Yesterday, the Tax Court decided Industrial Investors v. Commissioner. Industrial Investors, a corporation in Santa Monica, California, had fought the IRS in Tax Court. The case was then appealed to the 9th Circuit Court of Appeals. After the case was settled in court, the IRS attempted collection of the tax owed; Industrial owed tax for 1990 – 1992. Industrial requested a collection due process (CDP) hearing.
When Industrial made the request, the IRS revenue officer working the case sent a letter to the IRS appeals office…in Oklahoma City. (An interesting point is why the appeal went to Oklahoma from California when the IRS has several offices that I’m all too familiar with in Southern California…but I digress.) An appeals officer is supposed to independently judge the facts; thus, ex parte communications are not allowed. Here are a few of the lines from the letter of the IRS revenue officer:
“Therefore, no CDP hearing on the recorded Notices of Federal Tax Liens should be considered. As for the Notice of Intent to Levy, this should proceed accordingly….
Since Mr. William G. Wells has had numerous opportunities to sell, refinance or secure a second mortgage on all real property owned by Industrial Investors Inc and has not done so to this date, it is time that the government secure any and all interest for all assets owned by the Corporation to pay the outstanding tax debts.
That’s just part of this letter. I’m not an attorney, but I do know that this is an ex parte communication.
Among the other gems of the IRS’ behavior is how quickly they forced Industrial to respond. On June 21, the IRS demands information by July 8; on July 8, the IRS schedules a telephonic CDP hearing on July 19, without checking that the representative from Industrial could make that time. He couldn’t, as was under subpoena for that date and time. He wrote back, asking for a change of time/date, but the IRS didn’t receive the request until after July 19.
The IRS’ behavior was atrocious in this case. And the Tax Court rightly takes the IRS to task. The Court notes regarding the ex parte communications,
“The Commissioner then made the guarantee of impartiality part of the IRS’s standard operating procedure by issuing Revenue Procedure 2000-43, 2000-2 C.B. 404. This procedure prohibits ex parte communications by IRS employees that would appear to compromise the independence of an Appeals officer…There can’t be any suspense in our holding on this point–the cover letter sent to Talbott that accompanied the administrative file was precisely the sort of prohibited ex parte contact that the Commissioner and Congress wanted to ban.”
The IRS also lost on other issues. Industrial impliedly requested a face-to-face CDP hearing. That request is required to be granted, and the hearing is required to be at a local IRS office, not one 1500 miles away. And the IRS should have allowed more time for a corporation to prepare for a hearing, “We merely note that eighteen business days from the date of initial contact hardly seems an adequate amount of time for a corporation to provide all relevant documentation, and putting Industrial into default when Wells left word that he was under subpoena to appear in court is inexplicable.”
So Industrial Investors will get a CDP here in Southern California. This is a case the IRS deserved to lose, and hopefully the patterns of behavior that were shown in this case by the IRS will go into the trash heap…but I’m not holding my breath.
Case: Industrial Investors v. Commissioner, T.C. Memo 2007-93