Tuesday, March 9, 2010

Offer in compromise - abuse of discretion issue

Gregg Bartl, et ux. v. Commissioner, TC Memo 2010-43 , Code Sec(s) 6320; 6330; 7122.
Case Information:
Code Sec(s): 6320; 6330; 7122
Docket: Docket No. 22866-07L.
Date Issued: 03/4/2010
Judge: Opinion by LARO
I. Overview Petitioners argue that Appeals was required to let them pay $50,000 to compromise their $83,755 in Federal income tax liability on the basis of (i) doubt as to collectibility; and (ii) effective tax administration. Our review is limited to those issues petitioners raised at the hearing. See Giamelli v. Commissioner, 129 T.C. 107, 114 (2007). At the hearing, petitioners raised only the appropriateness of their offers-in- compromise to be accepted. Accordingly, we limit our analysis to the propriety of Appeals' rejection of petitioners' $50,000 offer-in-compromise, the higher of their two offers.
II. Standard of Review Where, as here, petitioners' underlying tax liability is not at issue, we review the determination solely for abuse of discretion. See Sego v. Commissioner, 114 T.C. 604, 610 (2000). In deciding whether Appeals' rejection of an offer-in-compromise was an abuse of discretion, we decide whether the rejection was arbitrary, capricious, or without sound basis in fact or law. See Cox v. Commissioner, 126 T.C. 237, 255 (2006), revd. 514 F.3d 1119 [101 AFTR 2d 2008-685] (10th Cir. 2008); Murphy v. Commissioner, 125 T.C. 301, 308 (2005), affd. 469 F.3d 27 [98 AFTR 2d 2006-7853] (1st Cir. 2006); Woodral v. Commissioner, 112 T.C. 19, 23 (1999). We do not substitute our judgment for that of Appeals, and we do not prescribe the amount we believe would be an acceptable offer-in-compromise. See Murphy v. Commissioner, supra at 320; see also Fowler v. Commissioner, T.C. Memo. 2004-163 [TC Memo 2004-163].
III. Petitioners' Offers-in-Compromise
A. Overview
A taxpayer may offer to compromise a Federal tax liability. Sec. 7122; see also sec. 6330(c)(2)(A)(iii). The Commissioner has specified guidelines for determining when a taxpayer's offer- in-compromise should be accepted. See sec. 301.7122-1(b), Proced. & Admin Regs. These guidelines permit the Commissioner to accept an offer-in-compromise on the following grounds: “Doubt as to liability”, “Doubt as to collectibility”, and to “Promote effective tax administration”. Id. Petitioners argue that Appeals was required to accept the compromise of their tax liability on the latter two grounds.
B. Doubt as to Collectibility
1. Overview Petitioners argue that Appeals abused its discretion in failing to accept their $50,000 offer-in-compromise on the basis of doubt as to collectibility because their “limited assets do not enable them to pay their tax debt.” We disagree that Appeals abused its discretion.
2. No Abuse of Discretion in Rejecting Petitioners' Doubt as to Collectibility Claim The guidelines for evaluating offers-in-compromise on the basis of doubt as to collectibility are set forth in regulations under section 7122. See , sec. 301.7122-1(b)(2), (c)(2), Proced. & Admin. Regs.; see also IRM pt. (Sept. 1, 2005). Under this guidance, the Commissioner may generally compromise a tax liability on the basis of doubt as to collectibility where the taxpayers' assets and income are less than the full liability. See sec. 301.7122-1(b)(2), Proced. & Admin. Regs. An offer-in- compromise based on doubt as to collectibility will be acceptable only if the offer reflects the taxpayer's reasonable collection potential (i.e., the amount less than the full liability that the Commissioner could collect through alternative remedies such as administrative and judicial proceedings). See Murphy v. Commissioner, supra at 309. A taxpayer's reasonable collection potential is determined, in part, using published guidelines that establish national and local allowances for necessary living expenses. Income and assets in excess of those needed for necessary living expenses are treated as available to satisfy Federal income tax liabilities. See IRM exhs. 5.15.1-3, 5.15.1- 8, 5.15.1-9 (Jan. 1, 2005).
Before the hearing, petitioners submitted Form 433-A on which they set forth their income, expenses, assets, and liabilities. Appeals reviewed petitioners' Form 433-A and adjusted petitioners' income, expenses, assets, and liabilities as prescribed by the IRM, determining that $308,285 could reasonably be collected from petitioners. On that basis, Appeals determined that petitioners possessed sufficient assets and income to satisfy in full the subject tax debts owed to the Government. Among the assets included by Appeals in its determination of petitioners' reasonable collection potential was the $92,000 in equity of petitioners' rental property. We find no reason to disturb Appeals' reliance on the rental property equity as an asset available to satisfy petitioners' outstanding tax liabilities. 8
3. No Abuse of Discretion in Respect of the Bank of America Home Equity Line or the Reich Mortgage Petitioners contend that Appeals failed to adjust their net realizable equity to include all encumbrances on the primary residence. We do not agree. Appeals noted in its report that even if petitioners' encumbrances were recognized, the net realizable equity ($183,800) less the encumbrances ($91,667) resulted in $92,133 in equity remaining to satisfy outstandingtax liabilities. 9 Appeals also considered whether the value of the rental property should be further reduced from its original $125,000 value to reflect (i) hurricane damage; and (ii) a generally depressed real estate market in South Florida. Appeals determined that no further adjustment was necessary because the rental property could be either sold or rented and the proceeds from either of those prospects would be sufficient to satisfy petitioners' outstanding tax liabilities.
4. Recalculation of Reasonable Collection Potential
Petitioners ask us to find that respondent should have adjusted their reasonable collection potential for the following items: (1) Bank of America home equity line; (2) Reich mortgage; (3) $3,226 owed to the State of New Jersey; and (4) $5,363 to satisfy Mr. Bartl's unpaid medical expenses. We note further that an additional amount for petitioners to satisfy the outstanding loan of $4,907 on the 2003 Chevrolet should have also been included in the calculation of petitioners' reasonable collection potential. Even if Appeals took into account each of the above-mentioned items, however, petitioners still have $197,198 with which to satisfy their tax liabilities, calculated as follows:
Net Realizable Equity Value of primary residence (discounted) $100,000 Value of rental property (discounted) 92,000 Value of vehicles (for sale) 480 Less Bank of America primary mortgage (9,604) 1 Less Reich mortgage (41,667) Less Bank of America home equity line (55,000) Total 86,209
Retired Debt Relief 47,445 Future Income Potential 77,040 Miscellaneous Liabilities State of New Jersey liabilities 3,226 Medical expenses 5,363 Balance on 2003 Chevrolet after sale 4,907 Total 13,496
Reasonable Collection Potential Net realizable equity 86,209 Retired debt relief 47,445 Future income potential 77,040 Less miscellaneous adjustments (13,496) Total 197,198 1 Although petitioners contend that respondent should have accounted for the Reich mortgage as $50,000, the mortgage deed only makes petitioners liable for $41,667. We decline to find that respondent should have accounted for any portion of the Reich mortgage in excess of the amount petitioners were personally liable. Accordingly, even if we treat as fact all of petitioners' assertions regarding the value of their assets and the accompanying encumbrances, petitioners will still realize $197,198 with which to satisfy their tax liabilities.
5. Summary of Doubt as to Collectibility Appeals' decision to reject petitioners' $50,000 offer-in- compromise was not arbitrary, capricious, or without a sound basis in fact or law, and it was not abusive or unfair to petitioners. The settlement officer's determination was based on a reasonable application of the guidelines which we decline to call into question. See Speltz v. Commissioner, 124 T.C. 165 (2005), affd. 454 F.3d 782 [98 AFTR 2d 2006-5364] (8th Cir. 2006); Sullivan v. Commissioner, T.C. Memo. 2009-4 [TC Memo 2009-4].
C. Effective Tax Administration
1. Overview The Commissioner may compromise a tax liability for promotion of effective tax administration where: (i) Collection in full, while achievable, would cause the taxpayer economic hardship; or (ii) compelling public policy or equity considerations provide a basis for compromising the liability. See Speltz v. Commissioner, supra at 172-173. Petitioners argue that their physical and psychological frailties coupled with an inability to maintain steady employment required Appeals to compromise their tax liability. We disagree.
2. Economic Hardship
Petitioners argue that Mr. Bartl's stroke and Ms. Feinstein- Bartl's tumors require that their $50,000 offer-in-compromise be accepted or else undue economic hardship will result. To this end, petitioners state that Appeals ignored their medical and psychological issues and that forcing the sale of their rental property would cause petitioners to be “homeless”, turning them into “public charges”. Section 301.6343-1(b)(4)(i), Proced. & Admin. Regs., states that economic hardship occurs when a taxpayer is “unable to pay his or her reasonable basic living expenses.” Section 301.7122-1(c)(3), Proced. & Admin. Regs., sets forth factors to consider in evaluating whether collection of a tax liability would cause economic hardship, as well as some illustrative examples. One example involves a taxpayer who provides fulltime care to a dependent child with a serious long-term illness. A second example involves a retired taxpayer who would lack adequate means to pay his basic living expenses were his only asset, a retirement account, to be liquidated. A third example involves a disabled taxpayer with a fixed income and a modest home specially equipped to accommodate his disability, who is unable to borrow against his home because of his disability. See sec. 301.7122-1(c)(3)(iii), Proced. & Admin. Regs. Petitioners' situation is not comparable to that of the taxpayers described in the regulations—they own two homes, four cars, and are easily meeting their basic living expenses. See Speltz v. Commissioner, 454 F.3d at 786. The record is clear that Appeals' settlement officer, in making his determination, took into account petitioners' claims of mental and employment difficulties. We find those claims to be speculative such that Appeals was not required to arbitrarily decrease petitioners' income potential to reflect them. See, e.g., Fargo v. Commissioner, 447 F.3d 706, 710 [97 AFTR 2d 2006-2381] (9th Cir. 2006), affg. T.C. Memo. 2004-13 [TC Memo 2004-13].
As to petitioners' claim that sustaining the lien action against them would turn them into public charges, we note that even after the payment of their tax liabilities, petitioners will have a surplus of approximately $113,443 ($197,198 - $83,755) with which to continue to develop their funds for retirement.
Appeals' analysis took into account, inter alia, petitioners' $83,755 uncontested liability and petitioners' net realizable equity in the rental property of $92,000, an amount that exceeds by a considerable margin petitioners' offer of $50,000. Appeals also examined articles published in South Florida newspapers in determining that Ms. Feinstein-Bartl continued to generate business income despite her contrary contentions. We do not consider Appeals to have abused its discretion by rejecting petitioners' claim that they will suffer economic hardship if required to pay more than their $50,000 offer.
3. Compelling Policy or Equity Considerations
Petitioners argue that their physical and mental illnesses entitle them to forgiveness of their tax liabilities as a matter of equity. However, petitioners present no convincing argument that requiring them to pay more than $50,000 would undermine public confidence that tax laws are being administered fairly. 10 To the contrary, if Appeals accepted petitioners' proposal that they pay less than all of their tax liabilities and of their reasonable collection potential under the facts of this case, then taxpayers in similar situations who lose a job or suffer health issues, but dutifully pay their taxes, might lose confidence in a system that excuses others when they fail to comply. See Sullivan v. Commissioner, supra.
IV. Conclusion Petitioners have not shown that Appeals' rejection of their $50,000 offer-in-compromise was arbitrary, capricious, or without sound basis in fact or law. Accordingly, we hold that Appeals' determination was not an abuse of discretion. In so holding, we express no opinion as to the amount of any compromise that petitioners could or should be required to pay, or that Appeals is required to accept. The only issue before us is whether Appeals abused its discretion in refusing to accept petitioners' specific offer-in-compromise of $50,000. See Speltz v. Commissioner, 124 T.C. at 179-180.
In reaching our decision, we have considered all arguments made, and to the extent that we have not specifically addressed them, we conclude that they are without merit. To reflect the foregoing,
Decision will be entered for respondent.
Unless otherwise indicated, section references are to the applicable version of the Internal Revenue Code. Some dollar amounts are rounded.
The extent of her medical expenses is not discernible from the record.
The first offer initially asserted doubt as to liability as the reason for compromise. On June 26, 2006, respondent received petitioners' revised offer-in-compromise, which removed doubt as to liability as the reason for compromise and substituted doubt as to collectibility and effective tax administration. The original and revised offers were otherwise unchanged. We refer collectively to the first offer dated June 11, 2006, and the revised offer dated June 26, 2006, as the “first offer”.
Petitioners support the Reich mortgage with a mortgage deed dated Oct. 18, 2006, which was recorded with Broward County on Oct. 20, 2006. That mortgage calls for monthly payments of $277.78 and a maturity date of Oct. 18, 2021. The mortgage states that it does not bear interest, and the total payments equal $41,667 over the life of the mortgage, which is $8,333 less than the face amount of the mortgage. On Jan. 19, 2007, Ms. Reich drafted a letter to petitioners in which she threatened to foreclose on petitioners' primary residence in repayment of the mortgage. The record does not indicate whether any such foreclosure action was initiated.
The sum of individual expenses does not equal the total expenses because of rounding.
Mr. Bartl owed $5,970 in past-due medical expenses, but apparently $607 of that debt was forgiven.
Appeals apparently located at least seven articles published during January and

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