Prepared testimony of Tom Savage, Construction Company Owner

Testimony Taxes

Prepared testimony of Tom Savage, Construction Company Owner

September 21, 1997 6 min read
Tom Savage
Health Policy Fellow

Testimony before the Senate Finance Committee

Good morning/afternoon. My name is Tom Savage. I run a small construction management company in Lewes, Delaware, which my wife and I own. I want to thank the Committee for the opportunity to share my story which has been no less than a true "horror story" for my wife and me.

We were unfortunate to have been the subject of a zealous, unrelenting, and abusive pursuit by an IRS Revenue Officer with the assistance and complicity of attorneys, and particularly the lead attorney at the Department of Justice, who were charged with advising the IRS. They were in a position to stop the abuse and yet permitted it to continue, perhaps even causing much of it. In the interest of time, I will simply say that the emotional damage done to my wife and me outstrips the financial damage we suffered, which was not insubstantial. There were many sleepless nights. Believe me, when the sources of the government are unleashed on you, you are in trouble, no matter how good your case. Few people know what it is like to be in the cross-hairs of the IRS. We unfortunately do.

I am here today in the hope that by telling my story, and participating in these hearings, I might help bring about real and lasting change at the IRS. For the sake of other taxpayers, I hope that this happens.

The nightmare began when a subcontractor of Tom Savage Associates or TSA, my own company, fell behind in paying its employment taxes. The case ended with intense litigation in the United States District Court, which TSA was forced to bring in order to recover a payment check issued by the State which had been wrongfully seized from it by the IRS. In order to keep my company afloat, we had to settle the case, much as this offended our desire to "stand on principle." We allowed the IRS to keep $50,000 of the check that was seized in order to get the case over, since the litigation was bankrupting our company financially and us emotionally. We regret not having pursued the case to the end but we had to save our business. The government had endless resources to drag the case out. We did not. In settling the case, the government extorted $50,000 before giving back the check. The government attorneys knew that it was going to cost an additional $50,000 to litigate the case and used it to leverage the IRS' position.

In brief, the subcontractor had tax problems that surfaced during the period it was working for my company, TSA, on a project for the State of Delaware. Unknown to TSA, the subcontractor had not been paying its employment taxes for approximately one year before the project commenced. TSA, with the subcontractor's assistance, was building a women's correctional facility. The subcontractor performed the construction while TSA oversaw the project and provided the performance bond for the project. Toward the end of the job, the subcontractor's tax problems came to light. The IRS investigated the subcontractor, but quickly concluded that the amount of taxes due were uncollectible. Since the IRS was unable to collect the money from the subcontractor, the Revenue Officer, in his zeal, set his sights on TSA. First he attempted to hold me personally responsible for the unpaid taxes, asserting that I was a "responsible person" representing the subcontractor. This approach failed when my tax advisors filed a legal memorandum explaining the severe deficiencies with this theory, so the IRS then went after my company. The IRS now asserted, falsely, that TSA and the subcontractor were partners and that the employees of the subcontractor working on the project were actually employees of this fictitious association between TSA and the subcontractor. My tax advisors pressed the Revenue Officer for some authority for asserting the existence of this fictitious "partnership" that he had established between TSA and the subcontractor. The Revenue Office pointed to a non-tax Delaware case that was totally inapplicable.

Undaunted by challenges to provide authority in support of the fictitious "partnership," the Revenue Officer caused the IRS to issue a "30 day letter," which proposed as assessment against the fictitious "partnership." We immediately filed a written protest with the IRS Appeals Office and eagerly awaited the Appeals Conference to put the case behind us. As things turned out, we were never given an opportunity to present our case to the Appeals Office. While waiting for the Appeals Conference to be scheduled, the IRS seized a large check paid to our company by the State of Delaware for the project. At the time of the seizure, and this is significant, there was no assessment entered against either TSA or the fictitious "partnership" between TSA and the subcontractor. Even if one were to assume that the partnership existed, which is a generous assumption even for the sake of argument, the only assessment on the books allowing the IRS to enforce collection was against the subcontractor. The seizure of the check thus constituted a "wrongful levy." Open and shut. Existing IRS revenue rulings clearly hold that the assets of a partnership or another partner may not be seized to satisfy the tax debts of another partner.

It is a fundamental principle of the tax law that the government may not seize any taxpayer's property, or undertake any type of enforcement action against a taxpayer until there has been an assessment entered against the taxpayer. For those of you not versed in tax procedure, an assessment is the administrative equivalent of a judgment. In our case, the right to be free of government collection action. until such time as an assessment has been entered was flagrantly violated. Not only was this right violated, as will be explained in a moment, the IRS would later attempt to sweep this fact under the rug in the US District Court. Indeed, the government attorneys were so hell bent on "winning" that they waged a behind-the-scenes campaign during the proceedings in District Court to sanitize the record presented to the judge. The government requested an extension of time to respond to the plaintiff's brief in support of its motion for summary judgment and then, during the extension, entered an assessment against the fictitious "partnership" between TSA and the subcontractor by hand delivering a "notice of demand" the Saturday before the government's answering brief was due. The government attorneys then had the audacity to argue in their answering brief that an assessment had been entered against the fictitious partnership. No mention was made in the government's brief that the assessment was entered 25 weeks after the IRS seized the check and literally days before the answering brief was filed. And these were the attorneys we though would stop the abuse!

When we instituted the suit, we were convinced that the case would be resolved quickly, that the government would concede the case once it got into the hands of a competent attorney. We guessed wrong. The government had my money and was not going to give it up without a fight. Faced with this "win-at-all-costs" attitude, we were clearly in for a protracted battle with the IRS. As much as it offended my wife and me, we chose to settle the case and permitted the IRS to keep $50,000 of the proceeds. We wanted to pursue the case to the end, but to do so would have destroyed our business.

On top of the $50,000 that the IRS kept, I had other financial losses. Although my attorneys reduced their fee substantially in encouraging me to settle the case, their fees were substantial. We spent $51,000 in legal fees in connection with the case. We lost approximately $600,000 in business during the proceedings with the IRS and in its wake. And finally, we lost our sense of well being, confidence, and freedom from government intervention.I believe the IRS, the Revenue Officer, the District Counsel attorneys, and the attorneys with the Tax Division of the U.S. Department of Justice should be held accountable for their conduct. Unless abuses of this type committed by the IRS and its representatives are met with strong response, including legislation to compensate victims of IRS abuse, they will continue.

I thank the Committee for the opportunity to be here today.

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Tom Savage

Health Policy Fellow