In conjunction, the Zietzke decisions support the conclusion that the federal district courts and tax courts appear to understand digital accounts and are comfortable applying the law to summonses served on more traditional types of financial institutions or in search of more traditional assets. Analysis of the IRS summons proceeded without difficulty, along identical lines to those laid out well before virtual currency or virtual currency exchanges (or, indeed, before many of those owning or trading in virtual currencies themselves) existed.32
Strashny—Facts and Procedure
The Strashnys filed their Federal income tax returns on time for tax year 2017; however, they did not pay the amount of tax due on the return.33 The IRS assessed the Strashnys for the amount listed, plus additional amounts for failure to pay, subject to interest.34 In July 2017, the Strashnys mailed in Form 9465, an Installment Agreement Request, and a Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals.35 By December 2018, including interest, the Strashnys assessed 2017 tax liability was more than $1.1 million.36
The IRS followed up by sending the Strashnys a Notice CP90, Intent to Seize Your Assets and Notice of Your Right to a Hearing.37 The Strashnys responded by requesting a hearing and attaching copies of their previously mailed Forms 9465 and 433-A.38 The Strashnys’ Forms did not contest the underlying amount of 2017 tax liability; similarly, the opinion notes that the Strashnys did not “check the box indicating that they could not pay the balance ….”39 The IRS Settlement Officer (“SO”) conducting the Strashnys’ requested a hearing (related to the requested Installment Agreement, “IA”) verified the Strashnys’ 2017 tax liability, confirmed all procedural requirements had been met, and, finally, noted the extensive virtual currency assets listed on Form 433-A.40 Prior to the conference, the SO also received documents including a copy of the Strashnys’ 2018 tax return, noting wages of over $200,000, and investment statements valuing the Strashnys’ virtual currency assets at over $7 million.41 Furthermore, the SO noted that the Strashnys “were currently withdrawing $19,000 per month from their cryptocurrency account.”42 This led the SO to question why the Strashnys had not liquidated these assets to pay their tax liability in full; if the Strashnys had the ability to do so, they would not qualify for an installment agreement.43 Although the Strashnys’ representative at the conference raised a minor procedural issue, he did not directly address why the Strashnys’ were unwilling to liquidate assets to fully satisfy their tax liability.44 In a follow-up call, the Strashnys’ representative similarly did not provide any reason why the Strashnys were unable to liquidate their virtual currency assets to pay the entire liability at once.45 The SO denied the Strashnys’ IA request, issuing a notice of determination which supported the SO’s proposed levy set for 30 days later.46 Following an assessment of tax liability and denial of the Strashnys’ request for an installment agreement, the IRS determined that action to collect their outstanding tax liability was appropriate. The Strashnys responded by proceeding with a Collections Due Process (“CDP”) case.47 The parties filed cross-motions for summary judgment, and the court agreed the case did not present a dispute of any material fact.48 As the parties did not dispute the amount of the underlying tax liability, the Tax Court reviewed the IRS collection decision for abuse of discretion, and finding none, granted the government’s motion for summary judgment.49
The Tax Court restated the general rule of applicable law that summary judgment is appropriate where no material facts are in dispute and a judgment based purely on the law suffices.50 As noted above, the Strashnys and the government disputed none of the relevant facts, including the amount of underlying tax liability, the Strashnys’ possession of substantial virtual currency holdings, and the Strashnys’ monthly income from wages and from the virtual currency holdings.51 As Code Sec. 6330(d)(1) provides no judicial standard of review for a CDP hearing, prior Tax Court decisions delineate an abuse of discretion standard (“arbitrary, capricious, or without sound basis in fact or law”) in cases without dispute as to the underlying tax liability.52
Law governing these hearings requires: first, verification of whether requirements under applicable law or administrative procedure have been met; second, consideration of any issues presented relevant to the unpaid tax or proposed levy; and third, a balance between the concerns of efficient collection activity and intrusion caused by collection action.53 Although installment agreements such as the one sought by the Strashnys are permitted under statute,54 subject to the Commissioner’s discretion,55 the Internal Revenue Manual (“IRM”) notes generally that unless a special circumstance applies, assets must be liquidated before such agreement is appropriate.56 In general, the Tax Court agreed with prior law that following the IRM guidelines when determining whether a taxpayer is eligible for an IA is not abuse of discretion.57
Here, the Strashnys volunteered the relevant information concerning their virtual currency holdings.58 The Strashnys also failed to provide any reason why it might be difficult or impractical to liquidate some or all of the virtual currency, and made no representations of any special circumstances that might make an IA more appropriate.59 The SO made the requisite procedural verifications, considered any issues the Strashnys raised, followed the IRM guidelines in requesting that assets be liquidated and attempted to determine whether some special set of circumstances might have prevented the Strashnys from liquidating their virtual currency holdings.60 The Tax Court, therefore, found no abuse of discretion under Code Sec. 6330(c).61 Similarly, the Tax Court held that denial of the Strashnys’ request for an installment agreement did not constitute abuse of discretion.62
The key takeaway from this summary proceeding is that the IRS (and the SO) treated the Strashnys’ virtual currency holdings just like any other asset.63 Absent special circumstances, reliance on the IRM requirement that most types of assets (presumably including virtual currencies) must be liquidated before a taxpayer can qualify for an IA was not an abuse of the SO’s discretion.64
The Strashnys’ assets were comprised primarily of considerable virtual currency holdings, which the Strashnys valued substantially in excess of their total tax liability. Although the record is unclear as to why the Strashnys believed an IA was appropriate despite these assets, it seems plausible that the novel nature of the assets caused either the Strashnys or their advisors to believe virtual currency could be treated differently. As demonstrated by the Tax Court’s memo opinion, it is relatively settled law that in most circumstances where a taxpayer has sufficient assets to satisfy their total tax liability, an IA simply isn’t an option.
Curiously, neither the SO nor the Strashnys raised any valuation concerns. Virtual currency assets are notoriously volatile, and the end of 2017 through the beginning of 2018 was a period of relatively drastic downward correction.65 On the other hand, from a purely procedural standpoint, the Strashnys themselves placed a value on the virtual currency of several multiples of their tax liability, so presumably the SO was more than willing to accept such a valuation.
The IRS demonstrably had no difficulties here understanding and accepting that in spite of the differences, virtual currency holdings were governed by its existing framework of analysis. The Strashnys had a certain outstanding liability, and, just as if their holdings consisted of other readily tradable assets such as publicly traded stocks, bonds, or commodities futures, before they could qualify for an IA these assets needed to be liquidated or borrowed against. Without any mitigating circumstances or arguments about why liquidation was inappropriate, the Strashnys (and presumably any other taxpayers with significant virtual currency holdings, regardless of whether they clearly disclose those holdings as the Strashnys did) simply did not qualify for repayment of their liability through an IA. Over time, the IRS has demonstrated its ability to locate these holdings and apply existing rules tax rules by analogy. Zietzke and Strashny suggest that taxpayers, their advisors and their counsel, should consider Bitcoin, Ethereum, or other virtual currencies as one more type of asset and that virtual currency holdings are generally subject to IRS summonses and collections rules.