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

by M. Robinson & Company, P.C.
Contact

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] See Union 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, see Herrington v. C.I.R., 854 F.2d 755, 758 (5th Cir. 1988).

[5] See IRC Section 7433.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© M. Robinson & Company, P.C. | Attorney Advertising

Written by:

M. Robinson & Company, P.C.
Contact
more
less

M. Robinson & Company, P.C. on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.