IRS Not Required to Collect Payments from Trust Set Up for Taxpayer.
(Parker Tax Publishing May 25, 2014)

It was not an abuse of discretion for the IRS to determine to proceed with a levy in lieu of, or in addition to, an attempt to invade a trust of which the taxpayer was a beneficiary in order to satisfy the taxpayer's income tax liability. Kraft v. Comm'r, 142 T.C. No. 14 (4/23/14).

On his 2009 Form 1040, Bruce Kraft reported a tax liability of over $141,000. The IRS then assessed penalties and interest. On May 24, 2011, the IRS issued a Letter 1058, Final Notice of Intent to Levy and Notice of Your Right to a Hearing, for the 2009 tax year. Bruce subsequently submitted a Form 12153, Request for a Collection Due Process or Equivalent Hearing. In the Form 12153, Bruce checked the box indicating that he disputed the IRS's proposed or actual levy and indicated that he wanted to discuss an installment agreement as a collection alternative for his tax liabilities. Bruce was a beneficiary of the spendthrift Bruce Kraft Discretionary Trust UTD 1999 (Kraft Trust). The Kraft Trust was an irrevocable trust set up by Bruce that allows the trustee to distribute net income and principal as the trustee deems "necessary and appropriate for beneficiary's health, maintenance, support, and education."

Bruce specifically requested that the IRS levy on a specific source, a property at 1220 Wisconsin Ave, N.W., Washington, D.C., or other Kraft Trust-owned assets, rather than his distribution of income from the Kraft Trust and another trust of which he was a beneficiary. Bruce also indicated that he preferred that the IRS levy on this source instead of approving an installment payment plan. According to Bruce, his personal liquid assets were insufficient to satisfy his federal income tax liability and a continuing or multiple levies would be required.

The IRS eventually sustained the proposed levy action and would not grant Bruce relief under Code Sec. 6330 from the proposed levy action. Bruce filed a petition with the Tax Court for review of the collection due process (CDP) determination, arguing that the IRS erred in not granting the relief requested.

Under Code Sec. 6330, following a CDP hearing, the IRS Appeals officer must determine whether the proposed collection action should proceed. In making the determination the Appeals officer must take into consideration: (1) whether the requirements of any applicable law or administrative procedure have been satisfied; (2) any relevant issues raised by the taxpayer during the hearing; and (3) whether the proposed collection action balances the need for efficient collection of taxes with the taxpayer's legitimate concern that any collection action be no more intrusive than necessary.

The Tax Court held that it was not an abuse of discretion for the IRS to determine to proceed with a levy in lieu of, or in addition to, an attempt to invade the trust in order to satisfy Bruce's income tax liability. The court further held that the IRS was not required to grant Bruce's request to collect involuntary payments from a certain source. Finally, the court said that the IRS settlement officer did not abuse her discretion in determining that the proposed levy action appropriately balanced the need for efficient collection of taxes with Bruce's concerns that the levy be no more intrusive than necessary.

For a discussion of the requirements that must be met in order for the IRS to levy upon a taxpayer's property, see Parker Tax ¶260,540. (Staff Editor Parker Tax Publishing)

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