Liquidation of assets not mandated for taxpayers’ installment agreement

The Tax Court finds the taxpayers' residence and other properties were necessary for the production of income or the health and welfare of the family.
By Maria M. Pirrone, CPA, LL.M.

The Tax Court remanded a case to the IRS Appeals Office after deciding an IRS settlement officer abused her discretion by withholding approval of an installment agreement pending liquidation of nearly all the taxpayers' assets, including their home.

Facts: The taxpayers, Martin D. Kirkley and his wife, Sheila G. Kirkley, were the sole owners of an S corporation. They owed over $4 million in federal income tax, interest, and penalties for tax years 2013 and 2014. The IRS issued them a Notice of Federal Tax Lien filing in December 2015 and a final notice of intent to levy in January 2016.

In February 2016, the Kirkleys submitted a Form 12153, Request for a Collection Due Process or Equivalent Hearing, for the lien and levy notices. In the request, they inquired about entering into an installment agreement and stated they were attempting to borrow against their home equity.

In June 2016, the settlement officer (SO) assigned to their case asked the Kirkleys to complete a Form 9465, Installment Agreement Request. In addition, she asked them to forward their applications for a home-equity loan and denial letters if the applications for the loans were denied. The SO also stated if they were unable to obtain a loan, the Kirkleys would be required to sell their assets before the parties could enter into an installment agreement. The Kirkleys submitted Form 9465, proposing to pay $50,000 per month.

The SO reiterated that they were expected to sell all their assets except for two vehicles, including their principal residence and real property used by the S corporation. They could satisfy this requirement by providing evidence that the assets had been placed up for sale. In subsequent discussions, the Kirkleys told the SO they had applied for a loan, repeated their offer of $50,000 per month, and agreed they would pay a lump sum of more than $1 million from equity in real estate and other property they sold.

The SO subsequently sent a letter to the Kirkleys stating that she could not accept the proposed installment agreement because the Internal Revenue Manual (IRM) did not permit the IRS to enter into an installment agreement before the Kirkleys liquidated their assets. Also, the letter stated, the IRS's financial investigation had indicated the Kirkleys were able to pay installments of only $3,438 per month.

Early in 2017, the Kirkleys received a notice of determination rejecting the proposed installment agreement and sustaining the lien and levy notice. The Kirkleys petitioned the Tax Court for review.

Issues: Sec. 6330(c)(3)(C) requires IRS personnel to consider "whether any proposed collection action balances the need for the efficient collection of taxes with the legitimate concern of the person that any collection action be no more intrusive than necessary."

IRM Section 5.14.1.4(5) states that an SO should "explore the possibility of liquidating or borrowing against ... assets" when considering an installment agreement "unless ... the asset is necessary for the production of income or the health and welfare of the family."

Holding: The Tax Court held that the SO had abused her discretion and remanded the case to the IRS Appeals Office for a supplemental hearing regarding the lien and levy notice. The court noted that it was not resolving the issue of the installment agreement.

The court cited Budish, T.C. Memo. 2014-239, in which it had rejected an Appeals officer's determination to uphold a notice of lien because of her mistaken belief that she lacked discretion to do otherwise under the IRM. The court noted that the record in the Kirkleys' case did not show that the SO considered whether their principal residence and S corporation properties were necessary for the production of income or the health and welfare of the family and therefore did not balance the need to collect tax with the legitimate concern that the collection action be no more intrusive than necessary.

In failing to perform that analysis, the SO abused her discretion by rejecting the proposed installment agreement and by issuing the notice of determination. Accordingly, the case was remanded to Appeals.

  • Kirkley, T.C. Memo. 2020-57

By Maria M. Pirrone, CPA, LL.M., associate professor of taxation, St. John's University, Queens, N.Y.

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