her residence was not an essential business asset.

The SO rejected petitioner’s claim for a larger household size because she had reported only two people in her household on her last-filed return, which was for tax year 2013. See IRM pt. 5.15.1.9(1). Petitioner contends that the SO should have based his household size determination on her 2014 return, which showed four household members. But she requested an extension of time, until October 15, 2015, to file her 2014 return, and the SO issued the notice of deter[*11] mination on June 10, 2015, four months before that return was due. It was not an abuse of discretion for the SO to base his determination on petitioner’s 2013 return, which was her most recently filed return at the time the SO made his determination.4

With respect to vehicle expenses, petitioner contends that she needed her Lexus for work purposes and that $1,617 of the reported monthly expenses, including a lease payment of $1,200, should be allowed. The SO reasonably rejected this contention and limited petitioner to the standard vehicle allowance. He found that she had not shown a “special vehicle requirement” for her work and that a less expensive vehicle would have been perfectly suitable. IRM pt. 5.8.5.22.3 (Sept. 30, 2013).

The SO did not act arbitrarily or capriciously in determining that petitioner’s RCP greatly exceeded her $3,000 offer. He reasonably rejected her request for a deviation from the local standards because she failed to demonstrate that they were inadequate to provide for her basic living expenses. He reasonably determined that petitioner had no “special circumstances” that would warrant accept-[*12] ance of an offer substantially below her RCP.5 Instead he offered petitioner a six-year installment agreement of $1,545 per month, which she rejected. Finding no abuse of discretion in any respect, we will sustain the proposed collection action.

To reflect the foregoing,

An appropriate order and decision will be entered .

Footnotes

1All statutory references are to the Internal Revenue Code (Code) in effect at all relevant times, and all Rule references are to the Tax Court Rules of Practice and Procedure. We round all monetary amounts to the nearest dollar.

2Petitioner also contended that the mortgage on her house was “underwater.” However, her Form 433-A indicated that the house had a fair market value (FMV) of $960,000 and encumbrances of only $810,854; the mortgage could be regarded as “underwater” only if the FMV were reduced by 20% to produce an estimate of a “quick sale” price. In any event, the SO concluded that the value of the house was immaterial because it was not being considered an asset in the RCP calculation.

3Petitioner did not challenge her liability for the TFRPs during the CDP hearing or in her petition to this Court. She is thus precluded from challenging those liabilities here. See Rule 331(b)(4) (“Any issue not raised in the assignments of error shall be deemed to be conceded.”); Thompson v. Commissioner , 140 T.C. 173, 178 (2013) (“A taxpayer is precluded from disputing the underlying liability if it was not properly raised in the CDP hearing.”); sec. 301.6330-1(f)(2), Q&A-F3, Proced. & Admin. Regs. Petitioner likewise did not allege during the CDP hearing, in her petition, or in her response to the motion for summary judgment that the TFRPs, which are assessable penalties, were not “personally approved (in writing) by the immediate supervisor of the individual making * * * [the penalty determination].” Sec. 6751(b)(1). That issue is therefore deemed conceded. See Rule 331(b)(4) (“Any issue not raised in the assignments of error shall be deemed to be conceded.”); Triola v. Commissioner , T.C. Memo. 2014-166, 108 T.C.M. (CCH) 185, 187; Dinino v. Commissioner , T.C. Memo. 2009-284.

4Even if an increase to petitioner’s household size were warranted, the SO noted that he would then have to factor into his calculations the income of her nonliable spouse, which might have increased her RCP substantially.

5Special circumstances that may warrant acceptance of an OIC where the RCP is more than the offer amount include: (1) facts demonstrating that the taxpayer would suffer “economic hardship” if the IRS were to collect from her an amount equal to the RCP and (2) compelling public policy or equity considerations that provide sufficient basis for compromise. See Murphy , 125 T.C. at 309; McClanahan v. Commissioner , T.C. Memo. 2008-161; IRM pt. 5.8.4.2(4) (May 10, 2013).