Opinion ID: 205504
Heading Depth: 3
Heading Rank: 3

Heading: Mitchell's Negotiations with the IRS

Text: In June of 2003, Mitchell hired an attorney and submitted tax returns for all years at issue in this case. Based on those tax returns, Mitchell's adjusted gross income and federal income tax for the relevant years were as follows: Adjusted Gross Tax Income Owed 1998 $164,782 $ 56,947 1999 $103,136 $ 35,887 2000 $ 88,586 $ 28,428 2001 $132,741 $ 43,058 2002 $128,561 $ 40,727 Total $617,806 $205,047 Upon the late filing of his tax returns, the IRS sent Mitchell a final demand for payment. Rather than paying any of his delinquent taxes, Mitchell submitted an offer in compromise to the IRS, offering $25,000 for over $200,000 in past due taxes. A pending offer in compromise halts any collection activity by the IRS, and Mitchell understood this. This first offer was returned due to certain deficiencies in Mitchell's employment tax returns. Mitchell submitted a second offer in compromise for $25,000 in January of 2004, which was returned because Mitchell had not made any of his 2003 estimated tax payments. Finally, in April 2004, Mitchell submitted a third offer for $35,000. In November 2004, the IRS sent Mitchell a letter indicating that it had completed a preliminary analysis of his third offer in compromise and determined that Mitchell was capable of fully paying his outstanding tax debts. In response, Mitchell's attorney sent a letter on November 12, 2004 to the IRS, which warned: [I]n determining what is in the best interest of the IRS, the Service should look at reasonable collection potential. . . due to the fact that the taxpayer could file bankruptcy against all of the non-payroll taxes except 2002 and 2003 (and could do so against 2002 in April, 2006, and against 2003 in April, 2007). [7] (Govt. Exh. 21 Tab M at LMUSA 0418). In June 2005, the IRS officially returned Mitchell's third offer in compromise, because Mitchell had fallen behind on his 2004 estimated tax payments. The IRS informed Mitchell that it had determined he could pay his past due taxes in full and that he could not submit another offer in compromise for six months. Also in June of 2005, the IRS issued a notice of intent to levy against all of Mitchell's assets and income. In August 2005, after receiving the notice of intent to levy, Mitchell formed MI Real Estate Network Incorporated (MI Real Estate). Mitchell's wife, Kathleen, was made the sole officer, director, and shareholder of MI Real Estate. When asked why Kathleen was made the sole officer, director, and shareholder, Mitchell testified: We received the garnishment [notice of intent to levy] shortly before and the garnishment clearly stated that they could get all my income. I hadn't worked out a compromise and under advice of . . . accountants and attorneys, their advice was if you want to continue selling real estate, continue operating as a realtor continuing to make money to support your family . . . then you're going to at this point need to consider going ahead and forming a corporation so that the IRS, who will not compromise with you, does not come in and just shut you down. Plus, it will be a way that you could structure paying your taxes so that you don't wait at the end of the year to pay a lump sum that sometimes you have it and sometimes you don't. (R.3:701). Also in 2005, although Mitchell had not resolved his tax delinquencies for 1998 to 2002, he and Kathleen started building a larger house on Leafbrook Drive (Leafbrook House) and agreed to pay $465,000 for construction. In December 2005, Mitchell and Kathleen sold the Pintail House, realizing a profit of approximately $56,000. Kathleen deposited the proceeds into the bank account she used as a Mary Kay beauty consultant, and she eventually used $46,000 of the proceeds as a down payment on the Leafbrook House. Kathleen obtained a stated income loan for the Leafbrook House, and the house was titled solely in her name. As with the Pintail House, Mitchell made all the mortgage payments (approximately $3,300 per month), insurance payments, and utility payments for the Leafbrook House. When asked why the Leafbrook House was purchased solely in Kathleen's name, Mitchell testified that it was because he was unable to obtain a loan. In February 2006, the IRS issued levies on Mitchell's income from Kennon Parker and on Mitchell's personal bank account at Wachovia Bank. At this time, Mitchell closed his personal bank account at Wachovia and began depositing his commission checks into Kathleen's Mary Kay account and into the MI Real Estate account, even though MI Real Estate was not yet operational. [8] On February 16, 2006, Mitchell proposed to the IRS an installment agreement to pay his past due taxes. A pending installment agreement stops any other collection activity by the IRS and requires full repayment of taxes. Mitchell proposed to timely make his estimated tax payments and to pay nine percent, eventually increasing to twelve percent, of his gross revenues to the IRS. The IRS accepted Mitchell's proposed installment agreement, and Mitchell made payments pursuant to the agreement in July and August of 2006. On August 29, 2006, Mitchell filed his bankruptcy petition. In addition to the expenditures described above, Mitchell also made discretionary expenditures from 1998 to present, rather than paying his past due taxes. Those discretionary expenditures included: (1) repaying a personal loan of approximately $30,000; (2) purchasing stock in Compaq and Intel; (3) from 2002 to 2006, contributing $100 per month to an investment account; (4) from 2002 to 2005, purchasing three vacation timeshares, which included almost $4,000 in down payments and monthly payments ranging between $100 and $250; and (5) donating approximately $81,000 to his church.