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Richlin v. Commissioner (T.C. Memo. 2020-60)

On May 18, 2020, the Tax Court issued a Memorandum Opinion in the case of Richlin v. Commissioner (T.C. Memo. 2020-60). The issues before the court in Richlin were (1) whether Form 12257 (Summary Notice of Determination, Waiver of Right to Judicial Review of a Collection Due Process Determination, and Waiver of Suspension of Levy Action) is a binding contract between the petitioner and the IRS; (2) whether IRM 8.22.9.13 prohibits rescission of a Form 12257; (3) whether the IRS is equitably estopped from making a determination contrary to the terms of the Form 12257; (4) whether the IRS erred as a matter of law in allocating estimated payments of tax to husband’s account through reference to petitioner’s premarital agreement with husband.

Summary of Decision

The petitioner and her late husband, H, filed a joint return for 2005 and elected to apply the overpayment shown on that return to their estimated tax for 2006. H made additional estimated payments for 2007 between June 2006 and January 2007 and also made a payment with a request for an extension of time to file a 2006 return. The petitioner and H divorced in January 2007 and H died the following August.

The petitioner filed a separate return for 2006 in which she claimed credit for half of the 2005 overpayment, the estimated payments H made between June 2006 and January 2007, and H’s extension payment. The IRS issued a notice of Federal tax lien (NFTL) concerning the collection of unpaid tax liability of the petitioner for 2006.

After a collection due process (CDP) hearing, the petitioner and the IRS executed a summary notice of determination on Form 12257 (Summary Notice of Determination, Waiver of Right to Judicial Review of a Collection Due Process Determination, and Waiver of Suspension of Levy Action), stating that the lien would be released because the petitioner was entitled to credit for the payments shown on her return. The IRS then issued a notice of intent to levy in regard to the petitioner’s 2006 taxable year, which led to a second CDP hearing and execution of a second Form 12257 that confirmed the result of the first.

After M’s estate claimed credit for the full amount of the payments in issue, the IRS received “advice” from counsel supporting the estate’s claim, the IRS issued a notice of determination upholding the proposed levy action against the petitioner.

The Petitioner’s (Wholly Unavailing) Arguments

The petitioner did not appreciate being told one thing, and then finding a notice of determination in her mailbox that concluded another. This violated her sense of fair play, and because of that, she thought, it must also violate some law or regulation or rule. Looking for support in the IRM, the petitioner crafted four (tenuous at best) arguments to undergird her righteous indignation.

First, the petitioner argued that the summary notices (Forms 12257) that she and her counsel executed with respondent’s representatives in 2012 and 2014 constituted enforceable, binding contracts in which the IRS agreed not to enforce collection in regard to her 2006 taxable year. She characterized the issuance of the statutory notice of determination (SNOD) as “reneging” on the prior summary notices.

Rather like a petulant child who argues “but you said I could have ice cream” after throwing her bowl of spaghetti on the floor and demanding dessert in lieu of dinner, this argument was unpersuasive to the father (Tax Court), who had spent the last three hours negotiating the acceptability of spaghetti as a substitute for chocolate chip pancakes and whipped cream.

Second, the petitioner argued that the SNOD “rescinded” the prior summary notices in violation of IRM 8.22.9.13. Although the petitioner accepted that the IRM is not, technically, “binding” on the Tax Court, she nevertheless vehemently contended that the IRS’s failure to abide by I.R.M. § 8.22.9.13 here constitutes abuse of discretion.

Kudos to a three-year-old for invoking abuse of discretion with respect to the rescission of the offer of ice cream; nevertheless, the father (Tax Court) points out, the spaghetti is on the floor, not in her belly, and, therefore, ice cream is a no-go.

Third, petitioner argued that, in the event the Tax Court somehow finds that the IRS’s Forms 12257 are not enforceable contracts respondent is estopped from denying his Determinations are enforceable on the grounds of equitable estoppel.

You have to love the bargaining skills of a toddler. On appeal to Mommy, regarding Daddy’s denial of the request for ice cream in-lieu-of dinner, Mommy concurs, once again citing the evidence on the record, to wit: the spaghetti on the floor.

Fourth, petitioner argued that the IRS’s decision to apply the entire 2005 joint payment and all 2006 estimated payments to her now-dead-ex-husband’s account was erroneous as a matter of law and violates the Treasury Regulations.

Said toddler did not appreciate that her proportionate share of the evening’s ice cream allotment was allocated to her brother, who, despite using his hands and talking with his mouth full, ate all of his damn spaghetti and otherwise did not yowl like a randy tomcat on a tin roof for two hours about the utter indignity of pasta over pancakes.

Summary Notices Not Binding Contracts

If the IRS enters into an installment agreement (IA) under IRC § 6159, a closing agreement under IRC § 7121, or an offer in compromise (OIC) under IRC § 7122 with the taxpayer, the Tax Court has held that “then of course the [IRS] will be bound” under general contract principles to honor the agreement. Tucker v. Commissioner, 135 T.C. 114, 140 (2010), aff’d, 676 F.3d 1129 (D.C. Cir. 2012). Nevertheless, determinations of the IRS not contained or reflected in these specifically enumerated agreements are not final and not binding on the IRS. Id. at 163-64.

The Tax Court noted, also, that once a petition has been filed, a case may be settled by means of an agreement that does not meet the requirements of a closing agreement under IRC § 7121. In the prepetition context, however, IRC § 7121 and IRC § 7122 provide the exclusive means of effecting a binding settlement. See, e.g., Dormer v. Commissioner, T.C. Memo. 2004-167, *5-*7.

Rescission of Summary Notices – Not Nice, But Perfectly Appropriate

A faulty predicate leads to a faulty conclusion. The Tax Court and my intro to philosophy professor agree on this point. On the point of whether bathing and general personal hygiene were mere “suggestions,” the Tax Court would likely not concur. The petitioner’s claim the IRS’s notice of determination “rescind[ed]” the Forms 12257 “in violation of a directive in the IRM” rests on the faulty predicate that a SNOD (Letter 3193) and a summary notice on Form 12257 are equivalent. They are not, the Tax Court tells us without a great deal of elaboration except for pointing out the plain language of IRM 8.22.9.13 dictates that they are not.

Equitable Estoppel – Cute Argument, But No

Equitable estoppel is a judicial doctrine that precludes a party from denying its own representations which induced another to act to his or her detriment. Wilkins v. Commissioner, 120 T.C. 109, 112-13 (2003). The doctrine does not apply when the party’s reliance is unreasonable or unfounded. Id. Further, the party must prove that they detrimentally relied on the representation of the party-to-be-estopped.

Returning to my spaghetti hypothetical discussed above, if a father fails to tell a child that the ice cream bar is closed, this does not, ipso facto, mean that it is open. Relying on the silence that dessert would be available come-what-may, the little imp decides to forego dinner (by jettisoning her pasta onto the floor, with a meatball rolling straight into the open maw of the yellow Labrador who was waiting underfoot ever so patiently for just such a happy accident to occur).

When the father scolds the child and proclaims the edict “no dessert for you, young lady,” the toddler cries (literally) foul, claiming that the father “represented” to her that she could have desert. She’s the child of a lawyer and very advanced for her age. These types of things are said with unnerving regularity in my house, though generally from her seven-year-old brother.

When said father reviews the record, finding that no affirmative statement was made, and sustaining the determination that no ice cream will be had, the child retorts “but you didn’t say, I couldn’t have dessert.” The homunculus has a point; nothing in the record reflects a discussion of the unavailability of ice cream, one way or the other. However, employing the “I’m big; you’re small; I’m right; you’re wrong” line of authority, the father notes that he is not estopped (equitably or otherwise) from denying the demand for dessert based solely upon the child’s unreasonable reliance on what was not said.

The child seeks certiorari at the appellate level (mommy), but citing Wilkins as precedent, the father’s determination is upheld. To carry the burden of proving estoppel based on “wrongful, misleading silence,” mommy holds, requires a finding that the toddler reasonably relied on daddy’s representations and suffered a detriment because of said reliance. The child’s argument that she will “starve to death,” the appellate panel finds, is belied by the meal that is now conspicuously absent from the floor and the tomato-stained jowls of a fat and happy lab, who is quite proud of herself for her selfless service to the family.

The foregoing, in a nutshell, this is the Tax Court’s rebuttal to the petitioner’s equitable estoppel argument in Richlin. In Wilkins, the Tax Court observed that a taxpayer must prove that the taxpayer suffered adverse effects proximately caused by the taxpayer’s reasonable reliance on the acts or statements (including “misleading silence” of the IRS (the party against whom estoppel is claimed). Wilkins, 120 T.C. at 112-13. Critically silence, which was neither intended to mislead or objectively could be interpreted as misleading, does not satisfy the Wilkins test.

The “facts” that the IRS is accused of suppressing through silence in Richlin was that it had received legal advice from Counsel that was contrary to the determinations made in the summary notices. Nothing in the record suggests that the petitioner had yet received such advice at the time the notices were executed by the petitioner. Thus, there was nothing “misleading” about the silence.

Having nothing to say on the matter, the IRS simply said nothing. Further, the Tax Court notes that the petitioner admitted in an initial CDP hearing to being unable to pay the tax, and so her claim that she had not preserved assets to pay the tax in reliance on the summary notices was spurious at best. Because the non-preservation of assets was not based upon reliance on the statements (or misleading silence) of the IRS, whether detrimental or otherwise, the petitioner failed to prove the requisite elements of equitable estoppel.

Allocation of Estimated Payments Based on Pre-Marital Agreement Valid

The IRS determined that an overpayment of tax was made in 2005 and unnecessary estimated tax payments were made in 2006 and 2007. The IRS refunded such payments to petitioner’s husband’s account, because of the terms of the couple’s premarital agreement which stated that he would be responsible for all tax liabilities and other costs related to taxes incurred during the marriage.

The account to be credited, reasoned the IRS, was the account belonging to the actual payor of the liability and estimated tax payments. Because the petitioner’s husband paid all liability for taxes and estimated tax payments, he alone should receive the refund, and no allocation was appropriate. This did not sit well with Madame Richlin.

Nevertheless, the Tax Court points the petitioner in the direction of Treas. Reg. § 1.6654-2(e)(5)(ii)(A), which provides that, if a couple makes a joint payment of estimated tax in regard to a year for which they end up filing separate returns the payment made may be treated as a payment on account of the tax liability of either the husband or wife for the taxable year, or “may be divided between them in such manner as they may agree.” In the absence of such an agreement, the estimated payments are allocated between the two taxpayers in proportion to their separate tax liabilities. Treas. Reg. § 1.6654-2(e)(5)(ii)(B).

When the petitioner’s husband made the 2007 estimated tax payment, he and petitioner were officially divorced. A joint payment of estimated tax may not be made if the husband and wife are separated under a decree of divorce or of separate maintenance. Treas. Reg. § 1.6654-2(e)(5)(i). Thus, the payment was the husband’s and his alone. Treas. Reg. § 1.6654-2(e)(5)(ii).

With respect to the other payments made prior to the divorce, the Tax Court looks to any agreements or understandings that the husband and wife had regarding tax payment issues. In this case, the petitioner and her husband entered into a premarital agreement which “established a general principle whose application directs a particular allocation of the amounts in issue.” Therefore, the premarital agreement governed the allocation determination for purposes of Treas. Reg. § 1.6654-2(e)(5)(ii)(A).

(T.C. Memo. 2020-60) Richlin v. Commissioner

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