No “Alternatives” to Tax Lien Foreclosures

The IRS is not required to exhaust “alternative collection methods” before foreclosing tax liens, because IRC § 7403 contains no such requirement, a district court in Nebraska ruled. The court rejected the argument of taxpayer Jennifer Meisner to apply section 6331(j)(2)(D), which applies to levies, because levies and tax lien foreclosures are “separate mechanisms used by the IRS to collect unpaid taxes from recalcitrant taxpayers.” The court also refused to enforce statements contained in an Internal Revenue Manual because an IRM “does not have the force of law.”

The government won summary judgment in an action to foreclose on Meisner’s residence to collect a portion of more than $374,000 in unpaid income taxes from 1991, 1992 and 1994–1996. Meisner failed to pay income taxes on an average of $150,000 annual royalty income after her divorce from Randall Meisner, a member of the rock group the Eagles. The district court previously granted the government’s motion for partial summary judgment on the outstanding balance of the taxes (See U.S. v. Meisner , 99 AFTR2d 2007-725) and in May ruled the IRS could foreclose upon the home.

Meisner first argued that IRM 5.17.4.7(2) required the IRS to prove that “all administrative remedies available have been exhausted” before proceeding with a foreclosure. The court disagreed, saying the IRM “is not binding on the IRS in litigation with taxpayers” and “only governs the internal affairs” of the IRS.

Meisner next argued that the principle of section 6331(j)(2), regarding levies, should apply to a foreclosure suit under section 7403. The court disagreed, saying that if Congress had intended for the exhaustion-of-remedies requirement to apply to section 7403, it would have amended the statute to reflect it. The ruling noted that Congress likely added several safeguards to levies under section 6331 because they are a purely administrative action, whereas section 7403 lien foreclosures are performed under court supervision.

Lastly, the court ruled that the equities did not weigh in Meisner’s favor to prevent the foreclosure. Her correspondence with counsel showed she was coherent and intelligent. She was the sole owner of the home, which was large and had no mortgages attached to it; she apparently did not intend to move to a smaller and more affordable home; nor did she intend to mortgage the current one to pay her tax debt. The court also found the property was uninsurable and falling into disrepair—findings backed up by Meisner’s own affidavit. This favored an expeditious foreclosure to ensure the “prompt and certain collection of delinquent taxes.”

Earlier, the court ruled inadmissible an affidavit by Meisner’s attorney. To the extent that the affidavit included conclusions and opinions based on the attorney’s review of historical financial information and not representation of his client, it contained expert witness testimony, the court held. But the attorney could not be both counsel and expert witness, it said.

CPAs are often called upon to provide information for court cases or to testify as expert witnesses. Practically and legally, these functions are different. Each CPA should carefully define and act as either a source of factual information or as an expert witness.

U.S. v. Meisner, 99 AFTR2d 2007-2627.

Prepared by Darlene Pulliam , CPA, Ph.D., McCray Professor of Business and professor of accounting, the College of Business, West Texas A&M University, Canyon, Texas.