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IRS Abused Discretion in Conditioning Installment Agreement on Filing Tax Lien.
(Parker Tax Publishing December 17, 2014)

The Tax Court held that an IRS appeals officer had abused her discretion when she conditioned an offer of an installment agreement on the filing of a notice of tax lien. The appeals officer misinterpreted the Internal Revenue Manual (IRM) as giving her no discretion in the matter and failed to give due consideration to the taxpayer's arguments against filing a lien notice. Budish v. Comm'r, T.C. Memo. 2014-239.


James Budish is a sculptor who works in cast bronze and sells his artwork through his wholly owned S corporation, Jim Budish Sculptor, Ltd. Over the years, he has relied on Metalphysic Sculpture Studio, Inc. (foundry) to provide the material he uses in his sculptures and to do the actual casting. Typically, buyers commission sculptures and pay for them before casting.

On his 2007 income tax return Budish reported a tax liability of $164,928 and a withholding credit of $1,000. He failed to remit the $163,928 balance due with his return. In 2008, the IRS assessed the tax shown on the 2007 return, along with accrued interest and penalties. In 2009, the IRS notified Budish of its intent to collect the unpaid taxes by levy. Budish timely requested a Collection Due Process (CDP) hearing, where he claimed a levy was inappropriate and requested an installment agreement. The Appeals officer offered to grant the installment agreement, but insisted that the Internal Revenue Manual (IRM) required that a notice of federal tax lien (NFTL) be filed under the circumstances and conditioned the agreement on the filing.

Through counsel, Budish argued that a notice of lien would hamper rather than facilitate collection of his tax liability by effectively putting him out of business, thereby terminating the flow of income necessary to honor the installment agreement. Specifically, he represented that, should the IRS file a notice of lien, his longstanding business relationship with the foundry would be drastically altered as he would be required to immediately pay for all past work and make "up front" payments for all future work. Finally, Budish represented that a notice of lien would cause the buyers of his sculptures to cease paying up front for artwork they might never receive because of his financial difficulties.

Notwithstanding Budish's arguments, the Appeals officer stood by her position that the installment agreement must be conditioned on filing a lien notice. Because of her insistence on this point, Budish rejected the offer. The Appeals officer then closed out her case and recommended that Appeals sustain the proposed levy. Appeals accepted the recommendation and issued a notice of determination reflecting its decision.


The issue before the Tax Court was whether the Appeals officer abused her discretion by insisting on the filing of a notice of lien as a condition of entering into an installment agreement with petitioner (the terms of which were agreed to).

In reaching a decision, the court focused on an attachment to the IRS's notice of determination. In the attachment, the Appeals officer gave two specific reasons for insisting on a lien notice, both of which were based on her interpretation of provisions of the IRM. The first reason was that, under IRM, the balance due of over $200,000 requires that a lien notice be filed in order to protect the government's interest. The second stated reason was that "IRM requires a[n] NFTL be filed if an installment agreement does not meet streamlined, guaranteed, or in business trust filed express criteria."

The IRS argued that it has discretionary authority to enter into installment agreements and can condition such an agreement on the filing of a NFTL. Additionally, it claimed the records indicated the Appeals officer's insistence on the lien was reasonable given Budish's excessive deficiency and his substantial income.

The Tax Court agreed with Budish that the Appeals officer misinterpreted and, in fact, overstated the directives set forth in the cited IRM provisions in determining that the filing of a notice of lien was required. The court noted that the language of IRM pt. (i.e. "in general" and "should be filed") clearly indicated that there may be occasions in which filing a NFTL would not be necessary, even under the circumstances described in that section. Additionally, IRM lists circumstances under which an NFTL filing determination must be made, rather than circumstance under which a notice of lien must be filed. Thus, the court believed the Appeals officer misinterpreted the IRM in thinking it required an NFTL be filed under the circumstances.

The Appeals officer also ran afoul of Code Sec. 6330(c)(3)(C), which provides that a determination by an appeals officer must take into consideration whether a proposed collection action balances the need for the efficient collection of taxes with the legitimate concern of the taxpayer that any collection action be no more intrusive than necessary.

The Tax Court found that, while the Appeals officer attempted to balance the need for a notice of lien against Budish's concern that such action was more intrusive than necessary, her rational was unpersuasive and fell short of the balancing requirement. First, she stated that Budish failed to show how withholding the lien would be in the best interest of the government. Second, she claimed that though the lien was intrusive, it did balance the concerns. The court noted, however, that the Appeals officer gave no rational for these statements and gave no indication that she actually did engage in a balancing test. Rather, the court believed that the Appeals officer gave little, if any, consideration to Budish's arguments and, instead, decided a notice of lien should be filed because of her mistaken belief that she lacked discretion to do otherwise under the IRM.

Because of the Appeals officer's erroneous interpretation of the IRM and resulting failure to correctly apply the balancing test of Code Sec. 6330(c)(3)(C), the Tax Court remanding the case to Appeals for further consideration.

For a discussion of tax liens and IRS collection procedures, see Parker Tax ¶260,530. (Staff Editor Parker Tax Publishing)

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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