number release date uil december pubwe-164740-01 cc pa cbs b2 date bulletin no collection bankruptcy and summonses bulletin department of the treasury office_of_chief_counsel internal_revenue_service tax_court restricts cdp jurisdiction overruling prior opinions in series of three decision sec_1 court does about-face on question of cdp jurisdiction will no longer look behind notice_of_determination to address whether hearing was conducted reversing 115_tc_417 a majority of the tax_court stated it would not look behind an appeals notice_of_determination in deciding whether it has jurisdiction over a collection_due_process case in lunsford v commissioner t c no lunsford i the court held that as long as the notice_of_determination under sec_6330 is valid on its face and a timely petition for review has been filed the tax_court will have jurisdiction to review that determination at the appeals hearing in this cdp case the taxpayers challenged the validity of the assessments asserting the lack of a valid summary record of assessment in response the appeals officer wrote a letter to the taxpayers indicating that the assessments had been verified and attaching a copy of the form_4340 certificate of assessments and payments the letter invited the taxpayers to contact the appeals officer by a specific date if they wished to discuss other matters such as resolution of the liability the taxpayers did not respond to the letter and the appeals officer issued a notice_of_determination sustaining the proposed levy the taxpayers timely filed a petition for tax_court review the trial judge raised the question of the court’s jurisdiction on the ground that the taxpayers may not have been afforded a proper hearing before appeals in meyer v commissioner supra pincite the court had held that it lacked jurisdiction under sec_6330 if the taxpayer was not given an opportunity for an appeals hearing writing for the court judge ruwe began by observing that the meyer court should not have decided whether the notice_of_determination was valid because it did not have subject bulletin no december matter jurisdiction over the type of tax at issue the validity of the hearing in meyer was a matter for determination by a district_court which has subject matter jurisdiction over cdp cases involving frivolous_return penalties the court further reasoned that its analysis in meyer improperly required it to look behind the notice_of_determination analogizing to notice_of_deficiency cases the court held that it had jurisdiction under sec_6330 where there is a written notice that embodies a determination to proceed with the collection of the taxes at issue and a timely filed petition the court overruled meyer to the extent that it holds that the court must first look behind the notice_of_determination to see whether a proper hearing was offered in order to have jurisdiction judge halpern wrote a lengthy concurring opinion looking to provisions of the administrative_procedure_act for support for the proposition that a failure to offer the taxpayer a sec_6330 hearing is not a jurisdictional defect he also found support in the apa for the proposition that it is up to the commissioner to determine the form of a sec_6330 hearing he pronounced meyer incorrect to the extent it appeared to hold that an exchange of correspondence could not constitute a proper cdp hearing judge beghe also wrote a brief concurrence judge foley dissented stating that meyer was correct and that the court must first determine whether a hearing took place in order to conclude it has jurisdiction judge vasquez also dissented complaining that the court had unnecessarily departed from principles of stare_decisis tax_court need not determine if hearing conducted where lack of hearing not raised in taxpayers’ petition in a second opinion in the lunsford case the tax_court held that having concluded it had jurisdiction it need not address the validity of the cdp appeals hearing where the taxpayers had not challenged the validity of the hearing in their petition for review lunsford v commissioner t c no lunsford ii in their petition the taxpayers had contended that the appeals officer could not rely merely on a form_4340 to verify the existence of a valid assessment the court readily dispensed with that argument noting that it had been rejected in 115_tc_35 the court went on to conclude that the taxpayers were not asserting that respondent failed to offer them a hearing per se although they were seeking relief in the form of a remand to appeals the court found that a remand would not be necessary or productive it noted that there may be cases in which a taxpayer was not given a proper opportunity for an appeals hearing where it would be appropriate to require that an appeals hearing be held but this was not such a case judge halpern concurred incorporating his comments in lunsford i bulletin no december judge colvin led off a series of dissenters stating that the commissioner had the obligation to provide the taxpayers with an opportunity for a hearing before an appeals officer whether or not the taxpayers raised the issue in their petition and that the court should require the commissioner to provide that opportunity judge laro penned a lengthy dissent taking issue first with the majority’s conclusion that the taxpayers had failed to assert their right to a hearing laro also took the majority to task for ignoring what he termed the legislative mandate that all taxpayers be offered a face-to-face hearing with appeals in cdp proceedings finally judge foley dissented separately to make clear his view that taxpayers must be offered a face-to-face hearing with appeals even if the court believes it would be unproductive tax_court will not determine whether b hearing requirement met where it lacks subject matter jurisdiction again overruling earlier cdp opinion in johnson v commissioner 117_tc_18 another full tax_court opinion the court held that where it does not have jurisdiction over the underlying type of tax it is inappropriate for it to determine whether the petitioner was provided with a collection_due_process_hearing for purposes of sec_6330 the court overruled 115_tc_417 to the extent it holds to the contrary for the second time in the same day following 115_tc_324 the court held that it lacked jurisdiction under sec_6330 to review a determination to collect by levy a frivolous_return penalty under sec_6702 treating case law governing the disposition of deficiency cases as analogous the court dismissed the taxpayer’s petition for lack of jurisdiction without addressing whether the appeals hearing was proper judge vasquez concurred with the majority holding that the court lacked jurisdiction in light of lunsford i but found the majority’s discussion of meyer unnecessary he also noted his disagreement with judge behge in dissent judge behge maintained that the court should have taken jurisdiction held that the hearing requirement was satisfied and upheld respondent’s determination to put an end to what he regarded as the taxpayer’s attempt merely to delay he also suggested that the tax_court may have jurisdiction in all cdp cases regardless of the type of underlying tax this he stated was a preferred reading of sec_6330 since it would eliminate the opportunity for abuse by taxpayers who intentionally file in the wrong court judge behge invited congress to enact more explicit language that would ensure one stop shopping in all cdp cases and he warned taxpayers and their counsel who file cdp cases in the tax_court that should be filed in a district_court that they face penalties of up to dollar_figure under sec_6673 collection_due_process december bulletin no first circuit reverses bap to hold interest on post-petition taxes entitled to first priority in chapter the court_of_appeals for the first circuit in in re weinstein united_states v yellin u s app lexis 1st cir date has held that interest on a post- petition tax claim filed in a chapter case is entitled to first priority treatment along with the tax claim and is payable pursuant to b c a the issue presented in weinstein was whether interest on a post-petition tax claim was entitled to payment pursuant to b c a which affords first-priority treatment to administrative expense claims or pursuant to b c a which affords fifth-priority treatment to payment of interest from the date of the filing of the petition both the bankruptcy court and the bankruptcy appellate panel bap determined that section a mandated that the interest be paid separately from the underlying post-petition tax claim as a fifth-priority expenditure in reversing the bap’s decision the first circuit initially noted that four other circuits had resolved in the government’s favor that interest accruing on post-petition liabilities of the estate is entitled to administrative expense priority status under b c sec_503 the court noted however that none of those cases either arose entirely under chapter or addressed the potential relevance of section a the court then considered the text of the statute itself ultimately determining that the interrelationship among sec_503 a and a rendered the language of the statute unclear so that the court could not rely on any plain language meaning alone to resolve whether interest on post- petition taxes of the estate is entitled to the same priority status as the taxes themselves next the court examined the bankruptcy code in the context of case law preceding its enactment the court viewed 384_us_678 relevant to the extent that nicholas holds that a post-petition tax claim includes interest accrued during the same phase of the bankruptcy proceeding the court reasoned that congress in enacting the code would have assumed that the courts would preserve the rule_of nicholas unless otherwise directed suggesting that in post-code cases interest should be afforded the same priority as the obligation on which it accrues the court went on to address the legislative_history of the statute determining that the legislative_history was largely inconclusive finally the court considered the policies underlying the statute finding that the most compelling policy consideration was the need to ensure that trustees pay post-petition tax claims promptly the court determined that the statutory scheme of imposition of penalties provides inadequate incentives to satisfy this need whereas affording first-priority bulletin no december treatment to payment of interest would do so the court stated that it found this policy consideration as well as the code’s historical context most useful in analyzing the issue presented the court concluded that a proper reading of the statute includes interest as part of a post-petition tax incurred by a bankruptcy_estate and held that the service was entitled to payment of interest on its post-petition tax claim as an administrative expense under section a bankruptcy code cases interest distribution in chapter december bulletin no cases bankruptcy code cases appeals in re pattullo u s app lexis 9th cir date - court determined that appeal before it presenting issue of whether service was precluded by res_judicata from raising an issue pertaining to debtor’s chapter eligibility was moot since the dismissal of the underlying bankruptcy case prevented the court from granting any effective relief with respect to the issue presented the court noted that neither the fact that the bankruptcy might be reinstated nor the fact that another bankruptcy case presenting the same issue might be filed was relevant to the mootness inquiry bankruptcy code cases jurisdiction of bankruptcy court in re numed healthcare inc u s dist lexis m d fla date - district_court denied service’s request to have its lien priority case tried in district_court rather than in bankruptcy court where bankruptcy court was already familiar with the numerous creditors and debtors involved in the underlying bankruptcy case where disposition of the lien priority issue did not necessitate any substantial or material consideration of nonbankruptcy federal_law and where the discovery needed to resolve the issue would be more efficiently conducted in the context of the bankruptcy proceeding than in that of a district_court proceeding collection_due_process moore v commissioner tcmemo_2001_305 date - where taxpayer did not affirmatively deny that he received notices of deficiency which were documented to have been mailed by the service and where he never challenged the deficiencies by instituting appropriate proceedings in the tax_court the taxpayer was precluded from raising a statute_of_limitations defense in a proceeding to review a notice_of_determination regarding the same liabilities collection_due_process strickland v commissioner tcmemo_2001_312 date - since tax_court petition contained no allegation of error as to the service’s notice_of_determination the tax_court pursuant to lunsford v commissioner t c no lunsford ii see pp supra confined its analysis to only the issues raised in the petition moreover the taxpayer was precluded from raising the issue of the amount and or the existence of an underlying tax_liability since he never contested the notices of deficiency issued by the service and the court found that the service did not abuse its discretion in refusing to accept an offer to compromise a liability of dollar_figure for dollar_figure pursuant to lunsford ii the court considered taxpayer to have december bulletin no abandoned the potential issue of whether the service properly substituted a revenue_agent for an appeals officer to hold the collection_due_process_hearing since that issue was not presented in the tax_court petition innocent spouse flores v united_states u s claims lexis u s ct_cl date - in a case of first impression the court of federal claims held that the effective date provision for sec_6015 added to the code in to afford entitlement to innocent spouse relief on an equitable basis indicates that relief under sec_6015 should be granted from the entire liability at issue rather than solely the portion remaining unpaid as of the provision’s effective date if any portion of the liability remained unpaid as of that date levy honoring effect of scott v hilton grand vacations club u s dist lexis d hawaii date - pursuant to sec_6332 taxpayer’s employer was immune from liability for withholding funds from taxpayer’s wages because employer did so in compliance with the service’s levy moreover taxpayer was not entitled to bring suit against the service in district_court since he did not either seek review in tax_court or fully pay the amount of the alleged liability prior to initiating the district_court lawsuit liens priority over security interests filing whiting-turner a l johnson v pdh development inc u s dist lexis m d ga date - bank’s security_interest in accounts_receivable had priority over federal_tax_lien pursuant to sec_6323 and c where its security_interest came into existence prior to the filing of the notice_of_federal_tax_lien moreover tax_lien was properly filed pursuant to sec_6323 regardless of the fact that the identification of the taxpayer contained in the filing was incorrect in certain minor respects since a reasonable inspection of the local lien index would have revealed the existence of the federal_tax_lien property subject_to collection trusts united_states v delano no 99-s-2209 d colo date - where circumstances surrounding the creation and terms of a_trust indicated that it was not a discretionary_trust taxpayer the sole beneficiary and a co-trustee of the trust possessed a property interest in the trust under applicable state law and the federal_tax_lien attached to that property interest december bulletin no summonses third-party summonses right to intervene or proceed to quash third-party_recordkeeper gilmartin v irs u s dist lexis s d n y date - court dismissed taxpayer’s petitions to quash summonses to third-party recordkeepers on grounds that two of the petitions were untimely the court lacked jurisdiction over two of the petitions because the summonses to which they were related were not issued to third-party recordkeepers as defined by sec_7603 and the remaining summonses satisfied the requirements for enforcement established by 379_us_48 third-party_contacts seawright v commissioner t c no date - tax_court held sec_7602 did not apply to impose restrictions on the service’s contacts with third parties where all the contacts at issue either took place prior to date the effective date of sec_7602 or were made in the context of preparing for trial and not with respect to examination or collection activities sec_7602 was similarly inapplicable since the alleged violations of that provision took place prior to date the effective date of sec_7602 transferees and fraudulent_conveyances nominee united_states v novotny no 99-d-2196 d colo date decision on reconsideration - in reversing in part its prior decision to not address the government’s allegation that the trusts at issue were actually nominees of the taxpayer or were sham trusts the court deemed the theory germane but ultimately determined that the government was not entitled to summary_judgment as genuine issues of material fact remained december bulletin no the following material was released previously under sec_6110 portions may be redacted from the original advice chief_counsel_advice bankruptcy code cases assessment see supplemental cca following cc pa cbs br1 uilc date internal_revenue_service national_office field_service_advice memorandum for los angeles associate area_counsel sbse from subject assistant chief_counsel collection bankruptcy summonses cc pa cbs validity of an assessment made during a bankruptcy case where statutory_notice_of_deficiency was previously issued during the same bankruptcy case this chief_counsel_advice responds to your memorandum dated date in accordance with sec_6110 this chief_counsel_advice should not be cited as precedent december legend taxpayer year issues bulletin no is the year assessment valid where the statutory_notice_of_deficiency was issued and assessment was made during the taxpayer’s uninterrupted chapter bankruptcy proceeding if the assessment is invalid on what basis should the case be decided conclusion sec_1 the assessment is invalid because the 90-day period during which the taxpayer could file a petition with the tax_court was suspended by the bankruptcy proceeding therefore when the assessment was made the 90-day period had not expired we should enter into a stipulated decision that the year liability is dollar_figure based on the invalidity of the date assessment facts the taxpayer is challenging the accuracy of her year liability in a tax_court petition seeking review of a notice_of_determination issued by the internal_revenue_service service office of appeals pursuant to sec_6330 the relevant facts are as follows the taxpayer filed a chapter bankruptcy case on date while the case was pending the service sent her a statutory_notice_of_deficiency for the year tax_liability on date an act permitted by the express language of u s c sec_362 however the taxpayer was precluded by the automatic_stay u s c sec_362 from filing a petition with the tax_court based on the statutory notice unless she obtained an order from the bankruptcy court lifting the stay the docket sheets from the chapter proceeding do not show that the taxpayer applied to lift the stay to bring a proceeding in the tax_court on date the service assessed the deficiency against the taxpayer the chapter case was dismissed on date thereby lifting the stay no plan_of_reorganization was ever confirmed by the court on date forty-three days after the dismissal an involuntary chapter case was filed against the taxpayer the chapter case was dismissed on date thereby lifting the stay december law and analysis bulletin no the general_rule is that if a taxpayer does not file a petition within days after the notice_of_deficiency is mailed the deficiency may be assessed sec_6213 however because of u s c sec_362’s prohibition on the filing of a tax_court petition sec_6213 suspends the 90-day period for days plus the period the automatic_stay is in effect 110_tc_271 84_tc_645 douglass v commissioner t c memo tax ct memo lexi sec_332 the first days of the 90-day period ran between the dismissal of the chapter case and the filing of the chapter petition the remaining days plus the days added by sec_6213 began to run after the dismissal of the chapter case on date therefore the taxpayer had until date to petition the tax_court in other words the time for filing a tax_court petition had not expired when the deficiency was assessed on date an assessment made prior to the expiration of time to petition the tax_court is invalid 944_f2d_1063 3d cir 205_f2d_461 5th cir 90_f2d_699 7th cir 86_f2d_149 9th cir cf 990_f2d_41 2nd cir but see 158_fsupp_951 30_fsupp_217 because the time for the taxpayer to file a petition had not expired when the year assessment was made we conclude the assessment is invalid case development hazards and other considerations considering the three year statute_of_limitations for assessment under sec_6501 including the suspension of the statute_of_limitations pursuant to sec_6503 during the bankruptcy cases plus days the time to reassess the deficiency under sec_6501 has passed even if the deficiency can be reassessed under some other provision such as sec_6501 the sec_6330 petition should be conceded in the notice_of_determination the appeals officer determined pursuant to sec_6330 that the taxpayer could not challenge her year liability because she had been given an opportunity to challenge the deficiency when she received the statutory_notice_of_deficiency notwithstanding the correctness of the appeals officer’s determination under sec_6330 he should have determined under sec_6330 that the assessment is invalid because the taxpayer’s sole challenge in her petition is to the year assessment and because the assessment is invalid we should enter into a stipulated december decision that the year liability is dollar_figure however care should be taken in drafting the decision document so as not to prevent reassessment of the liability in the event some statutory exception to the three-year statute_of_limitations is applicable bulletin no bankruptcy code cases assessment supplements previous cca cc pa cbs br1 date uilc internal_revenue_service national_office field_service_advice memorandum for los angeles associate area_counsel sbse from subject assistant chief_counsel collection bankruptcy summonses cc pa cbs supplemental response - validity of an assessment made during a bankruptcy case where statutory_notice_of_deficiency was previously issued during the same bankruptcy case this chief_counsel_advice responds to your memorandum dated date to be released as on date in accordance with sec_6110 this chief_counsel_advice should not be cited as precedent legend taxpayer year this memorandum supplements our date advice to you in connection with the taxpayer’s tax_court case brought under sec_6330 we would like to clarify that the stipulated decision should not state that the year liability is dollar_figure while we concluded that the current_year assessment is invalid we also concluded that a deficiency might be reasserted december under a provision other than sec_6501 such as sec_6501 accordingly the liability may not be dollar_figure the decision should state that the assessment is invalid and that the appeals officer abused his discretion in permitting the proposed levy bulletin no bankruptcy code cases chapter reorganization date cc pa cbs br2 gl-114587-01 uil memorandum for area_counsel small_business - self employed area greensboro cc sbse gbo from mitchel s hyman assistant branch chief branch collection bankruptcy and summonses subject by way of memorandum dated date you asked for our review of the debtor’s proposed chapter plan and disclosure statement involving an sec_368 reorganization we forwarded these documents to the office of associate chief_counsel corporate and the following reflects their views the plan the plan provides that certain note-holders who are the only unsecured creditors impaired under the plan will receive the common_stock of the reorganized debtor as well as stock warrants options to purchase future issues of stock however the plan on page also provides that a small portion of stock and the warrants will be reallocated to the old common_stock holders this provision is written as follows however if the effective date occurs the holders of allowed senior note- related claims shall be deemed to have reallocated and directed the disbursing agent to distribute pro_rata to holders of old common_stock class i big_number shares of new common_stock of the reorganized company and ii warrants the reallocation provision the disclosure statement makes the following statements on pages with regard to the federal_income_tax consequences to the reorganized debtors december bulletin no coi income that is realized by the reorganized debtors will not be recognized under sec_108 the reorganized debtors will be required to reduce certain tax_attributes such as net_operating_loss carryovers nols certain tax_credits and the tax basis of their assets by the amount of the coi income that is realized as of the beginning of the tax_year following the year in which the effective date occurs it is not entirely clear whether the tax_attributes that must be reduced as a result of coi income realized by the reorganized company the reorganized debtors included in such return being referred to herein as the consolidated_group are limited to tax_attributes attributable to that particular reorganized debtor or include attributes of other members of the consolidated_group the reorganized debtors intend to take the position that attribute reduction is applied on a debtor-by-debtor basis if the internal_revenue_service were to successfully assert a contrary position the reorganized debtors’ future federal_income_tax liability could be significantly increased the reorganized company will under go an ownership_change for purposes of sec_382 as a result of consummation of the plan and accordingly the amount of the future income of the reorganized debtors that can be offset by their remaining nols and certain tax_credit carryforwards will be subject_to an annual limitation the sec_382 limitation the sec_382 limitation generally will be determined by multiplying the value of the company’s equity before the ownership_change adjusted to reflect the increase in value arising from the reduction in indebtedness as a result of the plan by the long-term_tax-exempt_rate discussion with regard to the discussion of the federal_income_tax consequences of sec_108 on pages in the disclosure statement we note that the position the reorganized debtor intends to assert is contrary to that of the service it is the service’s position that in the case of nols the reduction of attributes of the members of a consolidated_group is not done on a member-by-member basis as apparently proposed by the debtors in the case of a consolidated_group there is only one nol the consolidated nol cnol see united dominion industries inc v united_states -- december u s - no date bulletin no with regard to the discussion of sec_382 on page of the disclosure statement we note that the debtor will have to make an election under sec_382 to have the tax consequences discussed pursuant to sec_1_382-9 such election must be made by the due_date of the loss corporation’s tax_return for the taxable_year which includes the change_date bankruptcy code cases chapter reorganization date cc pa cbs br2 gl-607466-00 uil memorandum for area_counsel small_business - self employed area greensboro cc sbse gbo from mitchel s hyman assistant branch chief branch collection bankruptcy and summonses sec_382 provides that sec_382 shall not apply to any ownership_change if inter alia the old_loss_corporation is immediately before such ownership_change under the jurisdiction of the court in a title_11_or_similar_case since worldtex is an old_loss_corporation and under the jurisdiction of the court in a title_11_case then pursuant to sec_382 sec_382 does not apply however sec_382 provides that the pre-change losses of the old_loss_corporation which may be carried to a post-change_year shall be computed as if no deduction was allowable under this chapter for the interest_paid or accrued by the old_loss_corporation on indebtedness which was converted into stock pursuant to title_11_or_similar_case during a certain specified period thus an old_loss_corporation applying sec_382 would have to reduce its nol carryforward by such amount as noted above sec_382 provides that a new_loss_corporation may elect not to have the provisions of sec_382 apply sec_382 provides that if sec_382 does not apply to an exchange of debt for stock in a title_11_or_similar_case the value under sec_382 shall reflect the increase if any in value of the old_loss_corporation resulting from any surrender or cancellation of creditors’ claims in the transaction december subject et al bulletin no this responds to your memorandum dated date in which you asked for our comments on the debtor’s proposed chapter plan and disclosure statement with respect to the liquidating_trust we forwarded these documents to the office of associate chief_counsel passthroughs special industries and the following reflects their views background the above named debtor and it sec_30 subsidiaries together the debtors filed bankruptcy under chapter and subsequently filed their proposed plan and disclosure statement with the bankruptcy court section of the plan provides that shortly after confirmation the debtors will transfer the trust assets which are generally defined in section dollar_figure as all property of the debtors and their consolidated estates of every type and nature to a liquidating_trust for the benefit of the holders of allowed claims upon confirmation the subsidiaries will merge into the debtor the trust is to be managed by a_trust administrator who will also dissolve the debtors according to state law section iv a of the disclosure statement provides that the debtors will transfer the trust assets to the trust free and clear of all liens claims and encumbrances of any kind whatsoever except as otherwise provided in the plan and in certain documents relating to the settlement of claims the documents include the collateral sharing_agreement the collateral sharing order the apa and the approval order the settlement was previously approved by the bankruptcy court article xii of the plan and section iv h of the disclosure statement provide that upon the effective date the documents will be deemed ratified and reaffirmed in their entirety and incorporated into the plan and disclosure statement section of the plan provides that the trust administrator with the advice of a post confirmation committee to be formed under the plan is authorized to enter into contracts and make all other arrangements necessary or appropriate to collect sell or otherwise dispose_of all trust assets except for the claims article iii of the plan classifies the claims and interests in the plan the allowed claims and interests other than allowed administrative claims are divided into the following five classes cla sec_1 consists of all allowed priority claims cla sec_2 consists of all allowed secured claims cla sec_3 consists of all allowed unsecured claims other than the certain claims in cla sec_4 class four consists of all allowed subordinated claims subordinated per settlement cla sec_5 consists of all interests in the debtors section of the plan provides that it is intended that the trust shall be classified for federal_income_tax purposes as a liquidating_trust the transfer of the trust assets to the trust are to be treated for federal_income_tax purposes as a deemed transfer of the december trust assets to certain holders of allowed claims generally in proportion to the amount that each such allowed claim bears to the total of such allowed claims followed by a deemed transfer of the trust assets by such holders of allowed claims to the trust bulletin no section vii d of the disclosure statement provides that although the holders of allowed claims generally will be treated for federal_income_tax purposes as having received the trust assets from the debtors and then transferring them to the trust because holders of allowed administrative claims and cla sec_1 claims will receive specified fixed amounts from the trust the trust administrator intends to treat the actual payments made to holders of allowed administrative claims and cla sec_1 claims from the trust as being made in exchange for these claims on the date of payment thereof accordingly a holder of an allowed administrative claim or a cla sec_1 claim should generally recognize gain_or_loss equal to the cash received plus the fair_market_value of other_property received if any with respect to its claim less its adjusted_basis in its claim section vii d of the disclosure statement provides that although not free from doubt holders of allowed claims in classe sec_2 and as of the effective date should be treated as receiving from the debtors their share of the trust assets remaining after distributions to holders of allowed administrative claims and cla sec_1 claims in satisfaction of their allowed claims and simultaneously transferring such trust assets to the trust accordingly a holder of a cla sec_2 or cla sec_3 allowed claim as of the effective date should initially recognize gain_or_loss in an amount equal to its share of the amount of cash and the fair_market_value of any other trust assets deemed received on the effective date other than attributable to accrued and unpaid interest less the adjusted tax basis of its claim additionally such holder should recognize its allocable share of taxable_income on the trust assets realized by the trust on an annual basis section vii d provides that it is highly unlikely that holders of cla sec_4 claims will receive any distributions under the plan accordingly although not free from doubt on the effective date a holder of a cla sec_4 allowed claim should recognize gain_or_loss in an amount equal to the amount of cash and the fair_market_value of any other_property that the holder actually receives with respect thereto other than for accrued but unpaid interest section vii d provides that equity holders will not receive any consideration under the plan in general if any security which is a capital_asset such as an interest becomes worthless during a taxable_year the loss resulting therefrom equal in amount to the holder’s basis therein shall be treated as a loss arising from the sale of exchange of such security on the last day of the taxable_year law and analysis sec_301_7701-4 of the procedure and administration regulations provides that certain organizations which are commonly known as liquidating trusts are treated as bulletin no december trusts for purposes of the internal_revenue_code the code an organization will be considered a liquidating_trust if it is organized for the primary purpose of liquidating and distributing the assets transferred to it and if its activities are all reasonably necessary to and consistent with the accomplishment of that purpose a liquidating_trust is treated as a_trust for purposes of the code because it is formed with the objective of liquidating particular assets and not as an organization having as its purpose the carrying on of a profit-making business which normally would be conducted through business organizations classified as corporations or partnerships however if the liquidation is unreasonably prolonged or if the liquidation purpose becomes so obscured by business activities that the declared purpose of liquidation can be said to be lost or abandoned the status of the organization will no longer be that of a liquidating_trust revproc_94_45 1994_2_cb_684 provides conditions under which the service will consider issuing an advance_ruling classifying an entity created pursuant to a bankruptcy plan under chapter of the bankruptcy code as a liquidating_trust under sec_301_7701-4 of the procedure and administration regulations we would like to bring the following issues to your attention business_purpose taxation of the transfer the transfer the disclosure statement and the plan do not clearly explain the tax consequences of the transfer of the assets to the trust section of the plan provides that the transfer of the trust assets to the trust shall be treated for federal_income_tax purposes as a deemed transfer of the trust assets to certain holders of allowed claims generally in proportion to the amount that each such allowed claim bears to the total of such allowed claims followed by a deemed transfer of the trust assets by such holders of bulletin no december allowed claims to the trust while section vii d of the disclosure statement provides that although the holders of allowed claims will generally be treated for federal_income_tax purposes as having received the trust assets from the debtors and then transferring them to the trust because holders of allowed administrative claims and cla sec_1 claims will receive specified fixed amounts from the trust the trust administrator intends to treat the actual payments made to holders of allowed administrative claims and cla sec_1 claims from the trust as being made in exchange for these claims on the date of payment thereof sections vii d and of the disclosure statement provide similar provisions with respect the holders of other classes of claims the service believes that a transfer to a liquidating_trust for the benefit of creditors must be treated for all purposes of the code as a transfer to the creditors eg sec_61 and to the extent that the creditors are beneficiaries of the trust the transfer will be treated as a deemed transfer to the beneficiary- creditors followed by a deemed transfer by the beneficiary-creditors to the trust to the extent that the trust is being created for the benefit of equity_interest holders in the debtor the transfer to the trust should be treated as a transfer to the equity_interest holders see revrul_94_45 rul 1985_1_cb_184 where the irs considered whether to the extend that a grantor is treated as the owner of a_trust the trust will be recognized as a separate taxpayer capable of entering into a sales transaction with the grantor see also rev cancellation_of_indebtedness_income the property transfer from the debtors to the trust will be taxable to the debtors under sec_1001 of the code the debtors are treated as having transferred their property to their creditors in return for relief from an amount of debt equal to the fair_market_value of the property see 73_tc_370 the debtors will realize gain_or_loss on the difference between the debtor’s basis in the property and its fair_market_value because the debtors are in bankruptcy the fair_market_value of any property to be transferred to the trust presumably will be less than the amount of debt being discharged therefore the debtors will probably realize cod cancellation_of_indebtedness_income under sec_61 on the difference between the amount of debt discharged and the total of the cash and fair_market_value of the property transferred however due to the bankruptcy proceeding the cod income will be excluded from the debtor’s gross_income and will reduce any of the debtor’s tax_attributes transferred to the estate sec_108 and b bulletin no december it is unlikely that any_tax will ultimately be payable upon the transfer from the debtors to the trust as contended in section vii b of the disclosure statement however if there is a tax_liability the bankruptcy_estate will be left without assets to satisfy this liability further the bar date for the payment of administrative claims from the trust assets will have passed before any such liability could be determined see plan sections dollar_figure and which require requests for payment of administrative claims be filed no later than days after effective date taxation of the trust generally liquidating trusts are taxed as grantor trusts with the creditors treated as the grantors and deemed owners the theory is that the debtor transferred its assets to the creditors in exchange for relief from its indebtedness to them and that the creditors then transferred those assets to the trust for purposes of liquidation the transfer to the creditors need not actually take place it is deemed to have occurred the beneficiaries of the bankruptcy_estate will be the grantors of the liquidating_trust they will be treated as the deemed owners of the trust because the property used to fund it came from them and all the income will be distributed to them or used to pay the expenses of their trusts the beneficiaries must report each item_of_income or gain as it is earned by the trust conclusion collection_due_process cc pa cbs br1 lkwilliams gl-805109-00 uil date memorandum for associate area_counsel sbse - san francisco cc sb sf december bulletin no attn trmackinson from alan c levine chief branch collection bankruptcy summonses cc pa cbs br1 subject this memorandum responds to your request for advice dated date this document is not to be cited as precedent sec_6110 question presented do taxpayers have a right to a collection_due_process_hearing cdp under sec_6320 where after a collection suit was brought by the department of justice the lien to be foreclosed was erroneously released the release was then revoked and a new notice_of_federal_tax_lien was filed conclusion the taxpayers have a right to a cdp hearing under sec_6320 the internal_revenue_service service office of appeals appeals however is limited in what it can consider at the hearing because of the pending collection suit these limitations are set forth below background on the u s attorney’s office in san francisco filed a suit to foreclose federal tax_liens against a parcel of real_property owned by and a parcel of adjacent real_property owned jointly by the improvement made to the parcel owned by is used as the residence the suit also seeks to reduce to judgment the federal income liabilities of mr for tax years and the liabilities for and were fixed by a closing_agreement entered into by the service and mr and mrs in settlement of contested deductions taken in connection with a tax_shelter mrs income_tax liabilities for and were discharged in chapter bankruptcy but the federal tax_liens continue to attach to the parcels of real_property see the case is set for trial in after the initiation of the suit the notices of federal liens for three tax periods and erroneously self-released when the mistake was discovered the service issued a revocation of the certificate of release in order to reinstate the bulletin no december assessment liens imposed by sec_6321 a new notice_of_federal_tax_lien was filed in place of the erroneously-released notices of federal liens relating to the three tax years and a cdp_notice pursuant to sec_6320 was issued to the taxpayers as a result mr and mrs made a single timely request for a cdp hearing in which they assert two challenges to the filing of the notice_of_federal_tax_lien the statute_of_limitations has expired and therefore the notice_of_federal_tax_lien and underlying assessment liens are no longer valid and is entitled to innocent spouse relief from the and liabilities analysis pursuant to sec_6320 a taxpayer against whose property a notice_of_federal_tax_lien has been filed on or after date has the right to a cdp hearing in this case mr and mrs were entitled to receive a cdp_notice under sec_6320 because the filing was not merely a refilling as described in temp sec_301_6320-1t a q a-a6 the self-release of a notice_of_federal_tax_lien has the same effect as the filing of a certificate of release 114_f3d_99 7th cir reh’g denied u s app lexis 7th cir 59_f3d_1571 n 11th cir 205_br_668 bankr d mass consequently the self- release extinguishes the lien which can be reinstated through the filing of a notice of revocation of release sec_301_6325-1 although the released federal_tax_lien can be reinstated the released notice_of_federal_tax_lien and the priority status the notice provides cannot sec_301_6325-1 793_fsupp_994 d colo thus filing of a new notice_of_federal_tax_lien is necessary to render the assessment lien valid against a subsequent purchaser holder of security_interest in the property mechanic’s_lienor or judgment lien a certificate of revocation of a lien release must be filed prior to expiration of the collection statute of limitation sec_6325 the statute_of_limitations for collecting taxes is tolled by the filing of a collection suit 793_fsupp_994 d colo united_states v reid u s t c big_number u s dist lexis in addition the statute_of_limitations was tolled during the period of time mrs was in bankruptcy sec_6503 therefore the certificate of revocation was timely filed in this case bulletin no december creditor sec_301_6325-1 sec_6323 because the previous priority status is lost upon release and a new notice_of_federal_tax_lien is required to establish priority as of the filing_date it is our conclusion that the filing of a notice_of_federal_tax_lien under the circumstances presented in this case entitles mr and mrs to a cdp hearing under sec_6320 moreover nothing in the internal_revenue_code or the legislative_history of the irs restructuring and reform act of suggests that the taxpayer cannot receive such a hearing if his or her tax_liability is the subject of a collection suit in a united_states district_court accordingly the are entitled to a cdp hearing even though there is currently a suit to foreclose federal tax_liens against their residence and to reduce tax assessments against mr to judgment however because of the pending matter in court there are restrictions discussed below as to what the office of appeals may consider in the cdp hearing once the service has referred a case to the department of justice for defense or prosecution only the attorney_general or his or her delegate has the authority to compromise the case sec_7122 see also irm 437_us_298 822_f2d_1466 n 10th cir in an attorney_general opinion to the secretary_of_the_treasury the attorney_general concluded that the department of justice has the authority to compromise not only the case pending before it but any other matter germane to the case which the attorney_general may find it necessary or proper to consider before he invokes the aid of the courts op atty gen see also executive_order no because of the pending suit appeals does not have the authority to settle or compromise the tax_liabilities irm see also ferrel v united_states u s dist lexis w d wa service cannot act on an administrative refund claim once the matter has been referred to the department of justice for litigation this includes challenges to tax_liabilities based on the expiration of the collection statute_of_limitations and innocent spouse relief as asserted by mr and mrs in their cdp hearing request even if appeals could consider a liability challenge should be precluded from raising innocent spouse relief because she has raised the issue before in a judicial proceeding in which she meaningfully participated temp sec_301_6320-1t e and e q a-e4 mrs asserted her entitlement to innocent spouse relief under sec_6013 now codified as part of sec_6015 in a bankruptcy adversary proceeding continued bulletin no december in addition appeals cannot consider any offer involving the release of the federal tax_liens or withdrawal of the notice against the two parcels because these parcels are the subject of the collection suit the settlement authority belongs to department of justice not appeals the assessment liens are necessary to the suit because these are the liens being foreclosed see sec_301_6325-1 c f 190_frd_539 e d cal notice_of_federal_tax_lien does not need to be refiled after the filing of lien foreclosure suit in order to foreclose lien because assessment lien remains attached to property 667_fsupp_767 d wyo same the filed notice is necessary to the suit because it protects the priority of the federal_tax_lien against subsequent purchasers and lienors of the property any requests for release or withdrawal therefore must be directed to the department of justice as a result of these limitations appeals would only be able to consider in the cdp hearing only offers involving the discharge from the federal tax_liens pursuant to sec_6325 of property owned by the other than the parcels in the suit for example such offer could be a bond or a lump sum payment of tax_liabilities in an amount equal to the value of the tax_liens on the property nevertheless before appeals concludes any agreement with the taxpayers it must obtain justice_department approval irm sub sec_613 because of the split jurisdiction between the justice_department and appeals and the potential for confusion we would recommend that appeals simply wait until the conclusion of the district_court action before holding the cdp hearing requested by the if the government prevails and mr or mrs or both decide to appeal the court’s decision the hearing would have to be delayed until the conclusion continued the bankruptcy court held she was not entitled to innocent spouse relief from her and income_tax liabilities the court’s holding was affirmed on appeal to the district_court and the district court’s decision was affirmed by the ninth circuit_court of appeals in filing a notice of lis pendens as an alternative to filing a notice_of_federal_tax_lien would probably not be sufficient to protect the government in this situation at least one court has held that the priority of judgment lien creditors is not affected by a lis pendens because lis pendens is not intended to give them notice r i o inc v anderson wn app p 2d wash ct app however the lis pendens would probably protect the priority of an unfiled federal_tax_lien against subsequent purchasers and holders of a security_interest see 627_fsupp_1034 n d iowa cf 876_fsupp_230 d hawaii nat’l acceptance co of america v mardigian 259_fsupp_612 e d mich lebanon savings bank v hollenbeck minn n w minn december of the appeal it is our understanding that appeals does not wish to keep a case in its inventory any longer than necessary however we believe the unique circumstances of this case warrant the delay in holding the hearing until the exhaust their right to appeal any adverse district_court decision bulletin no once the litigation is concluded the taxpayers may raise at the cdp hearing any issues not resolved by the district_court for example if the government prevails on all issues and the property is sold for an amount less than mr and mrs liabilities then mr whose liability has been reduced to judgment may request an installment_agreement or submit an offer-in-compromise with respect to the remaining unpaid liability however the should be advised that appeals may not consider any challenge to liability or any issue decided by the district_court sec_6320 sec_6330 and sec_6330 levy levy procedure date cc pa cbs br1 klbaker gl-123729-01 uli memorandum for area_counsel sb_se area st paul attn john schmittdiel from alan c levine chief branch collection bankruptcy and summonses subject opin re custodia legis issue failure to honor levy by telephone on date and via e-mail dated date you requested our advice as to whether the service has an interest either by a levy served under sec_6332 of the internal_revenue_code or by virtue of its lien under sec_6321 of the code or an interest worth asserting in money in a bank account deposited by the clerk of the state court pursuant to a state court action additionally you inquired as to how if the service an interest it should go about asserting its interest particularly before the state court arrives at a decision and the money disappears issue december whether the service has an interest pursuant to its tax_lien or by levy in money in a bank account deposited by the clerk of a state court pursuant to a state court action if the service does have an interest how should it assert its interest bulletin no conclusion by virtue of its tax_liens the service has an interest in the money deposited with the state court which was subsequently deposited with a bank this interest has priority over any interest of and facts in late and early the the health department began investigating allegations of improper disposal of asbestos- containing material on properties owned by either the corporation or the health department subsequently issued an environmental cleanup order eco and it appears that then retained the corporation as its environmental consultant and to conduct asbestos abatement and cleanup of the properties cited in the eco submitted a plan of action for removal of the asbestos on and then subcontracted with the company to perform some of the asbestos abatement work on date requested an extension to comply with the order noting that compliance had been delayed due to insufficient payments to on the health department issued notices of violation against on the irs made an assessment against for unpaid form_941 taxes for the quarter of in the amount of dollar_figure on the filed a complaint against hereinafter defendants in state court the complaint alleged numerous violations of statutes pertaining to inspection removal transportation and disposal of asbestos from properties the defendants owned and t the imposition of civil penalties on that same date the parties filed a consent agreement with the court this agreement stipulated that the defendants had violated numerous provisions of the code relating to hazardous waste management and asbestos removal in settlement of these violations the consent agreement provided for the levying of a bulletin no december civil penalty against the defendants in the amount of dollar_figure additionally section of the consent agreement provided as follows shall satisfy any monetary obligations owing to the environmental remediation contractor who performed the asbestos cleanup on the identified buildings in within two years of the date of entry of judgment herein the contractors shall retain the right to seek compensation from defendant prior to the two year period section further provided that if were current on their installment payments of the dollar_figure the health department would not execute on its judgment additionally the health department agreed to provide partial releases of any real_estate or other_property encumbered by the judgment as long as the net_proceeds from such sale after payment of closing costs and superior lienholders were distributed in fulfillment of obligations encumbered by the consent agreement the consent agreement provided that the defendants agreed to the entry of judgment in accordance with its terms and an order for judgment was signed that day on judgment was entered in the state action which ordered that the defendants be levied a dollar_figure civil penalty subject_to the terms and conditions delineated in the order for judgment the judgment set forth the payment terms of the dollar_figure penalty ie dollar_figure to be paid over years dollar_figure to be suspended under certain conditions the judgment also included the exact language from sections and of the consent agreement subsequently in the irs made assessments against for unpaid form_941 tax_liabilities for the quarter of and the quarters of respectively totaling approximately dollar_figure additionally on a notice_of_federal_tax_lien was filed against in and with the for the corporation’s unpaid form_941 tax_liabilities on hereinafter plaintiffs filed a complaint in state court against the health department and in their complaint the plaintiffs allege that they retained to conduct the asbestos removal and cleanup required by the eco and thereafter subcontracted with to perform some of the asbestos removal work bulletin no december plaintiffs contend that issued two bills to for its services one dated in the amount of dollar_figure and one dated in the amount of dollar_figure plaintiffs further allege that they made payments totaling dollar_figure in and to but that charges exceeded the work set forth in plan of action as well as the usual and customary rates charged for said services plaintiffs cited to the judgment which provided for payment to and and noted that it had negotiated a settlement with and had attempted to settle with but had been unable to do so accordingly the plaintiffs requested a determination of their rights and obligation with respect to and the proper amount of compensation if any to which was entitled for the work performed on that same date the plaintiffs filed an ex_parte motion to deposit dollar_figure with the clerk of the court and requested that the clerk of the court deposit the funds in an interest bearing account the source of these funds is not known the plaintiffs’ motion was granted however and the money was subsequently deposited with the on the health department filed an answer to the complaint alleging that the plaintiffs’ action was barred by estoppel and laches because it had years to resolve the payment issue it also argued that the court should decide whether the plaintiffs had complied in good_faith with the judgment also filed an answer on alleging that plaintiffs’ action was barred by the affirmative defenses of accord and satisfaction laches estoppel release waiver and fraud further alleged that the complaint was barred by res_judicata and collateral_estoppel because pursuant to the previous judgment the plaintiffs were required to satisfy any monetary obligation owing to within two years of the date of entry of the judgment on the service served a levy on for form_941 tax_liabilities as had previous accounts at the bank in response to the levy the bank identified accounts in s name one of which was a in the amount of dollar_figure issued as follows signers by court order only the bank refused to honor the levy stating that withdrawals were only permitted pursuant to a court order on filed a motion for summary_judgment in the state court action arguing res_judicata a hearing on the motion was scheduled for december law analysis bulletin no sec_6321 of the internal_revenue_code provides that a lien arises in favor of the united_states upon all property and rights to property real or personal belonging to any person who refuses to pay his taxes sec_6321 the lien arises upon assessment sec_6322 and attaches to all after-acquired property of the taxpayer 326_us_265 upon assessment of the form_941 tax_liabilities the irs had a lien on all property of this lien attached to the money when acquired it and continued even though the money was subsequently deposited with the state court which then deposited it with the bank under sec_6323 of the code the lien imposed by sec_6321 is not valid against any purchaser holder of a security_interest mechanic’s_lienor or judgment lien creditor until the service has filed a notice of its lien sec_6323 defines a mechanic’s_lienor as any person who under local law has a lien on real_property or on the proceeds of a contract relating to real_property for services labor or materials furnished in connection with the construction or improvement of such property mechanic's lien statute further provides any person who improves real_estate by the contribution of labor skill or materials whether under contract with the owner of such real_estate or under contract with any agent trustee contractor or subcontractor of the owner has a lien upon the improvement and upon the land on which it is situated or to which it may be removed for the price or value of such contribution this lien attaches as against an encumbrancer without notice upon the actual and visible beginning of the improvement removed hazardous materials from properties owned by the plaintiffs one could argue that made improvements on said properties however the statute indicates that would have a lien on the property it improved not money in this case the source of which is unknown the parties in the original state action did not include nor did a representative from sign the consent agreement which was subsequently incorporated into the judgment instead there is only a judgment which requires the plaintiffs to satisfy any monetary obligations owing to december bulletin no the issue then arises as to whether the service can obtain the funds given the doctrine_of custodia legis ie a court’s power to assume complete control_over assets in its possession we assume the collection_due_process requirements under sec_6330 have been met liens estate_tax liens date uilc cc pa cbs br1 gl-152006-01 memorandum for sbse associate area_counsel newark from alan c levine chief branch collection bankruptcy summonses subject sec_2057 federal estate_tax lien on personal_property this memorandum responds to your e-mail request for advice pertaining to the special estate_tax election under sec_2057 this document may not be used or cited as precedent sec_6110 issues for personal_property located in new jersey used to secure the sec_2057 lien what would be the proper manner to describe such property on the form 668h is the client required to forward to counsel for legal review each and every sec_2057 lien filing request would a sec_2057 lien on personal_property be enforceable against either a competing creditor who executed and levied upon the asset or a purchaser of the asset while the sec_2057 lien was in effect if personal_property subject_to a sec_2057 lien is either sold transferred or executed and levied upon by a creditor within the 10-year recapture_period imposed under sec_2032a what would be the effect on the recapture_tax december conclusions bulletin no the personal_property description should be sufficient as long as it reasonably identifies what is described counsel review is required if the only property securing the sec_2057 lien is personal_property or if the lien is secured_by real and personal_property but the real_property in itself is inadequate to fully secure the lien the sec_2057 lien once filed would be enforceable against a subsequent purchaser or creditor who purchases executes against the subject property there are practical concerns with seeking such enforcement however as further discussed below the recapture_tax would be triggered unless the sale was to a member of the qualified heir’s family in the ordinary course of business a like-kind_exchange or an involuntary_conversion discussion the taxpayer_relief_act_of_1997 p l added a new estate_tax election current sec_2057 which permits estates meeting certain requirements to deduct from the gross_estate the value of qualified family-owned business interests up to dollar_figure for sec_2057 elections sec_2057 provides the mechanism for establishing by reference to sec_6324b a lien for the collection of the additional estate_tax imposed if a recapture_event described in sec_2057 occurs rules similar to the following rules shall apply p sec_6324b relating to special lien for additional estate_tax sec_2057 thus a lien arises by operation of law under sec_2057 at the time the sec_2057 election is made see sec_6324b for purposes of the sec_2057 election all family members who have acquired from the decedent an interest in a qualified family-owned business qualified heirs and all other persons with an interest in business property to which the sec_2057 lien is to attach must sign an agreement consenting to the creation and filing of the lien sec_2057 sec_2057 sec_2057 i r m form_706 united_states estate and generation-skipping_transfer_tax return schedule t the property that will be subject_to the sec_2057 lien is listed in an attachment to the agreement we have been advised by the office of associate chief_counsel passthroughs and special industries that sec_2057 encompasses both real and personal_property you have been contacted by your local technical support advisory unit with several questions pertaining to the filing of a sec_2057 lien on both real and personal_property we will address each issue raised in turn below how should personal_property be described on the form 668h bulletin no december the sec_2057 lien is filed on form 668h notice of federal estate_tax lien as modified pursuant to guidance issued to all compliance area directors on date there are no specific requirements in sec_2057 or sec_6324b to govern how personal_property should be described in the lien notice we take the position that a description of personal_property should be sufficient as long as it reasonably identifies what is described for example the description should not merely provide the name of the qualified family-owned business corporation but should sufficiently reference the property used to secure the sec_2057 lien ie the number of shares of stock held in xyz corporation we don’t believe that such exact and detailed information as serial or i d numbers is required however when is counsel review of the sec_2057 lien required technical support does not need to seek the concurrence of counsel in every case in which the property subject_to the sec_2057 lien consists in any part of personal_property if both real and personal_property are available and a lien on the real_property can adequately secure the government’s interest there is no requirement to seek counsel’s advice however if the real_property involved is inadequate or if only personal_property is involved you should contact counsel for assistance in adequately protecting the government’s interest would a sec_2057 lien on personal_property be enforceable against a subsequent purchaser of or creditor who executed against such property notice of a sec_2057 lien must be filed in order to protect the government’s interest in the subject property the filing of a notice of a sec_6324b lien is governed by sec_6324a sec_6324b sec_20_6324b-1 because sec_2057 makes applicable rules similar to sec_6324b sec_6324a would also apply to a sec_2057 lien sec_6324a requires that a notice of lien meeting the requirements of sec_6323 be filed in order for the lien to be valid against any purchaser holder of security_interest mechanic’s lien or judgment lien creditor december accordingly as long as the sec_2057 lien notice is filed in accordance with sec_6323 the sec_2057 lien will have priority over a subsequent purchaser holder of security_interest mechanic’s lien or judgment lien creditor the sec_2057 lien is therefore enforceable against a purchaser of or creditor who executes by levy against the subject property bulletin no there are practical problems associated with the enforcement of the sec_2057 lien against personal_property however the internal_revenue_service the service may have no way of knowing the sec_2057 lien property has been transferred or executed upon the service may not therefore be able to locate the purchaser or creditor in possession of the property in order to enforce its lien interest accordingly it is preferable whenever possible to obtain an agreement to use real_property to secure the sec_2057 lien the interest in the qualified family- owned business may include the underlying real_property itself and is not limited to the type of ownership_interest in the property such as shares of stock we have been informally advised of certain offices entering into additional agreements which may be effective to secure the service’s interest and prevent transfer of the sec_2057 lien property in some cases for example we have learned that one office has drafted an escrow agreement which may be executed by the service the estate representative the qualified heirs and an escrow agent pursuant to such agreement shares of stock used as sec_2057 property are deposited with and held by an escrow agent bank to be held and distributed by such agent only in accordance with certain terms and conditions the agreement provides that in the event of tax recapture under sec_2057 described in item below the service may pursue enforcement including requiring the administrative sale or delivery to the service of the escrow property the agreement further provides for termination of the escrow agreement upon the lapse of the time period for recapture under sec_2057 or upon full payment of all estate_taxes owed upon termination and agreement by the service the shares may be released to the qualified heirs if all taxes have been satisfied you may wish to consider the use of a similar agreement contingent upon local law what is the effect upon the recapture_tax if the sec_2057 lien property is sold transferred or executed upon by levy sec_2057 provides for the imposition of a recapture_tax if within years after the date of the decedent’s death and before the date of the qualified heir’s death the qualified_heir disposes of any portion of a qualified_family-owned_business_interest other than by a disposition to a member of the qualified heir’s family or through a qualified_conservation_contribution under sec_170 we coordinated this question with the office of associate chief_counsel passthroughs and special industries it is that office’s position that in general the sale or transfer of the sec_2057 lien property would trigger the recapture_tax pursuant to sec_2057 unless the sale i was to a member of the qualified heir’s family bulletin no december ii was through a qualified_conservation_contribution iii qualifies as a sec_1031 transaction like-kind_exchange iv qualifies as a sec_1033 transaction involuntary_conversion or v was in the ordinary course of business it is also that office’s position that a third party levy would trigger sec_2057 recapture see priv ltr rul concluding that foreclosure proceedings instituted by mortgagee over taxpayer’s property did not constitute a disposition under sec_2032a since no transfer of the property had taken place revrul_89_4 1989_1_cb_298 holding that an estate’s sale of specially valued real_estate to halt a foreclosure constitutes a disposition for purposes of sec_2032a


t c summary opinion united_states tax_court kenneth michael francis and sedef tarlan francis petitioners v commissioner of internal revenue respondent docket no 19986-10s filed date kenneth michael francis pro_se mistala g merchant and maggie stehn student for respondent summary opinion armen special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed pursuant to sec_7463 the decision to be entered is not reviewable by any other court and this opinion shall not be treated as precedent for any other case respondent determined a deficiency in petitioners’ joint federal_income_tax of dollar_figure and an accuracy-related_penalty under sec_6662 of dollar_figure after a concession by petitioners the issues for decision are whether petitioners must include an award of backpay in their gross_income for and whether they are liable for the accuracy-related_penalty under sec_6662 background some of the facts have been stipulated and they are so found we incorporate by reference the parties’ stipulation of facts and accompanying exhibits petitioners resided in the state of california when the petition was filed unless otherwise indicated all subsequent section references are to the internal_revenue_code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure all dollar amounts are rounded to the nearest dollar petitioners concede that they received but failed to report a taxable retirement distribution of dollar_figure on their joint federal_income_tax return in kenneth michael francis petitioner was granted an award of backpay by the u s air force board for the correction of military records bcmr the bcmr held inter alia that petitioner was wrongfully denied a promotion to the rank of lieutenant colonel in the u s air force promotion denial in date petitioners received a payment of dollar_figure promotion backpay from the defense finance and accounting service dfas the promotion backpay represented the difference between the military pay and allowances petitioner received as an air force major and the military pay and allowances he would have received as an air force lieutenant colonel while he served on active_duty from date to date in date petitioner self-prepared and filed petitioners’ joint federal_income_tax return joint_return petitioners however did not report the promotion backpay on their joint_return dfas mailed petitioner a letter dated date dfas letter that states the following are enclosed for your use and information treasury_department form_w-2 wage and tax statement indicating taxable_income that the record is not clear as to why the payment was not made until date must be reported on your next tax_return attached to the dfas letter was a form_w-2 wage and tax statement for reporting the promotion backpay as wages at trial petitioner testified that petitioners did not receive the dfas letter and form_w-2 until approximately date because dfas had mailed the letter to his mother’s address in illinois illinois address petitioners were aware however that dfas typically sent tax correspondence to the illinois address and that the illinois address was petitioner’s permanent home of record on file with dfas in or around date petitioner began treatment for melanoma and remained in treatment for approximately a year thereafter petitioners never filed an amended joint_return for including the promotion backpay in their gross_income or otherwise reported the promotion backpay on any other tax_return i burden_of_proof discussion in general the commissioner’s determinations set forth in a notice_of_deficiency are presumed to be correct and the taxpayer bears the burden of proving that those determinations are in error rule a 290_us_111 pursuant to sec_7491 the burden_of_proof as to factual matters shifts to the commissioner under certain circumstances petitioners have neither alleged that sec_7491 applies nor have they established their compliance with its requirements accordingly petitioners bear the burden_of_proof see rule a welch v helvering u s pincite cf sec_6201 ii unreported income sec_61 provides the general_rule that gross_income includes income from whatever source derived including compensation_for services sec_451 generally provides that taxpayers such as petitioners who use the cash_receipts_and_disbursements_method of accounting must include any item_of_gross_income in their gross_income for the taxable_year in which the item is actually or constructively received see sec_1_451-1 income_tax regs petitioners generally argue that the promotion backpay received in should be included in their gross_income for the years through because the promotion backpay is attributable to the services petitioner provided in those years petitioners further contend that the promotion backpay should have been allocated to the years through because their taxable_income was subject_to a lower tax_bracket during those years when compared to in this regard we note that petitioners do not allege that sec_6201 applies and do not dispute that they received all dollar_figure of the promotion backpay in date reported on the form_w-2 wage and tax statement issued by dfas petitioners believe that by reporting the promotion backpay as taxable wages for on form_w-2 dfas has placed an artificial tax burden on them that is contrary to the purpose of the bcmr decision ie to place petitioner in the same position that he would be in if the promotion denial had never occurred the parties do not dispute that dfas paid and petitioners actually received the promotion backpay in petitioners have failed to show and the record does not suggest that the promotion backpay was constructively received by petitioners in any prior year therefore the promotion backpay is properly includible in petitioners’ gross_income for see sec_451 prewitt v commissioner tcmemo_1995_24 sec_1_451-1 income_tax regs petitioners’ argument that they should be entitled to retroactively allocate the promotion backpay to their gross_income for the years through because their tax_bracket for that period was lower than their tax_bracket for has been rejected by this court in the past see prewitt v commissioner tcmemo_1995_ we acknowledge that the purpose of the bcmr decision was to place petitioners also argue that dfas should have reduced the promotion backpay by the amount of civilian pay petitioner earned during the period from date through date civilian pay offset the civilian pay offset does not apply to petitioner’s promotion backpay however because the promotion backpay relates to a period when petitioner was not engaged in civilian employment see 47_f3d_1140 fed cir see also 40_fedclaims_67 petitioner in the same situation he would have been in if the promotion denial had never occurred although not clear from the record it may very well be that petitioners would have paid less tax with respect to the promotion backpay if the promotion denial had never occurred under the circumstances we can appreciate petitioners’ dismay nevertheless we are constrained to apply the law as written by congress to the facts as they occurred and not as they might have occurred see 417_us_134 we cannot reallocate the promotion backpay petitioner received in to prior years simply because doing so might provide favorable tax treatment for petitioners therefore we sustain respondent’s deficiency determination iii accuracy-related_penalty respondent determined that petitioners are liable for the accuracy-related_penalty under sec_6662 for a substantial_understatement_of_income_tax for the taxable_year sec_6662 and b imposes a penalty equal to of the amount of any underpayment that is due to a substantial_understatement_of_income_tax an individual substantially understates his or her income_tax when the reported tax is understated by the greater of of the tax required to be shown on the return or dollar_figure sec_6662 with respect to a taxpayer’s liability for any penalty sec_7491 places on the commissioner the burden of production thereby requiring the commissioner to come forward with sufficient evidence indicating that it is appropriate to impose the penalty 116_tc_438 once the commissioner meets his burden of production the taxpayer must come forward with persuasive evidence that the commissioner’s determination is incorrect see rule a welch v helvering u s pincite respondent has satisfied his burden of production because the record shows that petitioners understated their income_tax for by dollar_figure which constitutes a substantial_understatement within the meaning of sec_6662 see higbee v commissioner t c pincite the accuracy-related_penalty does not apply to any portion of an underpayment however if the taxpayer proves that the taxpayer had reasonable_cause for that portion of the underpayment and that the taxpayer acted in good_faith with respect to such portion sec_6664 sec_1_6664-4 income_tax regs petitioners bear the burden of proving that the accuracy-related_penalty should not be imposed see sec_6664 higbee v commissioner t c pincite the decision as to whether the taxpayer acted with reasonable_cause and in good_faith is made on a case-by-case basis taking into account the pertinent facts and circumstances see 85_tc_934 most important in this decision is the extent of the taxpayer’s effort to assess the taxpayer’s proper tax_liability sec_1_6664-4 income_tax regs a taxpayer must take reasonable steps to determine and apply the law 99_tc_202 campbell v commissioner tcmemo_2001_118 petitioners contend that they should not be liable for the accuracy-related_penalty with respect to the portion of the underpayment attributable to the promotion backpay although petitioners admit that they received the promotion backpay in date they did not report the promotion backpay on their joint_return because they believed that the payment was nontaxable petitioners however presented no evidence that they consulted a tax professional or took any other as for the portion of the underpayment attributable to the unreported retirement distribution petitioners make no argument regarding the penalty and are therefore deemed to have conceded that matter reasonable steps to ascertain the proper tax treatment of the promotion backpay they received moreover although petitioners allege that they did not receive the dfas letter or the form_w-2 until date they still did not file an amended joint_return or contact a tax professional thereafter petitioners admitted at trial that they should have filed an amended_return once they received the dfas letter and form_w-2 petitioners however point to petitioner’s yearlong treatment for melanoma beginning in date as reasonable_cause for not filing an amended joint_return petitioners provided no explanation as to why they did not file an amended joint_return once petitioner’s treatment for melanoma ended or why petitioner sedef tarlan francis could not have prepared an amended_return for petitioner to sign although the record might support a finding of good_faith on petitioners’ part the standard we are obliged to apply also requires the existence of reasonable_cause see sec_6664 sec_1_6664-4 income_tax regs thus petitioners might have had a good_faith belief that the promotion backpay was nontaxable petitioner was aware that dfas frequently sent tax correspondence to his mother’s address in illinois petitioner however presented no evidence that he inquired whether his mother received the dfas letter or form_w-2 before he filed petitioners’ joint_return in date however they have failed to prove that they acted with reasonable_cause under the relevant facts and circumstances therefore we sustain respondent’s determination with respect to the accuracy-related_penalty conclusion we have considered all of the arguments advanced by petitioners and to the extent not expressly addressed we conclude that those arguments do not support a result contrary to our decision herein to give effect to our disposition of the disputed issues as well as petitioners’ concession decision will be entered for respondent


internal_revenue_service number release date index number --------------------- ------------------------------------------------------------ ------------------- ------------------------------------------ ---------------------------- ------------------------------------------------- in re ------------------------------------------ department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------- id no ------------- telephone number refer reply to cc corp b03 plr-134526-07 date date -------------------------------------------- --------------------------------------------------------- us parent ---------------------------------------------------------------- ----------------------------------------------------------- foreign sub ------------------------------------------------------------------- foreign sub ------------------------------ ------------------------------------------------------------------- foreign sub ------------------------------ ------------------------------------------------------------------- ------------------------------ amalco ------------------------------------------------------------------- date a date b date c -------------------------------------------------------- country x ---------------------------- --------------------------- ---------------------- ---------- prior to the consummation of an agreement of amalgamation the we respond to your letter dated date submitted on behalf of us parent plr-134526-07 dear -------------- requesting rulings concerning the federal income_taxation of the proposed transaction described below additional information was submitted in letters dated august august september and date the information submitted is summarized below amalgamation between foreign sub foreign sub and foreign sub which agreement was dated on date a effective date b us parent owned all the outstanding common_stock of foreign sub and foreign sub minority shareholders owned preferred_stock in foreign sub foreign sub had no preferred_stock outstanding foreign sub owned all the outstanding common_stock of foreign sub minority shareholders owned preferred_stock in foreign sub the preferred shareholders in foreign sub and foreign sub are hereinafter referred to as the minority preferred shareholders in the amalgamating transaction foreign sub foreign sub and foreign sub amalgamated under the corporate law of country x with newly-created amalco being the resulting entity in the amalgamation shareholders gave up all shares in foreign sub foreign sub and foreign sub the minority preferred shareholders received preferred shares in amalco with terms identical to those of the foreign sub and foreign sub preferred shares they gave up us parent in exchange for the common of foreign sub and foreign sub that it gave up was issued all the common_stock of amalco country x counsel to us parent caused amalco also to issue preferred_stock to us parent in the amalgamation in the belief that such issuance would benefit us parent under country x corporate law going to issue preferred_stock to us parent and as soon as us parent's united_states tax advisors became aware of the preferred_stock issuance they took immediate action to attempt to rescind the issuance of preferred_stock to us parent out of concern that such preferred_stock constituted nonqualified_preferred_stock under sec_354 of the internal_revenue_code on date c a country x court ruled that amalco will be considered never to have issued preferred_stock to us parent neither us parent nor its united_states tax advisors realized that amalco was parent also makes the following representations a there were no actual or constructive transfers of money or property between us parent and amalco with respect to the common or preferred_stock held by us parent plr-134526-07 b no material changes in the legal or financial arrangements occurred since the amalgamation between any member of the affiliated_group of which us parent and amalco are members c after the rescission of the preferred shares the legal and financial arrangements among us parent the minority preferred shareholders and amalco will be identical in all material respects to the legal and financial arrangements among us parent the minority preferred shareholders and amalco or its predecessor corporations prior to the amalgamation d the issuance of the preferred shares in the amalgamation and the rescission of those shares will occur within the same taxable_year of us parent and amalco us parent and amalco both have a taxable_year ending date d e the rescission of the preferred shares is intended to restore the legal and financial arrangements between us parent and amalco as would have existed had the preferred_stock not been issued f g h i j the effect of the rescission is to cause the legal and financial arrangements between us parent amalco or its predecessor corporations and the minority preferred shareholders to be identical in all material respects from the date immediately before the issuance of the preferred shares to us parent to such arrangements as would have existed had the issuance not occurred neither us parent nor amalco has taken or will take any material position inconsistent with the position that would have existed had the preferred_stock not been issued the distribution on the preferred shares to the minority preferred shareholders would have occurred regardless of the amalgamation neither us parent nor its united_states tax advisors realized that the preferred shares were going to be issued prior to the amalgamation and as soon as the united_states tax advisors were aware of the preferred_stock issuance they took immediate action to rescind the shares all parties to the amalgamation us parent amalco or its predecessor corporations and the minority preferred shareholders will be in the same economic position after the rescission of the issuance of the preferred shares to us parent as they were before the amalgamation the rescission will not result in any economic or value shift between and among us parent amalco and the minority preferred shareholders plr-134526-07 k additional shares of common_stock will be issued to us parent in an amount that would have been issued in the amalgamation had the preferred_stock not been issued to us parent the rulings contained in this letter are based upon information and except as specifically set forth above we express no opinion concerning the tax based solely on the facts submitted the representations made and the parties’ restoration before the end of the taxable_year of the relative positions they would have occupied if preferred_stock had not been issued to us parent rev_rul c b we rule that for federal_income_tax purposes us parent will be treated as not having received preferred shares in amalco in the amalgamation consequences of these transactions under any other provision of the code and regulations or about the tax treatment of any conditions existing at the time of or effects resulting from these transactions representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination the internal_revenue_code provides that it may not be used or cited as precedent a copy of this letter must be attached to any income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their returns that provides the date and control number of the letter_ruling this ruling is directed only to the taxpayer s requesting it sec_6110 of in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your first two authorized representatives listed on form_2848 the power_of_attorney and declaration of representative sincerely ____________________________ ross e poulsen assistant to the branch chief branch office of associate chief_counsel corporate cc