151 T.C. 93
T.C.2018Background
- David and Audrey Melasky had long‑standing unpaid federal income taxes for multiple years; this CDP appeal concerns collection for 2006, 2008, and 2009.
- On Jan. 27, 2011, petitioners hand‑delivered an $18,000 personal check to the IRS and directed it be applied to 2009; the IRS later issued a bank levy (Jan. 31, 2011) on the account before the check cleared.
- The bank held the account and the IRS collected $21,182 by levy on Feb. 28, 2011; when the $18,000 check was later presented it was dishonored and the prior credit to 2009 was reversed.
- Petitioners asked Appeals to reapply the levy proceeds to 2009 and requested a partial payment installment agreement (PPIA); Appeals denied both (notice of determination Apr. 20, 2012).
- Appeals reasoned the levy proceeds were an involuntary payment and could be applied as the IRS chose; Appeals also rejected the PPIA because petitioners had not liquidated requested assets and Appeals projected trustee distributions from a testamentary trust to cover living expenses.
- Tax Court reviewed Appeals’ determinations for abuse of discretion and granted summary judgment for respondent, sustaining the levy application and denial of the PPIA.
Issues
| Issue | Melasky (Plaintiff) Argument | Commissioner (Defendant) Argument | Held |
|---|---|---|---|
| Whether the $18,000 check constituted a payment and required application to 2009 | The Jan. 27 check was a voluntary payment directed to 2009; levy came after tender so proceeds should be applied to 2009 | A check is a conditional payment until honored; the check was dishonored, levy proceeds were involuntary and may be applied at IRS discretion | Held: check was not a payment because dishonored; levy proceeds were involuntary and IRS permissibly applied them to 1995 (no abuse of discretion) |
| Whether Appeals abused discretion by denying petitioners’ proposed PPIA for failing to liquidate requested assets | Petitioners made good‑faith efforts, liquidated many assets and offered alternatives (cash‑surrender value, allow seizure of jointly held stock); Appeals should have accommodated remaining illiquid assets | Appeals gave multiple extensions (total ~4.5 months); petitioners failed to pay over equity in several assets by final deadline—SO reasonably denied PPIA | Held: Appeals reasonably concluded petitioners had not addressed equity in assets; denial not an abuse of discretion |
| Whether Appeals abused discretion in treating possible trust distributions as available to pay necessary expenses (thus increasing payment ability) | Trust is discretionary and spendthrift; trustee (Mrs. Melasky) could not be required to exhaust other resources or invade corpus in a way that breaches fiduciary duty | Trust expressly permits discretionary distributions for beneficiary’s "health, maintenance, support" and may exhaust corpus; Texas law allows trustee discretion subject to standards—distributions to pay necessary living expenses may be considered in ability‑to‑pay analysis | Held: SO reasonably forecasted trust distributions for necessary (nontax) living expenses; using projected distributions in the PPIA analysis was not an abuse of discretion |
| Whether amount allocation (68% of household nontax expenses to Mrs. Melasky) was improper | Allocation of expenses should be 50/50 under community‑property reasoning; SO’s split overstates availability from the trust and overstates payment ability | Even if allocation were 50/50, corrected calculations still showed petitioners could pay significantly more than their offered $1,017; SO’s ultimate rejection would stand | Held: Allocation dispute does not create reversible error because even under petitioner’s math ability‑to‑pay exceeded proposed offer; no abuse of discretion |
Key Cases Cited
- United States v. Energy Res. Co., 495 U.S. 545 (voluntary payment designation recognized; contrast with involuntary payments)
- SEC v. Chenery Corp., 332 U.S. 194 (agency must base decision on the grounds it actually relied upon; courts may uphold if agency's path can reasonably be discerned)
- Poindexter v. Greenhow, 114 U.S. 270 (discusses when a tender can operate as payment for tax purposes)
- Muldrow v. Tex. Frozen Foods, Inc., 299 S.W.2d 275 (Tex. 1957) (dishonored check is not payment; collecting official's mere receipt of a check does not discharge tax unless the check is honored)
- United States v. Craft, 535 U.S. 274 (trust/tenancy issues and federal tax lien principles invoked in discussion of asset seizure/collection alternatives)