Thursday, March 20, 2014

Offer in compromise - effective tax administration

An IRS Appeals officer, during a Collection Due Process hearing, abused his discretion in rejecting an offer in compromise (OIC) based on effective tax administration (ETA) because he failed to adequately consider public policy and equity issues. The taxpayers, a married couple that operated an S corporation, agreed that the assessed tax liabilities were correct but submitted a proposed ETA OIC on the basis that their tax problems stemmed from the criminal conduct (embezzlement) of their former bookkeeper. Although the taxpayers’ contention that the Appeals officer was obligated, as a matter of law, to accept the ETA OIC was rejected, the Appeals officer improperly failed to give any consideration to the public policy and equity grounds alleged by the couple. At trial, the IRS contended that the taxpayers’ circumstances did not conform with the examples provided in the regulations. However, those examples are not the exclusive circumstances under which the IRS may accept an OIC for public policy or equity reasons. The case was remanded for further consideration by the Appeals office.

Stacey L. Bogart and Timothy P. Bogart v. Commissioner, U.S. Tax Court, Dkt. No. 4568-12L, TC Memo. 2014-46, March 18, 2014..


MEMORANDUM OPINION

KROUPA, Judge: This collection review matter is before the Court on the parties' cross-motions for summary judgment filed pursuant to Rule 121(a). 1 [*2] Petitioners' Federal tax troubles stem from the criminal conduct of their former bookkeeper. Petitioners submitted an offer-in-compromise (OIC) of $10,000 2 to resolve deficiencies of $69,309 plus interest on the grounds that the OIC promoted effective tax administration (ETA OIC). Respondent rejected the ETA OIC and issued a determination notice sustaining a final notice of intent to levy (proposed levy action).See sec. 6330(d)(1).
Respondent contends that he acted within his discretion when he rejected the ETA OIC. Petitioners contend that respondent was obligated to accept the ETA OIC as a matter of law. Petitioners alternatively contend that we should remand the matter because respondent failed to adequately consider the ETA OIC on public policy and equity grounds. We conclude that respondent has yet to adequately consider the ETA OIC on those grounds. We will therefore deny the cross-motions for summary judgment without prejudice and remand the matter for respondent to consider the ETA OIC on public policy and equity grounds.
The Commissioner may determine that an OIC would promote effective tax administration when collection in full would create economic hardship. See sec. 301.7122-1(b)(3)(i), (iii), Proced. & Admin. Regs. If collection would not cause economic hardship, the Commissioner may still compromise a tax liability to promote effective tax administration when the taxpayer identifies compelling public policy or equity considerations. See sec. 301.7122-1(b)(3)(ii), Proced. & Admin. Regs.
Petitioners do not challenge the liabilities or their ability to satisfy them. Respondent determined, and petitioners acknowledge, that the ETA OIC did not meet the economic hardship standard.See sec. 301.6343-1, Proced. & Admin. Regs. Thus, the cross-motions focus on the rejection of the ETA OIC under only public policy and equity considerations. See sec. 301.7122-1(b)(3)(ii), Proced. & Admin. Regs.
[*10] The Commissioner will accept an OIC for public policy or equity reasons only if the taxpayer demonstrates that “exceptional circumstances” exist and meets three requirements. Sec. 301.7122-1(b)(3)(ii), (c)(3)(ii), Proced. & Admin. Regs.; Internal Revenue Manual (IRM) pt. 5.8.11.2.2(4) (Sept. 23, 2008). First, the taxpayer must have remained in compliance since incurring the liability and must not have an overall compliance history that weighs against compromise. IRM pt. 5.8.11.2.2(4). Second, the taxpayer must also show he or she acted reasonably and responsibly in incurring the liability. Id. Third, the Commissioner must also determine that other taxpayers would view the compromise as fair and equitable. Id. The Commissioner must base his determination on all facts and circumstances. Sec. 301.7122-1(c)(1), Proced. & Admin. Regs.
 
b. Petitioners' Motion for Summary Judgment
We now turn to petitioners' arguments in support of their summary judgment motion. First, petitioners claim that they satisfied the requirements as a matter of law for respondent to accept the ETA OIC. See IRM pt. 5.8.11.2.2. We disagree. It is undeniable that Ms. Sanak perpetrated a fraud against petitioners. The Commissioner maintains, however, wide discretion when evaluating an OIC and determining whether a taxpayer demonstrated exceptional circumstances. The record does not establish as a matter of law that respondent was obligated to accept the ETA OIC.
[*13] Next, petitioners argue that respondent abused his discretion when the SO rejected the ETA OIC without forwarding it to respondent's NEH-ETA group. 5 See id. pt. 5.8.11.2.2(1). Again, we disagree. The Appeals officer maintains discretion to accept an OIC that promotes effective tax administration and forward only those OICs to the NEH-ETA group. Id. The IRM does not require the Appeals officer to forward every OIC based on public policy or equity grounds to the NEH-ETA group. Thus, the Appeals officer could have rejected the ETA OIC without forwarding it to the NEH-ETA group. See id. pt. 1.2.44.2.1 (Jan. 6, 2009).
Last, petitioners contend that the matter should be remanded for further consideration because respondent did not adequately consider the ETA OIC. We agree. Notwithstanding respondent's wide discretion, he still must review the issues petitioners raised during the hearing. The undeveloped record demonstrates that respondent has not fully considered the ETA OIC as required. The record does not allow for meaningful review. See Hoyle v. Commissioner, 131 T.C. 197, 205 (2008). Thus, we will deny the cross-motions for summary judgment without prejudice and remand the matter for further consideration.
[*14] We have considered all arguments made in reaching our decision, and, to the extent not mentioned, we conclude that they are moot, irrelevant, or without merit.
To reflect the foregoing,
An appropriate order will be issued.

    Footnotes

     
     
     
    4
    Example (1) contemplates a taxpayer that was assessed a large deficiency because the taxpayer could not manage his own financial affairs because of serious illness. Sec. 301.7122-1(c)(3)(iv), Example ( 1), Proced & Admin. Regs. The taxpayer in Example (2) has a deficiency that results from the taxpayer's actions based on erroneous advice from the Commissioner.Id.
     
     
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