Hinerfeld, TC Memo 2019-47
The Tax Court has held that a case law rule—that a court in dealing with an administrative agency determination, must judge the agency’s action solely by the grounds invoked by the agency—did not prevent it from ruling on a collection due process (CDP) case despite the fact that IRS provided little detail to explain its actions. And the Court then determined that the taxpayer’s offer in compromise (OIC) should have included the value of a home that he had transferred to his wife.
Background—courts ruling on actions of agencies. The Supreme Court, in SEC v. Chenery Corp., (S Ct 1943) 318 U.S. 80: a) held that a reviewing court, in dealing with a determination which an administrative agency alone is authorized to make, must judge the propriety of such action solely by the grounds invoked by the agency; b) also held that if the administrative action is to be tested by the basis upon which it purports to rest, that basis must be set forth with such clarity as to be understandable; c) but drew a distinction between acts of administrative discretion, in which courts should be reluctant to interfere, and legal determinations, which are more squarely within the courts’ purview.
Background—offers in compromise. In connection with a collection due process (CDP) hearing, an Appeals officer must verify that the requirements of applicable law and administrative procedure have been met, consider issues properly raised by the taxpayer, and consider whether any proposed collection action balances the need for the efficient collection of taxes with the taxpayer’s legitimate concern that any collection action be no more intrusive than necessary. (Code Sec. 6330(c)(3))
An OIC is an offer made by the taxpayer to IRS to enter into a contract in which IRS agrees to accept an amount different from what the taxpayer owes in taxes. (Reg § 601.203) There are three grounds for such a compromise: (1) doubt as to liability; (2) doubt as to collectibility; and (3) promotion of effective tax administration. (Code Sec. 7122(a), Reg § 301.7122-1(b))
IRS may compromise a tax liability on doubt as to collectibility where the taxpayer’s assets and income render full collection unlikely. When a taxpayer submits an OIC based on doubt as to collectibility, the Appeals officer follows Internal Revenue Manual (IRM) guidelines to determine the taxpayer’s reasonable collection potential (RCP). (IRM pt. 184.108.40.206) Those guidelines consist of determining: (1) assets, including dissipated assets, (2) future income, (3) amounts collectible from third parties, and (4) assets available to the taxpayer but beyond the reach of the Government. (IRM pt. 220.127.116.11.1 (Apr. 30, 2015)) Under IRS procedures, IRS will not accept a compromise that is less than the RCP value of the case absent a showing of special circumstances. (Rev Proc 2003-71, 2003-2 CB 217, sec. 4.02(2)) IRS has no duty to negotiate with a taxpayer before rejecting an OIC. (Fargo v. Comm., (CA 9 2006) 97 AFTR 2d 2006-2381, affg (2004) TC Memo 2004-13)
A taxpayer may appeal the Appeals Office determination to the Tax Court within 30 days of the determination, and if an appeal is timely filed, the Court will have jurisdiction with respect to the matter. (Code Sec. 6330(d)(1), Reg § 301.6330-1(f)(1)) Where there is no challenge to the underlying tax liabilities, the Court reviews IRS’s determination for an abuse of discretion. (Goza, (2000) 114 TC 176)
Background—whether a titleholder is really a nominee under New York law. Federal courts have generally used the factors for determining whether a titleholder is really a nominee for a delinquent taxpayer under New York law that were first enunciated in LiButti, (DC NY 1995) 76 AFTR 2d 95-6381. Those factors are (1) whether inadequate or no consideration was paid by the nominee; (2) whether the property was placed in the nominee’s name in anticipation of a lawsuit or other liability while the transferor remains in control of the property; (3) whether there is a close relationship between the nominee and transferor; (4) whether the parties failed to record the conveyance; (5) whether the transferor retains possession; and (6) whether the transferor continues to enjoy the benefits of the transferred property.
Facts. The taxpayer, Mr. Hinerfeld, owed $550,000 with respect to 2002 and 2003 taxes. At all relevant times, he was married to his wife, Mrs. Hinerfeld.
Since 1968, Hinerfeld and his wife resided in a house located in Larchmont, New York (Larchmont residence). In February 2003, Hinerfeld executed a deed by which he transferred title to the Larchmont residence to Mrs. Hinerfeld. The parties stipulated the deed to be a quitclaim deed. After transferring the Larchmont residence to his wife, Hinerfeld continued to pay at least some of the expenses of maintaining the property.
Between March 2002 and November 2003, Mrs. Hinerfeld made payments to various financial institutions totaling $5 million, including a March 2000 payment of $300,000 in a November 2002 payment of $750,000.
In July 2013, IRS issued to Hinerfeld a lien notice regarding the unpaid taxes. Hinerfeld timely requested a CDP hearing. That request referred to a pending OIC Hinerfeld had made to settle his liabilities but raised no other issues. Hinerfeld did not dispute the amount of his liabilities.
Hinerfeld’s attorney, Mr. Kestenbaum, sent IRS Settlement Officer (SO) Matthews a copy of Hinerfeld’s affidavit in which he stated: “In exchange for the deed [to the Larchmont residence], my wife paid off my bank guarantees of $300,000.00 to Commerce Bank and $750,000.00 to Fleet Bank”. The following month, after the initial CDP hearing, Mr. Kestenbaum sent SO Matthews another letter that identified wholly different payments as the consideration. After claiming that “Mrs. Hinerfeld paid substantial consideration for the deed transfer”, Mr. Kestenbaum elaborated: “[A]mong other payments, Mrs. Hinerfeld satisfied debts of her husband to LaSalle Bank in the amount of $830,000.00 and $700,000.00 and then paid approximately $1,000,000.00 to satisfy the mortgage on the subject premises.”
SO Matthews rejected the OIC, and IRS Appeals sustained her ruling. In the notice of determination it issued to Hinerfeld, Appeals stated that it could not consider an OIC as a collection alternative because he had sufficient equity in assets to satisfy the liabilities. In reaching that conclusion, SO Matthews treated the Larchmont residence as an asset available to satisfy Hinerfeld’s liabilities on the ground that Mrs. Hinerfeld held that property as Hinerfeld’s nominee.
The Appeals notice did not explain in any detail SO Matthews’ reasoning. Instead, it stated only: “Most or all of the factors listed in… Internal Revenue Manual section 18.104.22.168.7.2 that are used to determine if a nominee situation exists are present in this case.”
Court could rule without violating Chenery. The Court held that upholding a determination by Appeals that lacks an adequate explanation does not violate the doctrine of Chenery, when the failure of explanation relates to a legal issue rather than a matter committed to the agency’s discretion.
Hinerfeld argued that SO Matthews abused her discretion when she denied his OIC. He said that, although Matthews cited to the IRM and its provisions respecting nominee theories of ownership, the administrative record disclosed no analysis or thoughtful consideration of any of the factors and failed to apply them in a reasoned way to his case.
The Court said that, although Matthews’s determination notice provided only a conclusory explanation of her determination that Mrs. Hinerfeld held the Larchmont property as Hinerfeld’s nominee, the Court could nonetheless uphold that determination without violating the Chenery doctrine. The reason, the Court said, was that the treatment of Mrs. Hinerfeld as her husband’s nominee was a legal issue that was not committed to IRS’s administrative discretion. SO Matthews’ failure to explain her reasoning meant that, even if the Court were to reach the same conclusion she did, the Court could not be confident that it would be relying on the same analysis. But the Court’s upholding her determination on grounds that might differ from the precise analysis she employed would not encroach upon IRS’s discretion.
The Court said that the issue of the adequacy of a taxpayer’s proposed OIC is one committed to IRS’s administrative discretion. Therefore, the Court could not uphold the rejection of an OIC on grounds other than those on which the agency relied. The Court said that it is not up to it to say which proposals are acceptable and which are not. But IRS had already already told the Court that it would not accept Hinerfeld’s OIC if he could be treated as owning the Larchmont residence. And the question of Hinerfeld’s rights in that property was a legal one. The adequacy of an offer of $x in settlement of a liability of $y made by a taxpayer with assets of $z is a question for the agency to determine. “But whether the assets available to satisfy the taxpayer’s liability are $z or some lesser amount may turn on determinations of law as to which the Court’s reviewing authority comes into play.”
The Court then said that, although SO Matthews’ failure to articulate her reasoning did not risk the Court’s encroaching on IRS’s discretion in violation of the Chenery doctrine, that failure could still be grounds for remand if it prevented effective judicial review. The Court said that, to satisfy such an adequate explanation requirement, however, an explanation need not be “a paragon of clarity.” It need only be sufficient to allow for effective judicial review.” Matthews’ explanation rejection of the OIC, though conclusory, was nonetheless adequate for the Court to conduct judicial review.
Wife was husband’s nominee. The Court then looked at whether Mrs. Hinerfeld was in fact a nominee, and it concluded that she was.
It started off by noting that, although Federal law provides means by which IRS can proceed against property owned by a delinquent taxpayer, the question of whether a taxpayer has an interest in particular property must be answered by State law. And, so it looked to the LiButti factors to determine whether Mrs. Hinerfeld was a nominee. It determined that all of the Libutti factors, other than perhaps the recording of the deed, weighed in favor of treating Mrs. Hinerfeld as Mr. Hinerfeld’s nominee and holding title to the Larchmont residence. For example:
…Adequacy of consideration. The court said that Hinerfeld did not establish that Mrs. Hinerfeld paid any consideration for the Larchmont residence. None of the payments made by Mrs. Hinerfeld that Hinerfeld and his attorney had, at various times, claimed to be the consideration for that transfer were made contemporaneously with the deed by which Hinerfeld transferred to his wife title to the Larchmont residence. The record included no written documentation that specifically identified those payments as bargained-for consideration for Mrs. Hinerfeld’s acquisition of the residence.
New York law requires contracts for the sale of real estate to be in writing (N.Y. Gen. Oblig. Law sec. 5-703(2)) The record provided no evidence that Hinerfeld and his wife committed their alleged agreement to writing. If Hinerfeld and Mrs. Hinerfeld had entered into an oral agreement requiring him to transfer to her title to the Larchmont residence in consideration of the payments she made in March and November 2002, her part performance of that agreement might have enabled her to have a court compel Hinerfeld’s transfer of title despite the absence of a written agreement. But the conflicting claims made by Hinerfeld and his attorney regarding the precise terms of the alleged agreement provided grounds for skepticism about the existence of an agreement with sufficiently clear terms to be specifically enforced.
…Close relationship. Hinerfeld argued that this factor should be neutral. Hinerfeld’s reasoning was grounded on the premise that, whenever one spouse transfers a joint residence to the other, the transferor’s continued use and enjoyment of the residence is to be expected. Given their relationship, the transferee is unlikely to send the transferor packing after securing title to the residence. The Court of Appeals for the Second Circuit recognized this reality in a bankruptcy case when it rejected the creditors’ argument that the debtor’s residing at property purchased by his wife and transferred to a trust evidences that the debtor was the property’s equitable owner. (Babitt v. Vebeliunas, (CA 2 2003) 332 F.3d 85)
But, the Court said, rendering the close relationship factor neutral, as Hinerfeld suggested, would go too far in the other direction. When other factors weigh in favor of treating one related party as the other’s nominee, as in Hinerfeld’s case, the parties’ relationship can and should provide further support for that treatment.
…Retention of possession; continued enjoyment. The Court said that, in the case of property used as a residence, possession and continued enjoyment amount to the same thing. Thus, in the present case, the fifth and sixth Libutti factors collapsed into one. And those factors both weighed in favor of treating Mrs. Hinerfeld as Hinerfeld’s nominee in holding title to the property. There was no evidence in the record that Hinerfeld’s transfer to his wife of title to the Larchmont residence significantly affected his possession or enjoyment of the property.
References: For whether a person is a nominee, see FTC 2d/FIN ¶S-3004.