Protecting Trust Assets from the Federal Tax Lien - Installment 3

SSRN link: Protecting Trust Assets from the Federal Tax Lien

By Bryan T. Camp

Introduction
      This Article offers some ideas on how to keep the federal tax lien locked out from trust assets using property law concepts of springing and shifting executory interests.  It is being posted on Wealth Strategies Journal in three separate Installments. Installment 1, already posted, illustrated the limited role that state law plays in controlling the scope of tax liens and in protecting non-delinquent third parties from the effect of the lien.  It explained the basics of the federal tax lien, focusing on the relationship between state and federal law and the two key methods by which the IRS enforces the lien: the administrative levy and the lien foreclosure suit. Installment 2, also already posted here introduced a basic hypothetical involving a fictitious elderly widower who wants to create a trust for his kids and grandkids. Installment 2 then used the hypothetical to illustrate why spendthrift provisions offer no protection from federal tax liens and why it is likely that neither discretionary nor protective trusts do much better.

IV.  Tax Lien Lockout Provisions
      Although a prudent practitioner would not advise Red Rader to rely on a discretionary trust to prevent the IRS from reaching trust assets to satisfy Darth's potential tax liabilities, a practitioner can still help Red achieve his goals.  In fact, Red can make the trust a true support trust for Darth and Padma, can give Darth powers that will constitute property under federal law---such as a power of appointment---and can even include realty in the trust to which Darth has use rights.  Red can do all this with every confidence that none of the property will be subject to the IRS tax lien should Darth screw up his federal taxes.  He can do this using the concept of shifting executory interests, as illustrated in the following sample trust provision:

      Texas property law recognizes that a grantor can condition a grant on the occurrence of an event that, if and when it occurs, will automatically divest the grantee of the property rights given and pass those property rights to another person.[1]  The grantee's interest is called a determinable interest subject to an executory limitation, and the term "executory limitation denotes an event which, if and when it occurs, will automatically divest the grantee of the property."[2]  The person who automatically gets the property interest upon the occurrence of the event has what is called a shifting executory interest.[3]  In the example above, Darth has a determinable property interest subject to an executory limitation, and Darth's children have shifting executory interests.[4]

      Properly used, shifting executory interests will effectively protect trust assets from the federal tax lien.  In order for the federal tax lien to attach, there must be "property or rights to property" within the meaning of § 6121, and, as discussed above, courts start with state law to determine what interests state  law gives the taxpayer in the property at issue at the time the tax lien arises.  A properly written trust instrument will have divested Darth of any enforceable interests in the trust assets before the time the tax lien arises and will have shifted them to his children.  Once the shift occurs, he will have ceased to be a beneficiary of the trust, and his children will succeed to his life estate in the trust.

      If and when Darth's interest shifts, then his children will take that life estate subject to an executory limitation--that Darth cleans up his act and gets rid of all outstanding tax liabilities.  It is true that the condition subsequent also gives Darth a shifting executory interest.  But the federal tax lien cannot attach to a shifting executory interest because a present right does not exist; rather, the right depends on unknowable future events.[5]  A lien cannot attach to future property rights that depend on future events.  The long-settled example of this is wages: the federal tax lien cannot attach to future wages until the employer's obligation to pay them to the employee arises, at which time the lien attaches and may be enforced by levy.[6]  Even the federal government admits that.[7]

      The curious practitioner may have several questions about the idea of using shifting executory interests to block the federal tax lien from attaching to trust assets.  First, why not simply use a forfeiture provision?  Second, what should be the proper trigger for the shift?  Third, what is the interplay of shifting interests and community property rules in Texas?  I shall address each of these in turn.

A.  Better than Forfeiture Provisions and Protective Trusts
      One wrinkle on the shifting executory interest idea is to simply make it a forfeiture provision so that upon the occurrence of a triggering event, Darth's theretofore enforceable interest in the trust ceases.  Many practitioners are familiar with what are called "protective trusts" where the triggering event  does not truly eliminate a beneficiary's interest in the trust; instead, the triggering event replaces that interest with a purely discretionary interest.[8]

      This is a bad idea.  First, it is not clear that Texas law recognizes protective trusts.[9]  Second, a forfeiture provision which simply morphs the trust into a discretionary trust raises all of the problems with discretionary  trusts as discussed above in Part II.C.  Third, as an empirical matter, courts have proved hostile to the use of forfeiture provisions against a federal tax lien.[10]

      Courts have found forfeiture provisions ineffective against the federal tax lien because they believe it is against public policy for a beneficiary to have access to funds when owing taxes.  For example, in United States v. Riggs National Bank, the court held that a forfeiture clause was inoperative against a federal tax lien on public policy grounds.[11]  The court first noted that, unlike private creditors, the federal government is an involuntary creditor; thus forfeiture provisions would be construed strictly against the settlor.[12]  The court then held that the forfeiture clause was inoperative as against public policy because enforcing it would allow the beneficiary to continue to receive benefits from the trust, all the while owing taxes that would remain unpaid.  The court found it both "offensive and disruptive to federal tax law for a beneficiary to receive an income stream for years" under those conditions.[13]

      In contrast, where trusts have contained a shifting provision rather than a straight forfeiture, courts have been willing to give force to the provision as against similar public policy concerns.  For example, the State of Kentucky has long disapproved spendthrift provisions as against public policy.[14]  At the same time, however, the highest court in Kentucky repeatedly upheld shifting executory interest provisions as valid, stating that "where the income from certain property is devised to one for life, with the provision that if any court should ever hold it subject to the devisee's debts his interest therein should cease and the title should vest at once in the remaindermen, such provision is valid."[15] 

      A forfeiture provision might still be possible if it were a true forfeiture provision, where the beneficiary's interest is totally destroyed, never to be regained.  The problem there, of course, is that many settlors would like to still help the beneficiary or at least give the beneficiary a second chance rather than cut them out for all time.  The possible advantage here of a shifting provision is that it can shift back when the delinquent beneficiary straightens up and flies right.  However, once a true forfeiture provision is triggered it is not clear how the settlor might "undo" the forfeiture.  If that issue could be figured out, then it should work as well as a shifting interest and for the same reasons.

B.  Finding the Proper Triggers
      The key to writing a successful shifting provision is finding the proper events to trigger the shift.  Practitioners who are not conversant with federal tax procedure will almost always pull the trigger too late to prevent the federal tax lien from attaching.  The perfect example of what trigger not to use comes in Bank One Ohio Trust Co. v. United States.[16]  At first glance, the elaborate trigger language used in that case appears quite comprehensive:

      The flaw in the above language, however, was that none of the events  listed occurred before the assessment of federal income tax.  The case arose from an IRS levy on the trustee to seize money in the trust bank account.  The trustee honored the levy but then brought a wrongful levy action, arguing that the service of the levy triggered the forfeiture clause.  That was a loser argument, because, as Part I.A. describes in detail, the federal tax lien arises as of the date of assessment, even though the prerequisites to its creation do not occur until after the date of assessment.  It is the tax lien that practitioners should be concerned with, not the levy, and waiting until a levy hits is much too late.

      To write an effective shifting provision, the practitioner must select a triggering event that occurs before the date of assessment.  That advice requires a brief explanation of how federal taxes are assessed.  But first, here are the triggering events that Darth should use:

      Assessments are foundational to tax practice and procedure.  They are the culmination of the liability determination process.[18]  Section 6203 provides that an assessment is simply a bookkeeping entry "recording the liability of the taxpayer[BTC3] ."  The regulations say the act of assessment is accomplished when the assessment officer schedules the liability and signs the "summary record of assessment."[19]  The summary record simply reflects the total amount of tax liabilities that are assessed that day. The regulations also require the Service to keep backup documentation to verify that any particular taxpayer's liability is included in the summary.[20]   The date of assessment is the date an assessment officer signs the summary record.[21]

      While all assessments occur by recording the liability of the taxpayer on the Service's books of accounts, there are basically three pre-assessment processes that the IRS must use before actually making the assessment.  These processes involve different degrees of notice to taxpayers about the impending assessment and are "rooted in the concept of voluntary compliance which does not permit the government to arbitrarily assess tax without a proper list or report."[22]  I label them as follows: (1) the summary process; (2) the deficiency process; and (3) the emergency process.  The possibility that Darth could be subject to each of these three processes requires at least three potential triggers, as reflected both in the above sample language and in the following analysis.

1.  Regular or Summary Process (§ 6203)
      The first trigger ties to the summary assessment process.  Making an assessment under the summary process involves no notice to the taxpayer and is the general rule created by § 6203.  All other processes are statutory or judicial exceptions to the regular summary process of simply recording the liability on the books.[23]

      The most common assessments using the summary process are those  made on the basis of the returns that taxpayers file.  Section 6011(a) requires  all taxpayers who are liable for any type of tax to report their financial transactions to the IRS each year on "a return or statement according to the forms and regulations prescribed" by the IRS.  Section 6201(a) permits the IRS to use a filed return, whether individual or joint, as the basis for an immediate assessment of tax.

      Accordingly, the first trigger is Darth's failure to either file a required return or to fully pay all the taxes shown on a filed return.  The filing date will, by definition, come before the assessment date.  Thus, the sample language above is "(1) Darth's failure to timely file a required tax return, or to fully and timely pay a federal tax liability reported on his filed return."

      The Service also uses the summary assessment process to assess some of the assessable penalties described in Chapter 63, Subchapter B of the Tax Code.  However, because most of these assessable penalties are tied to the proper filing of returns and reporting of taxes on those returns, the general trigger language should cover most such cases.  The Service also uses the summary assessment process to record the results of certain audits, mainly audits of employment taxes imposed on employers by § 3111, which is essentially an excise tax imposed for the privilege of employing workers.  The audit selection language in the second trigger covers that possibility.

2.  Deficiency Process (§ 6212)
      Prior to 1924, the IRS could assess all tax liabilities using the summary process.[24]  In 1924, however, Congress added what is now § 6211 et seq. to  the Tax Code.[25]  These statutes require that the Service use a special process whenever it concludes that any taxpayer has a "deficiency in respect of" any income, estate or gift tax, or certain excise taxes.[26]  In such situations, the Service may not summarily assess that deficiency.  Instead, the Service must send the taxpayer a "Notice of Deficiency" indicating the Service's intent to assess the deficiency at the end of ninety days.[27]  The taxpayer then has ninety days ( or 150 days if the notice is sent to an address outside the United States) to file a Tax Court petition for a redetermination of tax and during this time, the Service is barred from assessing the deficiency.[28]  This Notice of Deficiency is also called the "90-day letter" and is often thought of as the "ticket to the Tax Court" because one of its main functions is to allow the taxpayer access to a pre-payment forum to resolve any disputes relating to the merits of the proposed deficiency.[29]  Without this procedure, the taxpayer would not be  able to contest the Service's determination until after paying the deficiency in full, an impossibility for some taxpayers.[30]

      The deficiency process is also used for non-filers.  That is, although § 6011 requires taxpayers to file returns, not all do so.  Taxpayers who fail to file required returns are called "non-filers."[31]  The IRS typically deals with non-filers by using powers granted under § 6020 to prepare returns for them.[32] But the IRS may not simply assess the tax on the "return" it has prepared for the taxpayer.  It must first send the taxpayer a Notice of Deficiency and follow the deficiency procedures.[33]  That is because such a return--prepared by the Service often on the basis of third-party information, which may or may not be accurate--is not a return within the meaning of § 6201(a)(1), which allows the IRS to use the regular assessment process to assess a tax shown on a return.[34]  So the IRS must follow the deficiency procedures before assessing the tax shown on a § 6020(b) return and must send the taxpayer a Notice of Deficiency.

      Finally, the IRS must use a process similar to the deficiency process before it may assess the Trust Fund Recover Penalty of § 6672 against a taxpayer.  This is a penalty that the IRS uses to collect what are called "trust fund taxes," which are taxes that certain third parties, notably employers, are required to collect from those responsible for the tax. For example, employers must withhold their employees' income taxes from wages and pay that amount to the IRS at least quarterly. [35]  Section 6672 allows the Service to impose a penalty on any "person"--which can include individual employees as well as the employer--who, under a duty to collect a trust fund tax, "willfully fails to collect such tax, or truthfully account for and pay over such tax."[36]  However, § 6672(b) requires that before the Service may assess the penalty, it must send the taxpayer a notice that it intends to assess the penalty and give the taxpayer sixty days to respond.  While the taxpayer has no right to go to court, the IRS still may not make the assessment using the summary process.  The IRS calls this a "notice of proposed assessment."[37]

      The second trigger addresses these deficiency procedures by keying the shift to "(2) the IRS's sending Darth either (i) a Notice of  Deficiency, (ii) a notice of a proposed assessment of an assessable penalty, or (iii) a notice that his return has been selected for examination."  Two features of this trigger bear mention.  First, the trigger is keyed to the IRS action in sending out a notice, not in Darth actually receiving a notice.  That language parallels the Service's duty in the deficiency process, which is simply to "send notice" to the taxpayer.[38]  The applicable regulations emphasize that the Service's duty is to simply send notice to the taxpayer's "last known address."[39]  Therefore, the taxpayer may never actually receive any notice of what the IRS proposes to do.  Second, the "notice of a proposed assessment of an assessable penalty" language above covers the Trust Fund Recovery situation.  Finally, the "selected for examination" segment is partly redundant but is necessary to cover employment tax audits.  The term "selected for examination" is IRS parlance for what is commonly called an audit. Although every Notice of Deficiency results from an audit, not every audit results in a Notice of Deficiency.  As discussed above, the examination of some types of returns, notably employment tax returns, may result in an assessment being made without going through the deficiency process.

3.  Emergency Processes (§§ 6851, 6861, 6871)
      If the IRS determines that the collection of a tax is in jeopardy because a taxpayer is about to skip out with his or her assets or "do an act which would tend to prejudice" tax collection, then it may use an emergency assessment process without notice to the taxpayer.[40]  Issuing a deficiency notice would just give the taxpayer ninety days to hide assets or avoid collection.  Therefore,     §§ 6851 and 6861 allow the IRS to immediately make a jeopardy assessment, meaning it could record the liability without the notice protections that would otherwise be required by the deficiency process.[41]

      Additionally, when a taxpayer goes into either a state receivership proceeding or a federal bankruptcy proceeding, § 6871 authorizes the Service to immediately assess deficiencies without having to follow the deficiency procedure.  Even if the taxpayer has already received the 90-day letter and has filed a petition in tax court, § 6871(c) authorizes claims  for tax liabilities to be presented to the bankruptcy court or the court having jurisdiction over the receivership.  According to § 6871(c)(2), once a receiver is appointed for the taxpayer, the taxpayer may not file a tax court petition but must instead proceed through the receivership proceeding.

      Before the Service can make any of these emergency assessments, the Chief Counsel, or a properly authorized delegate, must personally approve the proposed assessment.[42]  However, the taxpayer does not get notice of the jeopardy determination until after the assessment is made.[43]  Accordingly, by the time the taxpayer learns of a jeopardy assessment, the tax lien will have already attached.

      The third and fourth triggers outlined above cover these emergency processes: "(3) the commencement of federal bankruptcy or state receivership proceedings regarding Darth; or (4) a determination by an authorized IRS employee that at least one of the conditions described in sections 1.6851-1 or 1.6861-1 of the Treasury Regulations exist with respect to Darth, if such determination results in a termination or jeopardy assessment."[44]  Note that the language regarding bankruptcy and receivership is not dependent on whether Darth's bankruptcy or receivership is voluntary or involuntary.

C.  Selection of Revesting Conditions
      Generally, the revesting conditions match the triggering events.  The revesting conditions that Darth should include are as follows:

      The important point to remember about the revesting conditions is that all the conditions must be met.  This is to ensure that when his interest revests he is truly square with the IRS and that none of the other triggering events have occurred during the period of which his interest has shifted.   The reason for  the sentence about the definition of tax is because the Tax Code treats the term tax as including all associated interest and penalties.[45]

D.  Selecting the Shifting Executory Interest Recipient
      The final issue that a practitioner in a community property state, such as Texas, will want to address is who should receive Darth's interest in the trust, should a triggering event occur.  As with most trust issues, this will depend largely on the specific circumstances and personalities involved; however, a simple caution is that the person who has the shifting executory interest should not be the beneficiary's spouse, here Padma.

      Texas is a community property state where the property possessed by either spouse during a marriage is presumed to be community property unless the spouse claiming separate property shows by clear and convincing evidence that it is separate property.[46]  Each spouse owns an equal interest in community property.[47]  While that is generally a welcome rule, the dark side of that arrangement is that community property is subject to the liabilities of either spouse, whereas separate property is generally not.[48]  Property that is received by gift or that is inherited by one spouse during the marriage is separate property.[49]  A spouse who claims to be holding separate property must trace the property and prove its separate origin by evidence showing how and when the spouse originally came into possession of the property.[50]

      Recall that Red wants to give both Darth and Padma a life estate in the trust and that Darth and Padma are married.  One question that might arise is whether Padma's interest could be subject to federal tax liens securing Darth's separate income tax liabilities by being classified as community property.[51]  There is little danger of that because her interest will have been received as a gift.  It is true that one student commentator believed that "Texas law is unsettled as to the marital property character of income from trusts."[52] However, after an exhaustive review, a federal court concluded otherwise:

      For these reasons, Padma should not be the person who has the shifting executory interest in Darth's trust interests.  If they were still married at the time the shift occurred, then Darth would still have an enforceable interest in the trust; therefore, the shift would be ineffective to prevent the attachment of the federal tax lien and its disruptive enforcement through administrative levy or lien foreclosure suit.  Accordingly, Red needs to be sure to shift Darth's interest to a non-spouse.  The logical choice is the grandchildren, who are also the remaindermen.[54]

V.  Conclusion
      Most Trust and Estate lawyers do not fully appreciate the complexity of the federal tax assessment and collection system.  This can cause problems when drafting trusts for clients who are concerned with protecting trust assets from the IRS.  While spendthrift provisions can protect clients from ordinary creditors under state law, state law has become increasingly ineffectual at protecting state citizens against the might of the federal tax collector. Similarly, while discretionary provisions have proved somewhat successful in the past, they are increasingly problematic under the law as it has evolved since 1999, and indeed, they were not really that successful even before then.  Certainly a well-advised practitioner should not be telling his or her client to rely on discretionary or sprinkling provisions to protect beneficiaries.  In addition, the degree of discretion necessary to even have a hope of fending off the federal tax lien may not be compatible with the desires of many clients.

      Shifting executory interests provide the best armor plating for trusts that seek to protect beneficiaries from the reach of the federal tax collector.. The key to their success is the careful selection of events that trigger the shift and the equally careful selection of persons to receive the shifted interests.  This article has attempted, through the use of a simple hypothetical, to give the practitioner a sense of the provisions to use to best effectuate a settlor's intent that the bad acts of one beneficiary should not impair the enjoyment of the settlor's bounty by other beneficiaries.

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       [1].   See Deviney v. Nationsbank, 993 S.W.2d 443, 448 (Tex. App.--Waco 1999, pet. denied) (collecting cases).

       [2].   See id.

       [3].   Now it might be that upon the occurrence of the event, the grant merely ceases, in which case the event works a forfeiture.  If the interest revests in the grantor, it is called a springing executory interest.  See, e.g., Peveto v. Starkey, 645 S.W.2d 770, 771 (Tex. 1982).  There, the grantor made out two deeds--the first to Mr. Peveto and the second to Mr. Starkey--each conveying the same interests in oil and gas royalties.  Id.  To prevent overlap, the second deed expressly provided that it would become effective only on the expiration of first deed.  Id.  The grant to Mr. Peveto was an interest subject to an executory limitation.  Id. at 772.  If the condition occurred, then the interest would spring back to the grantor, who then had re-granted the interest to Mr. Starkey.  Id.  So the interest was called a springing executory interest.  Id.  If the deed to Mr. Peveto had provided that the royalty interests would shift to Mr. Starkey upon the occurrence of the event, then Mr. Starkey would have had a shifting executory interest.  See id.

       [4].   See e.g., Gutierrez v. Rodriguez, 30 S.W.3d 558, 560-62 (Tex. App.--Texarkana 2000, no pet.) (finding the holders of shifting executory interests estopped from claiming interests once having signed quitclaim deeds before the events triggering the shift occurred).

       [5].   See Texas Commerce Bank Nat'l Ass'n v. United States, 908 F. Supp. 453, 459 (S.D. Tex. 1995).  The district court got it right in Texas Commerce Bank Nat'l Ass'n, where the taxpayer (Elly) was the beneficiary of a trust which was a "pure" discretionary trust until 2002 when she would become vested and entitled to mandatory distributions.  Id.  The court properly rejected the IRS's argument that it could levy on her future rights, noting:

The IRS levied on the trust over nine years before Elly would receive any of the mandatory income distributions.  By November 3, 2002, the trust estate may no longer be in existence.   There may not be any income.  The trustee may decide to exercise its discretion after November  3, 2002 to disburse the entire trust estate after November 3, 2002 to Elly, her husband, her issue, or the spouses of such issue.  Since Elly's right to receive income payments after November 3, 2002 is clearly a contingent, non-vested, and non-determinable right, the IRS's levy in June 1993 could not reach it.

Id.

       [6].   See, e.g., Wagner v. United States, 573 F.2d 447, 454 (7th Cir. 1978) ("[F]uture wages and commissions of the taxpayer were contingent on his continued employment and thus did not represent an existing property right to which a lien could attach.  [He] had no present right to the wages and commissions."); United States v. Long Island Drug Co., 115 F.2d 983, 986 (2d Cir. 1940) ("Though we shall assume that a salary or wages which have been earned may be made subject to a lien for unpaid taxes and also subject to distraint and levy, the situation in respect to future earnings is quite different.  They are contingent upon performance of a contract of service and represent no existing rights of property.").

       [7].   Treas. Reg. § 301.6331-1(a)(1) (1967); see, e.g., I.R.S Chief Couns. Adv. Mem.  200124020 (May 10, 2001), available at http://www.unclefed.com/ForTaxProfs/irs-wd/2001/0124020.pdf.  ("A levy does not reach property acquired after the levy has been made . . . and does not reach payments promised a taxpayer but contingent upon the performance of some future service.").

       [8].   See Restatement (Third) of Trusts § 57 cmt. c (2003):

The terms of a trust can validly provide that the interest of a beneficiary other than the settlor   shall cease upon voluntary or involuntary alienation of the interest and that, instead, the trustee shall thereafter have discretionary authority with respect to any further payments to the beneficiary.  These are often called "protective" provisions, and often authorize discretionary distributions also to the original income beneficiary's family or other relatives.

Id.

       [9].   Texas courts appear to equate the term "protective trust" with the term "spendthrift trust."   See, e.g., Glass v. Carpenter, 330 S.W.2d 530, 533 (Tex. Civ. App.--San Antonio 1959, writ ref'd n.r.e.).  If courts equate the two, then the well-settled rule that tax liens pierce spendthrift trusts would seem to apply.  In re Orr, 180 F.3d 656, 658 (5th Cir. 1999).

      [10].   See, e.g., Bank One Ohio Trust Co. v. United States, 80 F.3d 173, 177 (6th Cir. 1996) (holding that the forfeiture provision was ineffective against the federal tax lien).

      [11].   United States v. Riggs Nat'l Bank, 636 F. Supp. 172, 176 (D.D.C. 1986).

      [12].   Id. ("While it is clear that [the settlor] sought to restrict her son from squandering his future income stream, this court sees a distinction between language designed to prevent general creditor foreclosure and language that would stop government assessments.").

      [13].   Id. at 177; see also United States v. Taylor, 254 F. Supp. 752, 756-58 (N.D. Cal. 1966).

      [14].   See Montgomery v. Offutt, 123 S.W. 676, 677 (Ky. 1909) (holding that a trust provision attempting to shield a beneficiary's interest from creditors was void because it was against public policy); Bull v. Ky. Nat'l Bank, 14 S.W. 425, 427 (Ky. 1890) ("A testator cannot vest the title in a trustee for the use of another, and permit its enjoyment by the cestui que trust, without subjecting it to the debts of the latter.  This is the rule in this state . . . .").

      [15].   Todd's Executors v. Todd, 86 S.W.2d 168, 169-70 (Ky. 1935) (collecting cases); see also Restatement (Third) of Trusts, § 60 cmt. e and e(1) (2003) where the Reporter's analysis of that case concluded that "[p]ossibly most important, however . . . was a provision directing that the trust 'cease' and that principal shall go 'to the remaindermen if the Court should adjudge that any part should be subjected to the claims of any creditor.'").

      [16].   Bank One Ohio Trust Co. v. United States, 80 F.3d 173 (6th Cir. 1996).

      [17].   Id. at 174.

      [18].   See Bryan T. Camp, The Failure of Adversarial Process in the Administrative State, 84 Ind. L.J. 57, 58-65 (2009) (providing a fuller description).

      [19].   Treas. Reg. § 301.6203-1 (2007).  Typically, the summary record is Form 23C.  Sometimes it is computer-generated on the Revenue Accounting Control System (RACS) Report 006 ("Summary of Assessments").  See also Effectively Representing Your Client Before the "New" IRS: A Practical Manual for the Tax Practitioner with Sample Correspondence and Forms (Jerome Borison ed., 3d ed. 2004) (providing examples).

      [20].   See Treas. Reg. § 301.6203-1.  The backup documentation is generally in the form of data recorded into one of the computer systems that feed into the mater file account systems, rather than data recorded onto paper.  Likewise, rather than being kept in paper form, the data is stored electronically and printed out in various forms (discussed below).  The Form 23C itself is now computer-generated but is printed out and signed, usually on Mondays.

      [21].   Id.

      [22].   Millsap v. Comm'r, 91 T.C. 926, 931 n.10 (1988), acq., 1991-2 C.B. 1.

      [23].   See, e.g., § 6211, et seq. (requiring the deficiency process).

      [24].   Bryan T. Camp, The Never-Ending Battle, 111 Tax Notes 373, 376 (April 17, 2006).

      [25]  Revenue Act of 1924, 43 Stat. 253.

      [26].   § 6212(a).

      [27].   Id.

      [28].   § 6213.

      [29].   See generally Leandra Lederman, "Civil"izing Tax Procedure: Applying General Federal Learning to Statutory Notices of Deficiency, 30 U.C. Davis L. Rev. 183 (1996).

      [30].   Flora v. United States, 362 U.S. 145, 158-59 (1960).

      [31].   Taxpayers whose income is below the filing threshold are called "poor."

      [32].   See Bryan T. Camp, The Function of Forms in the Substitute-for-Return Process,111 Tax Notes 1511 (June 26, 2006), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1369272 (explaining the § 6020 process, exploring its implications for the legal definition of return and critiquing IRS positions); see also Bryan T. Camp, The Never-Ending Battle, 111 Tax Notes 373, 376 (Apr. 17, 2006), (exploring the legislative history of § 6020 back to 1862).

      [33].   Taylor v. Comm'r, 36 B.T.A. 427, 428 (1937).

      [34].   Id. at 429.

      [35].   See Bryan T. Camp, Avoiding the Ex Post Facto Slippery Slope of Deer Park, 3 Am. Bankr. Inst. L. Rev. 328, 330-32 (1995) (providing a full description).  Briefly, two of the most important trust fund taxes are the income and social security withholding taxes.  The Code makes every employer responsible for collecting their employees' income and social security taxes and paying these collected taxes to the government on a quarterly basis.  I.R.C. §§ 3102(a)-(b), 3402(a) (social security taxes and income taxes).  If the employer fails to properly pay over these withheld amounts to the government, then the Treasury suffers a loss because the employees are given credit for taxes withheld regardless of whether the money actually reaches the government's coffers.  I.R.C. § 31(a); Slodov v. United States, 436 U.S. 238, 243 (1978).  This trust fund tax is in addition to the taxes imposed directly on employers by § 3401 for the privilege of employing workers.  Initially, the idea of withholding was a byproduct of the creation of the social security system created by the Social Security Act of 1935.  Social Security Act of 1935, Pub. L. 74-271, ch. 531, 49 Stat. 620 (1935).  In 1943, Congress expanded the withholding scheme to require employers to withhold employees' income taxes and social security taxes.  Act of June 9, 1943, 57 Stat. 126.

      [36].   I.R.C. § 6672.

      [37].   See Rev. Proc. 2005-34, 2005-1 C.B. 1233, 2005-24 I.R.B. 1233.

      [38].   I.R.C. § 6212.

      [39].   Treas. Reg. 301.6212-2(a) (2001) ("A taxpayer's last known address is the address that appears on the taxpayer's most recently filed and properly processed federal tax return, unless the . . . Service . . . [receives] clear and concise notification of a different address.").

      [40].   Sections 6851 and 6861 cover slightly different situations, but they require the same findings.  Treas. Reg. 1.6861-1(a).

      [41].   See, e.g., I.R.C. §§ 6861, 6862, 7429 (the titles all refer to "Jeopardy Assessment").  The emergency process authorized by § 6851 is called the different name of "termination assessment" because it occurs when the IRS makes the assessment in the middle of the taxpayer's tax year, thus terminating that tax year in order to assess tax.

      [42].   § 7429(a).

      [43].   The notice entitles the taxpayer to limited court review.  § 7429(b).  In court, the government bears the burden to show the facts upon which its jeopardy determination was based, but otherwise the burden is on the taxpayer as usual.  See Comm'r  v. Shapiro, 424 U.S. 614, 627-29 (1976).

      [44].   See supra Part IV.

      [45].   I.R.C. § 6665(a)(2) ("[A]ny reference in this title to 'tax' shall be deemed also  to refer to the additions to the tax, additional amounts, and penalties provided by this chapter.").

      [46].   See Tex. Fam. Code Ann. § 3.003 (Vernon 2006).

      [47].   See Mitchell v. Schofield, 171 S.W. 1121, 1122 (Tex. 1915).

      [48].   See Tex. Fam. Code Ann. § 3.202; Gensheimer v. Kneisley, 778 S.W.2d 138, 140 (Tex. App.--Texarkana 1989, no writ).

      [49].   Tex. Fam. Code Ann. § 3.001; see Medaris v. United States, 884 F.2d 832, 833 (5th Cir. 1989) ("Texas law provides that property acquired during marriage, other than by gift, devise, descent or personal injury recovery, is community property.").

      [50].   See Whorrall v. Whorrall, 691 S.W.2d 32, 35 (Tex. Civ. App.--Austin 1985, writ dism'd) (citing McKinley v. McKinley, 496 S.W.2d 540, 543 (Tex. 1973)); Ganesan v. Vallabhaneni, 96 S.W.3d 345, 354 (Tex. Civ. App.--Austin 2002, pet. denied).

      [51].   Another issue that Red should consider here is whether to make both Padma and Darth's interests subject to executory limitation.  If they file joint returns, then § 6013(d)(3) provides that both become jointly and severally liable for the tax reported on the return or determined after audit.  In such case, shifting only Darth's interest would be ineffective to defeat the attachment of the federal tax lien.  The assumption here, for good or bad, is that Darth and Padma will be filing separate returns each year.  However, that is certainly an issue that needs to be addressed with the client, along with subsequently adjusting the trust language one way or another.

      [52].   W. Michael Wiist, Comment, Trust Income: Separate or Community Property?, 51 Baylor L. Rev. 1149, 1155 (1999).

      [53].   Wilmington Trust Co. v. United States, 4 Cl. Ct. 6, 11 (1983); see also Cleaver v. Cleaver, 935 S.W.2d 491, 493-494 (Tex. App.--Tyler 1996, no writ) (concluding that interest was separate property because it was established before marriage and conveyed by devise); Hardin v. Hardin, 681 S.W.2d 241, 242 (Tex. App.--San Antonio 1984, no writ) (finding that interest in the trust acquired by gift was separate property); In re Marriage of Burns, 573 S.W.2d 555, 556-57 (Tex. Civ. App.--Texarkana 1978, writ dism'd) (noting that trusts established before marriage and testamentary trusts were separate property); Currie v. Currie, 518 S.W.2d 386, 388 (Tex. Civ. App.--San Antonio 1974, writ dism'd) (recognizing that interest was inherited and thus separate property);.

      [54]  A final potential issue here is the possibility that the holders of the shifting executory interest may also be  delinquent taxpayers at the time the beneficiary's interests shift to them.  For example, if Red provides that Darth's interest will shift to Leia and Luke, then this will not protect trust assets from the federal tax lien if either Leia or Luke have outstanding federal income tax liabilities at the time Darth's interest shifts.  One possibility is to have a double shift provision; however, if there are no further beneficiaries to shift the interest to, then the next best approach would be to put in forfeiture provisions and hope for the best.