Levy Release for Economic Hardship Doesn't Apply to Corporations

(Parker Tax Publishing September 2021)

The Tenth Circuit affirmed a Tax Court decision and held that the IRS's obligation under Code Sec. 6343(a)(1)(D) to release a levy if it determines that the levy is creating an economic hardship applies only to individuals, not corporations. The court found that the use of the word "taxpayer" in the statute is ambiguous and that Reg. Sec. 301.6343-1(b)(4)(i), which restricts the economic hardship exception to individual taxpayers, is a valid interpretation of the statute. Seminole Nursing Home, Inc. v. Comm'r, 2021 PTC 284 (10th Cir. 2021).

Background

When Seminole Nursing Home, Inc. failed to pay $61,916 in federal employment taxes for 2013, the IRS provided notice of its intent to levy to collect the unpaid taxes plus penalties and interest. After receiving the levy notice, Seminole requested a collections due process (CDP) hearing with the IRS Office of Appeals.

Before the hearing, Seminole proposed an installment agreement permitting it to pay off its debt through monthly payments of $6,000 to the IRS. In August 2014, one day before the hearing, Seminole submitted a three-paragraph letter to the Office of Appeals stating that, in addition to seeking a collection alternative, Seminole was also seeking to challenge the appropriateness of the proposed levy on the grounds of economic hardship. Seminole acknowledged that its assets included an outstanding accounts receivable balance of $313,112 - more than four times what it owed the IRS in taxes, penalty, and interest at that time. It asserted, however, that a levy would cause economic hardship because it could not sustain a levy and still provide essential care services to the patients residing at its nursing facility.

The IRS Office of Appeals rejected the proposed installment agreement on two grounds: (1) Seminole had sufficient assets to pay its tax debt in full, and (2) Seminole was ineligible for an installment agreement because it had not made all its required federal tax deposits for 2014. The Appeals Office also rejected Seminole's economic hardship argument, explaining that economic hardship relief is available only to individual taxpayers under Reg. Sec. 301.6343-1(b)(4)(i). The Appeals Office issued a Notice of Determination sustaining the levy.

Seminole took its case to the Tax Court, which also rejected Seminole's economic hardship argument because Reg. Sec. 301.6343-1(b)(4)(i) limits that relief to individual taxpayers. The Tax Court noted that it had previously held in Lindsay Manor Nursing Home, Inc. v. Comm'r, 148 T.C. No. 9 (2017), that the regulation was entitled to deference under Chevron, U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837 (1984). The court also affirmed that Seminole was ineligible for an installment agreement, although it found that the Appeals Office had made a calculation error when determining Seminole's monthly income and therefore remanded the matter to the Appeals Office.

On remand, the Appeals Office scheduled a second hearing and requested that Seminole submit updated financial statements and proof that Seminole was current with its federal tax deposits in advance of the hearing. Seminole did not attend the hearing, nor did it provide the requested documents. The Appeals Office issued a second letter providing Seminole with additional time to submit the requested documents, but Seminole still did not respond. In November 2017, the Appeals Office issued a supplemental notice of determination sustaining the levy. In April 2018, Seminole filed motions for reconsideration and summary judgment with the Tax Court. The motions argued, among other things, that the Tax Court should apply the economic hardship exception to Seminole because, while the case was on remand, the Tenth Circuit had vacated the Tax Court's decision in Lindsay Manor on the ground that the controversy had been moot when the Tax Court published its decision. The Tax Court rejected this argument from Seminole and explained that reconsideration was unnecessary because the Tenth Circuit only vacated Lindsay Manor for procedural purposes, not for substantive reasons. The Tax Court thus denied Seminole's request for relief, and Seminole appealed to the Tenth Circuit.

Before the Tenth Circuit, Seminole argued that Reg. Sec. 301.6343-1(b)(4)(i) is unlawful because it contradicts the economic hardship rule in Code Sec. 6343 that it purports to interpret, which applies to all taxpayers, not just individuals. According to Seminole, the hardship exception is unambiguous because Code Sec. 7701(a)(14) defines "taxpayer" as "any person subject to any internal revenue tax" and defines "person" to include "an individual, a trust, estate, partnership, association, company or corporation." Seminole further contended that the text of Code Sec. 6343(a)(1)(D) makes no distinction between an individual taxpayer and a corporate taxpayer.

Analysis

The Tenth Circuit affirmed the Tax Court's verdict and agreed that, under Chevron, Code Sec. 6343(a)(1)(D) is ambiguous and that Reg. Sec. 301.6343-1(b)(4)(i) is a reasonable interpretation of that statute.

The Tenth Circuit noted that Code Sec. 7701(a) prefaces the definitions it contains by saying that they apply where not otherwise "distinctly expressed or manifestly incompatible with the intent thereof." The court found that the use of the word "taxpayer" in other parts of the Code makes clear that the word can be implicitly limited to individuals. For example, Code Sec. 6343(e) provides that the IRS should release "a levy on the salary or wages payable to or received by the taxpayer, upon agreement with the taxpayer that the tax is not collectible." The court said this provision is necessarily limited to individuals, since, only individual taxpayers receive salary or wages.

According to the Tenth Circuit, the question therefore became whether it made sense to apply the exceptional circumstance of economic hardship to a corporation. The court recognized that it is possible for a corporation to experience economic hardship, but the court reasoned that such hardship could not reasonably excuse releasing a tax levy on the corporation's assets. The court explained that the economic hardship exception prevents the government from taking everything an individual owns and thus depriving him or her of the minimal comforts of life. The court said that taking everything that the individual possesses is not acceptable, and this policy is reflected in Code Sec. 6334(a), which exempts certain items (such as clothing, personal effects, and tools of a trade) from levy. The court went on to say that, if levies on corporations could be released due to economic hardship, then a bizarre tax system with perverse incentives would be created under which businesses maintain themselves on the edge of insolvency in order to enjoy immunity from tax enforcement. The court added that the IRS already has tools to deal with such circumstances, such as Code Sec. 6343(a)(1)(B), which authorizes a release that will facilitate the collection of the tax liability and Code Sec. 6343(a)(1)(C), which permits a release under an installment agreement.

In the court's view, it was telling that Seminole made no attempt to illustrate what an economic hardship regulation for nonindividuals would look like. In addition, the court observed that when the IRS issued Reg. Sec. 301.6343-1(b) as a proposed regulation, no one suggested expanding the economic hardship exception to include nonindividuals. The court concluded that Code Sec. 6343(a)(1)(D) is ambiguous and that Reg. Sec. 301.6343-1(b) is a reasonable interpretation of it. The Tenth Circuit also upheld the Tax Court's denial of Seminole's motion for reconsideration on the grounds that its ruling in Lindsay Manor was not based on the merits of the Tax Court's opinion and it was not an abuse of discretion for the Tax Court to adopt its reasoning in that decision when no higher court had cast doubt on that reasoning.

For a discussion of the release of a levy due to economic hardship, see Parker Tax. ¶260,540.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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