or, Never Suborn, But Consider to Subordinate
We all know that unless taxpayer is current with present taxes, IRS need not consider an installment agreement or other collection alternative as to past-due taxes. But when IRS, through its own mistake of law, creates the default in current payments, Tax Court’s abuse-of-discretion review puts taxpayer’s proposed collection agreement back on track.
That’s the moral of AlessioAzzari, Inc., 136 T.C. 9, 2/24/11.
Taxpayer was a New Jersey homebuilder torpedoed by the credit crunch of 2008. Taxpayer was behind on its quarterlies even before 2008, but caught up by factoring its receivables to raise cash. Then the tsunami hit, and IRS filed a lien.
Taxpayer had more factoring cash lined up, laid off half its employees and entered other lines of business, trying to stay in business. But the factor refused to lend with the tax lien in place. Taxpayer sought release of lien, but IRS denied it, saying the factor’s filed lien (UCC financing statement) predated the tax lien filing, and was therefore senior, so there was no reason to subordinate that which was already subordinated as a matter of law—“first in time is first in right.”
Except it isn’t. Reviewing tax lien learning for the last sixty years, Tax Court distinguishes, as the law does, between “choate” and “inchoate” liens (pronounced “ko-ate”; not to be confused, as one of my colleagues did, with Choate, pronounced “Chote”, a private school). The factor’s lien attached only to receivables existing at filing date of tax lien and those acquired by factor during 45 days following (“choate”). So the factor was subordinate to the tax lien from day 46 onward (“inchoate”).
IRS’ appeals officer first misapplied the law, then refused to consider an installment agreement because his refusal to consider subordination provoked taxpayer to fall further behind. Tax Court treats this conduct as it deserves (I cannot do better than quote Judge Wells’ decision):
“Respondent urges us to hold that the issue of subordination of the tax lien is irrelevant because even if the tax lien had been subordinated, petitioner still would have been ineligible for a collection alternative because it was not in compliance with its employment tax deposits. In his briefs respondent did not even address the relevant law governing the priority of tax liens, nor did he bother to respond to petitioner’s arguments that Mr. Lee [IRS appeals officer] erred in his interpretation of that law.
“Instead, respondent rests his entire argument on a previous case in which we upheld the Commissioner’s policy of rejecting collection alternatives when taxpayers have failed to pay their current taxes. See Giamelli v. Commissioner, 129 T.C. 107, 111 (2007). However, respondent’s reliance on Giamelli is misplaced.
“In Giamelli and other previous cases in which we have upheld the Commissioner’s rejection of collection alternatives because the taxpayers had failed to satisfy current tax obligations, the Commissioner had done nothing to contribute to the taxpayers’ failures to remain current with their tax liabilities. In contrast, respondent’s abuse of discretion contributed to petitioner’s failure to make timely tax deposits.” 136 T.C. 9, at pp. 23-24.
Judge Wells went on to say:
“We do not accept respondent’s argument that Mr. Lee’s decision regarding subordination of the tax lien is irrelevant.
“Indeed, accepting respondent’s contention would be tantamount to granting respondent the power to abuse his discretion at will as long as petitioner eventually misses a deposit on its employment taxes. In situations similar to the instant case, where petitioner’s business is in a dire position largely due to industry conditions beyond its control, the Commissioner’s decision not to subordinate an NFTL could exacerbate taxpayers’ cashflow problems and make it difficult, if not impossible, for taxpayers to remain current with their tax deposits while continuing to run their businesses. The Commissioner could hold off issuing a notice of determination indefinitely until the taxpayer missed a deposit, and the Commissioner could then refuse to grant an installment agreement on the basis of the taxpayer’s failure to remain current with its tax deposits. Because the taxpayer would have already fallen behind on current tax liabilities, we would be unable to meaningfully review the Commissioner’s decision not to subordinate the NFTL. We find such a scenario unacceptable.” 136 T.C. 9, at pp. 25-26.
In short, while IRS must never suborn, if they caused the problem they must at least consider to subordinate.