Mark N. Shebby v. Commissioner, TC Memo 2011-125 , Code Sec(s) 6672; 6330; 7122.

MARK N. SHEBBY, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent .

Case Information:

Code Sec(s):       6672; 6330; 7122

Docket:                Docket No. 18841-08L.

Date Issued:       06/7/2011

Judge:   Opinion by MORRISON

HEADNOTE

XX.

Reference(s): Code Sec. 6672 ; Code Sec. 6330 ; Code Sec. 7122

Syllabus

Official Tax Court Syllabus

Counsel

Benjamin C. Sanchez and Martin J. Tierney, for petitioner.

James A. Whitten, for respondent.

Opinion by MORRISON

MEMORANDUM FINDINGS OF FACT AND OPINION

The petitioner, Mark N. Shebby, filed a petition to challenge the determination of the IRS Office of Appeals to sustain a levy to collect  section 6672 penalties. 1 We have jurisdiction to review the determination under section 6330(d). Mr. Shebby resided in Morgan Hill, California, at the time he filed the petition.

FINDINGS OF FACT

Mr. Shebby and his wife were married in 1999. They jointly owned their residence on Mill River Lane in San Jose, California. On June 14, 2004, the IRS assessed  section 6672 penalties against Shebby for the following six quarterly tax periods: the second, third, and fourth quarters of 2002 and the first, second, and third quarters of 2003. On December 30, 2005, Shebby and his wife signed a separate-property agreement. The agreement provided that Shebby and his wife each gave up any claim to the other's earnings. The agreement provided that each of them held an undivided one-half interest in the Mill River Lane property as a separate property interest.

On November 1, 2006, Shebby started a business called Pro Se Legal Document Service.

In 2007 Shebby and his wife sold the Mill River Lane property. They received the proceeds in the form of an $87,890.91 check from a title company, dated August 31, 2007.

On September 20, 2007, the IRS mailed Shebby a notice that it intended to levy on Shebby's property unless Shebby paid $314,378.86, an amount that comprised (1) his unpaid  section 6672 penalties for the six quarterly tax periods listed above and (2) accrued interest. On September 28, 2007, Shebby requested an administrative hearing with the IRS Office of Appeals. 2 In his request, Shebby stated that he wished to propose an offer-in- compromise because he was unable to pay the penalties.

In October 2007 Shebby and his wife used $57,481.11 of the proceeds from the sale of the Mill River Lane property to pay the balance due on their joint federal income tax liabilities for tax years 2001, 2002, and 2004.

On December 31, 2007, Shebby ceased doing business as Pro Se Legal Document Service and started a law practice under the name Law Office of Mark N. Shebby.

On April 29, 2008, Raymundo Jacquez, a settlement officer with the San Francisco office of the Office of Appeals, sent a letter to Shebby scheduling a face-to-face meeting on May 29, 2008, to take place at an IRS office in San Jose. In the letter, Jacquez requested that Shebby submit some financial documents within 14 days; that is, by May 12, 2008. Among the documents that Jacquez requested was an appraisal of each business in which Shebby had an ownership interest.

In a letter of May 23, 2008, Shebby requested a 30-day postponement of the upcoming May 29 conference. In a letter of May 27, 2008, Jacquez agreed to postpone the conference to 2 p.m. on June 19, 2008. Jacquez noted that he had not received any of the financial information requested in his April 29, 2008, letter. He agreed to extend the May 12 deadline for submitting the requested documents to June 12.

On June 3, 2008, Shebby sent a letter to Jacquez with some documents. In the letter, Shebby explained that he had operated the business Pro Se Legal Document Service from November 1, 2006, until December 31, 2007, and that on December 31, 2007, Shebby had started a law practice under the name Law Office of Mark N. Shebby. Shebby declined Jacquez' request that he supply an appraisal of his law practice. He said an appraisal of a new law practice was unnecessary. He asked Jacquez to advise him if he was incorrect.

On June 9, 2008, Shebby sent a letter to Jacquez with additional documents. One of the documents was a Form 433-A, Collection Information Statement for Wage Earners and Self- Employed Individuals. Shebby did not disclose his wife's income on the form. Also included with Shebby's letter was a Form 656, Offer in Compromise, in which Shebby offered to compromise his penalty liabilities for $5,000. The form contained boxes for the person filling out the form to indicate the reason for the offer. Shebby checked the box “Doubt as to Collectibility”. The form required the person filling out the form to check a box to indicate whether the offer was a “Lump sum cash offer”, a “Short Term Periodic Payment Offer”, or a “Deferred Periodic Payment Offer”. Shebby did not check any of the three boxes. The form advised that if a “Lump sum cash offer” was being made, 20 percent of the amount of the offer had to be sent along with the form. However, Shebby did not include any payment.

In a June 11, 2008, letter to Shebby, Jacquez listed several inadequacies he had found in the information that Shebby provided to him on June 3 and 9. According to Jacquez' letter, the Form 433-A was incomplete because it did not disclose the income of Shebby's wife. Jacquez confirmed that he required an appraisal of Shebby's law practice. Jacquez implied that the sale of the Mill River Lane property appeared to involve dissipated assets, meaning that Shebby had dissipated the proceeds without paying the IRS. Jacquez acknowledged that he had received a telephone message from Shebby's lawyer requesting that the face-to-face conference be changed to a telephone conference.

Shebby responded to the June 11 letter with a letter dated June 16, 2008. In his letter, Shebby requested—again—that the upcoming June 19 meeting be changed from a face-to-face meeting to a telephone conference. The letter said that the income of Shebby's wife was irrelevant because Shebby had signed a separate-property agreement with her. The letter asserted that it was unreasonable to require an appraisal of the law practice. The letter claimed that the proceeds from the sale of the Mill River Lane property were used to pay attorney's fees and the Shebbys' past due joint federal income tax liabilities. In a letter dated June 17, 2008, Shebby supplemented his response to Jacquez of June 16, 2008. The supplementary response is not relevant to the errors that Shebby alleges were made by the Office of Appeals.

On June 18, 2008, Jacquez sent a letter responding to the June 16 and 17 letters. In the letter, Jacquez asserted that the income of Shebby's wife was relevant and asked Shebby whether the separate-property agreement had been created in order to avoid collection of the  section 6672 penalties. He also asked for proof that the remainder of the proceeds from the Mill River Lane property sale was consumed by attorney's fees, as Shebby had claimed in his June 16 letter. Jacquez also advised Shebby that the offer-in-compromise could not be processed without a 20- percent payment.

In a letter that he faxed to Jacquez at 9:58 a.m. on June 19, 2008, Shebby responded to Jacquez' letter of June 18. Shebby's letter did not answer Jacquez' question about the reason for the separate-property agreement because, Shebby claimed, a separate-property agreement cannot be considered a fraudulent conveyance. Shebby's letter did not supply proof that the remainder of the proceeds of the Mill River Lane property sale was consumed by attorney's fees. In the letter, Shebby explained that he had not made the 20-percent payment because he thought no payment was necessary until the Office of Appeals accepted the offer-in-compromise. However, Shebby said, he would make the payment “if you so require.”

On June 19, 2008, Jacquez (the settlement officer) conducted a telephone conference with Shebby's lawyer. Shebby summarized the telephone conversation in a letter sent to Jacquez the same day. According to the letter, Shebby's counsel had told Jacquez that Shebby was willing to make a “down payment”, but Jacquez had said it was too late. Shebby's letter enclosed a check for $5,000, which was the entire amount of Shebby's offer-in- compromise, but the letter stipulated that the check could be applied by the IRS only if the IRS accepted the proposed offer- in-compromise. On June 19, Jacquez returned the $5,000 check to Shebby.

On June 30, 2008, the IRS Office of Appeals issued a notice of determination. The determination stated that Shebby's offer- in-compromise could not be processed because Shebby had not provided an original, signed, offer-in-compromise containing terms. (The offer submitted by Shebby on June 9, 2008, did not indicate a payment plan.) It also stated that Shebby had not submitted a payment with the offer-in-compromise. The determination recounted that Jacquez generally found Shebby's documentation inadequate. It noted that Shebby had refused to supply an appraisal of his law practice. The determination stated that there was a disparity between the $2,740 in gross monthly income Shebby reported on the Form 433-A and the fact that, during 2007, $112,239 was deposited into a personal bank account Shebby had with his wife to pay household expenses. The determination stated that Shebby had dissipated escrow funds of $87,890 without documenting how the money was spent. The notice determined that the levy on Shebby's property should be made.

OPINION

Before the IRS can levy on property, it must afford the taxpayer the opportunity for a hearing.   Sec. 6330(a)(1). At the hearing, the taxpayer may raise any relevant issue relating to the unpaid tax or to the proposed levy, including an alternative to collection such as an offer-in-compromise.   Sec. 6330(c)(2)(A)(iii). Any issue so raised by the taxpayer must be considered by the Appeals officer.   Sec. 6330(c)(3).

Shebby's sole complaint about the determination by the Office of Appeals concerns his $5,000 offer-in-compromise. Settlement Officer Jacquez, who served as the Appeals officer, rejected the offer-in-compromise. A rejection of an offer-in- compromise is reviewed by the Tax Court for abuse of discretion. Keller v. Commissioner,  568 F.3d 710, 716 [103 AFTR 2d 2009-2470] (9th Cir. 2009), affg. in part and vacating in part  T.C. Memo. 2006-166 [TC Memo 2006-166], Barnes v. Commissioner,  T.C. Memo. 2006-150 [TC Memo 2006-150], Clayton v. Commissioner,  T.C. Memo. 2006-188 [TC Memo 2006-188], Blondheim v. Commissioner,  T.C. Memo. 2006-216 [TC Memo 2006-216], Lindley v. Commissioner,  T.C. Memo. 2006-229 [TC Memo 2006-229], McDonough v. Commissioner,  T.C. Memo. 2006-234 [TC Memo 2006-234]. An abuse of discretion occurs when a decision is based on (1) an erroneous view of the law or As we explain (2) a clearly erroneous assessment of facts. Id. below, we find that Jacquez did not abuse his discretion in rejecting Shebby's $5,000 offer-in-compromise. First, the offer- in-compromise was not accompanied by a payment of tax. Second, Shebby refused to supply Jacquez with an appraisal of his law practice, thus impairing Jacquez's ability to evaluate the amount that the IRS could reasonably collect from Shebby. Third, Shebby thwarted Jacquez' attempts to determine whether his separate- property agreement with his wife was a fraudulent conveyance. Fourth, Shebby failed to establish whether he had dissipated the proceeds of the sale of his residence. 1. Shebby's Offer-in-Compromise Was Not Accompanied by a Partial Payment of Tax. On June 9, 2008, Shebby furnished a Form 656 to Jacquez. On the form Shebby indicated that he wished to compromise his penalty liabilities for $5,000. Shebby did not check a box to indicate whether the payment would be made in a lump sum or in periodic payments. The form contained a preprinted explanation that a payment of 20 percent of the lump-sum offer had to be sent with the Form 656. Shebby did not enclose a check with the form. On June 18, 2008, Jacquez sent a letter to Shebby warning him that the offer-in-compromise could not be processed without the 20-percent payment. In a letter of June 19, 2008, Shebby explained that he had thought the 20-percent payment was not necessary until the Appeals Office accepted the offer-in- compromise. However, Shebby stated he would still make the payment “if you so require.” After the telephone conference on June 19, 2008, Shebby wrote a letter to Jacquez stating that at the conference Jacquez had advised that Shebby's offer-in- compromise could not be processed because he had failed to make the 20-percent payment; and that Shebby's counsel had told Jacquez that Shebby was willing to remit the 20-percent payment, but only if Jacquez provided the “established Appeals Office protocols and administrative procedures” requiring such a payment. (On the basis of Jacquez' notes of the telephone conversation, it appears that Shebby's letter was an accurate, but incomplete, summary of the telephone conversation.) A check for $5,000 was attached to Shebby's postconference letter. Instructing the IRS not to cash the check until the offer-in- compromise had been accepted, Shebby's letter said: “in order to protect our position we advised you that we would remit the enclosed amount of $5000 to be applied by the IRS only upon acceptance of our proposed offer in compromise, and returned to us upon your refusal to accept our offer.” Later in the day, Jacquez returned the $5,000 check to Shebby. In a letter, Jacquez explained: we cannot accept the check drawn from you [sic] bank account, which does not state anywhere on the check how it is to be applied, particularly under the terms you have stated. You state that you want the check “returned to us upon refusal to accept our offer.”

Since we cannot return funds submitted in an offer your check is being returned as not processable as well. We cannot accept such a check, under such conditions. In the June 30, 2008, notice of determination, the Office of Appeals explained that Shebby's offer-in-compromise could not be processed.

Because of Shebby's failure to unconditionally remit the 20- percent payment, the Office of Appeals did not err in determining that the offer-in-compromise could not be processed.   Section 7122(c)(1)(A)(i) provides: “The submission of any lump-sum offer-in-compromise shall be accompanied by the payment of 20 percent of the amount of such offer.” 3 The $5,000 check was conditioned upon the IRS' accepting the offer, and therefore it was not a payment but a refundable deposit. The Office of Appeals did not err in returning the $5,000 check and in deeming the offer-in-compromise not processable. “The provision requires a taxpayer to make partial payments to the IRS while the taxpayer's offer is being considered by the IRS.” H. Conf. Rept. 109-455, at 234 (2006). The report said that offers “submitted to the IRS that do not comport with [this requirement] are returned to the taxpayer as unprocessable and immediate enforcement action is permitted.” Id. 2. Shebby Refused To Provide an Appraisal of His Law Practice.

Shebby operated a sole proprietorship called Pro Se Legal Document Service. Apparently, this business ended in December 2007, when Shebby began his legal practice under the name Law Office of Mark N. Shebby. On April 29, 2008, Jacquez asked Shebby for an appraisal of each business in which Shebby owned an interest. In a letter of June 3, 2008, Shebby stated that an appraisal of a new law practice was not necessary. Shebby stated: “If I am incorrect in this assumption, please so advise me.” In a letter of June 11, 2008, Jacquez confirmed to Shebby that an appraisal of the law practice was required. On June 16, 2008, Shebby wrote a letter to Jacquez claiming that it was unreasonable to require an appraisal of his law practice. The notice of determination of June 30, 2008, in which the Office of Appeals explained that Shebby's offer-in-compromise could not be processed, cited Shebby's refusal to supply an appraisal of his law practice.

Shebby continues to argue that it was unreasonable for Jacquez to demand an appraisal of Shebby's law practice. He says that because the law practice had been in existence only since January 2008, it would have had no goodwill a few months later. The IRS argues that the Office of Appeals acted reasonably in requesting an appraisal and, when Shebby refused to provide the appraisal, in determining that the offer-in-compromise could not be processed.

 Section 7122(a) authorizes the IRS to “compromise any civil or criminal case arising under the internal revenue laws.” Section 7122(d)(1) authorizes the Treasury to prescribe guidelines for IRS employees to use to determine whether an offer-in-compromise should be accepted. Regulations issued pursuant to  section 7122(d)(1) set forth three grounds for an offer-in-compromise: (1) doubt as to collectibility, (2) doubt as to liability, and (3) promotion of effective tax administration.   Sec. 301.7122-1(b), Proced. & Admin. Regs. Shebby's offer-in-compromise was based on doubt as to collectibility. Under IRS guidelines, an offer-in-compromise based on doubt as to collectibility is generally justified if the amount of the offer is reasonably near the amount the IRS could collect through other means.   Rev. Proc. 2003-71, sec. 4.02(2), 2003-2 C.B. 517, 517. This latter amount, referred to as the “reasonable collection potential”, takes into account the Section taxpayer's reasonable basic living expenses. Id. 301.6330-1(e), Proced. & Admin. Regs., provides that during a levy hearing, “Taxpayers will be expected to provide all relevant information requested by Appeals, including financial statements, for its consideration of the facts and issues involved in the hearing.” When an Appeals officer refuses to consider an offer- in-compromise because of a taxpayer's failure to provide financial information, courts have held that there was no abuse of discretion. See, e.g., Lance v. Commissioner,  T.C. Memo. 2009-129 [TC Memo 2009-129],  97 T.C.M. (CCH) 1670, 1672.

Shebby's business at the time of the hearing was apparently a newly formed law practice. To say that Jacquez should have assumed that the practice had no value would inappropriately substitute our judgment for his. Perhaps the legal practice was some sort of continuation of Shebby's prior business. Or perhaps Shebby had just landed a big client. The Office of Appeals did not abuse its discretion by requiring an appraisal of Shebby's law practice. 3. Shebby Refused To Supply Information to Jacquez Necessary To Determine Whether the Separate-Property Agreement Was a Fraudulent Conveyance. On June 14, 2004, the IRS assessed large section 6672 penalties against Shebby. Shebby and his wife signed a separate- property agreement on December 30, 2005.   Section 9 of the agreement stated that all income earned after they were married would be considered the separate property of the party earning the income “as though the marriage had never occurred.” Thus, Shebby purported to give up any claim to his wife's earnings. On June 9, 2008, Shebby submitted a Form 433-A that did not disclose his wife's income. On June 11, 2008, Jacquez notified Shebby that the Form 433-A was incomplete because it failed to include his wife's income. On June 16, 2008, Shebby wrote Jacquez that the income of his wife was not relevant because of the separate- property agreement. On June 18, 2008, Jacquez sent a letter to Shebby asserting that the income of his wife was indeed relevant, and asked Shebby whether the separate-property agreement had been created to avoid collection of Shebby's  section 6672 liabilities. On June 19, 2008, Shebby sent a letter to Jacquez reiterating that the income of his wife was not legally relevant, arguing: “The Office of Chief Counsel has litigated, and lost, the issue of whether a post nuptial separate property agreement amounts to a fraudulent conveyance of future income. The courts have rejected this position.” The notice of determination issued by the Office of Appeals on June 30, 2008, recounted Shebby's refusal to supply documentation to Jacquez.

Shebby continues to argue that because he had disavowed any claim to his wife's income in the 2005 separate-property agreement, his wife's income was not relevant to what the IRS could collect from him. Shebby argues that the record is devoid of any proof adduced by the IRS that the purpose of the separate- property agreement was to defraud creditors. We reject Shebby's arguments, as explained below.

The regulations provide that in determining whether to accept an offer-in-compromise, the IRS should consider whether the taxpayer made a fraudulent transfer of property to the taxpayer's nonliable spouse.   Section 301.7122-1(c)(2)(ii), Proced. & Admin. Regs., provides:

(ii) Nonliable spouses —(A) In general. Where a taxpayer is offering to compromise a liability for which the taxpayer's spouse has no liability, the assets and income of the nonliable spouse will not be considered in determining the amount of an adequate offer. The assets and income of a nonliable spouse may be considered, however, to the extent property has been transferred by the taxpayer to the nonliable spouse under circumstances that would permit the IRS to effect collection of the taxpayer's liability from such property (e.g., property that was conveyed in fraud of creditors), property has been transferred by the taxpayer to the nonliable spouse for the purpose of removing the property from consideration by the IRS in evaluating the compromise, or as provided in paragraph (c)(2)(ii)(B) of this section. The IRS also may request information regarding the assets and income of the nonliable spouse for the purpose of verifying the amount of and responsibility for expenses claimed by the taxpayer.

(B) Exception. Where collection of the taxpayer's liability from the assets and income of the nonliable spouse is permitted by applicable state law (e.g., under state community property laws), the assets and income of the nonliable spouse will be considered in determining the amount of an adequate offer except to the extent that the taxpayer and the nonliable spouse demonstrate that collection of such assets and income would have a material and adverse impact on the standard of living of the taxpayer, the nonliable spouse, and their dependents. Under California law, a separate-property agreement between a tax debtor and the debtor's spouse can constitute a fraudulent transfer. 4 In an attempt to determine whether Shebby's separate- property agreement with his wife was a fraudulent transfer, Jacquez asked Shebby why the agreement had been signed. Shebby refused to answer the question. Having thus thwarted Jacquez's inquiry, Shebby cannot now argue that Jacquez failed to prove that the agreement was a fraudulent transfer. The Office of Appeals determined that the earnings of Shebby's wife were potentially relevant to the reasonable collection potential. We find no abuse of discretion in this determination. 4. Dissipation of Mill River Lane Property Sale Proceeds Shebby and his wife jointly owned a residence at Mill River Lane in San Jose. On June 14, 2004, the IRS assessed  section 6672 penalties against Shebby. In December 2005 Shebby and his wife signed a separate-property agreement leaving each of them an undivided one-half interest in the Mill River Lane property as a separate property interest. In 2007 Shebby and his wife sold the Mill River Lane property. They received $87,890.91 in proceeds. They used $57,481.11 of the money to pay their joint federal income tax liabilities for tax years 2001, 2002, and 2004. On June 16, 2008, Shebby wrote a letter to Jacquez claiming that the rest of the proceeds had been “used to cover attorneys fees”. On June 18, 2008, Jacquez sent a letter to Shebby asking for proof that this was the case. Shebby never responded to this inquiry. The notice of determination of June 30, 2008, stated that Shebby had dissipated the $87,890 and had failed to document how the money was spent. The Office of Appeals determined that the reasonable collection potential should be increased by $87,890.91. 5

Shebby argues that the Office of Appeals erred. First, Shebby argues that his share of the $87,890.91 in proceeds was $43,945 and that he used his entire $43,945 share to pay part of the delinquent joint income taxes. Thus, Shebby maintains, he did not dissipate the proceeds but rather paid his entire share of the proceeds to the IRS. This argument presumes, incorrectly, that the Shebbys' income-tax liabilities were paid with the $43,945 belonging to Shebby and not the $43,945 that belonged to his wife. In fact, the $57,481.11 in checks that paid the joint income-tax liabilities came from the lawyer who represented both Shebby and his wife. It would have been reasonable to assume that the $57,481.11 was paid out of both spouses' property. Under this assumption, of Shebby's $43,945 share of the proceeds, only $28,741 (that is, one-half of the $57,481.11 income-tax payment) was paid by Shebby toward the joint income tax liabilities; the remainder—$15,204—was unaccounted for. It may have been a dissipated asset. 6

As a fallback argument, Shebby argues that the difference between the proceeds ($87,890.91) and the income tax payments ($57,478.11), a difference of approximately $30,000, was paid to “attorneys”. But Shebby declined to substantiate this. In the absence of information about the remaining $30,000, the Office of Appeals did not abuse its discretion in finding that at least a portion of the $87,890.91 in proceeds was dissipated. 7

The Appeals Office did not abuse its discretion when it refused to accept Shebby's offer-in-compromise and decided that the levy should proceed.

To reflect the foregoing, Decision will be entered for respondent.

1

  All section references are to the Internal Revenue Code, as amended.

2

  Shebby states that the request was dated Sept. 27, 2007, but the date on the form was Sept. 28, 2007.

3

  The 20-percent downpayment requirement, which was added by the Tax Increase Prevention and Reconciliation Act of 2005, Pub. L. 109-222,  sec. 509(a) and  (d), 120 Stat. 362, 364 (2006), applies to all lump-sum offers-in-compromise made after July 16, 2006. According to the report of the Committee on Conference:

4

  In State Bd. of Equalization v. Doreen H.Y. Woo, 98 Cal. Rptr. 2d 206, 207 (Ct. App. 2000), James Ho owed over $37,000 in taxes to the State of California. The state tax authority notified Ho's wife that it would seek an earnings-withholding order against her to pay her husband's tax debt. Id. Four months later, Ho and his wife entered into a separate-property agreement. Id. The wife subsequently became employed by Wells Fargo Bank, earning approximately $500,000 per year. Id. The state court held that Ho had had a present interest in his wife's earnings at the time he executed the marital agreement and that his attempt to transmute the community-property earnings into her separate property constituted a fraudulent transfer. Id.

5

  Internal Revenue Manual pt. 5.8.5.5(5) (Sept. 23, 2008) directs that the Appeals officer should add the value of dissipated assets to the reasonable collection potential. In this context, the term “dissipated assets” means assets that have been sold, given as gifts, transferred, or spent on nonpriority items or debts and are no longer available to pay the tax liability. Id. pt. 5.8.5.5(1).

6

  The IRS concedes in its brief that Jacquez calculated that the entire share of the proceeds ($87,890.91) should be included in reasonable collection potential. One might argue that the amount included should have been limited to $15,204, the unaccounted portion of Shebby's share of the proceeds. But the error Shebby complains of is greater; he believes that Jacquez should have included zero in reasonable collection potential. We decline to consider whether a lesser error (not including $15,204 in reasonable collection potential) would constitute an abuse of discretion.

7

  Besides the four reasons discussed here, the notice of determination also relied on the disparity between Shebby's monthly gross income and the amounts of deposits into the joint checking account that was maintained by Shebby and his wife for household expenses. Because the notice supplied other independent reasons for rejecting Shebby's offer-in-compromise, we need not consider whether it was an abuse of discretion for the settlement officer to consider the disparity between Shebby's reported income and the deposits into the checking account.

§ 7122 Compromises.

 (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.

 (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—

(1) The amount of tax assessed,

 (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

 (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.

 (c) Rules for submission of offers-in-compromise.

(1) New Law Analysis Partial payment required with submission.

(A) Lump-sum offers.

(i) New Law Analysis 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.

 (ii) New Law Analysis 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.

 (B) Periodic payment offers.

(i) New Law Analysis 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.

 (ii) New Law Analysis 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.

 (2) Rules of application.

(A) New Law Analysis 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.

 (B) New Law Analysis 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.

 (C) New Law Analysis 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) .

 (d) Standards for evaluation of offers.

(1) New Law Analysis 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.

 (2) New Law Analysis Allowances for basic living expenses.

(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.

 (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.

 (3) Special rules relating to treatment of offers.

The guidelines under paragraph (1) shall provide that—

(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,

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

(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

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

 (C) New Law Analysis 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.

 (e) Administrative review.

The Secretary shall establish procedures—

(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

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

 (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.

 (f [(g)]) New Law Analysis 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.

Reg §301.7122-1. Compromises.

Caution: The Treasury has not yet amended Reg § 301.7122-1 to reflect changes made by P.L. 109-432

 Effective: Effective July 18, 2002.

(a) WG&L Treatises In general.

(1) If the Secretary determines that there are grounds for compromise under this section, the Secretary may, at the Secretary's discretion, compromise any civil or criminal liability arising under the internal revenue laws prior to reference of a case involving such a liability to the Department of Justice for prosecution or defense.

(2) An agreement to compromise may relate to a civil or criminal liability for taxes, interest, or penalties. Unless the terms of the offer and acceptance expressly provide otherwise, acceptance of an offer to compromise a civil liability does not remit a criminal liability, nor does acceptance of an offer to compromise a criminal liability remit a civil liability.

(b) Grounds for compromise.

(1) Doubt as to liability. Doubt as to liability exists where there is a genuine dispute as to the existence or amount of the correct tax liability under the law. Doubt as to liability does not exist where the liability has been established by a final court decision or judgment concerning the existence or amount of the liability. See paragraph (f)(4) of this section for special rules applicable to rejection of offers in cases where the Internal Revenue Service (IRS) is unable to locate the taxpayer's return or return information to verify the liability.

(2) Doubt as to collectibility. Doubt as to collectibility exists in any case where the taxpayer's assets and income are less than the full amount of the liability.

(3) Promote effective tax administration.

(i) A compromise may be entered into to promote effective tax administration when the Secretary determines that, although collection in full could be achieved, collection of the full liability would cause the taxpayer economic hardship within the meaning of §301.6343-1.

(ii) If there are no grounds for compromise under paragraphs (b)(1), (2), or (3)(i) of this section, the IRS may compromise to promote effective tax administration where compelling public policy or equity considerations identified by the taxpayer provide a sufficient basis for compromising the liability. Compromise will be justified only where, due to exceptional circumstances, collection of the full liability would undermine public confidence that the tax laws are being administered in a fair and equitable manner. A taxpayer proposing compromise under this paragraph (b)(3)(ii) will be expected to demonstrate circumstances that justify compromise even though a similarly situated taxpayer may have paid his liability in full.

(iii) No compromise to promote effective tax administration may be entered into if compromise of the liability would undermine compliance by taxpayers with the tax laws.

(c) Special rules for evaluating offers to compromise.

(1) In general. Once a basis for compromise under paragraph (b) of this section has been identified, the decision to accept or reject an offer to compromise, as well as the terms and conditions agreed to, is left to the discretion of the Secretary. The determination whether to accept or reject an offer to compromise will be based upon consideration of all the facts and circumstances, including whether the circumstances of a particular case warrant acceptance of an amount that might not otherwise be acceptable under the Secretary's policies and procedures.

(2) Doubt as to collectibility.

(i) Allowable expenses. 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.

(ii) Nonliable spouses.

(A) In general. Where a taxpayer is offering to compromise a liability for which the taxpayer's spouse has no liability, the assets and income of the nonliable spouse will not be considered in determining the amount of an adequate offer. The assets and income of a nonliable spouse may be considered, however, to the extent property has been transferred by the taxpayer to the nonliable spouse under circumstances that would permit the IRS to effect collection of the taxpayer's liability from such property (e.g., property that was conveyed in fraud of creditors), property has been transferred by the taxpayer to the nonliable spouse for the purpose of removing the property from consideration by the IRS in evaluating the compromise, or as provided in paragraph (c)(2)(ii)(B) of this section. The IRS also may request information regarding the assets and income of the nonliable spouse for the purpose of verifying the amount of and responsibility for expenses claimed by the taxpayer.

(B) Exception. Where collection of the taxpayer's liability from the assets and income of the nonliable spouse is permitted by applicable state law (e.g., under state community property laws), the assets and income of the nonliable spouse will be considered in determining the amount of an adequate offer except to the extent that the taxpayer and the nonliable spouse demonstrate that collection of such assets and income would have a material and adverse impact on the standard of living of the taxpayer, the nonliable spouse, and their dependents.

(3) Compromises to promote effective tax administration.

(i) Factors supporting (but not conclusive of) a determination that collection would cause economic hardship within the meaning of paragraph (b)(3)(i) of this section include, but are not limited to—

(A) Taxpayer is incapable of earning a living because of a long term illness, medical condition, or disability, and it is reasonably foreseeable that taxpayer's financial resources will be exhausted providing for care and support during the course of the condition;

(B) Although taxpayer has certain monthly income, that income is exhausted each month in providing for the care of dependents with no other means of support; and

(C) Although taxpayer has certain assets, the taxpayer is unable to borrow against the equity in those assets and liquidation of those assets to pay outstanding tax liabilities would render the taxpayer unable to meet basic living expenses.

(ii) Factors supporting (but not conclusive of) a determination that compromise would undermine compliance within the meaning of paragraph (b)(3)(iii) of this section include, but are not limited to—

(A) Taxpayer has a history of noncompliance with the filing and payment requirements of the Internal Revenue Code;

(B) Taxpayer has taken deliberate actions to avoid the payment of taxes; and

(C) Taxpayer has encouraged others to refuse to comply with the tax laws.

(iii) The following examples illustrate the types of cases that may be compromised by the Secretary, at the Secretary's discretion, under the economic hardship provisions of paragraph (b)(3)(i) of this section:

Example (1). The taxpayer has assets sufficient to satisfy the tax liability. The taxpayer provides full time care and assistance to her dependent child, who has a serious long-term illness. It is expected that the taxpayer will need to use the equity in his assets to provide for adequate basic living expenses and medical care for his child. The taxpayer's overall compliance history does not weigh against compromise.

Example (2). The taxpayer is retired and his only income is from a pension. The taxpayer's only asset is a retirement account, and the funds in the account are sufficient to satisfy the liability. Liquidation of the retirement account would leave the taxpayer without an adequate means to provide for basic living expenses. The taxpayer's overall compliance history does not weigh against compromise.

Example (3). The taxpayer is disabled and lives on a fixed income that will not, after allowance of basic living expenses, permit full payment of his liability under an installment agreement. The taxpayer also owns a modest house that has been specially equipped to accommodate his disability. The taxpayer's equity in the house is sufficient to permit payment of the liability he owes. However, because of his disability and limited earning potential, the taxpayer is unable to obtain a mortgage or otherwise borrow against this equity. In addition, because the taxpayer's home has been specially equipped to accommodate his disability, forced sale of the taxpayer's residence would create severe adverse consequences for the taxpayer. The taxpayer's overall compliance history does not weigh against compromise.

(iv) The following examples illustrate the types of cases that may be compromised by the Secretary, at the Secretary's discretion, under the public policy and equity provisions of paragraph (b)(3)(ii) of this section:

Example (1). In October of 1986, the taxpayer developed a serious illness that resulted in almost continuous hospitalizations for a number of years. The taxpayer's medical condition was such that during this period the taxpayer was unable to manage any of his financial affairs. The taxpayer has not filed tax returns since that time. The taxpayer's health has now improved and he has promptly begun to attend to his tax affairs. He discovers that the IRS prepared a substitute for return for the 1986 tax year on the basis of information returns it had received and had assessed a tax deficiency. When the taxpayer discovered the liability, with penalties and interest, the tax bill is more than three times the original tax liability. The taxpayer's overall compliance history does not weigh against compromise.

Example (2). The taxpayer is a salaried sales manager at a department store who has been able to place $2,000 in a tax-deductible IRA account for each of the last two years. The taxpayer learns that he can earn a higher rate of interest on his IRA savings by moving those savings from a money management account to a certificate of deposit at a different financial institution. Prior to transferring his savings, the taxpayer submits an e-mail inquiry to the IRS at its Web Page, requesting information about the steps he must take to preserve the tax benefits he has enjoyed and to avoid penalties. The IRS responds in an answering e-mail that the taxpayer may withdraw his IRA savings from his neighborhood bank, but he must redeposit those savings in a new IRA account within 90 days. The taxpayer withdraws the funds and redeposits them in a new IRA account 63 days later. Upon audit, the taxpayer learns that he has been misinformed about the required rollover period and that he is liable for additional taxes, penalties and additions to tax for not having redeposited the amount within 60 days. Had it not been for the erroneous advice that is reflected in the taxpayer's retained copy of the IRS e-mail response to his inquiry, the taxpayer would have redeposited the amount within the required 60-day period. The taxpayer's overall compliance history does not weigh against compromise.

(d) Procedures for submission and consideration of offers.

(1) In general. An offer to compromise a tax liability pursuant to section 7122 must be submitted according to the procedures, and in the form and manner, prescribed by the Secretary. An offer to compromise a tax liability must be made in writing, must be signed by the taxpayer under penalty of perjury, and must contain all of the information prescribed or requested by the Secretary. However, taxpayers submitting offers to compromise liabilities solely on the basis of doubt as to liability will not be required to provide financial statements.

(2) When offers become pending and return of offers. An offer to compromise becomes pending when it is accepted for processing. The IRS may not accept for processing any offer to compromise a liability following reference of a case involving such liability to the Department of Justice for prosecution or defense. If an offer accepted for processing does not contain sufficient information to permit the IRS to evaluate whether the offer should be accepted, the IRS will request that the taxpayer provide the needed additional information. If the taxpayer does not submit the additional information that the IRS has requested within a reasonable time period after such a request, the IRS may return the offer to the taxpayer. The IRS may also return an offer to compromise a tax liability if it determines that the offer was submitted solely to delay collection or was otherwise nonprocessable. An offer returned following acceptance for processing is deemed pending only for the period between the date the offer is accepted for processing and the date the IRS returns the offer to the taxpayer. See paragraphs (f)(5)(ii) and (g)(4) of this section for rules regarding the effect of such returns of offers.

(3) Withdrawal. An offer to compromise a tax liability may be withdrawn by the taxpayer or the taxpayer's representative at any time prior to the IRS' acceptance of the offer to compromise. An offer will be considered withdrawn upon the IRS' receipt of written notification of the withdrawal of the offer either by personal delivery or certified mail, or upon issuance of a letter by the IRS confirming the taxpayer's intent to withdraw the offer.

(e) Acceptance of an offer to compromise a tax liability.

(1) An offer to compromise has not been accepted until the IRS issues a written notification of acceptance to the taxpayer or the taxpayer's representative.

(2) As additional consideration for the acceptance of an offer to compromise, the IRS may request that taxpayer enter into any collateral agreement or post any security which is deemed necessary for the protection of the interests of the United States.

(3) Offers may be accepted when they provide for payment of compromised amounts in one or more equal or unequal installments.

(4) If the final payment on an accepted offer to compromise is contingent upon the immediate and simultaneous release of a tax lien in whole or in part, such payment must be made in accordance with the forms, instructions, or procedures prescribed by the Secretary.

(5) Acceptance of an offer to compromise will conclusively settle the liability of the taxpayer specified in the offer. Compromise with one taxpayer does not extinguish the liability of, nor prevent the IRS from taking action to collect from, any person not named in the offer who is also liable for the tax to which the compromise relates. Neither the taxpayer nor the Government will, following acceptance of an offer to compromise, be permitted to reopen the case except in instances where—

(i) False information or documents are supplied in conjunction with the offer;

(ii) The ability to pay or the assets of the taxpayer are concealed; or

(iii) A mutual mistake of material fact sufficient to cause the offer agreement to be reformed or set aside is discovered.

(6) Opinion of Chief Counsel. Except as otherwise provided in this paragraph (e)(6), if an offer to compromise is accepted, there will be placed on file the opinion of the Chief Counsel for the IRS with respect to such compromise, along with the reasons therefor. However, no such opinion will 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. Also placed on file will be a statement of—

(i) The amount of tax assessed;

(ii) 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

(iii) The amount actually paid in accordance with the terms of the compromise.

(f) Rejection of an offer to compromise.

(1) An offer to compromise has not been rejected until the IRS issues a written notice to the taxpayer or his representative, advising of the rejection, the reason(s) for rejection, and the right to an appeal.

(2) The IRS may not notify a taxpayer or taxpayer's representative of the rejection of an offer to compromise until an independent administrative review of the proposed rejection is completed.

(3) No offer to compromise may be rejected solely on the basis of the amount of the offer without evaluating that offer under the provisions of this section and the Secretary's policies and procedures regarding the compromise of cases.

(4) Offers based upon doubt as to liability. Offers submitted on the basis of doubt as to liability cannot be rejected solely because the IRS is unable to locate the taxpayer's return or return information for verification of the liability.

(5) Appeal of rejection of an offer to compromise.

(i) In general. The taxpayer may administratively appeal a rejection of an offer to compromise to the IRS Office of Appeals (Appeals) if, within the 30-day period commencing the day after the date on the letter of rejection, the taxpayer requests such an administrative review in the manner provided by the Secretary.

(ii) Offer to compromise returned following a determination that the offer was nonprocessable, a failure by the taxpayer to provide requested information, or a determination that the offer was submitted for purposes of delay. Where a determination is made to return offer documents because the offer to compromise was nonprocessable, because the taxpayer failed to provide requested information, or because the IRS determined that the offer to compromise was submitted solely for purposes of delay under paragraph (d)(2) of this section, the return of the offer does not constitute a rejection of the offer for purposes of this provision and does not entitle the taxpayer to appeal the matter to Appeals under the provisions of this paragraph (f)(5). However, if the offer is returned because the taxpayer failed to provide requested financial information, the offer will not be returned until a managerial review of the proposed return is completed.

(g) Effect of offer to compromise on collection activity.

(1) In general. The IRS will not levy against the property or rights to property of a taxpayer who submits an offer to compromise, to collect the liability that is the subject of the offer, during the period the offer is pending, for 30 days immediately following the rejection of the offer, and for any period when a timely filed appeal from the rejection is being considered by Appeals.

(2) Revised offers submitted following rejection. If, following the rejection of an offer to compromise, the taxpayer makes a good faith revision of that offer and submits the revised offer within 30 days after the date of rejection, the IRS will not levy to collect from the taxpayer the liability that is the subject of the revised offer to compromise while that revised offer is pending.

(3) Jeopardy. The IRS may levy to collect the liability that is the subject of an offer to compromise during the period the IRS is evaluating whether that offer will be accepted if it determines that collection of the liability is in jeopardy.

(4) Offers to compromise determined by IRS to be nonprocessable or submitted solely for purposes of delay. If the IRS determines, under paragraph (d)(2) of this section, that a pending offer did not contain sufficient information to permit evaluation of whether the offer should be accepted, that the offer was submitted solely to delay collection, or that the offer was otherwise nonprocessable, then the IRS may levy to collect the liability that is the subject of that offer at any time after it returns the offer to the taxpayer.

(5) Offsets under section 6402. Notwithstanding the evaluation and processing of an offer to compromise, the IRS may, in accordance with section 6402, credit any overpayments made by the taxpayer against a liability that is the subject of an offer to compromise and may offset such overpayments against other liabilities owed by the taxpayer to the extent authorized by section 6402.

(6) Proceedings in court. Except as otherwise provided in this paragraph (g)(6), the IRS will not refer a case to the Department of Justice for the commencement of a proceeding in court, against a person named in a pending offer to compromise, if levy to collect the liability is prohibited by paragraph (g)(1) of this section. Without regard to whether a person is named in a pending offer to compromise, however, the IRS may authorize the Department of Justice to file a counterclaim or third-party complaint in a refund action or to join that person in any other proceeding in which liability for the tax that is the subject of the pending offer to compromise may be established or disputed, including a suit against the United States under 28 U.S.C. 2410. In addition, the United States may file a claim in any bankruptcy proceeding or insolvency action brought by or against such person.

(h) Deposits. Sums submitted with an offer to compromise a liability or during the pendency of an offer to compromise are considered deposits and will not be applied to the liability until the offer is accepted unless the taxpayer provides written authorization for application of the payments. If an offer to compromise is withdrawn, is determined to be nonprocessable, or is submitted solely for purposes of delay and returned to the taxpayer, any amount tendered with the offer, including all installments paid on the offer, will be refunded without interest. If an offer is rejected, any amount tendered with the offer, including all installments paid on the offer, will be refunded, without interest, after the conclusion of any review sought by the taxpayer with Appeals. Refund will not be required if the taxpayer has agreed in writing that amounts tendered pursuant to the offer may be applied to the liability for which the offer was submitted.

(i) Statute of limitations.

(1) Suspension of the statute of limitations on collection. The statute of limitations on collection will be suspended while levy is prohibited under paragraph (g)(1) of this section.

(2) Extension of the statute of limitations on assessment. For any offer to compromise, the IRS may require, where appropriate, the extension of the statute of limitations on assessment. However, in any case where waiver of the running of the statutory period of limitations on assessment is sought, the taxpayer must be notified of the right to refuse to extend the period of limitations or to limit the extension to particular issues or particular periods of time.

(j) Inspection with respect to accepted offers to compromise. For provisions relating to the inspection of returns and accepted offers to compromise, see section 6103(k)(1).

(k) Effective date. This section applies to offers to compromise pending on or submitted on or after July 18, 2002.

T.D. 9007, 7/18/2002 .

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