Dkt. No. 8431-05L , TC Memo. 2007-312, October 15, 2007.
[Code Sec. 7122]
Offer-in-compromise: Dissipation of assets: Abuse of discretion.
An IRS Appeals officer abused her discretion by including the
full amount of an individual's dissipated assets in his net
realizable equity (NRE) during her evaluation of his offer-in-compromise.
The the individual's NRE should not have included amounts paid
for: attorney's fees incurred in the representation of his tax
case; attorney's fees incurred in a civil lawsuit he filed for
unpaid wages; an estimated tax payment made for one of the tax
years at issue; and a lump-sum payment of delinquent child support.
The case was remanded to Appeals for 60 days, during which time
the individual had the opportunity to amend his offer based
on the revised amount of his tax liability and in consideration
of his available monthly income. --
P filed a petition for judicial review in response to R's determination
to proceed with collection by lien and/or levy of assessed income
tax liabilities, plus additions to tax and interest, for 1996-2002.
R's settlement officer rejected P's offer-in-compromise because
it was not a viable alternative to collection. The settlement
officer, applying guidelines established by the Internal Revenue
Manual, determined that P should include in the amount of his
offer-in-compromise the value of certain "dissipated assets",
which, because of the dissipation, became unavailable for payment
of P's delinquent income tax obligation. The settlement officer
required this inclusion, notwithstanding that some of the assets
had been used for proper purposes.
Held: R's rejection of P's offer-in-compromise was an abuse
of discretion, and this case will be remanded to the IRS Appeals
Office so that P may make a revised offer reflecting a reduced
amount of dissipated assets.
NIMS, Judge: This case arises from a petition for judicial
review filed in response to a Notice of Determination Concerning
Collection Action(s) Under Section 6320 and/or 6330. Unless
otherwise indicated, all section references are to the Internal
Revenue Code in effect for the years in issue as amended, and
all Rule references are to the Tax Court Rules of Practice and
Procedure. The issue for decision is whether respondent's rejection
of petitioner's offer-in-compromise was an abuse of discretion.
This case was submitted fully stipulated pursuant to Rule 122,
and the facts are so found. The stipulations of the parties,
with accompanying exhibits, are incorporated herein by this
reference. At the time he filed the petition, petitioner resided
Petitioner is a practicing physician specializing in adult
and pediatric urology. He operates his own medical practice,
David L. Samuel, M.D., A Professional Medical Corporation. Petitioner
is also a partner in Pontchartrain Lithotripsy, LLC. Prior to
starting his own practice, petitioner practiced with another
urologist until sometime in 2002.
Beginning on February 3, 2003, petitioner began filing delinquent
individual income tax returns for 1996-2002. The dates on which
petitioner filed the returns and the Internal Revenue Service
(IRS) assessed the taxes due are as follows:
Year Date Return Filed Date Taxes Assessed
1996 January 26, 2004 March 8, 2004
1997 February 3, 2003 March 24, 2003
1998 February 3, 2003 March 31, 2003
1999 February 3, 2003 March 24, 2003
2000 February 3, 2003 March 3, 2003
2001 February 3, 2003 March 3, 2003
2002 October 3, 2003 November 3, 2003
The so-called "TXMODA" computer transcripts of petitioner's
IRS accounts for each of these years show adjusted gross income
posted from petitioner's tax returns as follows:
Petitioner did not remit any payments for the amounts due on
these returns when they were filed.
Respondent assessed the taxes shown on the above returns. Calculated
as of January 1, 2005, petitioner owed in excess of $773,368
for the tax years 1996-2002, inclusive.
In October 2004, petitioner filed his 2003 individual income
tax return. Withheld taxes for 2003 exceeded total tax by $8,016.
The excess withheld taxes combined with an estimated tax payment
of $15,600 resulted in a $23,616 overpayment of tax for 2003.
This overpayment was applied to petitioner's 1996 unpaid tax
Respondent sent the following collection notices to petitioner
for unpaid Federal income taxes: Notice of Federal Tax Lien
Filing and Your Right to a Hearing Under IRC 6320, dated October
2, 2003, for the 1997-2001 tax years; a Final Notice - Notice
of Intent to Levy and Notice of Your Right to a Hearing, dated
February 10, 2004, for 2002; a Final Notice - Notice of Intent
to Levy and Notice of Your Right to a Hearing, dated March 8,
2004, for 1996; and a Notice of Federal Tax Lien Filing and
Your Right to a Hearing Under IRC 6320, dated April 1, 2004,
for 1996. (Neither party has explained this 1996 discrepancy.)
Petitioner timely requested a hearing in response to each of
these Notices. On each Form 12153, Request for a Collection
Due Process Hearing, petitioner stated that he was preparing
a Form 433-A, Collection Information Statement for Wage Earners
and Self-Employed Individuals, and a Form 433-B, Collection
Information Statement for Businesses, in order to submit an
offer-in-compromise for his tax liabilities.
On July 8, 2004, petitioner submitted a Form 656, Offer in
Compromise, along with two different Forms 433-A (both dated
June 1, 2004) and a Form 433-B for his professional corporation.
Petitioner submitted the offer on the basis of "doubt as
to collectibility". Petitioner was not then, and is not
now, contesting his 1996-2002 income tax liabilities. Petitioner
offered to pay $30,000 to compromise his 1996-2002 tax liabilities.
This was a short-term deferred payment offer payable in monthly
installments of $1,250 for 24 months.
On one of the Forms 433-A, petitioner indicated that he operated
David L. Samuel, M.D., P.C., and identified this corporation
as his employer for the prior 4 years. Petitioner listed his
assets as $1,409.89 in a checking account, a house valued at
$330,000 (with a loan balance of $322,025), and furniture/personal
effects worth $10,000. Petitioner indicated that he was the
plaintiff in a $25,000 civil lawsuit for unpaid wages. Petitioner
showed his only source of income as monthly wages of $7,963.
Petitioner reported monthly expenses of: $976 for food, clothing,
and miscellaneous (noted as the statutory allowance); $1,024
for housing and utilities (noted as the statutory allowance);
$50 for health care; $2,470 for taxes; $2,750 for court-ordered
payments (child support); and $250 for other expenses (later
identified as attorney's fees for representation in the instant
matter). The second Form 433-A contained the same information
as the first, except that it reported gross monthly wages of
$8,144.10 and monthly medical expenses of $41.20.
The Form 433-B for David L. Samuel, M.D., P.C., reflected that
petitioner was the only shareholder. The total accounts/notes
receivable of the medical corporation was shown as $87,388.73.
The only other assets disclosed on the Form 433-B were $613.74
in a bank account, $200.22 of cash on hand, and office furniture
valued at $4,000. In the "Investments" section, petitioner
listed one share of Pontchartrain Lithotripsy, LLC, with a value
of $10,000. Total monthly income for petitioner's professional
corporation consisted of $26,435.20 in gross receipts and $4,416
in dividends for a total of $30,851.20. Petitioner reported
monthly expenses totaling $33,523.93 for the professional corporation.
Petitioner's offer-in-compromise was accepted for processing
and forwarded to respondent's New Orleans Compliance Office
Petitioner requested a face-to-face hearing at the New Orleans
Appeals Office, to which the IRS agreed. The face-to-face hearing
was conducted in New Orleans on January 31, 2005. During the
face-to-face hearing, petitioner disclosed that he sold an interest
in Fairway Medical Center (FMC) in June 2003, for $108,000 and
refinanced his home in September 2003, for a net cash payment
to him of $25,158. Petitioner also discussed his ownership interest
in Pontchartrain Lithotripsy, LLC, from which he reported $51,922
of income in 2003, but which he designated on the Form 433-B
as a $10,000 investment held by his professional corporation.
Petitioner explained that his $10,000 initial investment in
Sabine Lithotripsy, LLC (which dissolved into four entities,
one of which was Pontchartrain Lithotripsy, LLC) entitles him
to access a medical mobile unit for use in his medical practice.
He also receives monthly income receipts, which he said are
deposited into his business account. After the hearing, petitioner
provided a list of the monthly income received from Pontchartrain
Lithotripsy. This income totaled $61,440 for 2004.
Petitioner clarified other issues at the hearing. He indicated
that the lower of the two monthly income amounts on the different
Forms 433-A, $7,963, should be used for consideration of the
offer-in-compromise. Petitioner asserted that his interest in
his professional corporation is limited to the value of the
medical and office equipment (which he estimated to be $3,630)
and that a patient list in the urology field has little or no
value. Petitioner also gave details regarding the abovementioned
lawsuit against his previous employer to collect back wages.
He said that billings show that he is entitled to $60,000 plus
On February 10, 2005, the settlement officer sent petitioner
a letter with her preliminary determination. She stated her
position that petitioner had "dissipated assets" with
a disregard of his outstanding tax liabilities when he sold
his interest in FMC and refinanced his home. She reasoned that
at the time the transactions occurred, the outstanding assessed
balances due to the IRS exceeded the amounts realized from the
dissipated assets. In addition, she noted that none of the funds
were remitted to the IRS, and she took the position that petitioner
did not use any of the funds for necessary expenses. She said
that unless petitioner increased his offer to $163,158 ($30,000
initial offer amount plus 100 percent of the dissipated asset
values), she would assume that petitioner was not interested
in pursuing the matter further, and that she would recommend
that Appeals issue a notice of determination.
The settlement officer indicated that her preliminary determination
did not represent a final amount determined to be an acceptable
offer. She noted that she did not include in the reasonable
collection potential calculation any amounts for petitioner's
interest in his civil lawsuit, his ownership interest in his
medical practice, or his interest in Pontchartrain Lithotripsy.
On March 2, 2005, petitioner responded to the preliminary determination
letter. In his letter he said that when he "lost his job"
practicing with another urologist in 2002, he accumulated substantial
debt setting up his new medical practice and paying necessary
living expenses and fell behind on his child support payments.
The letter claimed that the payments made from the funds realized
from the FMC sale in July and home refinancing in September
2003, were necessary to pay judgments rendered against him and
to avoid additional legal proceedings. Petitioner provided details
on the distribution of the proceeds of these two transactions.
He alleged that he distributed the $108,000 from the sale of
his interest in FMC as follows:
Payee Payment Amount
City Bank (credit card debt)* Payment pursuant to
City Bank (credit card debt)* Payment pursuant to
First USA (credit card payoff) 2,745.69
MBNA (credit card payoff)** Lawsuit filed against
IRS (2003 estimated tax payment) 15,600.00
Child support payments 5,464.02
Hibernia Bank (loan repayment) 8,820.20
Whitney Bank (credit line) 4,709.59
William A. Neilson (legal fees) 4,000.00
Paul Lea (legal fees) 5,000.00
Diane Cherry (legal fees) 3,000.00
Pedalhore (accounting fees) 1,600.00
Fintech (accounting fees) 1,000.00
From the refinance of his residence petitioner received a net
amount of $25,158. Petitioner used $11,000 to pay delinquent
child support and transferred the remaining $14,158 to his professional
corporation (which was used to pay a supplier, malpractice insurance,
delinquent telephone charges, and payroll).
Also in his response to the preliminary determination, petitioner
asserted that the attorney's fees were an allowable necessary
expense because they were necessary for his representation before
the IRS with respect to his current tax matters. He closed the
letter by saying he thought negotiation of an offer-in-compromise
was possible given his belief that he did not dissipate assets
and that he is allowed to claim attorney's fees as an expense.
On March 8, 2005, the settlement officer sent a letter to petitioner
stating that her positions on the dissipated assets and attorney's
fees remained unchanged. Petitioner did not respond to this
letter and never increased his offer.
On April 8, 2005, Appeals issued petitioner a notice of determination
sustaining the proposed collection actions. The summary of determination
concluded that petitioner's proposed collection alternative
was not a viable option. The notice indicated Appeals' finding
that the IRS could collect more than the $30,000 offer. The
notice referred to the discovery of the dissipated assets during
consideration of the offer-in-compromise. The notice acknowledged
the $15,600 payment to the IRS but pointed out that the remaining
$117,558 was distributed to other creditors. It noted that petitioner
was given the opportunity to increase his offer but declined
to do so. The notice also stated that
The proposed levy action balances the need for efficient collection
with the concern that it be no more intrusive than necessary
because your offer-in-compromise does not outweigh the government's
need for efficient collection of your tax liabilities. Your
collection alternative was considered however we find that it
is not a viable alternative given the facts and evidence raised.
The settlement officer's Appeals Case Determination (Case Determination)
reflects that in recommending petitioner's offer based on doubt
as to collectibility be rejected, she calculated petitioner's
future income potential plus his net realizable equity (NRE)
in assets to get the reasonable collection potential for the
In determining petitioner's NRE, the settlement officer decided
that petitioner had dissipated assets in disregard of his tax
liabilities when he sold his interest in FMC and when he refinanced
his home. She considered the assets dissipated because petitioner
realized the funds after his tax liabilities for 1996-2002 had
accrued and after the amounts due for 1997-2001 were assessed,
and he used all of the funds to pay other creditors, with the
exception of the $15,600 payment to the IRS. She determined
that 100 percent of the $133,158 received from the dissipated
assets should be included in petitioner's NRE with the possible
exception of the $15,600 paid to the IRS, the $5,000 legal fees
incurred in the lawsuit against his former employer, and the
$5,464 paid for child support. She reached this conclusion despite
recognizing that the assets were dissipated before the offer-in-compromise
was made. The settlement officer did not include any amount
for the value of petitioner's residence in NRE, having determined
that he had no equity. She also expressed doubt as to whether
petitioner reported an accurate value for his interest in his
medical corporation, noting the comparatively low value of equipment
totaling $3,630 given that the business had gross income in
excess of $300,000 in 2003. The settlement officer did not account
for petitioner's interests in his medical corporation or Pontchartrain
Lithotripsy in calculating NRE. The settlement officer determined
petitioner's future income collection potential to be $946 per
month, which, over 60 months (the multiplier for a short-term
deferred payment offer) amounted to $56,760.
In response to the notice of determination, petitioner filed
a petition with this Court.
Before a levy may be made on any property or right to property,
a taxpayer is entitled to notice of the Commissioner's intent
to levy and notice of the right to a fair hearing before an
impartial officer of the IRS Appeals Office. Secs. 6330(a) and
(b), 6331(d). Section 6320 provides that after the filing of
a Federal tax lien under section 6323, the Secretary shall furnish
written notice. This notice must advise the taxpayer of the
opportunity for administrative review in the form of a hearing,
which is generally conducted consistent with the procedures
set forth in section 6330(c), (d), and (e). Sec. 6320(c).
Where, as here, the underlying tax liability is not at issue,
our review of the notice of determination under section 6330
is for abuse of discretion. See Sego v. Commissioner [Dec. 53,938],
114 T.C. 604, 610 (2000); Goza v. Commissioner [Dec. 53,803],
114 T.C. 176, 182 (2000). This standard does not require us
to decide what we think would be an acceptable offer-in-compromise.
Murphy v. Commissioner [Dec. 56,232], 125 T.C. 301, 320 (2005),
affd. [2007-1 USTC ¶50,115] 469 F.3d 27 (1st Cir. 2006).
Rather, our review is to determine whether respondent's rejection
of petitioner's offer-in-compromise was arbitrary, capricious,
or without sound basis in fact or law. Id.
At the hearing, taxpayers may raise challenges to "the
appropriateness of collection actions" and may make "offers
of collection alternatives, which may include the posting of
a bond, the substitution of other assets, an installment agreement,
or an offer-in-compromise." Sec. 6330(c)(2)(A). The Appeals
officer must consider those issues, verify that the requirements
of applicable law and administrative procedures have been met,
and consider "whether any proposed collection action balances
the need for the efficient collection of taxes with the legitimate
concern of the person [involved] that any collection action
be no more intrusive than necessary." Sec. 6330(c)(3)(C).
As his collection alternative, petitioner chose to make an offer-incompromise.
In the case before us, petitioner disputes respondent's rejection
of his offer-in-compromise.
Section 7122(a) authorizes the Secretary to compromise any
civil or criminal case arising under the internal revenue laws.
Section 7122(c) provides that the Secretary shall prescribe
guidelines for evaluation of whether an offer-in-compromise
should be accepted. The decision whether to accept or reject
an offer-in-compromise is left to the Secretary's discretion.
Fargo v. Commissioner [2006-1 USTC ¶50,326], 447 F.3d 706,
712 (9th Cir. 2006), affg. [Dec. 55,514(M)] T.C. Memo. 2004-13;
sec. 301.7122-1(c)(1), Proced. & Admin. Regs.
The section 7122 regulations set forth three grounds for compromise
of a taxpayer's liability. These grounds are doubt as to liability,
doubt as to collectibility, and the promotion of effective tax
administration. Sec. 301.7122-1(b), Proced. & Admin. Regs.
Petitioner seeks a compromise based on doubt as to collectibility.
The Secretary may compromise a tax liability based on doubt
as to collectibility 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. Generally, under the Commissioner's
administrative procedures, an offer-in-compromise based on doubt
as to collectibility will be acceptable only if it reflects
the taxpayer's "reasonable collection potential".
Rev. Proc. 2003-71, sec. 4.02(2), 2003-2 C.B. 517. Both parties
appear to agree that petitioner's reasonable collection potential
is substantially less than his tax liability which, as above
noted, stood at more than $773,368, as of January 1, 2005. The
parties obviously disagree as to petitioner's collection potential.
The IRS has developed guidelines and procedures for the submission
and evaluation of offers to compromise under section 7122. Rev.
Proc. 2003-71, supra. In furtherance thereof, the Internal Revenue
Manual (IRM) contains extensive guidelines for evaluating offers-in-compromise.
1 Administration, Internal Revenue Manual (CCH), sec. 5.8, at
16,253. Both petitioner and respondent focus substantial attention
in their briefs to the issue of "Dissipation of Assets",
The IRM provides in part, in "Dissipation of Assets",
section 18.104.22.168, at 16,339-6, the following:
(1) During an offer investigation it may be discovered that
assets (liquid or non-liquid) have been sold, gifted, transferred,
or spent on non-priority items and/or debts and are no longer
available to pay the tax liability. This section discusses treatment
of the value of these assets when considering an offer in compromise.
(2) Once it is determined that a specific asset has been dissipated,
the investigation should address whether the value of the asset,
or a portion of the value, should be included in an acceptable
(3) Inclusion of the value of dissipated assets must clearly
be justified in the case file and documented on the ICS/AOIC
history. * * *
(4) When the taxpayer can show that assets have been dissipated
to provide for necessary living expenses, these amounts should
not be included in the reasonable collection potential (RCP)
(5) If the investigation clearly reveals that assets have been
dissipated with a disregard of the outstanding tax liability,
consider including the value in the reasonable collection potential
(RCP) calculation. [Emphasis added.]
It is not totally clear how dissipated assets can be "no
longer available to pay the tax liability" (see (1), above)
while at the same time included in the "reasonable collection
potential (RCP) calculation" (see (5), above).
The settlement officer apparently considered herself required
to apply this rather cryptic guideline, and under an abuse of
discretion standard we are not at liberty to challenge her judgment
that it should be used. However, under the abuse of discretion
standard, we must assure that the guideline is correctly applied.
The Appeals Case Determination states that
Appeals preliminary determination of Dr. Samuel's net realizable
equity (NRE) in his assets is that it should include 100% of
his dissipated assets totaling $133,158 with the possible exception
of the $15,600 paid for his 2003 estimated tax payment, his
legal fees of $5,000 incurred in association with his civil
law suit against his prior employer and $5,464 paid for child
support. He has no net realizable equity in his personal residence
given that quick sale value (QSV) is used and offset against
his mortgage of $322,000. Since his mortgage exceeds the QSV
of $320,000 (80% of FMV determined to be at $400,000), he has
no equity to include in his NRE. Appeals believes that his interest
in his medical corporation exceeds that which was reported at
the face-to-face hearing to be the value of the equipment totaling
$3,630. This is an on-going business that had gross income in
excess of $300,000 in 2003.
The Appeals Case Determination goes on to state that Dr. Samuel
was provided the opportunity to increase his offered amount
to at least include amounts he realized pursuant to his dissipated
assets in order that his offer receive further consideration.
He declined to so do.
The $15,600 which Dr. Samuel paid for his 2003 estimated tax
payment should have been excluded from the dissipated assets
category, and if Appeals was in doubt about the includability
of the $5,000 incurred in association with Dr. Samuel's civil
law suit and the $5,464 paid for child support, these amounts
should have been excluded also. It was an abuse of discretion
not to do so.
It is represented in his brief that petitioner has been current
on all of the filings and payments of his taxes, starting with
2003. It appears from the Appeals Case Determination that petitioner
has in fact minimal assets from which cash could be realized,
but that he has a medical practice that produces a fairly substantial
amount of income. Clearly, then, any IRS recovery from petitioner
would have to come principally, if not entirely, from his medical
In connection with its consideration of petitioner's offerin-compromise,
Appeals prepared the following table to illustrate petitioner's
future income potential. The Case Determination states that
the table is intended to show that petitioner's future income
potential is more than his $30,000 offer.
Total Income Living Expenses
Source Gross Claimed Allowed
T/P $7,963expenses $976 $953
Wages/salaries Housing &
spouse utilities 1,024 1,034
Interest Transportation 0 0
income Health care 50 100
Taxes 2,470 2,180
Rental income pmts. 2,750 2,750
Child support Life insurance
Alimony Secured debts
Other: Representation 250 0
IRA dstrbtn. Other:
Total income 7,963 Total expense 7,520 7,017
Net difference 946
Net difference times (a, b or c) = FIP [Future income potential]
Net difference = $946 x 60 $56,760
(a) If the taxpayer is making a cash offer (offering to pay
within 90 days or less) multiply the net difference by 48 or
the number of months remaining on the statute.
(b) If the taxpayer is making a short term deferred payment
offer (offering to pay within 2 years) multiply the net difference
by 60 or the number of months remaining on the statute, whichever
(c) If the taxpayer is making a deferred payment offer (offering
to pay over the life of the statute), use the deferred payment
chart to determine the number of months.
Petitioner points out that 2 Administration, Internal Revenue
Manual (CCH), section 22.214.171.124(3), at 17,662, allows as a necessary
expense accounting and legal fees if representation before the
IRS is needed or meets the necessary expense tests. The costs
must be related to solving the current controversy. In calculating
petitioner's future income potential, the settlement officer
failed to allow monthly payments of $250 which petitioner was
making to his tax attorney in connection with the current controversy.
The corrected income potential would thus be $41,760.
The Appeals Case Determination takes the position that Appeals
was not required to counteroffer petitioner's offer-incompromise,
but petitioner points out that 1 Administration, Internal Revenue
Manual (CCH), section 126.96.36.199., at 16,308, provides that in
the course of processing the case, if the taxpayer's offer must
be increased in order to be recommended for acceptance, the
taxpayer must be contacted by letter or telephone advising the
taxpayer "to amend the offer to the acceptable amount".
In the present case, petitioner should have been advised that
instead of 100 percent of the dissipated assets, totaling $133,158,
an acceptable amount would be $133,158 less $26,064 ($15,600
plus $5,000 plus $5,464), or $107,094. Appeals' failure to do
so was an abuse of discretion, and we so hold.
Petitioner should be given the opportunity to revise his offer-in-compromise
to reflect the $107,094, referred to above. However, since petitioner
appears to lack any substantial assets outside his medical practice
which could provide a source for paying any compromise amount,
it is obvious, as previously observed, that any payments would
come from his medical earnings. The table prepared by Appeals,
above, unquestionably reveals that petitioner has ample income
in excess of his $30,000 offer payable over 24 months.
We shall remand this case to Appeals for a 60-day period within
which petitioner may, if he so chooses, revise the amount of
his offer-in-compromise and suggest new terms of payment in
An appropriate order will be issued.
[T.C. Summary Opinion 2006-75]
A. Sampson v. Commissioner.
Docket No. 4170-05S . Filed May 8, 2006.
[Code Secs. 6320, 6330 and 7122]
Tax Court: Summary opinion: Tax liens: Collection Due Process
(CDP) hearings: Offer-in-compromise: Abuse of discretion. --
An Appeals officer abused his discretion when he rejected an
individual's offer-in-compromise on the ground that the taxpayer
had sufficient future income to pay his tax liability in full.
Since the individual's employment history did not allow the
Appeals officer to accurately estimate his fututre income, the
Appeals officer should have considered using a future income
collateral agreement. Moreover, there was no indication that
the Appeals officer attempted to calculate the taxpayer's forgone
earnings; instead he assumed that the taxpayer would earn sufficient
income to pay his tax liability in full. However, the taxpayer's
employment history and modest wage income raised doubts about
the validity of this assumption. --
PURSUANT TO INTERNAL REVENUE CODE SECTION 7463(b),THIS OPINION
MAY NOT BE TREATED AS PRECEDENT FOR ANY OTHER CASE.
PANUTHOS, Chief Special Trial Judge: This case was heard pursuant
to the provisions of sections 6330(d) and 7463 of the Internal
Revenue Code in effect when the petition was filed. The decision
to be entered is not reviewable by any other court, and this
opinion should not be cited as authority. Unless otherwise indicated,
all subsequent section references are to the Internal Revenue
Code in effect at relevant times.
This proceeding arises from a petition for judicial review
filed in response to a Notice of Determination Concerning Collection
Action(s) Under Section 6320 and/or 6330 (notice of determination)
sent to petitioner on February 19, 2005. Pursuant to sections
6320(c) and 6330(d), petitioner seeks review of respondent's
determination sustaining the filing of a notice of Federal tax
lien against petitioner. The issue for decision is whether respondent
abused his discretion in rejecting an offerin-compromise (OIC)
that petitioner submitted for the taxable year 2002.
Some of the facts have been stipulated, and they are so found.
The record consists of the stipulation of facts and supplemental
stipulation of facts with attached exhibits, an additional exhibit
admitted during trial, and the testimony of petitioner. At the
time of filing the petition, petitioner resided in San Francisco,
Petitioner was 43 years old at the time of trial. He has been
sporadically employed throughout his adulthood. Social Security
records covering the taxable years 1978 through 2003 indicate
petitioner's annual wage income has never exceeded $19,432.
The records also indicate petitioner earned no wage income from
1998 through 2003.1 For the past several years, petitioner has
been a student at City College of San Francisco (City College).
At the time of trial, petitioner was a senior at City College
but was unsure when he would graduate. Petitioner indicated
that City College had recently reduced its offering of courses
due to budget constraints, which has delayed his graduation.
Petitioner has maintained himself during this time by using
student loan proceeds and by minimizing his living expenses.
In the taxable year 2002, petitioner won a car from Centra
Marketing & Communications, LLC (Centra) as part of an Internet
sales promotion. Petitioner sold the car shortly after receiving
it, although it is not clear what he did with the proceeds.
Centra issued a Form 1099-MISC, Miscellaneous Income, to petitioner
reflecting $38,540 of gross income attributable to the car.
Petitioner reported that amount on his 2002 Federal income tax
return, as well as $146 of interest income, but made no payments
toward his tax liability.
Respondent made assessments against petitioner for the taxable
year 2002 totaling $5,942.01 for income tax and related penalties
and interest. In July 2004, respondent filed a notice of Federal
tax lien and sent petitioner a Notice of Federal Tax Lien Filing
and Your Right to a Hearing Under IRC 6320. Petitioner timely
submitted a Form 12153, Request for a Collection Due Process
Hearing. He also submitted an OIC, in which he made a cash offer
of $2,000 to compromise his 2002 tax liability.2 The OIC was
based on doubt as to collectibility.
Petitioner's OIC was assigned to an Appeals officer. As part
of his evaluation of the OIC, the Appeals officer calculated
the monthly income that petitioner could pay toward his 2002
tax liability. The Appeals officer used petitioner's 2002 gross
income of $38,686 as a baseline and then projected that amount
over a 48-month period. After subtracting allowable expenses,
the Appeals officer calculated that petitioner could pay $932
a month toward his 2002 tax liability, which would allow him
to pay the liability in full in less than a year.
Petitioner and the Appeals officer participated in an administrative
hearing in January 2005. Prior to the hearing, the Appeals officer
was unaware that petitioner's 2002 gross income was attributable
almost entirely to the car he had received from Centra. After
learning of this fact, the Appeals officer requested and received
additional information from petitioner.
On January 19, 2005, the Appeals officer sent petitioner a
letter stating in part:
Part of the process of evaluating an offer from a person who
is unemployed is to consider what that person would earn if
they were working. Usually that is done by looking at previous
income history. In your case, that is problematical because
of your history, but it seems clear that were you to find employment
you would be able to pay the tax liability for 2002. The fact
that you have chosen to go to school rather than work is not
On February 19, 2005, respondent issued petitioner a notice
of determination sustaining the filing of the notice of Federal
tax lien. The notice of determination states that the Appeals
officer verified that the requirements of law and administrative
procedure had been met and that petitioner's OIC was rejected
because petitioner could fully pay his 2002 tax liability.
Section 6321 imposes a lien in favor of the United States on
all property and rights to property of a person when a demand
for the payment of the person's liability for taxes has been
made and the person fails to pay those taxes. Such a lien arises
when an assessment is made. Sec. 6322. Section 6323(a) requires
the Secretary to file notice of Federal tax lien if such lien
is to be valid against any purchaser, holder of a security interest,
mechanic's lienor, or judgment lien creditor. Lindsay v. Commissioner,
T.C. Memo. 2001-285, affd. 56 Fed. Appx. 800 (9th Cir. 2003).
Section 6320 provides that a taxpayer shall be notified in
writing by the Secretary of the filing of a Federal tax lien
and provided with an opportunity for an administrative hearing.
Sec. 6320(b). An administrative hearing under section 6320 is
conducted in accordance with the procedural requirements of
section 6330. Sec. 6320(c). At the administrative hearing, a
taxpayer is entitled to raise any relevant issue relating to
the unpaid tax, including a spousal defense or collection alternatives
such as an OIC or an installment agreement. Sec. 6330(b) and
(c)(2); sec. 301.6320-1(e)(1), Proced. & Admin. Regs.
A taxpayer also may challenge the existence or amount of the
underlying tax liability, including a liability reported on
the taxpayer's original return, if the taxpayer "did not
receive any statutory notice of deficiency for such tax liability
or did not otherwise have an opportunity to dispute such tax
liability." Sec. 6330(c)(2)(B); see also Urbano v. Commissioner,
122 T.C. 384, 389-390 (2004); Montgomery v. Commissioner, 122
T.C. 1, 9-10 (2004). Section 6330(d) provides for judicial review
of the administrative determination in the Tax Court or a Federal
District Court, as may be appropriate. Where the validity of
the underlying tax liability is properly at issue, the Court
will review the matter de novo. Where the validity of the underlying
tax liability is not properly at issue, however, the Court will
review the Commissioner's administrative determination for abuse
of discretion. Goza v. Commissioner, 114 T.C. 176, 181-182 (2000).
Whether an abuse of discretion has occurred depends upon whether
the exercise of discretion is without sound basis in fact or
law. See Freije v. Commissioner, 125 T.C. 14, 23 (2005); Ansley-Sheppard-Burgess
Co. v. Commissioner, 104 T.C. 367, 371 (1995).
Petitioner does not seek to challenge his underlying tax liability.
He challenges only the rejection of his OIC. We therefore review
for abuse of discretion.
Section 7122(a) authorizes the Secretary to compromise any
civil case arising under the internal revenue laws. The Commissioner
will generally compromise a liability on the basis of doubt
as to collectibility only if the liability exceeds the taxpayer's
reasonable collection potential. Lemann v. Commissioner, T.C.
Memo. 2006-37. A taxpayer's reasonable collection potential
is calculated by determining and adding together the taxpayer's
net equity and his future income. See id.; sec. 301.7122-1(b)(2),
Proced. & Admin. Regs. Respondent concedes that petitioner
had no equity available to satisfy his 2002 tax liability. Respondent
argues, however, that petitioner had sufficient future income
to pay his tax liability in full.1
Section 7122(c) provides that the Secretary shall prescribe
guidelines for IRS personnel to determine whether an OIC is
adequate and should be accepted. These guidelines have been
published and include certain provisions of the Internal Revenue
Manual (IRM). See Lemann v. Commissioner, supra; Spurgin v.
Commissioner, T.C. Memo. 2001-290. IRM sec. 188.8.131.52 (Nov. 15,
2004) provides guidelines for calculating a taxpayer's future
income. "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." IRM sec. 184.108.40.206(1) (Nov. 15, 2004).
For cash offers, income and expenses are estimated for a 48-month
period. Id. The calculation of future income should take into
account "the taxpayer's 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 sec. 220.127.116.11(3) (Nov. 15, 2004). The IRM
provides that "Some situations may warrant placing a different
value on future income than current or past income indicates".
IRM sec. 18.104.22.168(5) (Nov. 15, 2004). For example, if income
or necessary expenses will increase or decrease, then the amount
or number of expected payments should be adjusted accordingly.
Id. If a taxpayer is "temporarily unemployed or underemployed",
then income should be calculated as if the taxpayer were fully
employed. Id. If a taxpayer has a "sporadic employment
history or fluctuating income", then earnings over several
prior years should be averaged. Id.
As the Appeals officer acknowledged, estimating petitioner's
future income is "problematical". Petitioner intends
to graduate and find work, but it is uncertain when he will
graduate, what type of employment he will find, or how much
he will earn. While the IRM addresses situations where the taxpayer
is "temporarily" out of work, petitioner has not been
employed for several years. Petitioner has a history of sporadic
employment and thus is a candidate for income averaging. See
IRM sec. 22.214.171.124(5) (Nov. 15, 2004). Because of his limited
earnings, however, petitioner's average income over the several
years prior to 2002 is close to zero.
Despite the unusual circumstances of petitioner's case, the
IRM provides the following guidance:
In some instances, a future income collateral agreement may
be used in lieu of including the estimated value of future income
in reasonable collection potential (RCP). When investigating
an offer where current or past income does not provide an ability
to accurately estimate future income, the use of a future income
collateral agreement may provide a better means of calculating
an acceptable offer amount. * * *
Example: A taxpayer is currently in medical school and it is
anticipated that upon graduation income should increase dramatically.
IRM sec. 126.96.36.199(6) (Nov. 15, 2004).
Assuming petitioner secures employment after graduation, he
likely will earn significantly more income than he has over
the past several years. For the reasons stated above, however,
it is difficult to estimate the amount of his future income
or when he will receive such income. The facts of petitioner's
case therefore appear to fit squarely within IRM sec. 188.8.131.52(6).
Nevertheless, there is no indication that the Appeals officer
considered using a future income collateral agreement. Instead,
the Appeals officer determined that because petitioner's status
as a student was "not really relevant", petitioner's
future income included the wages he could have earned, but chose
to forgo, in order to pursue his studies (forgone earnings).
The Appeals officer also determined that petitioner's forgone
earnings were sufficient to pay his 2002 tax liability in full.
It is true petitioner could have increased his income had he
discontinued his education and found work; however, we can find
nothing in the IRM suggesting that a student's forgone earnings
are a component of future income. In fact, the example in IRM
sec. 184.108.40.206(6) indicates a taxpayer can qualify for an OIC
despite choosing to pursue education rather than employment.
The example does not include forgone earnings as part of the
taxpayer's reasonable collection potential.
Even if petitioner's future income did include forgone earnings,
the difficulty of calculating the amount of such earnings is
evident. Petitioner's forgone earnings presumably depend on
the type of employment he could obtain, which in turn depends
on factors such as his work experience, job skills, and the
strength of the labor market. There is no indication the Appeals
officer considered these factors or attempted to calculate petitioner's
forgone earnings.4 Rather, it appears the Appeals officer assumed
that petitioner would earn sufficient income, after allowable
expenses, to pay his tax liability in full. Petitioner's history
of intermittent employment and modest wage income raises doubts
about the validity of this assumption. Furthermore, it is unclear
whether the Appeals officer considered that petitioner might
have increased expenses if he discontinued his studies, such
as student loan repayments.
We conclude the Appeals officer abused his discretion in rejecting
petitioner's OIC on the ground that petitioner had sufficient
future income to pay his 2002 tax liability in full. We therefore
shall remand this matter to the Appeals Office for reconsideration
of petitioner's OIC.
Reviewed and adopted as the report of the Small Tax Case Division.
To reflect the foregoing,