Corporation Does Not Have Access to Economic Hardship Relief to Avoid Imposition of Levy

Can a corporation suffer economic hardship that would justify relief from an IRS levy under IRC §6343(a)(1)(D), or does the nature of economic hardship limit its application to individuals?  The IRS’s view, implicit in Reg. §301.6343-1(b)(4)(i), is that only individuals should be treated as being able to suffer economic hardship as the section refers to it.  The taxpayer in the case of Lindsay Manor Nursing Home, Inc. v. Commissioner, 148 TC No. 9 argued the law did not allow for such a limited view..

IRC §6343 provides the IRS with the authority to release levies and return property in certain situations.  IRC §6343(a)(1)(D) provides:

(a) Release of levy and notice of release

(1) In general

Under regulations prescribed by the Secretary, the Secretary shall release the levy upon all, or part of, the property or rights to property levied upon and shall promptly notify the person upon whom such levy was made (if any) that such levy has been released if—

…(D) the Secretary has determined that such levy is creating an economic hardship due to the financial condition of the taxpayer,

In this case, a nursing home was facing a notice of intent to levy from the IRS for unpaid payroll taxes of $108,911 reported on the corporation’s fourth quarter Form 941 for 2013.  At a Collections Due Process (CDP) hearing the taxpayer requested that the IRS not move forward with the levy based on the taxpayer’s position that the corporation would suffer an economic hardship of the type Congress intended to grant relief for under the above provision.

As the taxpayer noted in a letter to the Settlement Officer as part of the CDP hearing process:

As demonstrated by Taxpayer’s Form 433-B, Collection Information Statement, Taxpayer has an outstanding accounts receivable balance of $306,598.61 due to nonpayment of monies billed to Medicare and Medicaid and is currently operating at a net loss. Taxpayer cannot survive an all source levy of the available funding that it does have and still provide essential care services to the patients residing at Taxpayer’s nursing facility. Taxpayer has a mandatory obligation, under federal and state law, to provide food, medicine, physical therapy services, linens and bedding, supplies, equipment and certified healthcare providers for its patients. Failure to provide adequate care to these patients can subject Taxpayer to a loss of its license among numerous other civil and criminal penalties.

…[T]he proposed levy on Taxpayer’s accounts receivables, Medicaid and Medicare funding, private pay and bank accounts should be released. Such a levy on Taxpayer’s essential business property would prevent it from being able to carry on its trade or business (i.e., to provide adequate care and treatment to its patients). Taxpayer would not be able to meet its payroll and other basic necessities, which in turn would result in patients not receiving the needed care from qualified healthcare providers that the law mandates Taxpayer must provide. Simply put, Taxpayer cannot survive or provide essential care services to its patients if the IRS is able to file a levy against every available source of income. As such, Taxpayer asserts that the hardship relief provisions of § 6343 apply to this situation and mandate the release of the proposed levy issued against it.

The Settlement Officer refused to consider the economic hardship argument, holding that corporations are barred from using this provision per the regulations the IRS has written interpreting the provision.  Reg. 301.6343-1(b)(4)(i) provides:

(i) General rule. The levy is creating an economic hardship due to the financial condition of an individual taxpayer. This condition applies if satisfaction of the levy in whole or in part will cause an individual taxpayer to be unable to pay his or her reasonable basic living expenses. The determination of a reasonable amount for basic living expenses will be made by the director and will vary according to the unique circumstances of the individual taxpayer. Unique circumstances, however, do not include the maintenance of an affluent or luxurious standard of living.

First, the regulation begins by clearly referring only to the hardship of an individual taxpayer.  Second, the regulation goes on to look at the taxpayer’s need to meet basic living expenses, something a corporation cannot have.

The nursing home contends that the regulation should be held to be invalid, taking the position that the plain language of the Code Section allows all taxpayers access to this relief whether or not the taxpayer is a natural person.

While in this statute the IRS is given the explicit right to write regulations to implement the statute, the IRS in doing so cannot advance a regulation that is at odds with the clearly expressed intent of Congress (the Tax Court references Chevron, U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 842 (1984) and Mayo Found. for Med. Educ. & Research v. United States, 562 U.S. 44, 55-58 (2011).

The taxpayer argues that the Code provision references releasing the levy on a “person” who is a “taxpayer” that suffers economic hardship. The term “person” is defined for purposes of the entire Internal Revenue Code in IRC §7701(a)(1) to include “an individual, a trust, estate, partnership, association, company or corporation.”  As well, §7701(a)(14) defines a “taxpayer” as “any person subject to any internal revenue tax.”

In the view of taxpayer, limiting the relief to individuals goes against the clear language of the statute and, to the extent the regulation attempts to impose that limit, it should be treated as invalid.

But the Tax Court did not agree in this context.  First, the Court pointed out that other provisions in §6343 referred to “taxpayers” for situations that could only ever impact an individual (such as a levy against wages received by the taxpayer) while in other cases it clearly had a broader meaning.  So it isn’t necessarily the case that the use of the term taxpayer implied Congress intended that there must be some circumstances where the relief would be available to non-individuals.

Second, Congress specifically granted the IRS the authority to define “economic hardship” in this context in the Code Section.  The Court found that Congress intentionally left this term ambiguous and available for the IRS to define.

Third, the Court pointed out that if the section is truly read literally then the provision, which applies to the release of a levy, would not be applicable to a situation where no levy has yet been made.  The fact that the IRS does allow the issue to be considered before the actual levy is made is technically contrary to the literal statute—and, after all, the taxpayer was arguing that it should get relief based on a literal reading of the statute.

Even if the statute is not clear, that doesn’t automatically make a regulation valid.  Rather the next question is whether the regulation offers a reasonable interpretation to resolve the ambiguity.  The Court, after considering the legislative history behind this Section and the drafting of the regulation in question, concluded that the IRS had not inappropriately interpreted the statute by limiting economic hardship to only include factors that impacted an individual, thus limiting the application of the section to individuals.

In fact, as the Court noted:

In January 1995 the Secretary promulgated final regulations under section 6343(a). See T.D. 8587, 1995-1 C.B. 207. These regulations currently appear in substantially the same form under section 301.6343-1(b), Proced. & Admin. Regs. In the preamble, the IRS addressed numerous comments and suggestions, adopting some and explaining the rejection of others. T.D. 8587, 1995-1 C.B. at 207-209. None of the comments, however, addressed the regulation’s restriction of economic hardship under section 6343(a)(1)(D) to individual taxpayers.

The Court concludes by noting that this does not mean a corporation cannot seek relief based on economic factors under other provisions of the IRC.

This conclusion, however, does not foreclose nonindividual taxpayers from relief in circumstances where the proposed collection action, if sustained, could result in some form of economic difficulty. These economic realities and consequences of the Commissioner’s proposed collection action are properly considered for all taxpayers as part of the intrusiveness analysis within the section 6330(c)(3)(c) balancing test—namely whether the intrusiveness caused by sustaining the proposed collection action outweighs the Government’s need for the efficient collection of taxes. Cf. Pazzo Pazzo, Inc. v. Commissioner, T.C. Memo. 2017-12, at *28-*29 (noting that relief for “economic hardship” under section 301.7122-1(b), Proced. & Admin. Regs., is unavailable to nonindividuals and evaluating the corporate taxpayer’s argument under the SO’s consideration of its specific facts and circumstances in the balancing test under section 6330(c)(3)(C)).

However, for this nursing home that turned out not to be very helpful. While the reported Tax Court decision did not look at the avenue of relief discussed above, a second memorandum decision issued the same day (Lindsay Manor Nursing Home Inc. v. Commissioner; T.C. Memo. 2017-50) concluded that this particular corporation did not meet the conditions for that relief either.