Back Taxes David L. Samuel v. Commissioner, Dkt. No. 8431-05L , TC Memo. 2007-312, October 15, 2007.


[Code Sec. 7122]


Offer-in-compromise: Dissipation of assets: Abuse of discretion. --
An IRS Appeals officer abused her discretion by including the full amount of an individual's dissipated assets in his net realizable equity (NRE) during her evaluation of his offer-in-compromise. The the individual's NRE should not have included amounts paid for: attorney's fees incurred in the representation of his tax case; attorney's fees incurred in a civil lawsuit he filed for unpaid wages; an estimated tax payment made for one of the tax years at issue; and a lump-sum payment of delinquent child support. The case was remanded to Appeals for 60 days, during which time the individual had the opportunity to amend his offer based on the revised amount of his tax liability and in consideration of his available monthly income. --


P filed a petition for judicial review in response to R's determination to proceed with collection by lien and/or levy of assessed income tax liabilities, plus additions to tax and interest, for 1996-2002. R's settlement officer rejected P's offer-in-compromise because it was not a viable alternative to collection. The settlement officer, applying guidelines established by the Internal Revenue Manual, determined that P should include in the amount of his offer-in-compromise the value of certain "dissipated assets", which, because of the dissipation, became unavailable for payment of P's delinquent income tax obligation. The settlement officer required this inclusion, notwithstanding that some of the assets had been used for proper purposes.

Held: R's rejection of P's offer-in-compromise was an abuse of discretion, and this case will be remanded to the IRS Appeals Office so that P may make a revised offer reflecting a reduced amount of dissipated assets.


MEMORANDUM OPINION

NIMS, Judge: This case arises from a petition for judicial review filed in response to a Notice of Determination Concerning Collection Action(s) Under Section 6320 and/or 6330. Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years in issue as amended, and all Rule references are to the Tax Court Rules of Practice and Procedure. The issue for decision is whether respondent's rejection of petitioner's offer-in-compromise was an abuse of discretion.


Background

.

In determining petitioner's NRE, the settlement officer decided that petitioner had dissipated assets in disregard of his tax liabilities when he sold his interest in FMC and when he refinanced his home. She considered the assets dissipated because petitioner realized the funds after his tax liabilities for 1996-2002 had accrued and after the amounts due for 1997-2001 were assessed, and he used all of the funds to pay other creditors, with the exception of the $15,600 payment to the IRS. She determined that 100 percent of the $133,158 received from the dissipated assets should be included in petitioner's NRE with the possible exception of the $15,600 paid to the IRS, the $5,000 legal fees incurred in the lawsuit against his former employer, and the $5,464 paid for child support. She reached this conclusion despite recognizing that the assets were dissipated before the offer-in-compromise was made. The settlement officer did not include any amount for the value of petitioner's residence in NRE, having determined that he had no equity. She also expressed doubt as to whether petitioner reported an accurate value for his interest in his medical corporation, noting the comparatively low value of equipment totaling $3,630 given that the business had gross income in excess of $300,000 in 2003. The settlement officer did not account for petitioner's interests in his medical corporation or Pontchartrain Lithotripsy in calculating NRE. The settlement officer determined petitioner's future income collection potential to be $946 per month, which, over 60 months (the multiplier for a short-term deferred payment offer) amounted to $56,760.

In response to the notice of determination, petitioner filed a petition with this Court.


Discussion

Before a levy may be made on any property or right to property, a taxpayer is entitled to notice of the Commissioner's intent to levy and notice of the right to a fair hearing before an impartial officer of the IRS Appeals Office. Secs. 6330(a) and (b), 6331(d). Section 6320 provides that after the filing of a Federal tax lien under section 6323, the Secretary shall furnish written notice. This notice must advise the taxpayer of the opportunity for administrative review in the form of a hearing, which is generally conducted consistent with the procedures set forth in section 6330(c), (d), and (e). Sec. 6320(c).

Where, as here, the underlying tax liability is not at issue, our review of the notice of determination under section 6330 is for abuse of discretion. See Sego v. Commissioner, 114 T.C. 604, 610 (2000); Goza v. Commissioner, 114 T.C. 176, 182 (2000). This standard does not require us to decide what we think would be an acceptable offer-in-compromise. Murphy v. Commissioner, 125 T.C. 301, 320 (2005), affd. 469 F.3d 27 (1st Cir. 2006). Rather, our review is to determine whether respondent's rejection of petitioner's offer-in-compromise was arbitrary, capricious, or without sound basis in fact or law. Id.

At the hearing, taxpayers may raise challenges to "the appropriateness of collection actions" and may make "offers of collection alternatives, which may include the posting of a bond, the substitution of other assets, an installment agreement, or an offer-in-compromise." Sec. 6330(c)(2)(A). The Appeals officer must consider those issues, verify that the requirements of applicable law and administrative procedures have been met, and consider "whether any proposed collection action balances the need for the efficient collection of taxes with the legitimate concern of the person [involved] that any collection action be no more intrusive than necessary." Sec. 6330(c)(3)(C). As his collection alternative, petitioner chose to make an offer-incompromise. In the case before us, petitioner disputes respondent's rejection of his offer-in-compromise.

Section 7122(a) authorizes the Secretary to compromise any civil or criminal case arising under the internal revenue laws. Section 7122(c) provides that the Secretary shall prescribe guidelines for evaluation of whether an offer-in-compromise should be accepted. The decision whether to accept or reject an offer-in-compromise is left to the Secretary's discretion. Fargo v. Commissioner, 447 F.3d 706, 712 (9th Cir. 2006), affg. T.C. Memo. 2004-13; sec. 301.7122-1(c)(1), Proced. & Admin. Regs.

The section 7122 regulations set forth three grounds for compromise of a taxpayer's liability. These grounds are doubt as to liability, doubt as to collectibility, and the promotion of effective tax administration. Sec. 301.7122-1(b), Proced. & Admin. Regs. Petitioner seeks a compromise based on doubt as to collectibility.

The Secretary may compromise a tax liability based on doubt as to collectibility where the taxpayer's assets and income are less than the full amount of the liability. Sec. 301.7122-1(b)(2), Proced. & Admin. Regs. Generally, under the Commissioner's administrative procedures, an offer-in-compromise based on doubt as to collectibility will be acceptable only if it reflects the taxpayer's "reasonable collection potential". Rev. Proc. 2003-71, sec. 4.02(2), 2003-2 C.B. 517. Both parties appear to agree that petitioner's reasonable collection potential is substantially less than his tax liability which, as above noted, stood at more than $773,368, as of January 1, 2005. The parties obviously disagree as to petitioner's collection potential.

The IRS has developed guidelines and procedures for the submission and evaluation of offers to compromise under section 7122. Rev. Proc. 2003-71, supra. In furtherance thereof, the Internal Revenue Manual (IRM) contains extensive guidelines for evaluating offers-in-compromise. 1 Administration, Internal Revenue Manual, sec. 5.8, at 16,253. Both petitioner and respondent focus substantial attention in their briefs to the issue of "Dissipation of Assets", discussed below.

The IRM provides in part, in "Dissipation of Assets", section 5.8.5.4, at 16,339-6, the following:

(1) During an offer investigation it may be discovered that assets (liquid or non-liquid) have been sold, gifted, transferred, or spent on non-priority items and/or debts and are no longer available to pay the tax liability. This section discusses treatment of the value of these assets when considering an offer in compromise.

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(2) Once it is determined that a specific asset has been dissipated, the investigation should address whether the value of the asset, or a portion of the value, should be included in an acceptable offer amount.

(3) Inclusion of the value of dissipated assets must clearly be justified in the case file and documented on the ICS/AOIC history. * * *

(4) When the taxpayer can show that assets have been dissipated to provide for necessary living expenses, these amounts should not be included in the reasonable collection potential (RCP) calculation.

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(5) If the investigation clearly reveals that assets have been dissipated with a disregard of the outstanding tax liability, consider including the value in the reasonable collection potential (RCP) calculation. [Emphasis added.]

It is not totally clear how dissipated assets can be "no longer available to pay the tax liability" (see (1), above) while at the same time included in the "reasonable collection potential (RCP) calculation" (see (5), above).

The settlement officer apparently considered herself required to apply this rather cryptic guideline, and under an abuse of discretion standard we are not at liberty to challenge her judgment that it should be used. However, under the abuse of discretion standard, we must assure that the guideline is correctly applied.

The Appeals Case Determination states that

Appeals preliminary determination of Dr. Samuel's net realizable equity (NRE) in his assets is that it should include 100% of his dissipated assets totaling $133,158 with the possible exception of the $15,600 paid for his 2003 estimated tax payment, his legal fees of $5,000 incurred in association with his civil law suit against his prior employer and $5,464 paid for child support. He has no net realizable equity in his personal residence given that quick sale value (QSV) is used and offset against his mortgage of $322,000. Since his mortgage exceeds the QSV of $320,000 (80% of FMV determined to be at $400,000), he has no equity to include in his NRE. Appeals believes that his interest in his medical corporation exceeds that which was reported at the face-to-face hearing to be the value of the equipment totaling $3,630. This is an on-going business that had gross income in excess of $300,000 in 2003.

The Appeals Case Determination goes on to state that Dr. Samuel was provided the opportunity to increase his offered amount to at least include amounts he realized pursuant to his dissipated assets in order that his offer receive further consideration. He declined to so do.

The $15,600 which Dr. Samuel paid for his 2003 estimated tax payment should have been excluded from the dissipated assets category, and if Appeals was in doubt about the includability of the $5,000 incurred in association with Dr. Samuel's civil law suit and the $5,464 paid for child support, these amounts should have been excluded also. It was an abuse of discretion not to do so.

It is represented in his brief that petitioner has been current on all of the filings and payments of his taxes, starting with 2003. It appears from the Appeals Case Determination that petitioner has in fact minimal assets from which cash could be realized, but that he has a medical practice that produces a fairly substantial amount of income. Clearly, then, any IRS recovery from petitioner would have to come principally, if not entirely, from his medical practice income.

In connection with its consideration of petitioner's offerin-compromise, Appeals prepared the following table to illustrate petitioner's future income potential. The Case Determination states that the table is intended to show that petitioner's future income potential is more than his $30,000 offer.



Necessary
Total Income Living Expenses

Source Gross Claimed Allowed

Wages/salaries Natl.Std
T/P $7,963expenses $976 $953

Wages/salaries Housing &
spouse utilities 1,024 1,034

Interest Transportation 0 0

Net business
income Health care 50 100

Taxes 2,470 2,180

Court ordered
Rental income pmts. 2,750 2,750

Pensions T/P

Child/dependent
care 0

Pensions
spouse

Child support Life insurance

Alimony Secured debts

Other: Representation 250 0

IRA dstrbtn. Other:

Total income 7,963 Total expense 7,520 7,017

Net difference 946


Net difference times (a, b or c) = FIP [Future income potential] Net difference = $946 x 60 $56,760

(a) If the taxpayer is making a cash offer (offering to pay within 90 days or less) multiply the net difference by 48 or the number of months remaining on the statute.

(b) If the taxpayer is making a short term deferred payment offer (offering to pay within 2 years) multiply the net difference by 60 or the number of months remaining on the statute, whichever is shorter.

(c) If the taxpayer is making a deferred payment offer (offering to pay over the life of the statute), use the deferred payment chart to determine the number of months.

Petitioner points out that 2 Administration, Internal Revenue Manual, section 5.15.1.10(3), at 17,662, allows as a necessary expense accounting and legal fees if representation before the IRS is needed or meets the necessary expense tests. The costs must be related to solving the current controversy. In calculating petitioner's future income potential, the settlement officer failed to allow monthly payments of $250 which petitioner was making to his tax attorney in connection with the current controversy. The corrected income potential would thus be $41,760.

The Appeals Case Determination takes the position that Appeals was not required to counteroffer petitioner's offer-incompromise, but petitioner points out that 1 Administration, Internal Revenue Manual , section 5.8.4.6., at 16,308, provides that in the course of processing the case, if the taxpayer's offer must be increased in order to be recommended for acceptance, the taxpayer must be contacted by letter or telephone advising the taxpayer "to amend the offer to the acceptable amount". In the present case, petitioner should have been advised that instead of 100 percent of the dissipated assets, totaling $133,158, an acceptable amount would be $133,158 less $26,064 ($15,600 plus $5,000 plus $5,464), or $107,094. Appeals' failure to do so was an abuse of discretion, and we so hold.

Petitioner should be given the opportunity to revise his offer-in-compromise to reflect the $107,094, referred to above. However, since petitioner appears to lack any substantial assets outside his medical practice which could provide a source for paying any compromise amount, it is obvious, as previously observed, that any payments would come from his medical earnings. The table prepared by Appeals, above, unquestionably reveals that petitioner has ample income in excess of his $30,000 offer payable over 24 months.

We shall remand this case to Appeals for a 60-day period within which petitioner may, if he so chooses, revise the amount of his offer-in-compromise and suggest new terms of payment in accordance herewith.

An appropriate order will be issued.

Mark Fowler and Joylyn Souter-Fowler v. Commissioner.

Dkt. No. 6650-02L , TC Memo. 2004-163, July 13, 2004.



[Code Secs. 6330 and 7122]
Practice and procedure: Collection Due Process hearing: Offer in compromise: Liens and levies: Abuse of discretion. --
An IRS Appeals officer abused his discretion in denying a married couple's offer in compromise on the grounds that the taxpayers had inadequate income to meet their living expenses and pay the proposed monthly payments. The officer appeared to rely exclusively on the IRS's prescribed schedule of national and local average living expenses to determine that the taxpayers' basic living expenses exceeded their monthly income. However, all of the facts and circumstances, including the schedule of actual expenses submitted by the taxpayers, should have been considered to determine whether the taxpayers could pay both (Code Sec. 7122(c)(2)). The filing of the federal tax liens to secure the IRS's interest in the unpaid tax liability was not an abuse of discretion.


MEMORANDUM FINDINGS OF FACT AND OPINION

GERBER, Chief Judge: Respondent, on February 21, 2002, sent Mark Fowler (petitioner) a Notice of Determination Concerning Collection Action(s) Under Section 63201 and/or 6330, in which respondent sustained the filing of a Federal tax lien for petitioner's 1990-92 tax liabilities. In that same notice respondent also rejected petitioner's offer in compromise. On that same date respondent sent Mark Fowler and Joylyn Souter-Fowler (petitioners) a second Notice of Determination Concerning Collection Action(s) Under Section 6320 and/or 6330. In this notice respondent sustained the filing of a Federal tax lien with respect to petitioners' 1994-96 tax liabilities, and respondent again rejected petitioners' offer in compromise.

Prior to these determinations, petitioners sought and were offered an Appeals hearing, but they did not attend due to personal reasons. One month after the scheduled hearing date, the Appeals officer issued the above determinations sustaining the filing of the Federal tax liens and rejecting petitioners' offers in compromise. With respect to both determinations, petitioners appealed to this Court.

The issue for consideration is whether respondent abused his discretion by rejecting petitioners' offers in compromise and by sustaining the filing of the Federal tax liens.


FINDINGS OF FACT2

Petitioners resided in Garden Grove, California, when the petition in this case was filed.



Separate Liabilities
Petitioner filed his 1990 Federal income tax return late on September 6, 1991. On July 21, 1993, respondent mailed a statutory notice of deficiency to petitioner for his 1990 taxable year. Petitioner did not petition this Court to dispute the deficiency. On December 20, 1993, respondent assessed the $399 income tax deficiency and a $98.74 late-filing penalty under section 6651(a)(1). In addition, $104.40 of interest was assessed. Petitioner does not contest the 1990 tax liability.

Petitioner timely filed his 1991 Federal income tax return that contained several mathematical errors. Respondent corrected the mathematical errors in accord with section 6213(b)(1), and assessments were made to correct the errors. Respondent subsequently selected petitioner's 1991 return for an audit examination. On April 5, 1994, respondent mailed petitioner a statutory notice of deficiency for his 1991 taxable year determining a $545 income tax deficiency. Petitioner did not petition this Court with respect to the 1991 notice of deficiency. On September 5, 1994, respondent assessed the $545 deficiency and $103.37 of accrued interest.

Petitioner filed his 1992 Federal income tax return late on July 28, 1993. Respondent selected petitioner's 1992 return for an audit examination. On January 11, 1995, respondent mailed petitioner a statutory notice of deficiency for his 1992 taxable year determining a $1,193 income tax deficiency and a $189 penalty for late filing under section 6651(a)(1). On July 17, 1995, respondent assessed the deficiency, the late-filing penalty, and accrued interest in the amount of $265.92. On the same day, the late-filing penalty was abated leaving an unpaid balance of $1,458.92 for 1992.



Joint Liabilities
Petitioners were married in 1993. Under cover of a letter dated September 15, 1997, petitioners submitted their untimely 1994, 1995, and 1996 joint Federal income tax returns. These returns were filed by respondent on September 29, 1997. Petitioners reported tax due for 1994, 1995, and 1996 on their returns in the amounts of $402.04, $402.03, and $1,480.66, respectively.

On October 27, 1997, respondent assessed the 1994 income tax liability, a late-filing penalty in the amount of $100, a failure to pay tax penalty in the amount of $62.32, and accrued interest in the amount of $128.35, for a total assessment of $692.71. On that same date, respondent assessed the 1995 income tax liability, a late-filing penalty in the amount of $100, a failure to pay tax penalty in the amount of $38.19, and accrued interest in the amount of $73.03, for a total assessment of $613.25. On November 17, 1997, respondent assessed the 1996 income tax liability, a late-filing penalty in the amount of $333.15, a failure to pay tax penalty in the amount of $59.23, and accrued interest in the amount of $99.21, for a total assessment of $1,972.25.



Events Leading to the Issuance of the Notice of Determination
On December 21, 1999, respondent mailed two separate Notices of Intent to Levy and Notice of Your Right to a Hearing to petitioners. The notices reflected petitioners' unpaid Federal income tax liabilities for 1990 through 1992 and 1994 through 1996. On January 26, 2000, petitioners informed respondent of their desire to submit an offer in compromise to resolve all of their individual and joint liabilities. In response, respondent mailed petitioners a package of materials for the submission of offers in compromise for their outstanding individual and joint liabilities.

On April 19, 2000, respondent received petitioners' offer to compromise the 1994 through 1996 joint liabilities for $1,150. On that same date respondent received petitioner's offer to compromise the 1990 through 1992 liabilities for $360. Both offers in compromise were submitted on Form 656, Offer in Compromise. Petitioners' offer was to make monthly payments to satisfy the liabilities. Petitioners planned to pay a portion of the offer amount from their expected tax refund for 1999.

On May 19, 2000, respondent's revenue officer advised petitioners that their offers in compromise could not be processed until petitioners' 1999 Federal income tax return was filed. Under respondent's procedures, offers are not processed while taxpayers are not in compliance with the internal revenue laws.

Petitioners had already filed for an extension of time to file for 1999 because they were awaiting information from third parties to complete the return. On June 15, 2000, respondent filed two Notices of Federal Tax Lien (NFTL) at the county recorder's office in Orange County, California, with respect to the individual and joint tax liabilities. Respondent sent petitioners the filed NFTLs and Notices of Right to a Collection Due Process Hearing. On July 14, 2000, petitioners submitted Form 12153, Request for a Collection Due Process Hearing (administrative hearing), contesting the NFTLs filed by respondent and noting the pending offers in compromise.

Sometime in 2001, petitioners' claims were assigned to respondent's Appeals officer. On June 20, 2001, the Appeals officer and petitioners had a telephone conversation discussing petitioners' desire to compromise all of the liabilities. The Appeals officer requested more information from petitioners, which they timely provided with a copy of their filed 1999 Federal income tax return. At some time in the process, petitioners submitted an amended offer in compromise for $2,400, to be paid in $100-monthly installments. Under those terms, the $2,400-offer could be paid in full in 2 years.

On October 16, 2001, respondent's Appeals officer sent petitioners a letter informing them that he had reviewed the offers in compromise. The Appeals officer determined that the minimum offer to compromise both the individual and joint liabilities should be a total of $2,400. The Appeals officer used petitioners' estimate of their primary vehicle3 to calculate a quick sale value of $2,400, which was determined to be the minimum acceptable offer. The Appeals officer then attempted to determine whether petitioners would be able to meet the monthly installment offer obligation. In calculating petitioners' financial capability, the Appeals officer used petitioners' submitted monthly gross income figure of $4,608, but did not use petitioners' submitted $3,989 monthly expense figure. Instead of using the $3,989 expense figure provided by petitioners, the Appeals officer used $4,644, an estimated amount based on national statistical averages. Using $4,644 resulted in petitioners' estimated monthly expenses exceeding their monthly income by $36 and rendering petitioners ineligible due to their projected inability to make the $100-monthly payments.

The Appeals officer rejected petitioners' offers in compromise. Petitioners requested an in person hearing, but a hearing was not held due to petitioners' unavailability. On February 21, 2002, respondent issued two separate notices of determination for the individual and joint liabilities sustaining the filing of the notices of Federal tax liens and rejecting petitioners' offers in compromise. Petitioners timely appealed to this Court for review of respondent's determinations.


OPINION

Petitioners contend that the Appeals officer abused his discretion by rejecting their offers in compromise and by sustaining the filing of the Federal tax liens.

Section 6320 provides that a taxpayer shall be notified in writing by the Secretary of the filing of a Federal tax lien and provided with an opportunity for an administrative hearing. Sec. 6320(b). Hearings under section 6320 are conducted in accordance with the procedural requirements set forth in section 6330. Sec. 6320(c).

When an Appeals officer issues a determination regarding a disputed collection action, section 6330(d) allows a taxpayer to seek judicial review with the Tax Court or a District Court. Where the validity of the underlying tax liability is properly at issue, the Court will review the matter on a de novo basis. Sego v. Commissioner [Dec. 53,938], 114 T.C. 604, 610 (2000). However, when the validity of the underlying tax is not at issue, the Court will review the Commissioner's administrative determination for an abuse of discretion. Id. Petitioners do not dispute the validity of the underlying tax. Accordingly, our review is for an abuse of discretion.

We do not conduct an independent review of what would be acceptable offers in compromise. We review only whether the Appeals officer's refusal to accept the offers in compromise was arbitrary, capricious, or without sound basis in fact or law. See Woodral v. Commissioner [Dec. 53,206], 112 T.C. 19, 23 (1999). The Court considers whether the Commissioner abused his discretion in rejecting a taxpayer's position with respect to any relevant issues, including challenges to the appropriateness of the collections action, and offers of collection alternatives. See sec. 6330(c)(2)(A). This case involves collection alternatives.

Section 7122(a) authorizes the Secretary to compromise any civil case arising under the internal revenue laws. There are three standards that the Secretary may use to compromise a liability. The first standard is doubt as to liability, the second being doubt as to ability to collect, and the third being promotion of effective tax administration. Sec. 301.7122-1T(b), Temporary Proced. & Admin. Regs., 64 Fed. Reg. 39024 (July 21, 1999); see sec. 7122(c)(1). The record reflects that petitioners' offers are with respect to doubt as to collectibility.4

Section 7122(c) provides the standards for evaluation of such offers. Under section 7122(c)(2):

(A) * * * the Secretary shall develop and publish schedules of national and local allowances designed to provide that taxpayers entering into a compromise have an adequate means to provide for basic living expenses.

(B) Use of schedules. --The guidelines shall provide that officers and employees of the Internal Revenue Service shall determine, on the basis of the facts and circumstances of each taxpayer, whether the use of the schedules published under subparagraph (A) is appropriate and shall not use the schedules to the extent such use would result in the taxpayer not having adequate means to provide for basic living expenses. [Emphasis added.]

The Appeals officer chose to use the national averages and that use resulted in petitioners' being categorized as not having adequate means to provide for basic living expenses.

The national average statistics are published by the Internal Revenue Service, but use of the statistics by Appeals officers is not mandatory. The Appeals officer exercised discretion in ignoring petitioners' submitted expense amount and, instead, used the national statistical amount as an estimate of petitioners' expenses. The use of the national averages for petitioners' expenses resulted in petitioners' monthly expenses exceeding their monthly income by $36. Therefore, by using the average expense figure, petitioners' income was $136 short of producing the $100 per month needed to compromise their tax liabilities for $2,400. We note that, percentagewise, the shortfall is less than 3 percent of petitioners' gross income. The Appeals officer chose to use the national statistical averages rather than the expense figures provided by petitioners. If the Appeals officer had used petitioners' submitted expense figure of $3,989, petitioners would have had $619 monthly and would have been financially capable of satisfying the $100 installments.

The Appeals officer is allowed to use the national schedules when considering the facts and circumstances of this case. However, if use of the schedules results in petitioners' not having adequate means to provide for basic living expenses, as here when the Appeals officer determined a negative $36 amount for basic living expenses, an installment offer may not be appropriate. See sec. 7122(c)(2)(B).

Under the regulations for doubt as to collectibility cases:

A determination of doubt as to collectibility will include a determination of ability to pay. In determining ability to pay, the Secretary will permit taxpayers to retain sufficient funds to pay basic living expenses. The determination of the amount of such basic living expenses will be founded upon an evaluation of the individual facts and circumstances presented by the taxpayer's case. To guide this determination, guidelines published by the Secretary on national and local living expense standards will be taken into account. [Sec. 301.7122-1T(b)(3)(ii), Temporary Proced. & Admin. Regs., 64 Fed. Reg. 39024 (July 21, 1999).]

The regulation provides that the guidelines are to be taken into account. When the Appeals officer reviewed petitioners' offers, he decided to use the guidelines because he thought petitioners' actual figures were too low. In that regard, there is no specific explanation why the Appeals officer believed that petitioners' monthly expenses of $3,989 was too low or why the guideline figure of $4,644 was more accurate. The use of the guideline expense figure resulted in a $136 shortfall in petitioners' capability to meet the $100-monthly installment to satisfy the $2,400 compromise. If petitioners' submitted monthly expenses of $3,989 had been used, there would have been a $619 surplus of income over expenses that would have enabled petitioners to meet the $100-monthly installment to satisfy the compromise.

In essence, the Appeals officer decided that petitioners could not live less expensively than the national average (guidelines). We find it curious that the Appeals officer relied on petitioners' figures for their vehicle and for their income, but chose not to use petitioners' figures for their monthly expenses. Petitioners made an estimate of $3,000 for the value of their primary car and the Appeals officer used this figure to calculate the quick sale value of $2,400. Based on this premise, the Appeals officer determined that an offer of $2,400 would be an appropriate amount to settle the outstanding liabilities due for 1990-92 and 1994-96. The Appeals officer requested a lump-sum payment through the sale of petitioners' primary vehicle. Petitioners rejected this approach as this was their primary vehicle and to sell it would have caused great financial harm.

Petitioners submitted an amended offer in compromise for $2,400, to be paid in $100 monthly installments. Under those terms, the $2,400 compromise could be paid in full in 2 years. That offer was rejected due to the Appeals officer's determination that petitioners were financially unable to make the payments. We note that petitioners had cooperated with all requests from the Internal Revenue Service in an attempt to resolve this matter.

Appeals officers, in the consideration of an offer in compromise should verify that the requirements of applicable law and administrative procedures have been met, and "whether any proposed collection action balances the need for the efficient collection of taxes with the legitimate concern of the person that any collection action be no more intrusive than necessary." See sec. 6330(c)(3)(C). The verification of applicable law and administrative procedure was met in this case. However, it is questionable as to whether the proposed collection action balanced the need for efficient collection of taxes with the concern of petitioners that any collection action be no more intrusive than necessary.

Payment plans are one possible option for an offer in compromise. According to the instructions that accompany the Form 656, there are three possible payment plans under the short-term deferred payment offer. One plan requires full payment of the realizable value of assets within 90 days from the date the Internal Revenue Service accepts the offer, and payment, within 2 years of acceptance of the amount that they could collect over 60 months. A second plan permits a cash payment for a portion of the realizable value of petitioners' assets within 90 days of the offer being accepted, and the balance of the realizable value plus the remainder of the amount that could have been collected over 60 months within 2 years. The third plan permits monthly payments of the entire offer amount over a period not to exceed 2 years from the date of acceptance by the Internal Revenue Service. Petitioners offered $100 per month for 2 years or 24 months, which equals the $2,400-compromise amount.5

Under the various payment options, respondent would be able to file Federal tax liens to protect his interests until such time as the liability is satisfied. Accordingly, respondent's interest would be protected through the liens while respondent received monthly payments. The result of the Appeals officer's financial analysis, however, was to deny petitioners' offers in compromise. To use the national guidelines rather than actual figures in this instance was arbitrary, capricious, and without a sound basis in fact. Petitioners have stated that they are still willing to compromise their tax liabilities for $2,400, but through monthly payments rather than a lump-sum payment.6

Therefore, based on the facts and circumstances of this case, we hold that respondent abused his discretion in denying petitioners' offer to compromise their tax liabilities for $2,400. We further hold that respondent did not abuse his discretion in sustaining the filing of the Notices of Federal Tax Liens.7

An appropriate decision will be entered.

1 Unless otherwise indicated, all section references are to the Internal Revenue Code.

2 The parties' stipulation of facts is incorporated by this reference.

3 Petitioners estimated the value of their primary vehicle to be $3,000. Respondent used this figure to calculate the $2,400 quick sale value.

4 Doubt as to collectibility exists in any case where the taxpayer's assets and income are less than the full amount of the assessed liability. Sec. 301.7122-1T(b)(3), Temporary Proced. & Admin. Regs., 64 Fed. Reg. 39024 (July 21, 1999).

5 Although not relevant to the facts of this case, there is also a deferred payment offer that provides for a plan similar to the short-term deferred plan (the third plan described above). The deferred payment plan allows the entire offer amount to be made in monthly payments over the life of the collection statute. The deferred plan could result in a longer payment period than 24 months.

6 Petitioners and respondent agreed on the amount of the compromise. The only disagreement here is the method of payment. Based on the financial information submitted by petitioners, a payment plan is a reasonable option.

7 Petitioners have made no argument of merit from which an abuse of discretion could be found with respect to respondent's determination that the filing of the Notices of Federal Tax Liens was appropriate.


Compromises: Acceptance of offer

An IRS Appeals officer did not abuse her discretion when she refused a corporation's offer-in-compromise regarding its unpaid employment taxes. Her rejection of the offer as nonprocessable and inadequate was in accordance with the Internal Revenue Code and Treasury regulations. The corporation was not current on the payment of its estimated tax for the prior two periods. Its failure to timely pay taxes owed was a reasonable basis for the Appeals officer to reject its offer-in-compromise relating to other unpaid taxes.

Christopher Cross, Inc., CA-5, 2006-2 USTC ¶50,524, 461 F3d 610.

The IRS did not abuse its discretion by refusing to accept a couple's offer in compromise on an alternative minimum tax liability they incurred for exercising incentive stock options.

R.J. Speltz, CA-8, 2006-2 USTC ¶50,403.

The government was not estopped from collecting an individual's unpaid taxes merely because he alleged that an IRS employee advised or enticed him to file offers-in-compromise relating to his tax liabilities.

J.C. Ryals, DC Fla., 2006-1 USTC ¶50,293.

The IRS could not be compelled to accept an offer in compromise submitted by a company after the commencement of a bankruptcy proceeding but before the filing of a proposed Chapter 11 plan.Rev. Proc. 2003-71, 2003-2 CB 517, which directs IRS personnel to treat any offer in compromise as nonprocessable if the taxpayer has a bankruptcy case pending, does not violate a clear nondiscretionary duty on the part of the IRS.

1900 M Restaurant Associates, Inc., BC-DC D.C., 2005-1 USTC ¶50,313, 319 BR 302.

The IRS did not abuse its discretion in refusing to accept an individual's multiple offers to compromise her liability for the trust fund recovery penalty. The taxpayer's first offer was for significantly less than her collection potential, and she failed to explain why the IRS's two counter offers would pose a hardship. In calculating its counter offers, the IRS took into consideration the taxpayer's age and numerous medical problems. The IRS also offered to forgo collection until the taxpayer's financial situation improved, or the collection action expired. The taxpayer made the second offer at a Collection Due Process (CDP) hearing, arguing that there was doubt as to her liability for the penalty.

A. Siquieros, DC Tex., 2005-1 USTC ¶50,244. Aff'd, per curiam, CA-5 (unpublished opinion), 2005-1 USTC ¶50,245, 124 FedAppx 279.

A taxpayer was not entitled to monetary damages resulting from the IRS's referral of a collection action against the taxpayer to the Department of Justice (DOJ) while one or more offers in compromise were allegedly pending. The IRS's referral of the taxpayer's case to the DOJ predated temporary regulations precluding any levy to collect outstanding tax debts while an offer in compromise for those tax debts is pending and final regulations, Reg. §301.7122-1(g)(6), prohibiting the referral of cases to the DOJ for the collection of unpaid taxes through judicial proceedings while an offer in compromise is pending. The IRS's failure to include provisions preventing referral of such cases to the DOJ in the temporary regulations was not actionable under the Taxpayer Bill of Rights (P.L. 104-168), as codified under Code Sec. 7433(a). There was also no proof that there were any offers in compromise pending when the taxpayer's case was referred to the DOJ. At least six offers in compromise submitted by the taxpayer were rejected or returned as "unprocessable." Documents evidencing the IRS's acceptance of an offer in compromise submitted by the taxpayer's accountant on behalf of the taxpayer were forgeries.

J.R. Evseroff, DC N.Y., 2005-1 USTC ¶50,112.

Married debtors' tender of a check to the government did not constitute an offer in compromise that would have discharged their tax liability. The government and the debtors agreed that an offer to compromise the tax liability of the debtors was never accepted in writing by an authorized official. Moreover, a certificate of assessment reflected that the debtors' offer in compromise was rejected.

L.M. Smallwood, BC-DC Ark., 2002-1 USTC ¶50,166.

A proposed tax levy and collection action against an individual was not barred because the government failed to entertain a settlement or other compromise of her liability. The taxpayer failed to assert any Internal Revenue Code provision that establishes the government's legal obligation to compromise its action against her. The government has discretion to accept or reject any offer in compromise of a tax liability but is not legally obligated to even consider such an offer.

D.G. Asbury, DC Pa., 2002-1 USTC ¶50,117.

A Cayman Islands corporation's suit for refund of federal withholding taxes was dismissed, with prejudice, in accordance with a closing agreement with the government. A letter sent by the taxpayer that purported to modify its settlement offer to include an offer-in-compromise with regard to tax years not at issue was ineffective. The taxpayer presented no evidence that the proper parties received the letter before the government accepted its offer.

Inverworld, Ltd., DC D.C., 2001-1 USTC ¶50,350. Aff'd, per curiam, CA-D.C. (unpublished opinion), 2002-1 USTC ¶50,113.

The co-owner of property foreclosed by a federal tax lien failed to show that he and the government had reached a settlement to release the property from the lien. There was no evidence that the government accepted his offer in compromise.

E.F. Ressler, DC Ala., 98-1 USTC ¶50,417.

Correspondence between a mutual insurance corporation and the government did not reflect an intention that the filing of a stipulation of dismissal would be a condition precedent to the completion of settlement negotiations. Because the parties entered into a valid settlement agreement, the government's acceptance letter merely stated that a stipulation of dismissal would "reflect" the agreement which had already been reached. As such, a stipulation was not essential to the validity of the parties' settlement agreement.

Principal Mutual Life Insurance Co., FedCl, 93-2 USTC ¶50,480, 29 FedCl 157. Aff'd on another issue, CA- FC, 95-1 USTC ¶50,160, 50 F3d 1021.

The IRS was not estopped from denying that it settled tax liabilities, even though it retained money offered as a settlement, because the procedures set forth for settling disputes were not followed. Since the statutory requirements were not followed, there could be no settlement, and thus no estoppel.

W.F. Brooks, DC W.Va., 86-2 USTC ¶9548.

A taxpayer's offer of compromise that contained a waiver of limitations was rejected by the IRS, and, therefore, the IRS could not assert that it accepted the portion of the offer containing the waiver.

G. Hamm, DC Ky., 79-2 USTC ¶9731.

The Commissioner effectively accepted an offer to compromise a refund claim when he mailed the taxpayer's attorney a letter accepting the offer and informing the taxpayer that the refund settlement would be credited against the unpaid tax liability of a later tax year. The court rejected the taxpayer's argument that the IRS letter constituted a counteroffer rather than an acceptance because it materially altered the terms of the offer.

J.P. Kehoe, DC N.Y., 79-2 USTC ¶9524.

There was no acceptance of a compromise settlement, which was negotiated during the trial, where the government's acceptance was not timely and unequivocal and where the taxpayer's counsel decided not to accept the settlement offer. Therefore, the taxpayer was not bound by the settlement agreement.

B.R. Kurio, DC Tex., 71-1 USTC ¶9112.

The IRS did not abuse its discretion when it refused married taxpayers' offer in compromise even though their tax liability arose from the application of the alternative minimum tax (AMT) as a result of the exercise of an incentive stock option on stock which then fell precipitously in value. The taxpayers had the ability to meet their obligation in full (albeit with a substantial reduction in their standard of living). The fact that their tax bill was much higher than the value of what they ended up receiving was not a reason for the IRS to accept the taxpayers' offer. The IRS was precluded from accepting an offer in compromise that would undermine compliance with the tax laws. Whether or not AMT is unfair is a question for Congress, not the IRS.

R.J. Speltz, 124 TC 165, Dec. 55,961.

Disallowance of tithes as allowable expenses in determining a taxpayer's ability to pay outstanding tax liabilities for purposes of an offer in compromise was not an abuse of an IRS Appeals officer's discretion even though the taxpayer argued that tithes were required as a condition of employment. At the Appeals hearing, the taxpayers were given the opportunity to substantiate that the husband was a minister but they failed to do so and the court was not persuaded that tithing was a condition of employment.

B.M. Pixley, 123 TC 269, Dec. 55,744.

An IRS Appeals officer did not abuse her discretion in rejecting a taxpayer's offer-in-compromise. The Appeals officer correctly concluded that acceptance of the offer-in-compromise would not promote effective tax administration. Further, she did not abuse her discretion in determining that the taxpayer's real property had a value in excess of the amount indicated by the taxpayer, which was based on an outdated appraisal, and she correctly determined that the reasonable collection potential was greater than the taxpayer's offer amount.

G.W. McDonough, 92 TCM 386, Dec. 56,665(M), TC Memo. 2006-234.

The IRS did not abuse its discretion when it rejected an elderly couple's compromise offer that amounted to less than half of their estimated tax liability. The IRS was not required to compromise the couple's tax liability in order to promote effective tax administration based on economic hardship, public policy or equity grounds because the taxpayers had sufficient assets to pay the tax owed and still meet their necessary living expenses for the foreseeable future. Further, it did not abuse its discretion in disregarding the couple's speculative future medical expenses. In addition, the IRS was not required to accept the offer based on the taxpayers' claim that they were the victims of fraud because the couple's situation was typical of many tax shelter participants who claimed deductions, obtained tax advantages and were now required to pay their tax liability. Thus, the IRS's determination to reject the offer-in-compromise was not arbitrary, capricious, or without a sound basis in fact or law, and it was not abusive or unfair to the taxpayers.

D. Clayton, 92 TCM 222, Dec. 56,612(M), TC Memo. 2006-188.

IRS representatives did not accept or intend to accept the offer of a husband and wife to settle their tax deficiency case. The IRS appeals officer to whom the offer letter was sent did not make a written or oral response, and did not accept the offer. The IRS's counsel in the case did not accept the offer, where the offer was not made to him, he was unaware of its specifics, and the appeals officer conducted the negotiations. Although it was disputed whether the IRS's counsel had told taxpayers' counsel that a settlement had been reached, IRS counsel's statement was, at best, his understanding of the intent or actions of the appeals officer or her office.

R.R. Smith, 92 TCM 219, Dec. 56,611(M), TC Memo. 2006-187.

The IRS's refusal of an individual's offer to compromise her alternative minimum tax (AMT) liability, which arose from the exercise of incentive stock options (ISO), was not an abuse of discretion. The fact that the taxpayer's AMT liability was much higher than the value of income she actually received, was not a reason for the IRS to accept her offer. Any inequity in the application of the AMT in situations such as the taxpayer's is a question for Congress to resolve and not the IRS.

C. Wai, 92 TCM 181, Dec. 56,602(M), TC Memo. 2006-179.

An IRS Appeals officer did not abuse her discretion in rejecting an taxpayer's offer-in-compromise. The Appeals officer's rejection of the offer-in-compromise was justified because the disclosure that the taxpayer had incurred additional tax liability without making payment suggested that the taxpayer preferred consumption over meeting his legal obligations. The Appeals officer had also agreed to allow a collection alternative if the taxpayer met certain conditions, but the taxpayer did not agree to those conditions. Finally, collection of the full tax liability would not have caused the taxpayer and his family financial hardship. Delaying his retirement plans was not considered a hardship.

J.G. Dostal, 90 TCM 496, Dec. 56,194(M), TC Memo. 2005-264.

An IRS Appeals officer's determination to proceed with collection of an individual's unpaid tax liability was not an abuse of discretion. Although the taxpayer's allegation of economic hardship was worthy of review, the taxpayer's substantial equity in his home, against which he could borrow, weighed against a finding of economic hardship. Accordingly, the IRS did not abuse its discretion by rejecting the taxpayer's offer to compromise.

K. Hawkins,, 89 TCM 1075, Dec. 55,999(M), TC Memo. 2005-88.

A settlement agreement between an individual and the IRS did not allow the taxpayer to claim business losses related to his wife's furniture business in a specific tax year. The IRS disallowed the losses, categorizing the expenses as start-up costs required to be capitalized. The IRS and the taxpayer reached a settlement for that year that included, in part, the disallowance of the business loss. The taxpayer argued, however, that the prior to signing the settlement an agreement was reached to allow the loss in the following year. Although the IRS agreed that the loss might be allowed in a subsequent year, there was no assent to allow the loss in any specific tax year. Moreover, the settlement did not contain any express agreement as to the business losses. Therefore, there was no binding agreement as to the losses.

K.J. Barela, 88 TCM 65, Dec. 55,707(M), TC Memo. 2004-175.

An IRS Appeals officer abused his discretion in denying a couple's offer in compromise on the grounds that the taxpayers had inadequate income to meet their living expenses and pay the proposed monthly payments. The officer appeared to rely exclusively on the IRS's prescribed schedule of national and local average living expenses to determine that the taxpayers' basic living expenses exceeded their monthly income. However, all of the facts and circumstances, including the schedule of actual expenses submitted by the taxpayers, should have been considered in determining whether the taxpayers could pay both their expenses and the installment payments (Code Sec. 7122(c)(2)). The filing of the federal tax liens to secure the IRS's interest in the unpaid tax liability was not an abuse of discretion.

M. Fowler, 88 TCM 17, Dec. 55,689(M), TC Memo. 2004-163.

Married taxpayers' challenge to an adverse Collection Due Process determination was rejected because they failed to establish an abuse of discretion on the part of the IRS. The officer's determination that the taxpayers had some ability to pay was supported by their proposed offer in compromise. In light of the unresolved question regarding the taxpayers' ownership of real property, the rejection of their proposed offer in compromise was sustained.

D.G. Willis, 86 TCM 506, Dec. 55,334(M), TC Memo. 2003-302.

A married couple's offer to settle their tax liability for the amount of their deficiency, but excluding penalties and interest, did not constitute a binding compromise agreement. The taxpayers had received an oral confirmation from the IRS auditor that their offer had been accepted; however, the auditor believed their offer was a request for additional time to pay. In fact, the taxpayers had not submitted the offer on the appropriate form and had not received a written confirmation that the offer was accepted. Further, there was no mutual assent to the offer since the auditor misunderstood the nature of their request.

J. Ringgold, 86 TCM 28, Dec. 55,218(M), TC Memo. 2003-199.

The IRS's action in cashing a check submitted by an exempt association with a letter that purported to be an offer in compromise did not amount to an acceptance of the entity's offer and did not bar the IRS from asserting that its income activity gave rise to unrelated business taxable income. Rather, the letter merely constituted a settlement offer to resolve the dispute resulting from the IRS audit of the taxpayer for three of the tax years in issue. Moreover, no compromise was effected because the letter failed to meet the specific requirements of Code Sec. 7122.

Education Athletic Assoc., Inc., 77 TCM 1525, Dec. 53,284(M), TC Memo. 1999-75.

Married taxpayers who were assessed deficiencies did not have a binding settlement agreement with the IRS regarding the years at issue. Although the taxpayers submitted several Forms 656, Offer in Compromise in Any Civil or Criminal Case, and District Director's Recommendation, the IRS never accepted any of their settlement offers. An IRS employee's signing of the forms to indicate that the IRS accepted the taxpayers' waiver of the limitations period did not constitute an acceptance of their offers. Further, the IRS employee and the taxpayers' accountant testified that the IRS employee never orally agreed to accept the taxpayers' proposals. Since the husband had a history of dishonest, criminal behavior, his testimony with respect to the alleged oral agreement lacked credibility. Thus, the taxpayers failed to establish that a binding agreement existed.

D.L. Streck, 74 TCM 545, Dec. 52,240(M), TC Memo. 1997-407. Aff'd, CA-6 (unpublished opinion), 99-2 USTC ¶50,650.

The IRS and an investor did not enter into a binding settlement agreement on deficiencies related to a tax shelter because the parties did not mutually assent to a settlement. The taxpayer failed to indicate his belief that a settlement agreement had been entered into until six months after he received written indications that the IRS did not believe that a settlement agreement existed.

T.W. Heil, 68 TCM 513, Dec. 50,071(M), TC Memo. 1994-417.

The government was not bound by an alleged proposed settlement between a former attorney and his wife and the IRS. A proposed decision document did not conform to the formalities required to execute a binding settlement. Even if the document constituted a formal settlement offer, there was no evidence that the taxpayers executed the agreement. Moreover, the IRS never executed the agreement, and no such document was filed with the Tax Court.

B.J. O'Sullivan, 68 TCM 407, Dec. 50,046(M), TC Memo. 1994-395. Aff'd, CA-9 (unpublished opinion), 96-2 USTC ¶50,496.

A notice of deficiency was not invalidated on account of a prior assessment where it was sent to a taxpayer who, along with her husband (who was also her business partner), had signed a Form 870-L(AD) settlement offer that was not signed by the IRS until after the husband filed for bankruptcy. The settlement agreement was void as to both spouses because acceptance of the offer was precluded by the automatic stay provision of the Bankruptcy Code.

N.J. Gillian, 66 TCM 398, Dec. 49,218(M), TC Memo. 1993-366.

In a case involving a delinquent taxpayer who entered into a compromise agreement with the IRS to discharge the federal tax lien on her home in order to facilitate its sale, and who subsequently sought to compromise her tax liability after a collateral agreement was signed, Chief Counsel determined that the Service could accept the offer. The taxpayer submitted a separate offer in compromise conditioned on the Service's release of the mortgage on her home. However, acceptance of such an offer did not require the IRS to release the mortgage. A collateral agreement in which the taxpayer grants additional security to the IRS creates an independent cause of action and, thus, the original unpaid taxes giving rise to the statutory liens remain as separate liabilities. Absent language to the contrary in the compromise agreement, the mortgage remains unaffected.

IRS Letter Ruling 200133028, July 17, 2001.

Chief Counsel determined that a Compliance Area Director is entitled to compromise a case notwithstanding an opinion by Associate Area Counsel that opposed acceptance of a taxpayer's offer based upon a purported economic hardship that would ensue from collection in full. Although Code Sec. 7122(b) requires the opinion of the Associate Area Counsel whenever an offer in compromise is made, the opinion need not favor acceptance of the compromise in order for the IRS to accept the offer. The ultimate determination of whether an offer is accepted lies with the Area Director or other delegated official. However, an offer may not be accepted unless one of the bases for compromise recognized by Reg. 301.7122-1T has been established.

CCA Letter Ruling 200128054, May 29, 2001.

The IRS could exercise its discretion to accept an offer in compromise in spite of the fact that processability rules pertaining to deposit, payment and filing of employment taxes changed prior to acceptance of the offer. Chief Counsel determined that the in-business corporation could not compel the IRS to apply the former rule that it demonstrated compliance by showing that it had been current in the preceding two quarters, rather than demonstrating compliance by having timely filed and timely deposited the previous two quarters' taxes. Nothing in the Internal Revenue Code or regulations prevented the Service from exercising its discretion to process an offer based on criteria that existed when the offer was first submitted.

CCA Letter Ruling 200137001, April 12, 2001.

The IRS's rejection of an offer-in-compromise from investors in a cattle-breeding tax shelter was not arbitrary, capricious or without sound basis in fact or law, and the IRS was allowed to proceed with its collection action. The IRS did not abuse its discretion in rejecting the offer despite the taxpayers' claim of special circumstances or economic hardship. The IRS was not required to address every aspect of the taxpayers' special circumstances in the notice of determination and its calculation of the taxpayers' reasonable collection potential far exceeded the taxpayers' offer. In addition, the IRS was not required to accept the taxpayers' offer based on considerations of public policy or equity. The longstanding nature of the taxpayers' case did not require acceptance of the offer, the IRS could rely on an example in the Internal Revenue Manual that was similar although not identical to the taxpayers' case, and the IRS did not have to consider the taxpayers' claim that they were victims of fraud. Finally, the taxpayers' other arguments regarding compromise of penalties and interest, the IRS's alleged failure to provide the court with sufficient information, the IRS's refusal to delay the Code Sec. 6330 hearing, and the IRS's alleged failure to balance the need for efficient tax collection with the concern that collection be no more intrusive than necessary were rejected.

R. Carter, 93 TCM 861, Dec. 56,826(M), TC Memo. 2007-25.

The IRS's rejection of an offer-in-compromise from investors in a cattle-breeding tax shelter was not arbitrary, capricious or without sound basis in fact or law, and the IRS was allowed to proceed with its collection action. The IRS did not abuse its discretion in rejecting the offer despite the taxpayer's claim of exceptional circumstances. In addition, the IRS was not required to accept the taxpayer's offer based on considerations of public policy or equity. The longstanding nature of the taxpayers' case did not require acceptance of the offer, the IRS could rely on an example in the Internal Revenue Manual that was similar although not identical to the taxpayers' case, and the IRS did not have to consider the taxpayers' claim that they were victims of fraud. Finally, the taxpayers' other arguments regarding compromise of penalties and interest, the IRS's alleged failure to provide the court with sufficient information, the IRS's refusal to delay the Code Sec. 6330 hearing, the wife's pending innocent spouse claim, and the IRS's alleged failure to balance the need for efficient tax collection with the concern that collection be no more intrusive than necessary were rejected.

G. Freeman, 93 TCM 879, Dec. 56,829(M), TC Memo. 2007-28.

The IRS's rejection of an offer-in-compromise from investors in a cattle-breeding tax shelter was not arbitrary, capricious or without sound basis in fact or law, and the IRS was allowed to proceed with its collection action. The IRS did not abuse its discretion in rejecting the offer despite the taxpayer's claim of special circumstances or economic hardship. The IRS was not required to address every aspect of the taxpayers' special circumstances in the notice of determination and its calculation of the taxpayers' reasonable collection potential far exceeded the taxpayers' offer. In addition, the IRS was not required to accept the taxpayer's offer based on considerations of public policy or equity. The longstanding nature of the taxpayers' case did not require acceptance of the offer-in-compromise, the IRS could rely on an example in the Internal Revenue Manual that was similar although not identical to the taxpayers' case, and the IRS did not have to consider all of the taxpayers' equitable facts, including their claim that they were victims of fraud. Finally, the taxpayers' other arguments regarding compromise of penalties and interest, the IRS's alleged failure to provide the court with sufficient information, the IRS's deadline for submission of information, the husband's pending innocent spouse claim and the IRS's alleged failure to balance the need for efficient tax collection of taxes with the concern that collection be no more intrusive than necessary were rejected.

C. Andrews Est., 93 TCM 891, Dec. 56,831(M), TC Memo. 2007-30.

Rejection of a taxpayer's offer in compromise was not an abuse of discretion where the financial information provided by the taxpayer conflicted with the implications of the terms of the taxpayer's marital settlement and separation agreement. The information provided did not explain the inconsistencies with regard to the ownership of various assets; thus, it was not sufficient to permit a reasonable analysis of the taxpayer's offer.

J.J. Kerr, 93 TCM 932, Dec. 56,846(M), TC Memo. 2007-43.

Refusal to accept a married couple's offer-in-compromise was not an abuse of discretion. The taxpayers did not demonstrate either that they would suffer economic hardship from the proposed collection method or that public policy and equity reasons weighed in favor of accepting their offer. The case was not a "longstanding" case in which forgiveness of penalties and interest was appropriate, and there was no evidence that the IRS Appeals officer failed to give adequate consideration to the taxpayers' unique facts and circumstances. Public policy did not demand acceptance of the offer because the taxpayers were victims of a shelter promoter's fraud. Acceptance of the compromise would reduce the risks involved in investing in tax shelters, undermining voluntary compliance with the tax laws.

G. Hansen, 93 TCM 983, Dec. 56,861(M), TC Memo. 2007-56.

The IRS Appeals Office did not abuse its discretion in rejecting a married couple's offer-in-compromise where the taxpayers had underreported their income for several tax years due to claimed losses and credits from Hoyt partnership tax shelter investments. The IRS Appeals officer considered all of the evidence submitted, and reasonably applied the guidelines for evaluating an offer-in-compromise. The offer was unacceptable because, among other reasons, the taxpayers were not forthcoming in establishing their financial status, acceptance of the offer would undermine compliance with the tax laws by taxpayers in general, and the taxpayers had the financial wherewithal to pay more than the offered amount. The officer adequately considered the taxpayers' unique facts and circumstances, and the taxpayers did not show that requiring them to pay more than the offer amount would result in an economic hardship. Public policy did not demand that the taxpayers' offer be accepted because they were victims of fraud, and acceptance of the offer would not enhance voluntary compliance by other taxpayers.

M. Smith, 93 TCM 1047, Dec. 56,880(M), TC Memo. 2007-73.

The IRS was not liable for a breach of contract claim with respect to a settlement agreement because the individual bringing suit failed to show the existence of an enforceable contract to settle his outstanding tax liabilities. The IRS agent's written reply to the individual's offer did not constitute a valid offer or counteroffer that could be accepted by the individual to create a binding contract with the IRS. Moreover, the IRS agent was not authorized to enter into any such contract with the individual.

D.W. Jordan, FedCl, 2007-2 USTC ¶50,601.

SEC. 7122. COMPROMISES.
7122(a) AUTHORIZATION. --The Secretary may compromise any civil or criminal case arising under the internal revenue laws prior to reference to the Department of Justice for prosecution or defense; and the Attorney General or his delegate may compromise any such case after reference to the Department of Justice for prosecution or defense.

7122(b) RECORD. --Whenever a compromise is made by the Secretary in any case, there shall be placed on file in the office of the Secretary the opinion of the General Counsel for the Department of the Treasury or his delegate, with his reasons therefor, with a statement of --

7122(b)(1) The amount of tax assessed,

7122(b)(2) The amount of interest, additional amount, addition to the tax, or assessable penalty, imposed by law on the person against whom the tax is assessed, and

7122(b)(3) The amount actually paid in accordance with the terms of the compromise.

Notwithstanding the foregoing provisions of this subsection, no such opinion shall be required with respect to the compromise of any civil case in which the unpaid amount of tax assessed (including any interest, additional amount, addition to the tax, or assessable penalty) is less than $50,000. However, such compromise shall be subject to continuing quality review by the Secretary.

7122(c) RULES FOR SUBMISSION OF OFFERS-IN-COMPROMISE. --

7122(c)(1) PARTIAL PAYMENT REQUIRED WITH SUBMISSION. --

7122(c)(1)(A) LUMP-SUM OFFERS. --

7122(c)(1)(A)(i) IN GENERAL. --The submission of any lump-sum offer-in-compromise shall be accompanied by the payment of 20 percent of the amount of such offer.

7122(c)(1)(A)(ii) LUMP-SUM OFFER-IN-COMPROMISE. --For purposes of this section, the term "lump-sum offer-in-compromise" means any offer of payments made in 5 or fewer installments.

7122(c)(1)(B) PERIODIC PAYMENT OFFERS. --

7122(c)(1)(B)(i) IN GENERAL. --The submission of any periodic payment offer-in-compromise shall be accompanied by the payment of the amount of the first proposed installment.

7122(c)(1)(B)(ii) FAILURE TO MAKE INSTALLMENT DURING PENDENCY OF OFFER. --Any failure to make an installment (other than the first installment) due under such offer-in-compromise during the period such offer is being evaluated by the Secretary may be treated by the Secretary as a withdrawal of such offer-in-compromise.

7122(c)(2) RULES OF APPLICATION. --

7122(c)(2)(A) USE OF PAYMENT. --The application of any payment made under this subsection to the assessed tax or other amounts imposed under this title with respect to such tax may be specified by the taxpayer.

7122(c)(2)(B) APPLICATION OF USER FEE. --In the case of any assessed tax or other amounts imposed under this title with respect to such tax which is the subject of an offer-in-compromise to which this subsection applies, such tax or other amounts shall be reduced by any user fee imposed under this title with respect to such offer-in-compromise.

7122(c)(2)(C) WAIVER AUTHORITY. --The Secretary may issue regulations waiving any payment required under paragraph (1) in a manner consistent with the practices established in accordance with the requirements under subsection (d)(3).

7122(d) STANDARDS FOR EVALUATION OF OFFERS. --

7122(d)(1) IN GENERAL. --The Secretary shall prescribe guidelines for officers and employees of the Internal Revenue Service to determine whether an offer-in-compromise is adequate and should be accepted to resolve a dispute.

7122(d)(2) ALLOWANCES FOR BASIC LIVING EXPENSES. --

7122(d)(2)(A) IN GENERAL. --In prescribing guidelines under paragraph (1), the Secretary shall develop and publish schedules of national and local allowances designed to provide that taxpayers entering into a compromise have an adequate means to provide for basic living expenses.

7122(d)(2)(B) USE OF SCHEDULES. --The guidelines shall provide that officers and employees of the Internal Revenue Service shall determine, on the basis of the facts and circumstances of each taxpayer, whether the use of the schedules published under subparagraph (A) is appropriate and shall not use the schedules to the extent such use would result in the taxpayer not having adequate means to provide for basic living expenses.

7122(d)(3) SPECIAL RULES RELATING TO TREATMENT OF OFFERS. --The guidelines under paragraph (1) shall provide that --

7122(d)(3)(A) an officer or employee of the Internal Revenue Service shall not reject an offer-in-compromise from a low-income taxpayer solely on the basis of the amount of the offer,

7122(d)(3)(B) in the case of an offer-in-compromise which relates only to issues of liability of the taxpayer --

7122(d)(3)(B)(i) such offer shall not be rejected solely because the Secretary is unable to locate the taxpayer's return or return information for verification of such liability; and

7122(d)(3)(B)(ii) the taxpayer shall not be required to provide a financial statement, and

7122(d)(3)(C) any offer-in-compromise which does not meet the requirements of subparagraph (A)(i) or (B)(i), as the case may be, of subsection (c)(1) may be returned to the taxpayer as unprocessable.

7122(e) ADMINISTRATIVE REVIEW. --The Secretary shall establish procedures --

7122(e)(1) for an independent administrative review of any rejection of a proposed offer-in-compromise or installment agreement made by a taxpayer under this section or section 6159 before such rejection is communicated to the taxpayer; and

7122(e)(2) which allow a taxpayer to appeal any rejection of such offer or agreement to the Internal Revenue Service Office of Appeals.

7122(f) DEEMED ACCEPTANCE OF OFFER NOT REJECTED WITHIN CERTAIN PERIOD. --Any offer-in-compromise submitted under this section shall be deemed to be accepted by the Secretary if such offer is not rejected by the Secretary before the date which is 24 months after the date of the submission of such offer. For purposes of the preceding sentence, any period during which any tax liability which is the subject of such offer-in-compromise is in dispute in any judicial proceeding shall not be taken into account in determining the expiration of the 24-month period.

Code Sec. 7122(f)[(g)]), below, as added by P.L. 109-432, §407(d), applies to submissions made and issues raised after the date on which the Secretary first prescribes a list under Code Sec. 6702(c), as amended by P.L. 109-432, §407(a).
7122(f)[(g)] FRIVOLOUS SUBMISSIONS, ETC. --Notwithstanding any other provision of this section, if the Secretary determines that any portion of an application for an offer-in-compromise or installment agreement submitted under this section or section 6159 meets the requirement of clause (i) or (ii) of section 6702(b)(2)(A), then the Secretary may treat such portion as if it were never submitted and such portion shall not be subject to any further administrative or judicial review.

Alvin S. Brown
Tax Attorney
www.irstaxattorney.com
703 425-1400

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