Statute of Limitations and Collections Process Against Executrix and Agent for Estate Tax Deficiency

United States v. Holmes

2016 WL 4363398 (SD Tex. Aug. 16, 2016)

Summary

Summary judgment was sought by both the taxpayers and the Government for an estate tax liability. The taxpayers contended that the 10-year statute of limitations on collections had expired. The Government disagreed and put forth that the statute of limitation had been suspended, or tolled, for 241 days while the taxpayer’s Collection Due Process hearing was pending. The Government also sought summary judgment that the taxpayers did not have standing in a counterclaim for refund because they were not “taxpayers” as the term relates to civil damages for unauthorized collection actions. Summary judgment was granted to the Government but denied to the taxpayers.

Facts

The Government brought a suit on behalf of the IRS for an unpaid estate tax deficiency against the executrix, Barbara Holmes, and her husband Kevin Holmes, a CPA and tax attorney who acted as agent by preparing the Form 706 estate tax return.

The Holmeses timely filed an estate tax return in 1998 and paid estate tax of about $700,000. The IRS audited the estate and assessed additional liability of more than $1.2 million. The estate contested this in Tax Court. The issue was resolved when the Tax Court adopted a stipulated decision of the parties that the balance due to the IRS was about $215,000. This resolution also allowed for a state estate tax credit, but permitted the IRS to assess statutory interest.

On July 16, 2004, the IRS reassessed the amount of the estate tax efficiency to be about $223,000 and added almost $109,000 in interest. The reassessment was erroneous and applied the state estate tax credit incorrectly. Kevin Holmes responded and requested a second determination. He did not receive a response. Instead, the IRS placed the case in queue for collection on December 27, 2004.

There was no further IRS communication until a revenue agent was assigned to the case on April 22, 2013 – almost nine years after the reassessment. The IRS began sending tax lien notices and, on September 27, 2013, they sent a Final Notice of Intent to Levy and Notice of Right to a Hearing. Kevin Holmes timely responded via certified mail on October 5, 2013, requesting a Collections Due Process (CDP) hearing. He also sent Form 2848 Power of Attorney (POA). The POA was processed, but the IRS misplaced the CDP hearing request.

Due to the misplacement of the CDP hearing request, the parties disputed its timeliness. Kevin Holmes resent a copy of the request on May 2, 2014. Ultimately, on June 2, 2014, Kevin Holmes withdrew the CDP hearing request. On July 11, 2014 the IRS accepted the CDP hearing request as submitted timely, but no hearing took place. The Government filed suit on March 10, 2015.

Law, Analysis and Ruling

Statute of Limitations:

While the Holmeses acknowledged the estate tax liability, they contended that the IRS collection efforts were barred by the ten-year statute of limitations[1] (July 16, 2004 to July 16, 2014, with the suit being filed on March 10, 2015). However, the District Court noted that the SOL is tolled, or suspended, when a written request for a CDP hearing is submitted by a taxpayer.[2] The tolling also affects the ability of the IRS to levy a taxpayer’s assets. The toll is lifted when the CDP hearing request is withdrawn at which point the SOL starts to run again.

The Holmeses argued that SOL wasn’t tolled because of the IRS’ misplacement of their CDP hearing request, or the period of tolling should be counted from May 2, 2014 when the copy of the request was sent to the IRS. The District Court disagreed and precluded the Holmeses’ argument under the estoppel doctrine of “quasi estoppel” or the “duty of consistency.”

“The duty of consistency prevents a taxpayer from taking one position one year, and a contrary position in a later year, after the limitations period has run.”[3]

The court explained that in 2013 the Holmeses had requested a CDP hearing and had argued with the IRS that their request was timely filed that year. Then in 2014, the IRS relied on the Holmeses’ position that the CDP hearing request was timely filed in 2013 and granted a hearing. The court then explained that the Holmeses later contradicted their primary argument about the timeliness of the CDP hearing request, to the harm of the Commissioner.[4]

As a result, the court found that the SOL was tolled between October 5, 2013, when the CDP hearing request was made, and June 2, 2014, when the CDP hearing request was withdrawn. This extended the original date as of the SOL’s expiration by about eight months. The suit filed on March 10, 2015 was just within the SOL by a few days in light of the tolling suspension.

Amount of the Estate Tax Liability:

The District Court in its memorandum, reminded the parties that the Government is entitled to a legal presumption of correctness regarding the amount of taxes, interest and penalties owed. In contrast, the taxpayers bear the burden of proof under a preponderance of evidence to show that a determination is incorrect. The Government’s claim was for more than $550,000.

The Holmeses conceded to the tax liability but disputed the interest and penalties because the July 16, 2004 reassessment was calculated by the IRS incorrectly. They requested abatement of interest (for which the court did not have jurisdiction) and removal of penalties. Their position was that the inaccurate 2004 reassessment provided reasonable cause for not paying the tax liability at the time.

The court did not find reasonable cause to remove penalties and instead found that the Holmeses did not exercise ordinary care and prudence. They noted that Kevin Holmes is a practicing CPA and a tax attorney. They particularly found willful neglect by Kevin Holmes because of his profession: he had a duty to resolve the tax liability as promptly as possible. However, the court adopted a concession by the Government for certain additional credits for prior year income tax payments and reduced the tax liability to just under $300,000.

Counterclaims for Refund:

The Holmeses had entered a counterclaim for refund which the Government challenged on the basis that they did not have standing as taxpayers under Section 7433. The section states:

“If, in connection with any collection of Federal tax with respect to a taxpayer, any officer or employee of the [IRS] recklessly or intentionally, or by reason of negligence, disregards any provision of this title, such taxpayer may bring a civil action for damages against the United States in a district court of the United States.”

The District Court stated the reasons why the Holmeses’ counterclaim failed “notwithstanding” the Government’s argument regarding standing. First, the taxpayers had based their counterclaim on an IRS erroneous assessment, but taxpayers cannot seek damages for an improper assessment made by the IRS.[5] They must establish that there was intention by the IRS to make the assessment recklessly or negligently. The Holmeses pointed to notices sent a wrong address as evidence of reckless or negligent intent, but the court did not agree.

Second, the court found that the Holmeses failed to establish damages. The Holmeses presented the unauthenticated denial of their application to refinance their home mortgage as their evidence of damages. Unauthenticated documents cannot be used in a motion for summary judgment. However, the court recognized errors were made by the IRS and, as a matter of equity, determined that the Holmeses should not be held liable in their individual capacities.

Note: An appeal was filed by Barbara Holmes on December 6, 2016.

Practice Notes

1. Before responding to IRS requests or notices, understand how the SOL and tolling rules will impact the taxpayer, keeping in mind potential future litigation.
2. Also, be aware and certain of where the taxpayer is in the SOL timeline.
3. If the Holmeses had promptly paid the amount of the tax liability determined during the 2004 Tax Court proceedings and not waited for the IRS to fix its error, further litigation may have been avoided or summary judgment may have been granted to them in full.

[1]See IRC Section 6502.

[2]See IRC Section 6330.

[3]SeeUnion Carbide Corp. v. United States, 612 F 2.d 558, 566 (Ct. Cl. 1979); Johnson v. C.I.R., 162 F.2d 844 (5th Cir. 1947).

[4] For the specific elements of quasi estoppel, seeHerrington v. C.I.R., 854 F.2d 755, 758 (5th Cir. 1988).

[5]See IRC Section 7433.