As the heir of a long time National Football League (NFL) franchise owner, Hugh Culverhouse Jr. knows a little bit about blindsiding. He just didn’t expect to experience it himself from the Internal Revenue Service (IRS).
According to Culverhouse, the IRS blindsided him with a demand for payment on a tax liability that doesn’t exist and then attempted to seize his assets in the process. In response, the Culverhouses have filed suit in federal court in the Southern District of Florida to stave off a levy.
If you’re at all familiar with tax procedure, this may seem like a curious route. Generally, when the IRS alleges that you owe tax and threatens a levy, you can ask for a temporary hold on collections while you make payment arrangements. Better yet, if you’re as flush as the Culverhouses, you can pay the tax due and fight about it after the fact in Tax Court.
That assumes, however, that you know how much you owe.
The Culverhouses assert that the IRS never billed them for any tax. Further, they claim that after numerous communications with IRS, it’s still unclear how much they allegedly owe, how the IRS calculated the tax or, remarkably, which tax years are in question.
The Culverhouses do admit that they are in the middle of a legitimate tax dispute with IRS involving a partnership in which Culverhouse holds an interest, Palmer Ranch Holdings, Ltd. And not coincidentally, it involves the same tax year, 2006, for which the IRS is attempting to collect from them personally. In that dispute, the IRS attempted to assess additional tax to the partnership; the partnership disagreed, sued and won. IRS appealed and the matter is currently pending in the Eleventh Circuit. (You can read my colleague’s take on the easement issue involved in the dispute here.)
So what does that have to do with the Culverhouses’ personal income tax liability? While a partnership is a separate entity from the individual partners, the two are connected for tax purposes. Tax is calculated at the partnership level and the individual tax attributes pass to the individual partners (that’s why you’ll hear a partnership referred to as a “passthrough entity”). That means that a change to the tax assessment for a partnership could affect the individual partners. But remember: the Culverhouses’ partnership matter is still pending.
Nevertheless, on June 8, 2015, the Culverhouses received a notice from IRS that their assets would be levied. Typically, an intent to levy follows a very specific procedure. The IRS must assess the tax and send a Notice and Demand for Payment; taxpayers must neglect or refuse to pay the tax; and IRS sends a Final Notice of Intent to Levy and Notice of Your Right to A Hearing (levy notice) at least 30 days before the levy. The Culverhouses say that procedure wasn’t followed.
The amount at issue in the levy was initially $939,101.88, including penalties and interest. The notice also included an invitation to call to resolve the matter, which both Hugh Culverhouse and his accountant, Andres Bolano, Jr., did. When Bolano called, the Culverhouses allege, IRS explained that the tax was improperly calculated. After much back and forth, IRS allegedly admitted that there had actually been an overpayment of $677,702 for the tax year 2006. However, the IRS went on to say that the Culverhouses’ 2007 and 2008 person income tax returns had been reassessed resulting in additional tax and interest due.
To try and resolve the matter, the Culverhouses asked for a Collection Due Process hearing (CDP hearing). Again, this is pretty standard practice. What this does is get your matter in front of someone at IRS in an effort to block an inappropriate levy. The reasons for the hearing can range from “I don’t think I owe this” to “I owe this but I can’t pay because I have reasonable cause.” It’s a last chance effort to prevent a levy. However, the Culverhouses’ request for a CDP hearing was denied because the IRS claimed that a “final notice of intent to levy” had not yet been issued (merely an intent to levy). The IRS more or less told them to try again later.
IRS next sent another intent to levy asking for even more money: $957,613.65, including penalty and interest: the penalties demanded were nearly double those from one month earlier. This time, however, the notice was sent solely to Hugh Culverhouse.
In the meantime, the IRS allegedly contacted the Culverhouses’ accountant and indicated that the IRS was only looking for about half of the original assessment. What followed was a notice saying that they had overpaid their 2006 personal income tax but now owed for 2007 and 2008.
At this point, the Culverhouse’s attorneys allege, simply, that “the IRS does not know what it is doing.”
It certainly feels that way. Typically, collections begin and end with the same office. In this case, that’s the Philadelphia office and that’s where the levy notices to the Culverhouses originated. But the Culverhouses are also receiving notices from Utah: that’s where most partnership returns are filed. It feels like a giant case of the right hand not knowing what the left hand is doing. And that confusion is costing the Culverhouses time and aggravation.
That said, if this only involved the statute of limitations issues for 2006, the IRS might have something of a leg to stand on. Granted, a wobbly, somewhat confused leg but they would have something. Under the Regulations and case law, there is support for the idea that the IRS may directly assess a partner after a finding at the partnership level even if the individual statute of limitations has run. In other words, consent to extend at both levels may not always be required to extend that statute of limitations. The Culverhouses seem to understand that (though their attorneys are still making the argument to the contrary as any good attorney would do).
But what about the rest? The partnership matter is far from settled. It remains pending in court. If that issue is really what that 2006 assessment was about – and it’s not quite clear, even to the Culverhouses, that it is – then the IRS should not be attempting to collect. As for 2007 and 2008, assuming that those returns were timely filed and further assuming no fraud or other issues that would normally extend the statute of limitations (and none of those things appear to have been asserted), the statute of limitations has already expired for those years.
And let’s not forget about the notice of intent to levy: the very thing that started this whole process. By law, the IRS can’t levy property without notice and an opportunity to appeal. There are a few exceptions but most of them involve a very real threat that the tax won’t otherwise be collected. Think drug dealers or criminals fleeing the country. This isn’t generally the case for wealthy philanthropists whose holdings in real estate are fairly permanent: you can’t exactly pack up your land and take it with you.
So what do the Culverhouses want? Closure. They’re asking IRS be barred from seizing their assets. They also want the court to hold that the statute of limitations has expired for 2006, 2007 and 2008; realizing that might not happen for 2006 since the matter is still pending in court, the Culverhouses have asked that, at the least, collections activities stop.
The IRS does not comment on private tax matters and has not yet filed a response to the lawsuit.