Reynolds v. Commissioner

Reynolds v. Commissioner
T.C. Memo. 2021-10

Posted on January 26, 2021

On January 26, 2021, the Tax Court issued a Memorandum Opinion in the case of Reynolds v. Commissioner (T.C. Memo. 2021-10). The issue presented in Reynolds v. Commissioner was whether the IRS possessed the collection authority under IRC § 6201(a)(4) to undertake administrative collection action to collect restitution-based assessments (RBAs).

Note on “Precedent” to Reynolds v. Commissioner

It should be noted that the argument the petitioner made in Reynolds was “squarely rejected” in the case of Carpenter v. Commissioner, 152 T.C. 202, 219 (2019), aff’d 788 F.App’x 187 (4th Cir. 2019)…but the petitioner “invited” the Tax Court to “reconsider” the holding in Carpenter. Tax Court Judge Thorton, not one to mince words, states simply “We decline the invitation.”

Background to Reynolds v. Commissioner

This is the cautionary tale of Dana Ray Reynolds, who, according to the opinion, “developed strategies to use corporations to conceal assets and evade income tax.” In particular, Ol’ Dana Ray not only marketed said strategies, but he also applied them to his own personal finances. Subsequently, Dana Ray plead guilty to criminal tax fraud charges…and admitted liability for civil tax fraud, to boot. Whilst in prison, Dana obtained a few life lessons, a bitchin’ mullet, and a spiderweb tattoo on his elbow. He regrets nothing about these decisions.

He was sentenced to 36 months in prison, and he was required to pay restitution in the amount of $194,000. He also had to pick up all the trash at the bottom of the hill with the shovels and rakes and other implements of destruction after sitting on the Group W bench next to the father-stabbers and being inspected, detected, neglected, and selected. If you get the reference, you are my people.

Meanwhile, Leaving Arlo to Come Back to Precedent

The petitioner contended that the Tax Court’s Opinion in Carpenter conflicts with the rationale of Klein v. Commissioner, 149 T.C. 341 (2017). The Tax Court disagreed…rather vehemently.

Klein held that IRC § 6201(a)(4) does not authorize the IRS to add underpayment interest or failure-to-pay penalties to a Title 18 restitution award. Importantly, the IRS’s authority to collect restitution was not in dispute in Klein because the taxpayers had fully paid the restitution.

In Carpenter, in holding that IRC § 6201(a)(4) grants the IRS independent authority to collect administratively Title 18 restitution awards assessed under that section, the Tax Court carefully considered the text and legislative history of IRC § 6201(a)(4) as well as other relevant provisions of titles 18 and 26 and relevant caselaw. The Court of Appeals for the Fourth Circuit summarily affirmed the Tax Court’s decision in Carpenter.

The petitioner, Dana Ray, did not dispute that the court-ordered restitution was currently due and payable when the IRS instituted the collection actions at issue. Thus, pursuant to IRC § 6201(a)(4), the IRS was authorized to proceed to collect the RBAs by lien and levy. See Carpenter, 152 T.C. at 218.

Effect of the DOJ “Payment Plan”

The petitioner contended that even if respondent generally has the authority to pursue administrative collection under IRC § 6201(a)(4), he is barred from collecting petitioner’s RBAs because the “DOJ has already made a determination that the petitioner should pay $65 per month.” The petitioner argued that IRC § 6331(k)(2)(C) bars respondent from collecting his outstanding restitution while this alleged “payment plan” with the DOJ is in effect.

Two problems with this…

First, the petitioner didn’t technically have an actual, formal payment plan with the DOJ.

Second, IRC § 6331(k)(2)(C) generally bars the IRS from making a “levy” on a person’s property while an installment agreement under IRC § 6159 is in effect.

Because there was no installment agreement under IRC § 6159 in effect but also because by its terms IRC § 6159 does not bar the IRS from issuing either an FNIL or an NFTL, which are the collection actions at issue in this proceeding. See Eichler v. Commissioner, 143 T.C. 30, 37 (2014) (construing IRC § 6331(k)(2)(A), (B)); Treas. Reg. § 301.6331-4(b)(1)(ii). Moreover, because the petitioner did not begin making his monthly payments to the DOJ until long after the IRS had issued to him the FNIL and the NFTL, those payments had no effect on the IRS’s authority to take these collection actions.

And Once More, with Gusto – Precedent

The Tax Court declined Dana Ray’s invitation to reconsider its holding in Carpenter, and it upheld the IRS’s independent authority to assess and administratively collect criminal restitution. The Tax Court likewise rejected the petitioner’s argument that the IRS is otherwise barred from collecting the unpaid RBAs. Furthermore, the IRS’s determinations in the notice of determination were not the result of any abuse of discretion.