In United States v. Holmes, No. 16-20790 (5th Cir. 2017), the U.S. Court of Appeals for the Fifth Circuit issued an unpublished opinion bringing beneficiaries of an estate back into “the jaws of tax” and permitting the Internal Revenue Service to collect estate taxes from them. The Fifth Circuit affirmed the district court, which estopped the beneficiaries from making a statute of limitations argument and rejected their claim for damages against the IRS for wrongful liens.
Estate Taxes Due
In October 1997, Shirley Bernhardt died and left her estate to her nephew Kevin Holmes, his wife Barbara and other family members. In July 1998, Kevin filed an estate tax return on which he reported a gross estate of $2,884,113 and tax due of a little over $700,000, which he paid. After a June 2001 audit that valued the estate at approximately $4.7 million, the IRS issued a notice of deficiency in the amount of an additional $1,225,577 in taxes. The taxpayers challenged the notice and filed a petition in Tax Court.
In June 2004, the Tax Court entered a stipulated decision that the estate owed an additional $215,264. The taxpayers didn’t pay this additional amount and incurred interest, penalties and fees. Throughout 2013 and 2014, the IRS placed liens on real property titled in the estate’s name and in Barbara’s name. The IRS issued a Notice of Intent to Levy notifying the estate that it could request a collection due process hearing. In October 2013, the estate sent a letter via certified mail to the IRS requesting such hearing and including a power of attorney form. Because this letter was sent during the federal government’s shutdown, it’s unclear whether the IRS actually saw this letter.
In May 2014, Kevin wrote to the IRS, claiming that it must have received his October letter that requested the collection due process hearing. He enclosed a copy of the certified mail receipt showing that his October letter had been received. The IRS Office of Appeals sustained the amount of the levy and, relying on the certified mail receipt, explained that it considered the hearing request to have been received in October 2013.
District Court Proceedings
By March 2015, the IRS determined that the estate owed $532,739.95. It brought suit in district court against Barbara, Kevin and the estate to foreclose outstanding liens and recover the unpaid taxes, penalties and fees. Barbara and Kevin counterclaimed for damages under Internal Revenue Code Section 7433, alleging that they couldn’t refinance their home at a lower rate of interest due to the filing of the IRS’ improper liens. They claimed that they weren’t notified of the liens, and in any case, the liens should have been filed against only the estate, not Kevin and Barbara personally. They also argued that the IRS was barred from bringing a lawsuit on statute of limitations grounds.
The district court granted the IRS’ motion for summary judgment in part but rejected the motion for summary judgment against Kevin and Barbara personally. The court also rejected the taxpayers’ statute of limitations argument on estoppel grounds, finding that the taxpayers’ bank letter to show damages was incompetent summary judgment evidence. Both sides moved to reconsider or alter the district court’s judgment.
Statute of Limitations
Under IRC Section 6502(a)(1), the IRS generally has 10 years from the date of tax assessment to file suit to collect it. “Assessment” refers to when the IRS Secretary or his delegate establishes an account against the taxpayer on the tax rolls. In this instance, following the Tax Court’s stipulated decision, the IRS, on July 16, 2004, entered a new assessment on its books reflecting the stipulated amount. It filed suit in district court against the taxpayers to collect that amount 10 years and 237 days later.
The IRS argued that the statute of limitations period was suspended for 241 days — from Oct. 5, 2013 (the date of the postmark on the taxpayers’ request for a hearing) until June 2, 2014. The IRS relied on IRC Section 6330(e)(1), which suspends the running of the statute of limitations during the pendency of a hearing.
The taxpayers argued, however, that this IRC section shouldn’t be applied in this instance because the hearing process wasn’t actually initiated until May 2014 — on the date that Kevin sent his letter to the IRS to prove that it received the request for a hearing in October. The district court, however, estopped the taxpayers from asserting this argument. Holding the taxpayers to a duty of consistency, the district court found it unfair for the taxpayers to have relied on the certified mail receipt showing that they submitted a hearing request in October, but insisted during the litigation that it was not so.
The Fifth Circuit agreed with the district court that the duty of consistency applied and was satisfied in this case. Citing U.S. Supreme Court cases and Herrington v. Commissioner, 854 F.2d 755, 758 (5th Cir. 1988), the Fifth Circuit found that the three elements of the duty of consistency were met: (1) a representation or report by the taxpayer; (2) on which the IRS has relied and (3) an attempt by the taxpayer after the statute of limitations has run to change the previous representation or to recharacterize the situation in such a way as to harm the IRS. As to the first element, Kevin and Barbara insisted that the IRS received their request for a hearing in October. As to the second element, after the IRS received Kevin’s letter with the certified mail receipt, it “graciously bowed to the evidence and accepted that the taxpayers had made a timely request. It gave them their hearing,” stated the court. The third element was satisfied as well, “by the fact that the taxpayers are now denying what they previously insisted to be true, that the CDP request was received in October, and are doing so to have the Service tossed out of court.”
The court, moreover, rejected the taxpayers’ argument that the duty of consistency didn’t apply to their situation because the duty only applied when a taxpayer takes an inconsistent position from one year to the next. The taxpayers’ argument was too narrow, stated the court: “[T]he doctrine [of estoppel] is not limited to depreciation cases, etc., but concerns representations that have the effect of delaying collection.”
Damages
The Fifth Circuit also found that the district court correctly denied the taxpayers’ claims for damages under IRC Section 7433. Under Section 7433, a taxpayer must prove: (1) the IRS intentionally, recklessly or negligently disregarded part of Title 26 in connection with the collection of a taxpayer’s federal tax liability and (2) evidence of damages.
To satisfy the first element, the taxpayers in the instant case stated they were denied a loan and lost the opportunity to refinance their home at a better interest rate due to the liens improperly placed by the IRS, without notice, on Barbara and Kevin personally. The only evidence in support of this argument was a rejection letter from a bank, which the district court held to be incompetent summary judgment evidence. Barbara and Kevin didn’t argue this point before the Fifth Circuit but instead argued that the IRS’ motion for summary judgment attacked their counterclaim for failure to mitigate, not failure to prove damages. The court held that this argument had merit because typically, a court may not grant summary judgment on a ground not advanced by the parties unless it gives notice and a reasonable time to respond to the party at risk of summary disposition. However, the Fifth Circuit refused to vacate and remand the district court’s finding because it was harmless error.
Accordingly, the Fifth Circuit affirmed the district court’s decision allowing the IRS to collect estate taxes as not barred by the statute of limitations and denying the taxpayers’ claim for damages.
