The Tenth Circuit affirmed the Tax Court's holding that Regs. Sec. 301.6343-1(b)(4) was a valid regulation, so the economic hardship exception to the imposition of a levy applies only to individuals, not to corporations.
Background
Seminole Nursing Home Inc. operates a nursing home facility in a rural community of fewer than 8,000 residents in Oklahoma. For the quarter ending Dec. 31, 2013, Seminole timely filed its Form 941, Employer's Quarterly Federal Tax Return, but failed to pay its reported employment tax liability of $61,916.19 for the quarter. On April 14, 2014, the IRS assessed the tax reported and began collection efforts.
On April 24, 2014, the IRS issued Seminole a Letter 1058, Final Notice — Notice of Intent to Levy and Notice of Your Right to a Hearing. In response, Seminole timely submitted a Form 12153, Request for a Collection Due Process or Equivalent Hearing (CDP hearing request), seeking to enter into a $6,000-per-month installment agreement for its unpaid employment tax liability. The CDP hearing request stated that if the IRS were permitted to levy, Seminole's difficulty with Medicare and Medicaid collections would make it unable to pay either its employment tax balance or its current taxes. Seminole, however, did not dispute the underlying employment tax liability in the CDP hearing request.
The IRS mailed Seminole a letter scheduling a CDP hearing for Aug. 26, 2014. The letter advised the company that it did not qualify for consideration of an installment agreement because it was not in compliance with its employment tax deposit requirements for the tax period ending June 30, 2014. It further advised Seminole it was required to send the IRS the following items no later than Aug. 12, 2014, to qualify for a collection alternative: (1) a completed Form 433-B, Collection Information Statement for Businesses, and (2) evidence that it had made the required federal employment tax deposits for the current tax period.
One day before the hearing, Seminole submitted a Form 433-B and a three-paragraph letter to the Office of Appeals (Appeals) stating that in addition to seeking a collection alternative, it was planning to challenge the proposed levy under the Sec. 6343(a)(1)(D) economic hardship exception to the imposition of a levy. The Form 433-B listed among Seminole's assets accounts receivable from Private Pay, Medicaid Oklahoma, Medicare, and Insurance CoPay with a combined balance of $313,112.98. It also asserted, though, that a levy would cause economic hardship because it could not sustain a levy while providing the necessary services to patients residing at its nursing home.
Seminole claimed that the plain language of Sec. 6343(a)(1)(D) indicated that Congress intended to mandate the release of a levy if it creates a financial economic hardship on a taxpayer. It also claimed that Sec. 6343(a)(1)(D) applies to all taxpayers, including corporations, although the language of the statute does not specifically state which taxpayers it applies to, and a regulation promulgated under the statute, Regs. Sec. 301.6343-1(b)(4), provides that the exception only applies to individual taxpayers.
At its CDP hearing, Seminole did not dispute the amount owed. Appeals rejected the proposed installment agreement on two grounds: (1) Seminole had sufficient assets to pay its tax debt in full; and (2) it was ineligible for an installment agreement because it had not made all its required federal tax deposits for 2014. Appeals also rejected Seminole's argument that the economic hardship exception applied because Regs. Sec. 301.6343-1(b)(4) limits economic hardship relief to individual taxpayers.
With regard to whether a levy was allowable, it determined that "[i]n balancing the least intrusive method of collection with the need to efficiently administer the tax laws and the collection of revenue, ... the balance favors issuance of the levy, and is no more intrusive than necessary." Therefore, Appeals issued a Notice of Determination sustaining the levy.
Seminole challenged the IRS's determination in Tax Court. The Tax Court, agreeing with the IRS, held that economic hardship relief was not available to Seminole because Regs. Sec. 301.6343-1(b)(4) limited the relief to individual taxpayers and that it had previously held in Lindsay Manor Nursing Home, Inc., 148 T.C. 235 (2017), that the regulation was a valid regulation entitled to Chevron deference. The court further held that Seminole was ineligible for an installment agreement. However, due to an error in the calculation of Seminole's monthly income, the court found the IRS may not have properly performed the balancing test of the need for the efficient collection of taxes against the intrusiveness of a collection action, and it sent the case back to Appeals to reconsider its balancing analysis.
Appeals, after trying but failing to get more information from Seminole, issued a supplemental notice of determination sustaining the levy. Seminole again took the case to the Tax Court, arguing, among other things, that the economic hardship exception should apply because the Tenth Circuit had vacated the Tax Court's decision in Lindsay Manor. The Tax Court held that this argument failed because the Tenth Circuit "only vacated ... Lindsay Manor for procedural purposes (i.e., mootness), not for substantive reasons."
Seminole then appealed its case to the Tenth Circuit, again arguing that Regs. Sec. 301.6343-1(b)(4)(i) was invalid and that under the language of Sec. 6343(a)(1)(D), the economic hardship rule applies to all taxpayers, including corporations.
The Tenth Circuit's decision
The Tenth Circuit affirmed the Tax Court and held Regs. Sec. 301.6343-1(b)(4)(i) was a valid regulation and that the economic hardship exception to a levy in Sec. 6343(a)(1)(D) did not apply to corporations.
The Tenth Circuit analyzed whether Regs. Sec. 301.6343-1(b)(4)(i) was a valid regulation by applying the two-step test from Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984). Under the first step, the court asks "whether Congress has directly spoken to the precise question at issue." If the statute unambiguously expresses Congress's intent, there is no need to consider the agency's interpretation; the court and the agency must give effect to the unambiguously expressed intent of Congress.
Under step two of the test, the court considers whether the agency regulation is a permissible construction of the statute. In determining whether a construction is permissible, a court is not required to find that the agency's construction was the only one the agency permissibly could have adopted, or even that it is the construction of the statute that the court would have chosen if the question initially had arisen in a judicial proceeding. If the court determines that the agency's construction of the statute is permissible, the court is required to follow the agency's interpretation of the statute.
Seminole argued that it is unambiguous under Sec. 6343(a)(1)(D) that the hardship exception applies to corporations, because Sec. 7701 — the definitions section for the Code — defines "taxpayer" as "any person subject to any internal revenue tax" (Sec. 7701(a)(14), emphasis added), and defines "person" to include "an individual, a trust, estate, partnership, association, company or corporation" (Sec. 7701(a)(1), emphasis added)). Moreover, Seminole noted, Sec. 6343(a)(1)(D) makes no distinction between an individual taxpayer and a corporate taxpayer.
However, the Tenth Circuit found that the matter was not so straightforward. To begin with, the court observed that Sec. 7701(a) prefaces the definitions contained in that subsection by saying that the definitions apply "[w]hen used in this title, where not otherwise distinctly expressed or manifestly incompatible with the intent thereof." This language recognizes the general principle that a court must read statutory language in light of the statutory scheme as a whole, the court stated.
Furthermore, the court explained, the use of the word "taxpayer" in other parts of the Code makes it clear that the word can be implicitly limited to individuals. As an example, it cited Sec. 6343(e), which provides that the IRS should release a "levy on the salary or wages payable to or received by the taxpayer, upon agreement with the taxpayer that the tax is not collectible." Because only an individual taxpayer receives salary or wages, Sec. 6343(e) is necessarily limited to individuals, according to the court.
The court then considered whether it made sense to apply the economic hardship exception to a corporation. While it found that a corporation could experience economic hardship, it was not entirely certain that releasing a tax levy on a corporation's assets due to economic hardship was justified, given the possibly negative public policy implications of providing levy release for economic hardship to corporations. Also, the court noted that it would be reasonable to infer that since no one had suggested expanding the exception beyond individuals when Regs. Sec. 301.6343-1(b)(4)(i) was promulgated, that to the extent that applying the exception to nonindividuals was consistent with public policy, it would be unnecessary to do so because of the existence of other Code provisions that accomplish the same purpose.
Still, the Tenth Circuit was reluctant to say that the only reasonable interpretation of Sec. 6343(a)(1)(D) would exclude corporations and other nonindividuals from the exception, and found that the statute is ambiguous. However, the court was also certain "that the language of the exemption does not compel that it be interpreted to apply to corporations and that the contours of the exemption are properly left to the expertise of the [IRS]." Thus, excluding corporations from the scope of the exception was a permissible interpretation of the statute. Consequently, Regs. Sec. 301.6343-1(b)(4)(i) met both parts of the Chevron test, so the regulation was valid and the economic hardship exception to a levy did not apply to Seminole as a corporation.
Reflections
As this case highlights, if a statute can be interpreted validly in more than one way, the IRS, within broad limits, can adopt any valid interpretation of the statute it chooses in regulations. While the IRS's interpretation in a regulation can sometimes be successfully challenged, mounting a challenge, even if it is well founded, can be a time-consuming and expensive process.
Seminole Nursing Home, Inc., No. 20-9005 (10th Cir. 9/2/21)
