Wednesday, February 25, 2009

No Abuse of Discretion in Refusal to Accept Offer-In-Compromise or to Grant Equitable Innocent Spouse Relief (Martino, TCM) The IRS did not abuse its discretion in rejecting a married couple's offer-in-compromise due to their failure to make current estimated tax payments. Also the wife's request for equitable innocent spouse relief was denied because she failed to proved she was entitled to such relief.

The taxpayers had requested a Collection Due Process hearing to consider settling deficiencies from a number of years. Prior to the hearing, the IRS Appeals officer informed the taxpayers that they were in arrears for the years following the deficiency notice. Further, their financial statements showed sufficient assets to satisfy the outstanding tax liability. Therefore, she rejected the offer-in-compromise. Upon review by the Tax Court, which found the taxpayers were still not current with their taxes, concluded that the IRS did not abuse its discretion in refusing to enter into an offer-in-compromise. The wife also filed a petition for innocent spouse relief under Code Sec. 6015(b) and (c). Since she failed to qualify for relief under those sections, she requested equitable innocent spouse relief under Code Sec. 6015(f). Although she met the threshold conditions to be considered for relief, she failed to provide sufficient evidence that such relief was in order. A review of all factors by the Tax Court demonstrated that the IRS did not abuse its discretion in refusing to grant equitable innocent spouse relief.

A.J. Martino, Jr., TC Memo. 2009-43, Dec. 57,746(M)

Anthony Martino, Jr. and Mikelin Martino v. Commissioner.

Dkt. No. 13912-06L, 8524-07L , TC Memo. 2009-43, February 24, 2009.


HAINES, Judge: These cases are before the Court consolidated for purposes of trial, briefing, and opinion. Respondent mailed petitioner Anthony Martino, Jr. (Mr. Martino), and petitioner Mikelin Martino (Mrs. Martino) (collectively, petitioners), a Notice of Determination Concerning Collection Action(s) Under Section 6320 and/or 6330 for 1998, 1999, 2000, 2001, and 2002 (first notice of determination), and for 2003 and 2004 (second notice of determination). Petitioners seek review under sections 6320 and 6330 of respondent's determinations. 1

The parties' controversy poses the following issues for our consideration: (1) Whether respondent abused his discretion by rejecting petitioners' collection alternatives because of petitioners' failure to remain in compliance with their tax obligations; (2) whether respondent abused his discretion by determining that petitioners possessed sufficient funds to fully pay their tax liability; and (3) whether respondent abused his discretion in denying the requests of Mrs. Martino for innocent spouse relief under section 6015(f) for the 1998 through 2004 tax liabilities.


Some of the facts have been stipulated and are so found. The stipulation of facts, together with the attached exhibits, is incorporated herein by this reference. At the time petitioners filed their petitions, they resided in Pennsylvania.

Mr. Martino is an attorney. From 1998 through 2004 petitioners derived their income from Mr. Martino's partnership interest and employment in a small law firm that focused on civil and criminal litigation.

I. Collection Alternatives


I. Collection Alternatives
Petitioners make two arguments regarding respondent's rejection of their collection alternatives: (1) Petitioners lack sufficient assets to satisfy the tax liabilities; and (2) respondent abused his discretion by basing his determination to reject petitioners' collection alternatives on petitioners' failure to establish that they made estimated tax payments.

When a lien is filed or levy is proposed to be made on any property or right to property, a taxpayer is entitled to a notice of lien or of intent to levy and notice of the right to a fair hearing before an impartial officer of the Appeals Office. Secs. 6320(a) and (b), 6330(a) and (b), 6331(d). If the taxpayer requests a hearing, he may raise in that hearing any relevant issue relating to the unpaid tax, the lien, or the proposed levy, including challenges to the appropriateness of the collection action and "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). A determination is then made which takes into consideration those issues, the verification 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." Sec. 6330(c)(3)(C).

Petitioners dispute respondent's rejection of their proposed offer-in-compromise and installment agreements. We review the determinations for abuse of discretion because the underlying tax liabilities are not at issue. See Lunsford v. Commissioner, 117 T.C. 183, 185 (2001); Nicklaus v. Commissioner, 117 T.C. 117, 120 (2001).

A. Compliance With Tax Obligations

Respondent rejected petitioners' collection alternatives for their 1998 through 2002 tax liabilities because the Appeals Office determined that petitioners had accrued additional unpaid tax liabilities in 2003 and 2004. Respondent similarly denied petitioners' collection alternatives for their 2003 and 2004 tax liabilities because the Appeals Office determined that petitioners had failed to make estimated tax payments for 2005 and 2006. Petitioners argue that respondent abused his discretion in rejecting petitioners' collection alternatives for the above reasons.

Ms. Stanton's consideration and rejection of petitioners' collection alternatives in two separate hearings was reasonable and not an abuse of discretion. With regard to the first notice of determination, a taxpayer's history of noncompliance is a valid basis for the Commissioner's rejection of a collection alternative. See Londono v. Commissioner, T.C. Memo. 2003-99. With regard to the second notice of determination, estimated tax payments, intended to ensure that current taxes are paid, are a significant component of the Federal tax system. Cox v. Commissioner, 126 T.C. 237, 258 (2006), revd. 514 F.3d 1119 (10th Cir. 2008). In fact, petitioners' circumstances illustrate the primary reason for requiring current compliance before granting collection alternatives; namely, "the risk of pyramiding tax liability." See Schwartz v. Commissioner, T.C. Memo. 2007-155; see also Orum v. Commissioner, 412 F.3d 819, 821 (7th Cir. 2005), affg. 123 T.C. 1 (2004). Accordingly, we conclude that respondent's rejection of petitioners' collection alternatives was not an abuse of discretion. 5

B. Insufficient Funds

Petitioners argue that respondent erred in rejecting petitioners' offer-in-compromise because petitioners lack sufficient assets to satisfy their tax liabilities. 6 Respondent's determination not to enter into an offer-in-compromise agreement with petitioners was not an abuse of discretion. Section 7122(a) authorizes the Secretary to compromise any civil case arising under the internal revenue laws. The regulations set forth three grounds for the compromise of a liability: (1) Doubt as to liability; (2) doubt as to collectibility; or (3) promotion of effective tax administration. Sec. 301.7122-1(b), Proced. & Admin. Regs.; see sec. 7122(c)(1). Doubt as to liability is not at issue in this case.

The Secretary may compromise a liability on the ground of doubt as to collectibility when "the taxpayer's assets and income are less than the full amount of the liability." Sec. 301.7122-1(b)(2), Proced. & Admin. Regs. Additionally, the Secretary may compromise a liability on the ground of "effective tax administration" when: (1) Collection of the full liability will create economic hardship; or (2) exceptional circumstances exist such that collection of the full liability will be detrimental to voluntary compliance by taxpayers; and (3) compromise of the liability will not undermine compliance by taxpayers with tax laws. Sec. 301.7122-1(b)(3), Proced. & Admin. Regs.; see 2 Administration, Internal Revenue Manual (CCH), pt., at 16,385-15 (Sept. 1, 2005) (taxpayer's liability may be eligible for compromise to promote effective tax administration if not eligible for compromise based on doubt as to liability or doubt as to collectibility and taxpayer has exceptional circumstances to merit the offer).

Ms. Stanton reviewed petitioners' submitted financial information at the hearing and determined that an offer-in-compromise was not appropriate. We received as exhibits the financial information presented to respondent and find that Ms. Stanton could have reasonably concluded that there are sufficient income and assets to satisfy the tax liabilities. Accordingly, we conclude that respondent's refusal to enter into an offer-in-compromise was not an abuse of discretion.

II. Relief From Joint and Several Liability
If a husband and wife file a joint Federal income tax return, they generally are jointly and severally liable for the tax due. Sec. 6013(d)(3); Butler v. Commissioner, 114 T.C. 276, 282 (2000). However, a spouse may qualify for relief from joint and several liability under section 6015(b) or (c) if various requirements are met. The parties agree that petitioner does not qualify for relief under section 6015(b) or (c). If relief is not available under section 6015(b) or (c), the Commissioner may relieve an individual of liability for any unpaid tax if, taking into account all the facts and circumstances, it would be inequitable to hold the individual liable. Sec. 6015(f). This Court has jurisdiction to determine whether a taxpayer is entitled to equitable relief under section 6015(f). Sec. 6015(e); see also Farmer v. Commissioner, T.C. Memo. 2007-74; Van Arsdalen v. Commissioner, T.C. Memo. 2007-48.

Petitioner bears the burden of proving that she is entitled to equitable relief under section 6015(f). See Rule 142(a). The Commissioner analyzes petitions for section 6015(f) relief using the procedures set forth in Rev. Proc. 2003-61, 2003-2 C.B. 296. See Banderas v. Commissioner, T.C. Memo. 2007-129. The parties have not disputed the application of the conditions and factors listed in the revenue procedure.

The Commissioner generally will not grant relief unless the taxpayer meets seven threshold conditions. Rev. Proc. 2003-61, sec. 4.01, 2003-2 C.B. at 297. Respondent concedes that petitioner meets these conditions. If a taxpayer meets the threshold conditions, the Commissioner considers several factors to determine whether a requesting spouse is entitled to relief under section 6015(f). Id. sec. 4.03, 2003-2 C.B. at 298. We consider all relevant facts and circumstances in determining whether the taxpayer is entitled to relief. Sec. 6015(e) and (f)(1). The following factors are relevant to our inquiry.

A. Petitioner's Marital Status

Mrs. Martino and Mr. Martino were still married when Mrs. Martino sought relief. This factor is neutral.

B. Significant Benefit

Receipt by the requesting spouse, either directly or indirectly, of a significant benefit in excess of normal support from the unpaid liability or the item giving rise to the deficiency weighs against relief. Lack of a significant benefit beyond normal support weighs in favor of relief. Normal support is measured by the circumstances of the particular parties. Estate of Krock v. Commissioner, 93 T.C. 672, 678-679 (1989). The record does not indicate whether Mrs. Martino received a significant benefit from the unpaid liability. This factor is neutral.

C. Compliance With Tax Laws

The record indicates that petitioners accrued unpaid liabilities from 1997 through 2004. Additionally, petitioners were unable to show proof of estimated tax payments from 2005 and 2006. This factor favors respondent.

D. Economic Hardship

A factor treated by the Commissioner as weighing in favor of relief under section 6015(f) is that paying the taxes owed would cause the requesting spouse to suffer economic hardship. Rev. Proc. 2003-61, sec. 4.03(2)(a)(ii), 2003-2 C.B. at 298. The Commissioner considers the taxpayer to suffer economic hardship if paying the tax would prevent the taxpayer from paying reasonable basic living expenses. Sec. 301.6343-1(b)(4)(i), Proced. & Admin. Regs.; Rev. Proc. 2003-61, secs. 4.02(1)(c), 4.03(2)(a)(ii), 2003-2 C.B. at 298. As the record does not indicate that Mrs. Martino would experience hardship from paying the tax, this factor favors respondent.

E. Knowledge or Reason To Know

In the case of a properly reported but unpaid liability we are less likely to grant relief under section 6015(f) if the requesting spouse knew or had reason to know when the returns were signed that the tax would not be paid. Washington v. Commissioner, 120 T.C. 137, 151 (2003). If the requesting spouse did not know or have reason to know, we are more likely to grant relief.

Mrs. Martino has not alleged that she was unaware that the taxes reported on her Federal income tax returns would be left unpaid, and the record does not indicate that she was unaware. Accordingly, this factor favors respondent.

F. Whether the Underpayment of Tax Is Attributable to the Nonrequesting Spouse

Respondent concedes that the underpayment of tax was solely attributable to Mr. Martino's business activities. This factor favors relief.

The only factor favoring relief is that the underpayment of tax was attributable to Mr. Martino's business activities. This factor is strongly outweighed by Mrs. Martino's failure to demonstrate economic hardship, her failure to demonstrate she was unaware the taxes would not be paid, and petitioners' history of noncompliance with Federal tax laws. On the basis of the above, we find that Mrs. Martino has failed to carry her burden of showing that she is entitled to relief from joint and several liability under section 6015(f).

In reaching our holding herein, we have considered all arguments made, and, to the extent not mentioned above, we conclude that they are moot, irrelevant, or without merit.

To reflect the foregoing,

Decisions will be entered for respondent.

1 Unless otherwise indicated, all section references are to the Internal Revenue Code, as amended, and all Rule references are to the Tax Court Rules of Practice and Procedure. Amounts are rounded to the nearest dollar.

2 In docket No. 13912-06L, respondent filed a motion to dismiss taxable year 1997 for mootness because petitioners had already paid the liability due for that year. Respondent also filed a motion to dismiss for lack of jurisdiction as to taxable year 1997 as to the sec. 6015 determination and to strike. We granted both motions on Oct. 5, 2007.

3 Mr. Martino is also a shareholder in a real estate holding company established by the partnership.

4 Respondent determined petitioners' collection potential using the published guidelines of Internal Revenue Manual pt.,, and (May 1, 2004). These guidelines establish certain national and local allowances for basic living expenses and treat income and assets in excess of those needed for basic living expenses as available to satisfy Federal income tax liabilities.

5 In Martino v. Commissioner, T.C. Memo. 2009-1, a case involving the instant petitioners unsuccessfully contesting a levy for 2005, we found that petitioners had not paid the taxes due on their returns for 2005, 2006, and 2007. With a 10-year record of noncompliance, petitioners give every indication of being recidivists whose strategy is delay.

6 Respondent's first notice of determination specifies that petitioners' offer-in-compromise was rejected because petitioners had accrued unpaid tax liabilities for 2003 and 2004. However, respondent's Form 5402-c, Appeals Transmittal and Case Memo., specifies that respondent rejected the offer in part because petitioners were determined to be capable of fully paying their liability. Because both parties spent the lion's share of their briefs addressing this issue, we shall consider it here.

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