STADNYK v. COMM., Cite as 105 AFTR 2d 2010-XXXX, 02/26/2010
________________________________________
DANIEL J. STADNYK and BRENDA J. STADNYK, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
Case Information:
Code Sec(s):
Court Name: UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT,
Docket No.: No. 09-1485,
Date Decided: 02/26/2010.
Disposition:
HEADNOTE
.
Reference(s):
OPINION
UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT,
BEFORE: GUY, CLAY, and KETHLEDGE, Circuit Judges.
ON APPEAL FROM THE UNITED STATES TAX COURT
Judge: CLAY, Circuit Judge.
NOT RECOMMENDED FOR FULL-TEXT PUBLICATION
File Name: 10a0128n.06
Petitioners Daniel and Brenda Stadnyk appeal from the order entered by the United States Tax Court denying their petition for redetermination of a deficiency. For the reasons set forth below, we AFFIRM the Tax Court's order.
BACKGROUND
On December 11, 1996, Petitioners purchased a used 1990 Geo Storm from Nicholasville Road Auto Sales, Inc. (“Nicholasville Auto”) for $3,430.00. Brenda Stadnyk tendered two checks to Nicholasville Auto as partial payment, check number 1080 for $100 and check number 1087 for $1,100, from a checking account with Bank One, Kentucky, N.A. (“Bank One”). After Petitioners drove approximately seven miles from the dealership, the car broke down. Petitioners spent $479.78 to repair the car. They attempted to call Nicholasville Auto about the Geo Storm, but their calls were ignored, placed on hold for long periods of time, and not returned.
Because of their dissatisfaction with the car, Mrs. Stadnyk contacted Bank One to place a stop payment order on check number 1087 for $1,100. Bank One's record of the stop payment order indicates “dissatisfied purchase” as the reason for the stop payment. However, Bank One incorrectly stamped the check “NSF” for insufficient funds and returned it to Nicholasville Auto. On February 4, 1997, Nicholasville Auto filed a criminal complaint against Mrs. Stadnyk for issuing and passing a worthless check in the amount of $1,100.
At approximately 6:00 p.m. on February 23, 1997, officers of the Fayette County Sheriff's Department arrested Mrs. Stadnyk at her home in the presence of her husband, her daughter, and a family friend, and transported her to the Fayette County Detention Center. She arrived at the detention center at approximately 6:30 p.m., and she was handcuffed, photographed, and confined to a holding area. At approximately 11:00 p.m., Mrs. Stadnyk was transferred to Jessamine County Jail, where she was searched via pat-down and use of an electric wand. Mrs. Stadnyk was required to undress to her undergarments, remove her brassiere in the presence of officers, and put on an orange jumpsuit. She was released on bail at approximately 2:00 a.m. on February 24, 1997. On April 23, 1997, Mrs. Stadnyk was indicted for “theft by deception over $300.00” based on the returned check marked for insufficient funds. These charges were later dropped.
Mrs. Stadnyk testified that she did not suffer any physical injury as a result of her arrest and detention. According to Mrs. Stadnyk, nobody put their hands on her, grabbed her, jerked her around, bruised her, or hurt her. As a result of the incident, Mrs. Stadnyk visited a psychologist every 1.5 to two weeks for approximately eight sessions. The cost of these sessions was covered by Mrs. Stadnyk's insurance and employer. Mrs. Stadnyk did not pay any out-of-pocket medical expenses for physical injury or mental distress as a result of the arrest and detention.
On August 25, 1999, Mrs. Stadnyk filed a Complaint against J.R. Maze, the owner of Nicholasville Auto, Nicholasville Auto, and Bank One. On July 5, 2000, she filed a First Amended Complaint, alleging that Bank One breached its fiduciary duty of care by improperly and negligently marking her check “NSF” for insufficient funds. Mrs. Stadnyk's First Amended Complaint also included the following claims against J.R. Maze and Nicholasville Auto: malicious prosecution, abuse of process, false imprisonment, defamation, and outrageous conduct. The First Amended Complaint repeated and incorporated by reference these allegations against Bank One.
On March 7, 2002, Mrs. Stadnyk entered into a mediation agreement with Bank One, under which Bank One agreed to pay Mrs. Stadnyk $49,000 to settle her claims and provide her with a letter of apology. In return, Mrs. Stadnyk agreed to dismiss her complaint against Bank One. The mediation agreement form stated that “Bank One shall pay the total sum of $49,000, by 3/15/02, by official check” and that “[t]he suit shall be dismissed with prejudice with each party to pay their own costs & fees.” (App. at 206). It contained no language indicating the purpose for which the settlement was paid. On March 14, 2002, Bank One issued a check to Mrs. Stadnyk for $49,000, and on May 3, 2002, Mrs. Stadnyk's complaint against Bank One was dismissed with prejudice. 1
During the trial before the Tax Court, Mrs. Stadnyk testified that her attorney, the attorney for Bank One, and the mediator all advised her that the settlement proceeds would not be subject to income tax. Based on this advice, the Stadnyks did not report the $49,000 settlement on their 2002 Form 1040 income tax return, although Bank One issued Mrs. Stadnyk a Form 1099-MISC reporting the payment of the $49,000 settlement. On March 14, 2005, Respondent issued a notice of deficiency to Petitioners, after determining that Petitioners were liable for a tax deficiency of $13,119.00 and an accuracy-related penalty of $2,624.00 under Internal Revenue Code (“I.R.C.”) § 6662(a). Petitioners timely appealed to the Tax Court. On January 12, 2009, the Tax Court ruled in favor of Respondent with respect to the deficiency and in favor of Petitioners with respect to the penalty. On April 15, 2009, Petitioners filed a timely notice of appeal.

DISCUSSION

I. Standard of Review

We review the Tax Court's conclusions of law de novo and its findings of facts for clear error.Limited, Inc. v. Comm'r , 286 F.3d 324, 331 [89 AFTR 2d 2002-1924] (6th Cir. 2002). We will conclude that a factual finding is clearly erroneous only if, upon review of the entire record, we are ““left with the definite and firm conviction that a mistake has been committed.”” Zack v. Comm'r, 291 F.3d 407, 412 [89 AFTR 2d 2002-2578] (6th Cir. 2002) (quoting Sanford v. Harvard Indus., Inc., 262 F.3d 590, 595 (6th Cir. 2001)).
II. The Definition of Income Under I.R.C. § 61(a)
Under I.R.C. § 61(a), taxpayers are liable for all gross income, which is defined as “all income from whatever source derived.” 26 U.S.C. § 61(a). The Supreme Court has instructed that § 61 “be construed liberally “in recognition of the intention of Congress to tax all gains except those specifically exempted.”” Greer v. United States, 207 F.3d 322, 326 [85 AFTR 2d 2000-1876] (6th Cir. 2000) (quotingComm'r v. Glenshaw Glass Co. , 348 U.S. 426, 430 [47 AFTR 162], 75 S. Ct. 473, 99 L. Ed. 483 (1955)). Nevertheless, the I.R.C. provides for a number of exclusions from income.
Petitioners argue that the $49,000 settlement award Mrs. Stadnyk received from Bank One does not classify as income under I.R.C. § 61(a) because Mrs. Stadnyk was made whole—not enriched—by the compensatory damages. Petitioners cite toGlenshaw for the proposition that the term “income” for tax purposes is commonly defined as all “accessions to wealth, clearly realized, and over which the taxpayers have complete dominion.” 348 U.S. at 431. According to Petitioners, because Mrs. Stadnyk's award was compensation for something she had lost, not an “accession to wealth,” her settlement award does not classify as income under § 61(a).
However, Petitioners' reliance on Glenshaw for the proposition that income does not include compensatory damages awards is misplaced. In Glenshaw, the Supreme Court observed that it “has given a liberal construction to this broad phraseology [of income] in recognition of the intention of Congress to tax all gains except those specifically exempted.” Id. at 430 (internal citations omitted). On multiple subsequent occasions, the Supreme Court has reaffirmed the “sweeping scope” of I.R.C. § 61(a).See Comm'r v. Schleier , 515 U.S. 323, 327 [75 AFTR 2d 95-2675], 115 S. Ct. 2159, 2167, 132 L. Ed. 2d 294 (1995). See also United States v. Burke, 504 U.S. 229, 233 [69 AFTR 2d 92-1293], 112 S. Ct. 1867, 119 L. Ed. 2d 34 (1992) (noting that I.R.C. § 61(a) “sweeps broadly” and includes all income “subject only to the exclusions specifically enumerated elsewhere in the Code”); Comm'r v. Banks, 543 U.S. 426, 433 [95 AFTR 2d 2005-659], 125 S. Ct. 826, 160 L. Ed.2d 859 (2005) (“Banks II”) (noting that the definition of gross income “extends broadly to all economic gains not otherwise exempted”). Consistent with interpreting the definition of income broadly, the Supreme Court has “also emphasized the corollary to § 61(a)'s broad construction, namely, the “default rule of statutory interpretation that exclusions from income must be narrowly construed.”” Schleier, 515 U.S. at 328 (quoting Burke, 504 U.S. at 248 (Souter, J. concurring in judgment)). The Supreme Court's instructions to interpret § 61(a) broadly and exceptions narrowly have led courts to the conclusion that “subject to certain exemptions, which are to be construed narrowly, § 61(a) applies to all income, including settlement payments.”Polone v. Comm'r , 505 F.3d 966, 969 [100 AFTR 2d 2007-6277] (9th Cir. 2007).
The fact that the damages award is compensatory does not make it nontaxable. The Supreme Court has found compensatory settlement awards that are not otherwise excluded to be taxable as gross income under I.R.C. § 61(a). See, e.g., Burke, 504 U.S. at 233 (“[t]here is no dispute that the settlement awards in this case would constitute gross income within the reach of § 61(a)”);Schleier , 515 U.S. at 328 (“[r]espondent recognizes § 61(a)'s “sweeping” definition and concedes that his settlement constitutes gross income unless it is expressly excepted by another provision in the Tax Code”). While the Supreme Court has never explicitly ruled that compensation received for personal injury is income pursuant to § 61(a), nothing in the Court's analysis of the scope of § 61(a) supports Petitioners' argument that the Court would come to a different conclusion in the context of personal injury awards than in the context of backpay. Settlement awards for back pay, like settlement awards for personal injury, are compensatory in nature because they make the recipient whole.
Furthermore, if damages awards received on account of personal injury were not income, there would be no need for the exclusion laid out in § 104(a)(2), which exempts from income taxation any damages received on account of personal physical injuries or physical sickness. See Lukhard v. Reed, 481 U.S. 368, 376 (1987) (rejecting the argument “that personal injury awards are [generally] not treated as income under the Internal Revenue Code” and noting that “in each of these instances [where personal injury awards are excluded from § 61(a)] there is an express provision that personal injury awards are not to be treated as income—which causes them not only to fail to support the proposition that the term “income” automatically excludes personal injury awards, but to support the opposite proposition that absent express exclusion it embraces them”). See also Murphy v. I.R.S., 493 F.3d 170, 180 [100 AFTR 2d 2007-5075] (D.C. Cir. 2007) (holding that money received in compensation for emotional injuries is taxable income pursuant to § 61 (a) because the 1996 amendments to § 104(a)(2) would make little sense if § 61(a) did not include compensation for personal injuries).
Accordingly, Mrs. Stadnyk's $49,000 settlement classifies as gross income under § 61(a), and Petitioners can only avoid paying taxes on the damages award if it falls under an exclusion.
III. The Exclusion in I.R.C. § 104(a)(2)
The exclusion from § 61(a) at issue in the instant case is contained in § 104(a)(2), which permits taxpayers to exclude from income “the amount of any damages received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal physical injuries or physical sickness.” 26 U.S.C. § 104(a)(2).
The Supreme Court has held that a taxpayer must meet two independent requirements before a recovery may be excluded under § 104(a)(2). “First, the taxpayer must demonstrate that the underlying cause of action giving rise to the recovery is based upon tort or tort type rights; and second, the taxpayer must show that the damages were received on account of personal injuries or sickness.” Schleier, 515 U.S. at 337 (internal quotations omitted). To satisfy the second prong, the taxpayer must present “concrete evidence demonstrating the precise causal connection” between the taxpayer's asserted personal injuries and the settlement she received. Banks v. Comm'r, 345 F.3d 373, 378–79 [92 AFTR 2d 2003-6298] (6th Cir. 2003) (“Banks I”) (overruled on other grounds byBanks II ) (citing Greer, 207 F.3d at 334).
In 1996, I.R.C. § 104(a)(2) was amended to add the word “physical” to the phrase “personal injuries or sickness.” See Small Business Job Protection Act of 1996, Pub. L. No. 104-188, § 1605(a), 110 Stat. 1755, 1838. Prior to the amendment, I.R.C. § 104(a)(2) encompassed damages compensating all personal injuries, including non-physical injuries. See Burke, 504 U.S. at 235 n.6. However, the amendment to I.R.C. § 104(a)(2) expressly limits the type of damages excludable from income to those received “on account of personal physical injuries or physical sickness,” and expressly states that emotional distress does not constitute a physical injury or sickness. Pub. L. No. 104-188, § 1605(a), 110 Stat. 1755, 1838.
Petitioners argue that their settlement award satisfies the two-part test laid out in Schleier, and, thus, may be excluded from taxation under § 104(a)(2).
A. Prong One: Tort or Tort Type Right
Under the first prong, the question is whether Mrs. Stadnyk's claims against Bank One giving rise to her recovery are based upon tort or tort type rights. The mediation agreement between Mrs. Stadnyk and Bank One did not state what claims provided the basis for the settlement award, nor does the remainder of the record surrounding the settlement provide any insight. Thus, we must look to the complaint to shed light on what claims gave rise to the award. In Mrs. Stadnyk's First Amended Complaint, she alleged a number of tort claims against J.R. Maze and Nicholasville Auto, including malicious prosecution, abuse of process, false imprisonment, defamation, and outrageous conduct, and she repeated, realleged, and incorporated these claims by reference against Bank One. By incorporating these claims by reference, Mrs. Stadnyk raised these tort claims against Bank One.
In addition, Mrs. Stadnyk alleged in her First Amended Complaint that Bank One breached its fiduciary duty of care by improperly and negligently marking her check “NSF” for insufficient funds. Kentucky's banking statutes recognize elements of both contract and tort law in the bank-depositor relationship. Under Kentucky law, banks are required to exercise good faith and ordinary care in the handling of customer accounts, thereby incorporating common law rules of negligence.See Bullitt County Bank v. Publisher's Printing Co. , 684 S.W.2d 289, 291–92 (Ky. Ct. App. 1984);Pulliam v. Pulliam , 738 S.W.2d 846, 849 (Ky. Ct. App. 1987); American Nat'l Bank v. Morey, 69 S.W. 759, 760 (Ky. 1902) (recognizing that a bank customer may have a tort claim against a bank for the wrongful dishonor of a check). Furthermore, under Kentucky law, arrest is a reasonably foreseeable consequence of a bank's wrongful dishonor, and a bank customer may sue for damages resulting from an arrest over such an error. See Ky. Rev. Stat. § 355.4-402 (“A payor bank is liable to its customers for damages proximately caused by the wrongful dishonor of an item. Liability is limited to actual damages proved and may include damages for an arrest or prosecution of the customer or other consequential damages.”).
Based on these Kentucky banking laws and the circumstances of this case, the Tax Court found that Mrs. Stadnyk's independent claims against Bank One sounded in tort:
It is incorrect to characterize [Mrs. Stadnyk's] complaint against Bank One as a contract claim or merely a dispute over the wrongful dishonor of a check. Rather, [Mrs. Stadnyk] decided to sue Bank One because of the ordeal she suffered as a result of her arrest and detention. [Mrs. Stadnyk] did not suffer an economic loss from Bank One's alleged mishandling of her check. She did not sue Bank One to recover on economic rights arising from a contract with Bank One. [Mrs. Stadnyk] sought damages against Bank One that resulted from her arrest, detention, and indictment.
(App. at 85–86.) We agree with the Tax Court's analysis. Based on the finding that Mrs. Stadnyk alleged tort claims against Bank One in her complaint, we conclude that Mrs. Stadnyk's settlement with Bank One was based on tort or tort type rights.
B. Prong Two: “On Account of Personal Physical Injuries”
Having satisfied the first prong, to obtain an exclusion under § 104(a)(2), Mrs. Stadnyk must show that she sustained the damages on account of personal physical injuries or sickness. Under the 1996 Amendment, I.R.C. § 104(a)(2) expressly limits the type of damages excludable from income to personalphysical injuries or physical sickness and expressly states that emotional distress does not constitute a physical injury or sickness. Pub. L. No. 104-188, § 1605(a), 110 Stat. 1755, 1838. Kentucky courts have defined false imprisonment as “any deprivation of the liberty of one person by another or detention for however short a time without such person's consent and against his will, whether done by actual violence, threats or otherwise.” Grayson Variety Store, Inc. v. Shaffer, 402 S.W.2d 424, 425 (Ky. 1966). The tort of false imprisonment protects personal interest in freedom from physical restraint; the interest is “in a sense a mental one” and the injury is “in large part a mental one.”Banks v. Fritsch , 39 S.W.3d 474, 479 (Ky. Ct. App. 2001).
During her deposition, Mrs. Stadnyk testified that she did not suffer any physical injury as a result of her arrest and detention. According to Mrs. Stadnyk, nobody carrying out her arrest or detention put their hands on her, grabbed her, jerked her around, bruised her, or hurt her. Petitioners' brief concedes that the actions of the police were proper and that Mrs. Stadnyk presumes that she was treated in the same manner as anyone else arrested for passing a bad check. Nothing in the record suggests that Mrs. Stadnyk suffered physical, as opposed to emotional, injuries as a result of Bank One's actions.
The Tax Court correctly noted that “[t]he damages sought by [Mrs. Stadnyk] against Bank One are stated in terms of recovery for nonphysical personal injuries: [e]motional distress, mortification, humiliation, mental anguish, and damage to reputation.” (App. at 88). These are all emotional injuries, and are thus not excludable under § 104(a)(2). See Sanford v. Comm'r, 95 T.C.M. (CCH) 1618 [TC Memo 2008-158] (2008) (settlement award for emotional distress relating to sexual harassment and discrimination claims is not excludable); Polone v. Comm'r, 86 T.C.M. (CCH) 698 [TC Memo 2003-339] (2003) (settlement award for defamation claim is not excludable),aff'd 505 F.3d 966 [100 AFTR 2d 2007-6277] (9th Cir. 2007); Venable v. Comm'r, 86 T.C.M. (CCH) 254 [TC Memo 2003-240] (2003) (settlement payment for mental anguish and loss of reputation relating to malicious prosecution claim is not excludable), aff'd 110 Fed. App'x 421 [94 AFTR 2d 2004-6408] (5th Cir. 2004).
However, despite Mrs. Stadnyk's testimony, Petitioners argue that Mrs. Stadnyk suffered a physical injury because “[p]hysical restraint and detention and the resulting deprivation of [Mrs. Stadnyk's] personal liberty is [itself] a physical injury ... that Mrs. Stadnyk endured for an eight hour period.” (Pets.' Br. at 15.) Petitioners further argue that Mrs. Stadnyk suffered physical damages in addition to emotional damages because “to be falsely imprisoned, the person must first be physically restrained or held against their will” and “[t]hus the damages received from false imprisonment arise from the person's physical loss of their freedom and the mental suffering and humiliation that accompany this deprivation.” (Pets.' Br. at 15.)
In other words, Petitioners are asking the Court to create aper se rule that every false imprisonment claim necessarily involves a physical injury, even though physical injury is not a required element of false imprisonment under Kentucky law. To be sure, a false imprisonment claim may cause a physical injury, such as an injured wrist as a result of being handcuffed. But the mere fact that false imprisonment involves a physical act—restraining the victim's freedom—does not mean that the victim is necessarily physically injured as a result of that physical act. In the instant case, Mrs. Stadnyk unequivocally testified that she suffered no physical injuries as a result of her physical restraint. Thus, Petitioners have failed to establish that Mrs. Stadnyk suffered from personal physical injuries or physical sickness.
In addition, the Supreme Court has construed the “on account of” phrase to require a direct causal link between the physical injury and the damages recovery in order to qualify for the income exclusion. See Schleier, 515 U.S. at 329–31. This direct causal connection must be more than a “but for” link, because a “but for” analysis would “bring virtually all personal injury lawsuit damages within the scope of the provision, since: but for the personal injury, there would be no lawsuit, and but for the lawsuit, there would be no damages.” O'Gilvie v. United States, 519 U.S. 79, 82 [78 AFTR 2d 96-7454], 117 S.Ct. 452, 136 L. Ed. 2d 454 (1996) (internal quotation marks omitted). Rather, the “on account of” phrase requires that the damages be awarded by reason of, or because of, a personal physical injury. Id. at 83.See also Greer , 207 F.3d at 327 (requiring that “the agreement was executed “in lieu” of the prosecution of the tort claim and “on account of” the personal injury”). Petitioners bear the burden of “present[ing] concrete evidence demonstrating the precise causal connection” between the personal physical injuries and the settlement payment. Id. at 334.
The settlement agreement does not include any express language of purpose. It only provides that “Bank One shall pay the total sum of $49,000” and that the “suit shall be dismissed with prejudice.” (App. at 206). Petitioners' only evidence arguably supporting the purpose necessary for exclusion under § 104(a)(2) is Mrs. Stadnyk's testimony that her attorney, the attorney for Bank One, and the mediator all advised her that the settlement proceeds would not be subject to income tax. However, even assuming the attorneys did give her this advice, there is no evidence concerning the basis for the advice. The attorneys may have advised Mrs. Stadnyk based on any number of incorrect beliefs, such as the belief that all personal injury awards are excludable from income, as Petitioner argues here, or the belief that a physical injury was unnecessary. Given that the settlement agreement included no indication that Bank One paid the settlement on account of any physical injury and that all of Mrs. Stadnyk's damages were stated in terms of emotional distress, Petitioners have failed to offer any concrete evidence demonstrating a causal connection between any physical injury and the settlement award.
Thus, Petitioner's settlement award may not be excluded from taxation under § 104(a)(2).
IV. The Constitutionality of I.R.C. § 104(a)(2)
Petitioners argue that § 104(a)(2), as amended by Congress in 1996, violates the Sixteenth Amendment to any extent that it purports to subject compensation for personal injuries to income tax. According to Petitioners, the Sixteenth Amendment only allows Congress to impose a tax on “incomes,” and a personal injury recovery is not income because it is not an accession to wealth. In arguing that Congress cannot comply with the Sixteenth Amendment by subjecting a personal injury recovery to income tax, Petitioners have recycled their argument that a personal injury award does not classify as income because it is compensatory rather than an accession to wealth. Thus, given our conclusion that a personal injury award is income under § 61(a), we must also reject Petitioner's related constitutional argument. See Murphy, 493 F.3d at 186.
In the alternative, Petitioners argue in the last two sentences of their brief that § 104(a)(2) is unconstitutional because it is a direct tax and is nonapportioned. Because Petitioners did not raise thus argument below, it is waived. Armstrong v. City of Melvindale, 432 F.3d 695, 700 (6th Cir. 2006). Furthermore, Petitioner's conclusory assertion is not enough to raise the issue now. Leary v. Livingston County, 528 F.3d 438, 449 (6th Cir. 2008) (“It is a settled appellate rule that issues averred in a perfunctory manner, unaccompanied by some effort at developed argumentation, are deemed waived.”).
However, assuming Petitioners have properly presented this argument, it is meritless. Even if the Court were to find that the damages award is not income within the meaning of the I.R.C. § 61(a) and the Sixteenth Amendment, a tax on Mrs. Stadnyk's settlement award would only be unconstitutional if it were a direct tax requiring apportionment or not uniform.See U.S. Const. art. I, § 8 (“all duties, imposts, and excises shall be uniform throughout the United States”); U.S. Const. art. I, § 9 (“No capitation, or other direct, tax shall be laid, unless in proportion to the census or enumeration herein before directed to be taken.”).
The tax on Petitioner's damages award is not a direct tax. Only three taxes are definitively known to be direct: (1) a capitation, (2) a tax upon real property, and (3) a tax upon personal property. See Murphy, 493 F.3d at 181. However, a tax on damages sustained on account of personal injury is not a tax on property; rather, it is a tax on thereceipt of a damages award. Id. at 184 (“it does not appear that this tax is upon ownership; rather, as the Government points out, [the taxpayer] is taxed only after she receives a compensatory award, which makes the tax seem to be laid upon a transaction”). Thus, it need not be apportioned. See Tyler v. United States, 281 U.S. 497, 502 [8 AFTR 10912], 50 S. Ct. 356, 4 L. Ed. 991 (1930) (“A tax laid upon the happening of an event, as distinguished from its tangible fruits, is an indirect tax which Congress ... undoubtably may impose.”).
Moreover, so long as Congress has the power to levy the tax, it is irrelevant whether it was proper for the tax to be labeled income tax or collected pursuant to § 61(a). See Penn Mut. Indemn. Co. v. Comm'r , 277 F.2d 16, 20 [5 AFTR 2d 1171] (3d Cir. 1960) (“[i]t is not necessary to uphold the validity of the tax imposed by the United States that the tax itself bear an accurate label”); Simmons v. United States, 308 F.2d 160, 166 [10 AFTR 2d 5523] n.21 (4th Cir. 1962) (“if Congress has the power to impose the tax in question, it is not material that it call the tax one on income, for it has been clearly established that the labels used do not determine the extent of the taxing power”).
Finally, even assuming the tax in this case is an excise subject to the uniformity requirement, the tax in this case meets this standard. See United States v. Ptasynski, 462 U.S. 74, 82 [52 AFTR 2d 83-6495], 103 S. Ct. 2239, 76 L. Ed. 2d 427 (1983) (“tax is uniform when it operates with the same force and effect in every place where the subject of it is found”) (internal citations and quotations omitted).
Thus, the Tax Court did not err by concluding that I.R.C. § 104(a)(2) does not violate the Constitution.
CONCLUSION
Because the Tax Court properly found that Petitioners owe income taxes on the damages award received pursuant to their settlement with Bank One and that I.R.C. § 104(a)(2) does not violate the Constitution, we AFFIRM the Tax's Court's order.
________________________________________
1
Mrs. Stadnyk's claims against J.R. Maze and Nicholasville Auto had already been dismissed with prejudice pursuant to an order entered on June 8, 2001. The record contains no information as to the terms of the dismissal.

Small Business/Self-Employed Interim Guidance for Calculation of Future Income in Offer in Compromise Cases, SBSE 05-0310-012, (Mar. 16, 2010)
2010ARD 052-5
Internal Revenue Service: Compromises: Future income
DEPARTMENT OF THE TREASURY INTERNAL REVENUE SERVICE Washington, DC 20224
March 10, 2010
SMALL BUSINESS / SELF-EMPLOYED DIVISION
SB/SE Control No: SBSE 05-0310-012
Expires: 3/10/2011
Impacted IRM 5.8.5
MEMORANDUM FOR DIRECTORS, COLLECTION AREA OPERATIONS DIRECTORS, CAMPUS COMPLIANCE OPERATIONS AND CHIEF, APPEALS
FROM: Frederick W. Schindler /s/ Frederick W. Schindler Director, Collection Policy
SUBJECT: Interim Guidance for Calculation of Future Income in Offer in Compromise Cases
The purpose of this memorandum is to provide revised guidance in the computation of the taxpayer's future income value during the evaluation of an offer in compromise.
Internal Revenue Manual (IRM) 5.8.5 defines future income as an estimate of the taxpayer's ability to pay based on an analysis of gross income, less necessary living expenses, for a specific number of months into the future. The number of months used depends on the payment terms of the offer. In general, a taxpayer's current income will be used in the analysis of future ability to pay.
Attached to this memorandum is a revision to sections of IRM 5.8.5, Financial Analysis which discuss the calculation of future income and the use of collateral agreements.
The revisions include specific examples of when the use of income averaging and/or a collateral agreement is appropriate.
These procedures are effective upon the date of issuance and should be applied to any offer currently under consideration. Additionally, these procedures may be applied to offers previously rejected which are currently in their appeal period or where the taxpayer has requested appeals consideration. These procedures will be incorporated into the next revision of IRM 5.8 Offers in Compromise.
If you have any questions, you may contact me, or a member of your staff may contact Thomas B. Moore, OIC Senior Program Analyst. Territory or Campus personnel should direct any questions, through their management staff, to the appropriate Area or Campus contact.
Attachment
cc: Commissioner, Small Business/Self-Employed Division
National Chief, Appeals
Chief Counsel
National Taxpayer Advocate
5.8.5.6 Future Income
(1) Future income is defined as an estimate of the taxpayer's ability to pay based on an analysis of gross income, less necessary living expenses, for a specific number of months into the future.
(2) As a general rule, the taxpayer's current income will be used in the analysis of future ability to pay. This includes situations where the taxpayer's income is recently reduced based on a change in occupation or employment status.
(3) Consideration should be given to the taxpayer's overall general situation including such facts as age, health, marital status, number and age of dependents, level of education or occupational training, and work experience.
(4) Situations that may warrant placing a different value on future income than current or past income indicates are discussed in the table below. Additionally, securing a future income collateral agreement based on the taxpayer's earnings potential may be appropriate and are discussed in more detail in IRM 5.8.5.19 and IRM 5.8.6, Collateral Agreements.

If… Then…

Income will increase or decrease or current necessary expenses will increase or decrease Adjust the amount or number of payments to what is expected during the appropriate number of months.

A taxpayer is temporarily or recently unemployed or underemployed Use the level of income expected if the taxpayer were fully employed and if the potential for employment is apparent. Each case should be judged on its own merit, including consideration of special circumstances or ETA issues.
Example: Unemployed - The taxpayer is a construction worker and between jobs. A review of the taxpayer's previous annual income and/or income averaging may be the appropriate method to determine taxpayer's income for calculation purposes.
Example: Underemployed - If a taxpayer is a teacher but recently moved and is currently at a lesser paying job until a teaching position becomes available, or has been hired and does not begin work until the school season begins, the taxpayer is considered to be currently underemployed. Use the anticipated income once the taxpayer is fully employed.

A taxpayer is unemployed and is not expected to return to their previous occupation or previous level of earnings Contact the taxpayer to discuss the expected future level of income. When considering future income, also allow anticipated increases in necessary living expenses and/or applicable taxes.
Each case should be judged on its own merit, including consideration of special circumstances or ETA issues.

A taxpayer is long-term unemployed Use of income averaging is not required; the taxpayer's current income may be used in the future income calculation.
Example: Taxpayer has been unemployed for over one year. There are currently no employment opportunities for the taxpayer and the household is living on one income. Use of the taxpayer's current income with a future income collateral agreement is appropriate.

A taxpayer is long-term underemployed Do not income average; use the taxpayer's current income.
Example: The taxpayer was previously employed in a manufacturing plant making $75,000 per year. There are currently no opportunities for the taxpayer to secure employment making the same rate of pay as their prior job. Their income is now $25,000 per year with no anticipated increase. Use the current income only.

A taxpayer has an irregular employment history or fluctuating income Average earnings over the three prior years. The use of a time period other than three years should be the exception and only when specific circumstances are present.
Example: The taxpayer is a stock broker whose income in 2007 was $150,000 and income in 2008 was $25,000. In this case, you should consider income averaging the prior three years or secure a future income collateral agreement if the offer is accepted.
Note: This practice does not apply to wage earners. Wage earners should be based on current income unless the taxpayer has unique circumstances.

A taxpayer is in poor health and their ability to continue working is questionable Reduce the number of payments to the appropriate number of months it is anticipated the taxpayer will continue working. Consider special circumstance situations when making any adjustments.
Example: Taxpayer has a serious health issue and it is anticipated they will be unable to work after six months. Use the taxpayer's current income for six months then reduce their income to the anticipated amount they will be receiving after they are unable to work.

A taxpayer is close to retirement and has indicated they will be retiring If the taxpayer can substantiate retirement is imminent, adjust the taxpayer's future earnings and expenses accordingly. If it cannot be substantiated, base the calculation on current earnings. At this point, it may be appropriate to discuss other options available to the taxpayer, for example an installment agreement.
Example: The taxpayer is 65 years of age and has indicated they will retire at the age of 66. They provide copies of documents that have been submitted to their employer discussing their retirement date. Use the taxpayer's current income until the taxpayer's anticipated retirement date, then adjust the taxpayer's income to reflect the amount expected in retirement.
Example: The taxpayer is 62 years of age, the taxpayer is in good health, and their income has remained stable for the past three years. The taxpayer states they would like to retire at age 65. Use the taxpayer's current income and if the RCP exceeds the offer amount, discuss the option of securing an installment agreement until the taxpayer actually retires, at which time an offer may be appropriate.

A taxpayer will file a petition for liquidating bankruptcy Consider reducing the value of future income. The total value of future income should not be reduced to an amount less than what could be paid toward non-dischargeable periods, or what would be recoverable through a bankruptcy proceeding. When considering a reduction in future income also consider the intangible value to the taxpayer of avoiding bankruptcy. Refer to IRM 5.8.10.2.

(5) Judgment should be used in determining the appropriate time to apply income averaging on a case by case basis. All circumstances of the taxpayer should be considered when determining the appropriate application of income averaging, including special circumstances and ETA considerations. Below are some examples of when income averaging may or may not be appropriate.
Example: Taxpayer's spouse has not worked for over two and one-half years and has no expectations of returning to work. Do not average income for the spouse's past employment.
Example: Taxpayer has been unemployed for over one year and provided proof that Social Security Disability is the sole source of income. Do not apply income averaging in this case but use current income to determine the taxpayer's future ability to pay.
Example: The taxpayer was incarcerated and unable to work for the past four years and provided proof that a relative is paying for all expenses, including child support payments. The taxpayer has no skills or promise of work in the near future but is planning on attending trade school to improve his chances of getting a job. Do not include income prior to the incarceration. In this case, since the taxpayer has no skills or promise of employment, their future income value may be determined to be zero. Consideration should be given whether it would be in the best interest of the government to accept the offer or reject the offer in favor of other case resolutions.
Example: The taxpayer recently began working after several months of unemployment. Use the most recent three months pay statements to determine future income. Since the taxpayer is a wage earner, the use of income averaging over the prior three years of income is not appropriate.
(6) In situations where the taxpayer's income does not appear to meet their stated living expenses the difference should not be included as additional income to the taxpayer, unless there are clear indications additional income not included on the collection information statement is being received and will continue to be received by the taxpayer. Discussion with the taxpayer/representative and a review of documents submitted by the taxpayer must take place to determine the appropriateness of including an additional amount in the calculation of future income. Verification of the source of unexplained bank deposits or statements from the source of gifts may be required to correctly determine the taxpayer's current income. Telephone contact is recommended to expedite case processing.
Example: The taxpayer has been receiving gifts from their parents to meet current living expenses for the past six months. The taxpayer has no guaranteed right to the funds in the future and the amount does not appear to be based on the transfer of assets to the parents. The gift amount should not be included as income.
Example: The taxpayer has been receiving an amount each month that only began recently, which they state is a gift from a friend. Further research has determined the taxpayer is in business with the friend and the amount is from their business. This amount should be included as income to the taxpayer. Additionally, consideration should be given to referring the taxpayer and the business income tax return to Examination.
Example: The taxpayer had gambling winnings over a period of time, but is not consistent. Do not include those winnings as additional income on the IET. This does not apply to professional gamblers.
Example: The collection information statement (CIS) submitted by the taxpayer included $ 3.000.00 of monthly income, which is verified by paystubs. The CIS submitted by the taxpayer includes $ 4,000.00 of expenses. An additional $ 1,000.00 should not be added to the taxpayer's income based solely on the fact it appears the taxpayer has been meeting the living expenses included on the CIS. Discussion with the taxpayer or representative is necessary to clarify the discrepancy prior to including the amount as additional income.
(7) Employees need to exercise good judgment when determining future income. The history must be clearly documented and support the known facts and circumstances of the case and include analysis of the supporting documents. Each case needs to be evaluated on its own particular set of facts and circumstances. The history must clearly explain the reasoning behind our actions.
Currently 5.8.5.6(7) Future Income Collateral Agreements
(1) In some instances, it may be difficult to calculate the taxpayer's anticipated income. While the use of income averaging is one method available and should be used when averaging the taxpayer's income provides a reasonable calculation of the taxpayer's future earnings potential, it may also be appropriate to use the taxpayer's current income and secure a future income collateral agreement. The use of a future income collateral agreement will protect the government's interest in any substantial increase in the taxpayer's earnings.
(2) A future income collateral agreement is most appropriate in situations where the taxpayer's future income is uncertain, but it is reasonably expected that the taxpayer will be receiving a substantial increase in income.
(3) A future income collateral agreement should not be used to accept an offer for a lesser amount than the calculated RCP. See IRM 5.8.6.3.1, Future Income, for instructions on completing collateral agreements.
Example: A taxpayer is currently in medical school; upon graduation income should increase dramatically. Consider securing a future income collateral agreement.
Example: A taxpayer recently secured a job as an attorney with a starting salary of $80,000 per year, with potential for significant increases in salary. Consider securing a future income collateral agreement.
Example: A taxpayer is a real estate agent who has had two years of high income and the current income is significantly diminished. Based on the current real estate market, it may be appropriate to use the taxpayer's current income and secure a future income collateral agreement in lieu of income averaging.
Example: A taxpayer's RCP is $12,000 but has offered $10,000 plus a future income collateral agreement. A future income collateral agreement is not appropriate in lieu of the taxpayer increasing their offer to the RCP amount. If the taxpayer is not willing to increase their offer to the RCP amount, the offer should be rejected.

The IRS and Treasury Department have provided revised guidance to Small Business/Self-Employed Division directors and the IRS Appeals chief on the computation of a taxpayer's future income value during the evaluation of an offer in compromise. The guidance revises sections of IRM 5.8.5, Financial Analysis, which discuss the calculation of future income and the use of collateral agreements. The revisions include specific examples of when the use of income averaging or a collateral agreement is appropriate.

The procedures apply to future offers and any offer currently under consideration. In addition, the procedures may be applied to offers previously rejected that are currently in their appeal period or where the taxpayer has requested appeals


IRS Small Business/Self-Employed Interim Guidance for Calculation of Future Income in Offer in Compromise Cases, SBSE 05-0310-012, (Mar. 16, 2010)
2010ARD 052-5
Internal Revenue Service: Compromises: Future income
DEPARTMENT OF THE TREASURY INTERNAL REVENUE SERVICE Washington, DC 20224
March 10, 2010
SMALL BUSINESS / SELF-EMPLOYED DIVISION
SB/SE Control No: SBSE 05-0310-012
Expires: 3/10/2011
Impacted IRM 5.8.5
MEMORANDUM FOR DIRECTORS, COLLECTION AREA OPERATIONS DIRECTORS, CAMPUS COMPLIANCE OPERATIONS AND CHIEF, APPEALS

FROM: Frederick W. Schindler /s/ Frederick W. Schindler Director, Collection Policy
SUBJECT: Interim Guidance for Calculation of Future Income in Offer in Compromise Cases

The purpose of this memorandum is to provide revised guidance in the computation of the taxpayer's future income value during the evaluation of an offer in compromise.
Internal Revenue Manual (IRM) 5.8.5 defines future income as an estimate of the taxpayer's ability to pay based on an analysis of gross income, less necessary living expenses, for a specific number of months into the future. The number of months used depends on the payment terms of the offer. In general, a taxpayer's current income will be used in the analysis of future ability to pay.
Attached to this memorandum is a revision to sections of IRM 5.8.5, Financial Analysis which discuss the calculation of future income and the use of collateral agreements.
The revisions include specific examples of when the use of income averaging and/or a collateral agreement is appropriate.
These procedures are effective upon the date of issuance and should be applied to any offer currently under consideration. Additionally, these procedures may be applied to offers previously rejected which are currently in their appeal period or where the taxpayer has requested appeals consideration. These procedures will be incorporated into the next revision of IRM 5.8 Offers in Compromise.
If you have any questions, you may contact me, or a member of your staff may contact Thomas B. Moore, OIC Senior Program Analyst. Territory or Campus personnel should direct any questions, through their management staff, to the appropriate Area or Campus contact.
Attachment
cc: Commissioner, Small Business/Self-Employed Division
National Chief, Appeals
Chief Counsel
National Taxpayer Advocate

5.8.5.6 Future Income

(1) Future income is defined as an estimate of the taxpayer's ability to pay based on an analysis of gross income, less necessary living expenses, for a specific number of months into the future.

(2) As a general rule, the taxpayer's current income will be used in the analysis of future ability to pay. This includes situations where the taxpayer's income is recently reduced based on a change in occupation or employment status.

(3) Consideration should be given to the taxpayer's overall general situation including such facts as age, health, marital status, number and age of dependents, level of education or occupational training, and work experience.

(4) Situations that may warrant placing a different value on future income than current or past income indicates are discussed in the table below. Additionally, securing a future income collateral agreement based on the taxpayer's earnings potential may be appropriate and are discussed in more detail in IRM 5.8.5.19 and IRM 5.8.6, Collateral Agreements.

If… Then…

Income will increase or decrease or current necessary expenses will increase or decrease Adjust the amount or number of payments to what is expected during the appropriate number of months.

A taxpayer is temporarily or recently unemployed or underemployed Use the level of income expected if the taxpayer were fully employed and if the potential for employment is apparent. Each case should be judged on its own merit, including consideration of special circumstances or ETA issues.

Example: Unemployed - The taxpayer is a construction worker and between jobs. A review of the taxpayer's previous annual income and/or income averaging may be the appropriate method to determine taxpayer's income for calculation purposes.

Example: Underemployed - If a taxpayer is a teacher but recently moved and is currently at a lesser paying job until a teaching position becomes available, or has been hired and does not begin work until the school season begins, the taxpayer is considered to be currently underemployed. Use the anticipated income once the taxpayer is fully employed.

A taxpayer is unemployed and is not expected to return to their previous occupation or previous level of earnings Contact the taxpayer to discuss the expected future level of income. When considering future income, also allow anticipated increases in necessary living expenses and/or applicable taxes.
Each case should be judged on its own merit, including consideration of special circumstances or ETA issues.

A taxpayer is long-term unemployed Use of income averaging is not required; the taxpayer's current income may be used in the future income calculation.
Example: Taxpayer has been unemployed for over one year. There are currently no employment opportunities for the taxpayer and the household is living on one income. Use of the taxpayer's current income with a future income collateral agreement is appropriate.

A taxpayer is long-term underemployed Do not income average; use the taxpayer's current income.
Example: The taxpayer was previously employed in a manufacturing plant making $75,000 per year. There are currently no opportunities for the taxpayer to secure employment making the same rate of pay as their prior job. Their income is now $25,000 per year with no anticipated increase. Use the current income only.

A taxpayer has an irregular employment history or fluctuating income Average earnings over the three prior years. The use of a time period other than three years should be the exception and only when specific circumstances are present.
Example: The taxpayer is a stock broker whose income in 2007 was $150,000 and income in 2008 was $25,000. In this case, you should consider income averaging the prior three years or secure a future income collateral agreement if the offer is accepted.
Note: This practice does not apply to wage earners. Wage earners should be based on current income unless the taxpayer has unique circumstances.

A taxpayer is in poor health and their ability to continue working is questionable Reduce the number of payments to the appropriate number of months it is anticipated the taxpayer will continue working. Consider special circumstance situations when making any adjustments.
Example: Taxpayer has a serious health issue and it is anticipated they will be unable to work after six months. Use the taxpayer's current income for six months then reduce their income to the anticipated amount they will be receiving after they are unable to work.

A taxpayer is close to retirement and has indicated they will be retiring If the taxpayer can substantiate retirement is imminent, adjust the taxpayer's future earnings and expenses accordingly. If it cannot be substantiated, base the calculation on current earnings. At this point, it may be appropriate to discuss other options available to the taxpayer, for example an installment agreement.
Example: The taxpayer is 65 years of age and has indicated they will retire at the age of 66. They provide copies of documents that have been submitted to their employer discussing their retirement date. Use the taxpayer's current income until the taxpayer's anticipated retirement date, then adjust the taxpayer's income to reflect the amount expected in retirement.
Example: The taxpayer is 62 years of age, the taxpayer is in good health, and their income has remained stable for the past three years. The taxpayer states they would like to retire at age 65. Use the taxpayer's current income and if the RCP exceeds the offer amount, discuss the option of securing an installment agreement until the taxpayer actually retires, at which time an offer may be appropriate.

A taxpayer will file a petition for liquidating bankruptcy Consider reducing the value of future income. The total value of future income should not be reduced to an amount less than what could be paid toward non-dischargeable periods, or what would be recoverable through a bankruptcy proceeding. When considering a reduction in future income also consider the intangible value to the taxpayer of avoiding bankruptcy. Refer to IRM 5.8.10.2.

(5) Judgment should be used in determining the appropriate time to apply income averaging on a case by case basis. All circumstances of the taxpayer should be considered when determining the appropriate application of income averaging, including special circumstances and ETA considerations. Below are some examples of when income averaging may or may not be appropriate.
Example: Taxpayer's spouse has not worked for over two and one-half years and has no expectations of returning to work. Do not average income for the spouse's past employment.
Example: Taxpayer has been unemployed for over one year and provided proof that Social Security Disability is the sole source of income. Do not apply income averaging in this case but use current income to determine the taxpayer's future ability to pay.
Example: The taxpayer was incarcerated and unable to work for the past four years and provided proof that a relative is paying for all expenses, including child support payments. The taxpayer has no skills or promise of work in the near future but is planning on attending trade school to improve his chances of getting a job. Do not include income prior to the incarceration. In this case, since the taxpayer has no skills or promise of employment, their future income value may be determined to be zero. Consideration should be given whether it would be in the best interest of the government to accept the offer or reject the offer in favor of other case resolutions.
Example: The taxpayer recently began working after several months of unemployment. Use the most recent three months pay statements to determine future income. Since the taxpayer is a wage earner, the use of income averaging over the prior three years of income is not appropriate.
(6) In situations where the taxpayer's income does not appear to meet their stated living expenses the difference should not be included as additional income to the taxpayer, unless there are clear indications additional income not included on the collection information statement is being received and will continue to be received by the taxpayer. Discussion with the taxpayer/representative and a review of documents submitted by the taxpayer must take place to determine the appropriateness of including an additional amount in the calculation of future income. Verification of the source of unexplained bank deposits or statements from the source of gifts may be required to correctly determine the taxpayer's current income. Telephone contact is recommended to expedite case processing.
Example: The taxpayer has been receiving gifts from their parents to meet current living expenses for the past six months. The taxpayer has no guaranteed right to the funds in the future and the amount does not appear to be based on the transfer of assets to the parents. The gift amount should not be included as income.
Example: The taxpayer has been receiving an amount each month that only began recently, which they state is a gift from a friend. Further research has determined the taxpayer is in business with the friend and the amount is from their business. This amount should be included as income to the taxpayer. Additionally, consideration should be given to referring the taxpayer and the business income tax return to Examination.
Example: The taxpayer had gambling winnings over a period of time, but is not consistent. Do not include those winnings as additional income on the IET. This does not apply to professional gamblers.
Example: The collection information statement (CIS) submitted by the taxpayer included $ 3.000.00 of monthly income, which is verified by paystubs. The CIS submitted by the taxpayer includes $ 4,000.00 of expenses. An additional $ 1,000.00 should not be added to the taxpayer's income based solely on the fact it appears the taxpayer has been meeting the living expenses included on the CIS. Discussion with the taxpayer or representative is necessary to clarify the discrepancy prior to including the amount as additional income.
(7) Employees need to exercise good judgment when determining future income. The history must be clearly documented and support the known facts and circumstances of the case and include analysis of the supporting documents. Each case needs to be evaluated on its own particular set of facts and circumstances. The history must clearly explain the reasoning behind our actions.
Currently 5.8.5.6(7) Future Income Collateral Agreements
(1) In some instances, it may be difficult to calculate the taxpayer's anticipated income. While the use of income averaging is one method available and should be used when averaging the taxpayer's income provides a reasonable calculation of the taxpayer's future earnings potential, it may also be appropriate to use the taxpayer's current income and secure a future income collateral agreement. The use of a future income collateral agreement will protect the government's interest in any substantial increase in the taxpayer's earnings.
(2) A future income collateral agreement is most appropriate in situations where the taxpayer's future income is uncertain, but it is reasonably expected that the taxpayer will be receiving a substantial increase in income.
(3) A future income collateral agreement should not be used to accept an offer for a lesser amount than the calculated RCP. See IRM 5.8.6.3.1, Future Income, for instructions on completing collateral agreements.
Example: A taxpayer is currently in medical school; upon graduation income should increase dramatically. Consider securing a future income collateral agreement.
Example: A taxpayer recently secured a job as an attorney with a starting salary of $80,000 per year, with potential for significant increases in salary. Consider securing a future income collateral agreement.
Example: A taxpayer is a real estate agent who has had two years of high income and the current income is significantly diminished. Based on the current real estate market, it may be appropriate to use the taxpayer's current income and secure a future income collateral agreement in lieu of income averaging.
Example: A taxpayer's RCP is $12,000 but has offered $10,000 plus a future income collateral agreement. A future income collateral agreement is not appropriate in lieu of the taxpayer increasing their offer to the RCP amount. If the taxpayer is not willing to increase their offer to the RCP amount, the offer should be rejected.

If the IRS takes the position that something is a sham trust, they cannot take an inconsistent position that it is not a sham trust.


BEMONT INVESTMENTS, LLC v. U.S., Cite as 105 AFTR 2d 2010-XXXX, 03/09/2010
________________________________________
BEMONT INVESTMENTS, LLC, by and through its Tax Matters Partner, et al., Plaintiffs, v. UNITED STATES OF AMERICA, Defendant.

Case Information:


Code Sec(s):
Court Name: IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF TEXAS SHERMAN DIVISION,
Docket No.: CASE NO. 4:07cv9 (consolidated with 4:07cv10),
Date Decided: 03/09/2010.
Disposition:
HEADNOTE
.
Reference(s):
OPINION

IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF TEXAS SHERMAN DIVISION,
MEMORANDUM OPINION AND ORDER REGARDING MOTION FOR PARTIAL SUMMARY JUDGMENT REGARDING INAPPLICABILITY OF VALUATION MISSTATEMENT PENALTY
Judge: DON D. BUSH UNITED STATES MAGISTRATE JUDGE

Before the Court is Plaintiffs' Motion for Partial Summary Judgment Regarding Inapplicability of Valuation Misstatement Penalty (Dkt. 137). The Court has considered the motion, as well as the response filed by the United States. The motion is GRANTED.

Plaintiffs, the partnerships herein, filed this suit contesting the determination by the Internal Revenue Service that the transactions which created partnership losses were sham transactions to create sham losses. The United States calls these tax shelters Son of Boss transactions.

The very narrow issue presented here is whether the United States can impose a penalty for valuation misstatements. The United States contends that the value of the currency swaps as reported results in a misstatement of over 8000%.
Section 6662 of the Internal Revenue Code allows an imposition of a penalty for underpayment of taxes when any one of the following factors is demonstrated: (1) negligence or disregard of rules or regulations; (2) any substantial understatement of income tax; (3) any substantial valuation misstatement under chapter 1; (4) any substantial overstatement of pension liabilities; or (5) any substantial estate or gift tax valuation understatement. 26 U.S.C. § 6662 (b)(1–5). Section 6662(h)(2) allows for a 40% penalty, if the substantial valuation misstatement is 400% or more. 26 U.S.C. § 6662(h)(2).

In October 2006, the I.R.S. sent both partnerships a Notice of Final Partnership Administrative Adjustment, or FPAA. Curiously, the notice states that, if the partnerships do nothing and do not enter into a binding settlement, they will be billed for any additional tax plus interest that they may owe under the FPAA. Nothing is said about penalties. However, the notice states that, if the partnerships accept the FPAA and sign the required form, then they are signing on for any additional penalties as determined by the I.R.S. This begs the question, why settle?

In the form 886-A, Explanation of Items, attached to the FPAA the I.R.S. notes a number of factors for its decision to disallow the transaction. First, the I.R.S. questions whether BPB Investments is a partnership as a matter of fact. Second, the I.R.S. states that the partnership was formed solely for the purposes of tax avoidance by artificially overstating basis in the partnership interests of its purported partners. Third, the transaction was noted by the I.R.S. as an economic sham with no business purpose. The I.R.S. makes the determination that the foreign currency swaps were acquired directly by the partners and not BPB Investments, LLC. The I.R.S. also concludes that the swap assumed by BM Investments, LLC is disregarded and any gains or losses on the swap is treated as having been realized by the partners. The I.R.S. then determines that the partners of BPB Investments are not to be treated as partners. It is also determined by the I.R.S. that obligations under the short positions transferred to BM Investments LLC are liabilities which reduce the purported partners' bases in BM Investments, LLC in the amount of $202,5000,000. The I.R.S. determines that there was no profit motive with this transaction and that any losses were not at risk. The I.R.S. also determines that none of the partners of BM Investments, LLC or PBP Investments, LLC established an adjusted basis in their respective interests in an amount greater than zero (0). The I.R.S. also determines that the sale, liquidation, or exchange of the above noted partnerships failed to establish a basis above zero for the partners' partnership interest.

Plaintiffs contend that, under well settled Fifth Circuit law, the I.R.S.'s determination that the transaction was a sham — and thus disallowed — forecloses assessment of the 40% penalty. The United States responds that current Fifth Circuit law either (1) does not apply to this transaction because the transaction is distinguishable or has been superseded by changes in the law and Treasury Regulations, or (2) precedent binding decisions were incorrectly decided. The United States points out that, when considering these type of tax shelters, most of the Circuits have upheld the 40% penalty provision. The United States concedes that the case law in the Ninth Circuit and Fifth Circuit reaches a contrary result.
Therefore, the task before the Court is relatively simple. If Fifth Circuit law operates in Plaintiffs' favor, there is little else to do than grant the motion. This Court is bound by precedent, not policy.
Plaintiffs contend that, under Todd v. Comm'r, 862 F.2d 540, 541–42 [63 AFTR 2d 89-523] (5th Cir. 1988), Heasley v. Comm'r, 902 F.2d 380, 382–83 [66 AFTR 2d 90-5068] (5th Cir. 1990), and their progeny, these penalties are not applicable if the I.R.S.'s disallowance of tax benefits is not “attributable to” a valuation misstatement. See Klamath Strategic Inv. Fund v. United States, 472 F. Supp.2d 885, 899–900 [99 AFTR 2d 2007-850] (E.D.Tex. 2007) aff'd in part, 568 F.3d at 553 (holding that a disallowance was not “attributable to” a valuation misstatement when the I.R.S. disallowed a transaction as lacking economic substance). In Todd, the Fifth Circuit held that, because deductions and credits were disallowed for a reason totally unrelated to any valuation overstatement, the resulting underpayment could not be “attributable to a valuation overstatement” and misstatement penalties should not apply.Todd, 862 F.2d at 542.

In Heasley, the Fifth Circuit determined:
Whenever the I.R.S. totally disallows a deduction or credit, the I.R.S. may not penalize the taxpayer for a valuation overstatement included in that deduction or credit. In such a case, the underpayment is not attributable to a valuation overstatement. Instead, it is attributable to claiming an improper deduction or credit.

Heasley, 902 F.2d at 383. The Fifth Circuit has reaffirmed the validity of the Todd/Heasley reasoning. See Weiner v. U.S., 389 F.3d 152, 160–62 [94 AFTR 2d 2004-6518] (5th Cir. 2004) (citing Todd/Heasley with approval); see also Southgate Master Fund, LLC ex rel. Montgomery Capital LLC v. United States, 651 F.Supp. 2d 596, 664 [104 AFTR 2d 2009-6053] (N.D. Tex. 2009) (noting that the Fifth Circuit reaffirmed the validity of Todd/Heasley in the 2004 opinion in Weiner).
Here, the Court must take into account the I.R.S.'s rationale for disallowing the transactions entered into by Plaintiffs. First and foremost, the transaction is not disallowed because of a substantial valuation misstatement. The I.R.S. determined that the transaction was created for no business purpose other than for tax avoidance. Accordingly, the I.R.S. disregards the partnerships and transactions in full. The I.R.S. goes on to hold that the transaction lacked economic substance and was an economic sham. All losses are not allowed. All increase in basis of assets are not allowed to eliminate gain, and increases to the adjusted basis of partnership interests are not allowed. In essence, the I.R.S. rips the whole transaction apart.
But, there is no finding in the explanation of benefits that the reason for doing so is because of a gross valuation misstatement. In fact, in its explanation of Accuracy - Related Penalties, the I.R.S. once again states that the tax shelter was created without substantial authority for the position taken and that there was no reasonable belief by the partners that the position taken was more likely than not the correct treatment of the shelter and related transactions.
The I.R.S. then “hedges its bet”, noting that, in addition, all underpayments of tax are due to, at a minimum, substantial understatements of income tax, gross valuation misstatement(s); or negligence or disregarded rules or regulations.
The United States argues that the earlier Fifth Circuit cases noted above dealt with shelters from the 1980s involving penalty provisions that are no longer in effect. However, the Fifth Circuit's decision in Weiner forecloses this argument. See Weiner, 389 F.3d at 161. Further, the United States's argument that Treas. Reg. Section 1.6662-5(g) mandates a finding that, when the basis is determined to be zero, the deemed valuation misstatement is considered to be a gross valuation statement is vain. As Plaintiffs point out, this section is only applicable when any portion of the underpaymentis attributable to a substantial valuation misstatement. See Treas. Reg., Section 1.6662-5(a).
Are Todd, Heasley and Weiner distinguishable? Although the degree of sophistication or motivation on the part of the taxpayers in the above cases might generate a more sympathetic treatment, the principle relied upon by Plaintiffs and cited above does not appear to hinge on the motives of the taxpayers, but rather how the United States treats the transaction. Therefore, although the United States invites this Court to ignore binding precedent, the Court will not and cannot do so. Any distinctions that might exist as to taxpayer motives, if such exist, are a matter of concern for the Fifth Circuit. Any attempt by the United States to establish a 40% penalty is foreclosed by its own actions in this case.
SO ORDERED.
SIGNED this 9th day of March, 2010.
DON D. BUSH
UNITED STATES MAGISTRATE JUDGE

Wilfulness” for trust fund penalty found both before and after actual knowledge of delinquency
Frohnaple v. U.S., (DC NC 3/8/2010) 105 AFTR 2d ¶ 2010-577
A district court's Magistrate Judge has concluded that the president of a failing company was liable for the trust fund penalty because he “wilfully” failed to pay over payroll taxes under Code Sec. 6672 , for periods both before and after he actually knew that payroll taxes hadn't been paid. His knowledge of the company's inability to meet its debts and cash flow problems, as well as red flags raised as to the integrity of financial information, imposed an affirmative duty on him to ensure that the payroll taxes were being paid.
Background. Where an employer fails to properly pay over its payroll taxes, IRS can seek to collect a penalty equal to 100% of the unpaid taxes from a “responsible person,” i.e., a person who: (1) is responsible for collecting, accounting for and paying over payroll taxes; and (2) willfully fails to perform this responsibility. ( Code Sec. 6672(a) )
In determining whether there is “willfulness” for purposes of Code Sec. 6672 liability, courts have focused on whether the taxpayer had knowledge of non-payment or reckless disregard of whether the payments were being made. Thus, IRS can show willfulness by showing either actual knowledge of non-payment or reckless disregard as to non-payment. Courts have held that although mere negligence isn't enough to establish reckless disregard, gross negligence is. (Thomsen v. U.S. (CA 1 1989), 64 AFTR 2d 89-5752 )
IRS assessed a Code Sec. 6672 penalty against Frohnaple for the tax periods ending June 30, 2000, Sept. 30, 2000, Dec. 31, 2000, Mar. 31, 2001, and June 30, 2001, in the amount of roughly $515,600.

Willfulness found. The Magistrate Judge initially concluded that Frohnaple acted willfully for four of the five quarters at issue—the portion of the last two quarters of 2000 and the first two quarters of 2001—when he was specifically made aware that the payroll taxes had not been paid. On learning of Boling Group's failure to remit payroll taxes, he had an absolute duty to use all corporate funds to pay the currently accruing tax liability, as well as the outstanding tax liability. However, Frohnaple did nothing to ensure that the taxes were paid and, instead, made payments to other creditors. From August 2000 through January 2001, Boling Group's bank deposits totaled more than $1.7 million, none of which was used to pay the payroll taxes. Instead it was used to pay other creditors, as well as employee salaries, including Frohnaple's own salary. Frohnaple's failure to ensure that the delinquent taxes were paid with these funds meets the willful standard of Code Sec. 6672 as a matter of law.
The Magistrate Judge concluded that Frohnaple's reliance on statements by Boling Group's Controller Phyllis Younts (who started in September 2000) that she was “dealing with” the payroll taxes, without doing anything more to investigate and ensure that they were being paid, was simply more than mere negligence. By the time Younts was hired Frohnaple already knew that Boling Group was delinquent in its payment of the taxes and that it was floundering financially. By December 2000, he had questioned Younts' reliability; and he could have examined Boling Group's books to confirm the payments. The Magistrate Judge found that after Frohnaple became aware that the payroll taxes had not been paid by Dizon, he had a duty to exercise greater oversight over the finance department to independently ensure that the payroll taxes were being paid, and his failure to do so during Younts' tenure with Boling Group amounted to careless disregard.
Further, the Magistrate Judge also concluded that for the time period before Frohnaple became aware that the payroll taxes weren't being paid, Frohnaple's failure to confirm whether Boling Group was current with its tax obligations and his failure to take remedial action amounted to reckless disregard for the purpose of finding willfulness. Even if he was never specifically told until August 2000 that Boling Group was delinquent in paying employment taxes, his knowledge of the company's inability to meet its debts and its severe cash flow constraints before August 2000, as well as the red flags that had already been raised about Dizon by the outside accountant as to the integrity of the financial information, gave rise to a duty to confirm that Boling Group was meeting its payroll tax obligations. Frohnaple knew that Boling Group had ongoing financial difficulties, and as a result, Frohnaple extended numerous personal loans to Boling Group for more than $200,000. At least once, Frohnaple personally loaned Boling Group money to meet payroll, and he also knew that the ability to pay suppliers to keep up with production was an ongoing problem.

BARRETT, JR. v. U.S., Cite as 105 AFTR 2d 2010-XXXX, 03/09/2010
________________________________________
CHARLES W. BARRETT, JR., Petitioner-Appellant, v. UNITED STATES OF AMERICA, Respondent-Appellee.
AFFIRMED.
________________________________________

§ 6672 Failure to collect and pay over tax, or attempt to evade or defeat tax.
________________________________________
(a) WG&L Treatises General rule.
Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over. No penalty shall be imposed under section 6653 or part II of subchapter A of chapter 68 for any offense to which this section is applicable.
(b) Preliminary notice requirement.
(1) In general.
No penalty shall be imposed under subsection (a) unless the Secretary notifies the taxpayer in writing by mail to an address as determined under section 6212(b) or in person that the taxpayer shall be subject to an assessment of such penalty.
(2) Timing of notice.
The mailing of the notice described in paragraph (1) (or, in the case of such a notice delivered in person, such delivery) shall precede any notice and demand of any penalty under subsection (a) by at least 60 days.
(3) Statute of limitations.
If a notice described in paragraph (1) with respect to any penalty is mailed or delivered in person before the expiration of the period provided by section 6501 for the assessment of such penalty (determined without regard to this paragraph ), the period provided by such section for the assessment of such penalty shall not expire before the later of—
(A) the date 90 days after the date on which such notice was mailed or delivered in person, or
(B) if there is a timely protest of the proposed assessment, the date 30 days after the Secretary makes a final administrative determination with respect to such protest.
(4) Exception for jeopardy.
This subsection shall not apply if the Secretary finds that the collection of the penalty is in jeopardy.
(c) Extension of period of collection where bond is filed.
(1) In general.
If, within 30 days after the day on which notice and demand of any penalty under subsection (a) is made against any person, such person—
(A) pays an amount which is not less than the minimum amount required to commence a proceeding in court with respect to his liability for such penalty,
(B) files a claim for refund of the amount so paid, and
(C) furnishes a bond which meets the requirements of paragraph (3) ,

no levy or proceeding in court for the collection of the remainder of such penalty shall be made, begun, or prosecuted until a final resolution of a proceeding begun as provided in paragraph (2) . Notwithstanding the provisions of section 7421(a) , the beginning of such proceeding or levy during the time such prohibition is in force may be enjoined by a proceeding in the proper court. Nothing in this paragraph shall be construed to prohibit any counterclaim for the remainder of such penalty in a proceeding begun as provided in paragraph (2) .
(2) Suit must be brought to determine liability for penalty.
If, within 30 days after the day on which his claim for refund with respect to any penalty under subsection (a) is denied, the person described in paragraph (1) fails to begin a proceeding in the appropriate United States district court (or in the Court of Claims) for the determination of his liability for such penalty, paragraph (1) shall cease to apply with respect to such penalty, effective on the day following the close of the 30-day period referred to in this paragraph .
(3) Bond.
The bond referred to in paragraph (1) shall be in such form and with such sureties as the Secretary may by regulations prescribe and shall be in an amount equal to 11/2 times the amount of excess of the penalty assessed over the payment described in paragraph (1) .
(4) Suspension of running of period of limitations on collection.
The running of the period of limitations provided in section 6502 on the collection by levy or by a proceeding in court in respect of any penalty described in paragraph (1) shall be suspended for the period during which the Secretary is prohibited from collecting by levy or a proceeding in court.
(5) Jeopardy collection.
If the Secretary makes a finding that the collection of the penalty is in jeopardy, nothing in this subsection shall prevent the immediate collection of such penalty.
(d) Right of contribution where more than 1 person liable for penalty.
If more than 1 person is liable for the penalty under subsection (a) with respect to any tax, each person who paid such penalty shall be entitled to recover from other persons who are liable for such penalty an amount equal to the excess of the amount paid by such person over such person's proportionate share of the penalty. Any claim for such a recovery may be made only in a proceeding which is separate from, and is not joined or consolidated with—
(1) an action for collection of such penalty brought by the United States, or
(2) a proceeding in which the United States files a counterclaim or third-party complaint for the collection of such penalty.
(e) Exception for voluntary board members of tax-exempt organizations.
No penalty shall be imposed by subsection (a) on any unpaid, volunteer member of any board of trustees or directors of an organization exempt from tax under subtitle A if such member—
(1) is solely serving in an honorary capacity,
(2) does not participate in the day-to-day or financial operations of the organization, and
(3) does not have actual knowledge of the failure on which such penalty is imposed.

The preceding sentence shall not apply if it results in no person being liable for the penalty imposed by subsection (a) .

Offer in compromise - abuse of discretion issue

Gregg Bartl, et ux. v. Commissioner, TC Memo 2010-43 , Code Sec(s) 6320; 6330; 7122.
________________________________________
GREGG BARTL AND BETH FEINSTEIN-BARTL, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent .
Case Information:
Code Sec(s): 6320; 6330; 7122
Docket: Docket No. 22866-07L.
Date Issued: 03/4/2010
Judge: Opinion by LARO
Discussion
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. 5.8.4.4 (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:
Amount
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.
________________________________________
1
Unless otherwise indicated, section references are to the applicable version of the Internal Revenue Code. Some dollar amounts are rounded.
________________________________________
2
The extent of her medical expenses is not discernible from the record.
________________________________________
3
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”.
________________________________________
4
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.
________________________________________
5
The sum of individual expenses does not equal the total expenses because of rounding.
________________________________________
6
Mr. Bartl owed $5,970 in past-due medical expenses, but apparently $607 of that debt was forgiven.
________________________________________
7
Appeals apparently located at least seven articles published during January and

ADVANCE RELEASE Documents, R.P. Fairlamb, U.S. Tax Court, (Feb. 5, 2010)
Dec. 58,126(M)
Code Sec. 6330, Code Sec. 7122

Collection: Proposed levy: Offer in compromise (OIC): Doubt as to collectibility: Calculation of future income: Abuse of discretion


T.C. Memo. 2010-22

REMINGTON P. FAIRLAMB, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
UNITED STATES TAX COURT. Docket No. 19122-07L. Filed February 4, 2010.
Tony Mankus , for petitioner.

Derek W. Kaczmarek , for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION
THORNTON, Judge: Pursuant to section 6330(d) , petitioner seeks judicial review of respondent's determination to proceed with a proposed levy to collect petitioner's unpaid Federal income tax liabilities for 2002, 2003, and 2004. 1 The issue for decision is whether respondent abused his discretion in rejecting petitioner's proposed offer-in-compromise.

FINDINGS OF FACT
The parties have stipulated some facts, which we so find. When he petitioned the Court, petitioner resided in Illinois.

Petitioner, born in 1942, has worked for many years as an independent sales representative in the paint industry. In March 2005 he incorporated his business activities, forming Phoenix Sales & Service, L.L.C. (the LLC), in which he and his wife each owned a 50-percent interest.

Petitioner did not timely file Federal income tax returns for taxable years 1998 through 2004. After making substitutes for returns, on September 13, 2004, respondent assessed petitioner's income taxes for 1998 through 2001. On April 9, 2005, respondent sent petitioner notices of intent to levy with respect to his tax years 1998, 1999, 2000, and 2001. Insofar as the record shows, petitioner submitted no request for a collection due process hearing with respect to these notices.

On or about April 29, 2005, petitioner filed amended Federal income tax returns for the years 1998 through 2002 and original Federal income tax returns for 2003 and 2004. He did not pay the taxes reported on these returns. On October 6, 2005, respondent sent petitioner a Letter 1058, Final Notice—Notice of Intent to Levy and Notice of Your Right to a Hearing, with regard to petitioner's 2002, 2003, and 2004 income taxes, showing an unpaid balance of $108,486 for these years. 2 On October 14, 2005, petitioner submitted a timely Form 12153, Request for a Collection Due Process Hearing, on which he indicated that enforcement action would create a hardship on him and that he intended to submit an offer-in-compromise.

Petitioner's First Offer-in-Compromise
On December 29, 2005, respondent received from petitioner Form 656, Offer in Compromise (the first offer), offering to pay $150,000 to compromise his Federal income tax liabilities for taxable years 1998 through 2004, which exceeded $400,000. Petitioner proposed to pay $1,389 per month for 108 months. This offer indicated that it was based on doubt as to collectibility; i.e., petitioner represented that he had insufficient assets to pay the full amount of his tax liability. As required, petitioner submitted with the first offer Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, and Form 433-B, Collection Information Statement for Businesses, with respect to the LLC.

Respondent accepted petitioner's offer-in-compromise for processing. By letter dated April 25, 2006, however, respondent's offer-in-compromise specialist (the first OIC specialist) rejected the proposed terms of the first offer, determining that any acceptable offer should be at least $372,949, calculated as the sum of $18,755 of total net equity in assets and $354,194 of total future income.

By letter dated May 5, 2006, petitioner's counsel took exception to the determinations made by the first OIC specialist. Petitioner's counsel asserted, among other things, that petitioner was elderly and in poor health and planned to retire by age 70 if his health permitted him to work that long. Petitioner's counsel contended that petitioner's future income should be measured by reference to the 59 months that he said remained until petitioner reached age 70.

By letter dated May 11, 2006, the first OIC specialist agreed that petitioner's future income should be measured by the months remaining until he reached age 70 but asserted that the correct number of these remaining months was 69 rather than 59, as petitioner asserted. Using 69 months of future income, the first OIC specialist lowered the minimum acceptable offer to $149,286, an amount that was slightly less than petitioner's original $150,000 offer. In a phone call with the first OIC specialist, petitioner's counsel indicated that he agreed with most of the recalculations, except he contended that petitioner's future income should be calculated using 67 months instead of 69 months, because it would take about 2 months to have the offer accepted, and that this adjustment would reduce the offer by about $4,000.

Petitioner's Second Offer-in-Compromise
This position was memorialized in petitioner's amended offer-in-compromise (the second offer), which respondent received on May 22, 2006. Petitioner offered to pay $145,433 to compromise his Federal income tax liabilities for taxable years 1998 through 2004. He proposed to pay $16,332 within 30 days of the second offer's acceptance and $1,927 per month for the next 67 months, until he reached age 70. In a report dated May 24, 2006, the first OIC specialist recommended to her group manager that petitioner's second offer be accepted because it represented “the most that can be expected to be paid by this taxpayer” taking into account “Special circumstance[s] due to the taxpayers [sic] age and health”. 3

On June 22, 2006, a different offer-in-compromise specialist (the second OIC specialist) reviewed the second offer and determined that it should be rejected. By letter dated June 28, 2006, the second OIC specialist informed petitioner that, notwithstanding the contrary recommendation of the first OIC specialist, he would recommend that the second offer not be accepted because “it is not in the best interests of the government”. As grounds for this conclusion, the second OIC specialist asserted that petitioner had a long history of not filing and not paying income taxes and had formed the LLC in 2005 to reduce his self-employment taxes. The letter stated that petitioner should make any response within 2 days because the second OIC specialist would be retiring then. By letter dated August 21, 2006, respondent's territory manager formally notified petitioner that the second offer had been rejected because it was determined not to be in the Government's best interests.

In a letter dated September 13, 2006, petitioner's counsel disputed the rejection of the second offer and requested that the case be transferred to respondent's Appeals Office.

Petitioner's Third Offer-in-Compromise
Petitioner's case was assigned to a settlement officer in respondent's Appeals Office. After discussions with petitioner's counsel, the settlement officer indicated by letter dated May 14, 2007, that she had determined petitioner's reasonable collection potential to be $241,356. She indicated that she had calculated petitioner's future income assuming that he would work for 60 more months and retire at age 70. The letter stated that “there are still no guarantees of acceptance since we need the approval of my Territory Manager and Counsel approval.”

Petitioner accepted most of the settlement officer's calculations. On June 12, 2007, respondent received a second amended offer-in-compromise (the third offer) from petitioner that was based on doubt as to collectibility and that proposed to pay $241,356 to compromise his income tax liabilities for taxable years 1998 through 2004. He proposed to pay $4,023 within 30 days of the third offer's acceptance and $4,023 per month for the next 59 months.

The third time was not a charm. By letter dated June 20, 2007, the settlement officer informed petitioner that his third offer had not been approved. Citing provisions of the Internal Revenue Manual (IRM), the letter indicated that petitioner's reasonable collection potential had been recalculated to be $523,958, by projecting his future income over the 107 months asserted to remain in the collection period. The letter proposed that petitioner's liabilities could be resolved in one of two ways: (1) By a long-term deferred offer-in-compromise to pay $4,897 for 107 months; or (2) by a part-payment installment agreement, which would require petitioner to liquidate certain assets and to make monthly payments of $4,053, apparently for 167 months (the 107 months alleged to remain in the collection period plus 5 years), with the possibility that the monthly amount “could be adjusted to a lesser amount when you retire if your income is reduced.”

By letter dated July 2, 2007, petitioner's counsel disagreed with the settlement officer's application of the IRM provisions and requested that the settlement officer and her manager reconsider the third offer.

Notice of Determination
On August 6, 2007, respondent issued a Notice of Determination Concerning Collection Action(s) Under Section 6320 and/or 6330, with respect to petitioner's tax years 2002, 2003, and 2004, sustaining the proposed levies for those years (the notice). The notice states in part:

[T]he Appeals Team Manager confirmed that the offer could not be accepted because the offer was a deferred payment offer which is to be paid over the life of the collection statute. Your offer stipulated a payment term of 59 months (your remaining projected work life until retirement) rather than the 107 months remaining on the collection statute. Consequently, your offer is considered a deferred payment offer with special circumstances.

IRM 5.8.11.2(2) states taxpayers can have an offer accepted under Doubt as to Collectibility with special circumstances when their reasonable collection potential is less than their liability, but there are economic hardship factors that would justify accepting the offer for an amount less than the reasonable collection potential. Economic hardship is further defined in IRM 5.8.11.2.(2) as unable to pay reasonable basic living expenses. Since you are able to meet your basic living expenses, economic hardship does not apply to your situation. Therefore, your offer could not be accepted.

* * * * * * *

Offer Discussion and Analysis

Based on the financial data you provided, you are currently unable to pay the entire liability. Therefore an offer-in-compromise based on doubt as to collectibility would initially appear to be a more appropriate and less intrusive means of collection. However, your offer amount does not equal or exceed your Reasonable Collection Potential (RCP) of $523,988.00. Calculation of your RCP in the amount of $523,958.00 was based on Net Realizable Equity (NRE) in assets totaling $90,287.00 and Future Income Potential (FIP) of 433,671.00. For a long term deferred offer, future income is projected over the life of the collection statute.

OPINION
A. Collection Procedures
Section 6330 requires the Secretary to furnish a person notice and opportunity for a hearing before making a levy on the person's property. At the hearing, the person may raise any relevant issue relating to the unpaid tax or proposed levy, including spousal defenses, challenges to the appropriateness of the collection action, and offers of collection alternatives. The person may challenge the existence or amount of the underlying tax liability for any period only if the person did not receive a notice of deficiency or did not otherwise have an opportunity to dispute the liability. Sec. 6330(c)(2)(B) ; Sego v. Commissioner , 114 T.C. 604, 609 (2000). Once the Commissioner's Appeals Office issues a notice of determination, the person may seek judicial review in this Court. Sec. 6330(d)(1) .

Because petitioner has not challenged his underlying liability, our review is for abuse of discretion. Sego v. Commissioner , supra at 610. Under this standard of review, the question is whether respondent's rejection of petitioner's offers-in-compromise was arbitrary, capricious, or without sound basis in fact or law. See, e.g., Murphy v. Commissioner , 125 T.C. 301, 320 (2005), affd. 469 F.3d 27 (1st Cir. 2006). On brief the parties focus primarily on respondent's rejection of the third and final offer as the precipitating event for the notice. We shall do the same.

B. Offers-in-Compromise
Section 7122(a) authorizes the Secretary to compromise any civil or criminal case arising under the internal revenue laws. 4 The regulations set forth three grounds for compromising a liability: (1) Doubt as to liability; (2) doubt as to collectibility; and (3) promotion of effective tax administration. Sec. 301.7122-1(b) , Proced. & Admin. Regs. Petitioner based each of his three offers-in-compromise on doubt as to collectibility.

For purposes of evaluating an offer-in-compromise, doubt as to collectibility exists “where the taxpayer's assets and income are less than the full amount of the liability.” Sec. 301.7122-1(b)(2) , Proced. & Admin. Regs. An offer-in-compromise based on doubt as to collectibility “will be considered acceptable if it is unlikely that the tax can be collected in full and the offer reasonably reflects the amount the Service could collect through other means * * * This amount is the reasonable collection potential of a case.” Rev. Proc. 2003-71 , sec. 4.02(2) , 2003-2 C.B. 517, 517. In some cases, the Commissioner will accept an offer-in-compromise of less than the reasonable collection potential if there are “special circumstances.” Id.

The IRM describes procedures for analyzing a taxpayer's financial condition to determine reasonable collection potential. See IRM pt. 5.8.5 (Sept. 1, 2005). 5 The IRM defines reasonable collection potential as net equity plus future income. IRM pt. 5.8.11.2 (Sept. 1, 2005). “Future income” is defined as “an estimate of the taxpayers [sic] ability to pay based on an analysis of gross income, less necessary living expenses, for a specific number of months into the future.” IRM pt. 5.8.5.5(1). For a deferred payment offer, the general rule is that future income should be projected for “the number of months remaining on the statutory period for collection.” Id. The IRM also instructs the offer-in-compromise examiner to “Consider the taxpayers [sic] overall general situation including such facts as age, health, marital status, number and age of dependents, highest education or occupational training, and work experience.” IRM pt. 5.8.5.5(3). More specifically, the IRM states: “Some situations may warrant placing a different value on future income than current or past income indicates”. IRM pt. 5.8.5.5(5). By way of illustration, the IRM states that if “A taxpayer is elderly, in poor health, or both and the ability to continue working is questionable”, then the offer-in-compromise examiner should “Adjust the amount or number of payments to the expected earnings during the appropriate number of months. Consider special circumstance situations when making any adjustments”. Id.

The IRM also describes procedures for processing offers-in-compromise in the Commissioner's Appeals Office. See IRM pt. 8.23.3 (Oct. 16, 2007). It states: “IRM 5.8 is the primary authority for evaluating offers and should be followed when evaluating an appealed rejection. Appeals does not have the authority to disregard established guidance.” IRM pt. 8.23.3.3(1).

C. Analysis of Respondent's Determination
Respondent's settlement officer followed the just-cited IRM directives in initially recommending that petitioner's third offer be accepted. In determining petitioner's reasonable collection potential, she projected his future income for 60 months, which she noted was his “remaining working life until 70”. She noted in her case activity report:

Determination is made to recommend the offer for acceptance. Tp [taxpayer] owns no realty and only has minimal personal assets. His most important asset is his income as an independent paint sales manufacturing representative. This income is the source that will fund the offer of $241,356.00. Distraint action against this income could be a possibility but would not provide any more funds into the Treasury than is provided via monthly payments of $4,022.60 via the offer. Also continued levy could result in tp's dismissal. If the taxpayer maintains the offer, he will liquidate the back taxes and remain compliant with current taxes as well. Tp is now 65 years old. The older he becomes, the less likely the Service is to collect the liability or enforce collection.

Ultimately, the settlement officer was overruled by her superiors, and petitioner's third offer was rejected. The reasons articulated in the notice are somewhat cryptic. The notice cites IRM pt. 5.8.11.2(2) for the proposition that “[t]axpayers can have an offer accepted under Doubt as to Collectibility with special circumstances when their reasonable collection potential is less than their liability, but there are economic hardship factors that would justify accepting the offer for an amount less than the reasonable collection potential.” Applying this standard, the notice concludes that petitioner did not qualify for an offer-in-compromise based on doubt as to collectibility with special circumstances because “you are able to meet your basic living expenses”.

This rationale is deficient for at least two reasons. First, the notice misstates IRM pt. 5.8.11.2(2), which states that an offer-in-compromise based on doubt as to collectibility with special circumstances may be accepted where there are “economic hardship or public policy/equity factors that would justify accepting the offer”. (Emphasis added.) More fundamentally, according to the IRM an offer-in-compromise is to be evaluated as based on doubt as to collectibility with special circumstances (as opposed to plain-vanilla doubt as to collectibility) only if it is “for an amount less than the reasonable collection potential”. Id.

Petitioner's third offer was for the exact amount that the settlement officer had initially calculated to be his reasonable collection potential. Addressing this issue obliquely, the notice states (without citation of authority): “For a long term deferred offer, future income is projected over the life of the collection statute.” The notice fails to take into account, however, IRM pt. 5.8.5.5(5), which, as previously discussed, directs that in computing a taxpayer's future income, adjustments should be made for a taxpayer who is elderly or in poor health and whose ability to continue working is questionable. Following this directive, the settlement officer initially calculated petitioner's future income under the assumption that he would work until age 70. There is no indication in the record that any determination was ever made that petitioner would be able to work beyond age 70. Rather, the record strongly suggests that the determination in the notice was based on a misapplication of the IRM directives.

The Commissioner's internal procedures, as reflected in the IRM, do not have the force of law, and deviation from them does not necessarily render the Commissioner's action invalid. Vallone v. Commissioner , 88 T.C. 794, 807-808 (1987). Nevertheless, the determination in this case, which was based wholly on misapplication of internal procedures, cannot be said to have a sound basis in law or fact.

On brief respondent argues that the offer-in-compromise was properly rejected because of petitioner's alleged “long history of non-compliance and his affirmative tax avoidance actions”. 6 In making this argument, respondent cites section 301.7122-1(b)(3)(iii) , Proced. & Admin. Regs., which provides: “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.” (Emphasis added.) Because petitioner's various offers were all based on doubt as to collectibility rather than effective tax administration, this regulatory provision is not, by its terms, applicable. 7 In any event, we do not believe that respondent's ultimate determination, as explained in the notice, can fairly be construed as predicated on this rationale. In initially recommending petitioner's third offer, the settlement officer expressed no concern about this issue, and there is no indication in the record that this consideration played any role in the decision to overturn the settlement officer's initial recommendation.

In the light of the inadequacy of the reasons given in the notice for rejecting petitioner's third offer, which the settlement officer, with seemingly more soundly reasoned analysis, had initially recommended accepting, we are unable to conclude whether it was an abuse of discretion for respondent to determine to proceed with the proposed collection action for petitioner's 2002, 2003, and 2004 tax liabilities. We will remand the case to respondent's Appeals Office for further consideration and clarification and to allow petitioner, if he wishes, to propose a new collection alternative.

D. Evidentiary Issues
At trial the Court received into evidence a number of petitioner's exhibits over respondent's objection that they are outside the administrative record. On similar grounds respondent objected to petitioner's testimony and, in a motion in limine, to the testimony of petitioner's witness, a business associate. On brief respondent has renewed his objections.

Petitioner suggests that the disputed documents should be considered part of the administrative record because most of them are IRS documents and the others were sent to petitioner by the IRS. 8 Petitioner complains that respondent evinces a double standard in that, while insisting that judicial review should be limited to the administrative record, respondent seeks to raise in these proceedings for the first time issues and arguments that were never raised in the administrative hearings. 9 Petitioner states on brief: “The Petitioner cannot help but further wonder whether Respondent's strenuous efforts to limit the judicial review to the administrative file is not an effort to generally hamstring the tax courts and the taxpayers in order to avoid having its procedural missteps brought to light.”

The Tax Court does not follow the administrative record rule. See Robinette v. Commissioner , 123 T.C. 85 (2004), revd. 439 F.3d 455 (8th Cir. 2006). In any event, in reaching our decision we have not relied upon any of the disputed documents or their contents or any of the trial testimony. The portions of the record as to which respondent has raised no objection are sufficient to sustain our decision.

To reflect the foregoing,

An appropriate order will be issued .


Footnotes

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

2 In addition to proposing the levy, on Oct. 24, 2005, respondent filed a notice of Federal tax lien with respect to petitioner's tax years 2002, 2003, and 2004. Petitioner did not file a Form 12153, Request for a Collection Due Process Hearing, in response to this notice of Federal tax lien, and it is not at issue in this proceeding.

3 The report indicates that petitioner had provided verification from two physicians regarding his health and states that petitioner “has coronary artery disease, hypertension, hyperlipidemia and problems with recurring sinusitis and pneumonia.”

4 Sec. 6331(k) generally prohibits the IRS from making a levy on a taxpayer's property while an offer-in-compromise is pending with the IRS. An offer-in-compromise becomes pending when it is accepted for processing. Rev. Proc. 2003-71 , sec. 5.01 , 2003-2 C.B. 517, 518.

5 The parties have stipulated the relevant provisions of the Internal Revenue Manual (IRM) referenced in this opinion.

6 Petitioner contests these assertions as unfounded in the record.

7 In Oman v. Commissioner , T.C. Memo. 2006-231, this Court found that IRS directives as contained in IRM pt. 5.8.7.6(5) (Nov. 15, 2004) and policy statement P-5-100 (Jan. 30, 1992) were inconsistent as to whether doubt as to future compliance is a sufficient reason to reject an offer-in compromise. The Court remanded for further consideration and clarification the Commissioner's determination rejecting on this ground the taxpayer's proposed offer-in-compromise based on doubt as to collectibility.

8 Evaluation of the parties' competing claims in this regard is complicated by the fact that respondent has not offered into evidence a certified copy of the entire administrative record. Although the parties have stipulated numerous documents that might properly appear in an administrative record, they have not filed with the Court the entire administrative record, stipulated as to its genuineness. Cf. Rule 217 (describing procedures for disposing of a declaratory judgment action on the administrative record). From the absence of certain documents cross-referenced in the stipulated exhibits, it is apparent that the entire administrative record is not in evidence.

9 For instance, on brief respondent disputes whether petitioner's health would necessitate his retirement by age 70. Insofar as the record shows, however, respondent's officers who examined petitioner's offers-in-compromise were satisfied with the documentary evidence petitioner submitted in this regard, and the notice of determination does not suggest that this issue played any role in the ultimate rejection of petitioner's offer-in-compromise.



Back to Top
Show MetadataHide Metadata
METADATA
title R.P. Fairlamb
search-title Case: ADVANCE RELEASE Documents, R.P. Fairlamb, U.S. Tax Court, (Feb. 5, 2010)
primary-class case-law/case
wk-da number WKUS_TAL_1432
CCH PubVol adc01
language http://psi.oasis-open.org/iso/639/#eng
region United States [http://wk-us.com/meta/regions/#US]
publisher http://wk-us.com/meta/publishers/#CCH
publishing-status new
publishing-dates available-date:
modified-date:
revised-date:
sort-date: 2010-02-05

key-phrase Collection
key-phrase Proposed levy
key-phrase Offer in compromise (OIC)
key-phrase Doubt as to collectibility
key-phrase Calculation of future income
key-phrase Abuse of discretion
document-transformation-history SOURCE-CRC: 931114030
G2I-VERSION: Group2Interchange-RELEASE-03-14-0012
G2I-TRANSFORMATION-DATE: 2010-02-26
I2A-VERSION: I2A-03-15-0006
I2A-TRANSFORMATION-DATE: 2010-02-26

wkcase-law:metadata parties in-re:R.P. Fairlamb

case-abbrev-name R.P. Fairlamb
court U.S. Tax Court [http://wk-us.com/meta/courts/#US-FJ-TAX]
document-date , precision: day
2010-02-05