Reed v. Commissioner

TOM REED, PETITIONER v. COMMISSIONER OF INTERNAL

REVENUE, RESPONDENT

Docket No. 27604–11L. Filed September 23, 2013.

P failed to file Federal income tax returns timely for years

1987 through 2001. P subsequently submitted delinquent

returns but failed to fully satisfy the outstanding tax liabil-

ities. P submitted two separate offers-in-compromise (OICs) to

settle the outstanding tax liabilities. R rejected the first OIC.

R returned the second OIC. R issued a final notice of intent

to levy. P requested a collection due process hearing (collec-

tion hearing). P raised issues during the collection hearing

regarding R’s handling of the two OICs and requested that

the returned OIC be reopened. R concluded that he did not

have the authority to reopen the returned OIC and sustained

the final notice of intent to levy. P contends that R abused his

discretion in sustaining the final notice of intent to levy. P

argues that R abused his discretion by concluding that he

lacked the authority to reopen an OIC based on doubt as to

collectibility that R returned to P years before the collection

hearing commenced. R argues this Court lacks jurisdiction to

determine whether he abused his discretion because P pro-

posed no new OIC during the collection hearing. R further

argues that this Court lacks jurisdiction because P has no

judicial review rights relating to R’s rejecting or returning an

OIC. Held: This Court has jurisdiction to determine whether

R abused his discretion in sustaining the final notice of intent

to levy. Held, further, R cannot be required to reopen an OIC

based on doubt as to collectibility that R returned to P years

before the collection hearing commenced. Held, further, R did

not abuse his discretion in sustaining the final notice of intent

to levy.

248

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(248) REED v. COMMISSIONER 249

George W. Connelly, Jr., Heather M. Pesikoff, and Renesha

N. Fountain, for petitioner.

David Baudilio Mora and Gordon P. Sanz, for respondent.

OPINION

KROUPA, Judge: This collection review matter is before the

Court because petitioner challenges a determination notice.

See sec. 6330(d)(1). 1 Respondent issued the determination

notice sustaining a final notice of intent to levy (proposed

levy action). The primary issue we are asked to decide is

whether respondent abused his discretion in sustaining the

proposed levy action. We hold he did not.

Determining whether respondent abused his discretion

requires us to first consider three questions. Two of these

questions involve well-trodden areas of law. The remaining

question involves an issue of first impression. That question

is: can respondent be required to reopen an offer-in-com-

promise (OIC) based on doubt as to collectibility that he had

returned to petitioner as unprocessable years before a collec-

tion due process hearing (collection hearing) commenced? 2

We hold that respondent cannot be required to reopen an

OIC based on doubt as to collectibility that he had returned

to petitioner as unprocessable years before the collection

hearing commenced.

Background

Some of the facts have been stipulated and are so found.

The stipulation of facts and its accompanying exhibits are

1 All

section references are to the Internal Revenue Code in effect at all

relevant times.

2 This question concerns the interaction of secs. 7122 and 6330 and the

consequences that flow from the Commissioner’s rejecting an OIC versus

his returning an OIC. The Court previously addressed a different question

on similar facts. See Lloyd v. Commissioner, T.C. Memo. 2008–15. The

Court at first had difficulty deciphering the taxpayer’s exact argument in

Lloyd. The Court ultimately concluded, however, that the taxpayer in

Lloyd was arguing that an Appeals officer abused his discretion in failing

to use the taxpayer’s reasonable collection potential as calculated in con-

nection with an earlier, returned OIC. Petitioner here, on the other hand,

argues respondent abused his discretion by concluding in the determina-

tion notice that he lacked the authority to reopen an OIC based on doubt

as to collectibility that he had returned to petitioner as unprocessable

years before the collection hearing commenced.

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250 141 UNITED STATES TAX COURT REPORTS (248)

incorporated by this reference. Petitioner resided in Texas at

the time he filed the petition.

Petitioner failed to file Federal income tax returns timely

for years 1987 through 2001 (years at issue). 3 Petitioner

eventually filed returns for the years at issue (delinquent

returns), but did not fully satisfy his liabilities for the taxes,

penalties and interest arising from the delinquent returns

(outstanding tax liabilities). 4 Petitioner subsequently sub-

mitted two separate OICs to settle his outstanding tax liabil-

ities.

A. The 2004 Offer

Petitioner first submitted an OIC in 2004 (2004 offer) to

respondent’s Houston Offer in Compromise Unit (offer unit).

Respondent determined the outstanding tax liabilities at the

time petitioner submitted the 2004 offer to be more than

$480,000. Petitioner proposed in the 2004 offer to settle his

outstanding tax liabilities for $22,000 (which was less than

5% of the outstanding tax liabilities) based on doubt as to

collectibility. The offer unit concluded respondent could

reasonably collect more from petitioner than petitioner had

proposed to pay in the 2004 offer. Accordingly, the offer unit

proposed that the 2004 offer be rejected.

Petitioner appealed the proposed rejection to the Internal

Revenue Service Appeals Office in Houston, Texas (Houston

Appeals). Houston Appeals determined that petitioner had

received $258,000 from a real estate sale in 2001. Houston

Appeals further determined that petitioner used a small por-

tion of the real estate proceeds to pay business expenses and

lost the remaining proceeds through high-risk day trading in

the stock market. Houston Appeals therefore found that peti-

tioner had dissipated the real estate proceeds with inten-

tional disregard for his outstanding tax liabilities. Houston

Appeals included the dissipated real estate proceeds in the

calculation of an acceptable offer amount and sustained the

offer unit’s decision to reject the 2004 offer.

3 Petitioner and respondent have stipulated that the years giving rise to

the underlying Federal income tax liabilities span 1987 through 2001. We

note, however, that each of the OICs petitioner submitted included 1986

as well. The underlying Federal income tax liabilities are not presently at

issue. Accordingly, we merely note this discrepancy.

4 The contents of the delinquent returns are not presently at issue.

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(248) REED v. COMMISSIONER 251

B. The 2008 Offer

Petitioner next submitted an OIC to the offer unit in 2008

(2008 offer). The 2008 offer proposed settling the outstanding

tax liabilities (which exceeded almost one-half million dol-

lars) for $35,196, based on doubt as to collectibility. The offer

unit determined that petitioner had failed to demonstrate he

was in compliance with his Federal income tax obligations at

the time he submitted the 2008 offer. The offer unit

returned 5 the 2008 offer to petitioner as unprocessable. Peti-

tioner then exchanged several letters with the offer unit.

Petitioner attempted through the letter exchange to have the

offer unit reconsider its returning the 2008 offer. To this end,

petitioner argued that he was in fact in compliance with his

Federal income tax obligations at the time he submitted the

2008 offer. Petitioner also argued in the letter exchange that

he should be given the opportunity to become compliant if,

in fact, he was not at the time he submitted the 2008 offer.

Petitioner continued to make payments during the pendency

of the letter exchange consistent with the 2008 offer. The

letter exchange ultimately failed, however, to convince the

offer unit to alter its decision to return the 2008 offer to peti-

tioner.

C. The Collection Due Process Hearing

Respondent subsequently issued a final notice of intent to

levy (levy notice) for the years at issue. Petitioner timely

requested a collection hearing. Settlement Officer Liana A.

White (SO White) at Houston Appeals was assigned to con-

duct the collection hearing. The relevant issues petitioner

raised at the collection hearing involved the manner by

which respondent had handled the 2004 offer and the 2008

offer. SO White issued the determination notice in late 2011

sustaining the proposed levy action. Petitioner timely filed

the petition.

5 The distinction between a rejected OIC and a returned OIC is impor-

tant, as we later explain. Briefly, a taxpayer has the right to administra-

tively appeal the Commissioner’s rejecting an OIC but has no right to ap-

peal the Commissioner’s returning an OIC.

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252 141 UNITED STATES TAX COURT REPORTS (248)

Discussion

We must now decide whether respondent abused his

discretion in sustaining the proposed levy action. We focus on

the manner by which respondent addressed the issues peti-

tioner raised during the collection hearing.

Petitioner advances two theories to argue respondent

abused his discretion. Petitioner first attacks SO White’s

conclusion that she lacked the authority to reopen the 2008

offer during the collection hearing. See sec. 6330(c)(2)(A)(iii).

Petitioner contends that SO White’s conclusion lacks a sound

basis in fact or law. Petitioner next attacks respondent’s

rejecting the 2004 offer and returning the 2008 offer. Peti-

tioner makes several related arguments under this theory.

The thrust of these arguments is that respondent improperly

rejected the 2004 offer and improperly returned the 2008

offer. Petitioner argues that respondent abused his discretion

in sustaining the proposed levy action in light of these

improprieties.

We first address the scope of our jurisdiction because

respondent argues we lack jurisdiction. We next address the

standard of our review. We then address each of petitioner’s

theories and its related arguments, in turn.

A. Scope of Jurisdiction

We now review the scope of our jurisdiction. The Tax Court

is a court of limited jurisdiction. Sec. 7442; Naftel v. Commis-

sioner, 85 T.C. 527, 529 (1985). We may exercise jurisdiction

only to the extent expressly authorized by Congress. Stewart

v. Commissioner, 127 T.C. 109, 112 (2006). Questions of juris-

diction are fundamental and must be addressed whenever it

appears this Court may lack jurisdiction. Wheeler’s Peachtree

Pharmacy, Inc. v. Commissioner, 35 T.C. 177, 179 (1960). We

have jurisdiction to determine whether we have jurisdiction.

Stewart v. Commissioner, 127 T.C. at 112.

Respondent argues this Court lacks jurisdiction because

petitioner proposed no new OIC during the collection hearing

and the Court therefore has nothing to consider. Respondent

also argues this Court lacks jurisdiction because petitioner

has no right of judicial review of respondent’s rejecting the

2004 offer or returning the 2008 offer. We are perplexed by

the arguments that respondent raises as they appear to miss

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(248) REED v. COMMISSIONER 253

the thrust of the theories petitioner advances. Moreover, it is

fundamental that we have jurisdiction in collection matters

if the Commissioner issues a determination notice and a tax-

payer timely files a petition. See Sego v. Commissioner, 114

T.C. 604 (2000); Goza v. Commissioner, 114 T.C. 176 (2000).

Both conditions apply here. Accordingly, we have jurisdiction

to review the determination SO White made to sustain the

proposed levy action. Sec. 6330(d); Offiler v. Commissioner,

114 T.C. 492, 498 (2000).

B. Standard of Review

We now focus on the standard we apply in determining

whether respondent abused his discretion. Petitioner does

not argue the validity of his outstanding tax liabilities.

Accordingly, we review the determination sustaining the pro-

posed levy action for abuse of discretion. Sego v. Commis-

sioner, 114 T.C. at 610; Goza v. Commissioner, 114 T.C. at

181–182. We must therefore decide whether respondent acted

in a manner that was arbitrary, capricious or without a

sound basis in fact or law. Murphy v. Commissioner, 125 T.C.

301, 320 (2005), aff ’d, 469 F.3d 27 (1st Cir. 2006).

C. Authority To Reopen the 2008 Offer

We now address petitioner’s contention that SO White had

the authority to reopen the 2008 offer during the collection

hearing. SO White proposed, during the collection hearing, a

collection alternative based on petitioner’s then-current

financial data. Petitioner rejected the collection alternative

SO White proposed. Petitioner argued that SO White had to

instead reopen the 2008 offer and apply the payments peti-

tioner made during the pendency of his letter exchange with

the offer unit toward the 2008 offer. SO White concluded that

she lacked authority to reopen the 2008 offer. Petitioner con-

tends SO White’s conclusion has no sound basis in fact or

law and therefore respondent abused his discretion. Peti-

tioner urges us to so find because reopening the 2008 offer

would permit respondent to treat petitioner as having met

his payment obligations under the 2008 offer. And doing so

would seemingly extinguish his outstanding tax liabilities as

he paid the amount he offered to pay in the 2008 offer.

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254 141 UNITED STATES TAX COURT REPORTS (248)

This issue of first impression concerns the interaction of

sections 7122 and 6330 and the consequences that flow from

the Commissioner’s rejecting an OIC versus his returning an

OIC. We begin by reviewing the authority Congress granted

to the Commissioner to compromise unpaid tax liabilities.

See sec. 7122. We then turn to whether the Commissioner

can exercise this compromise authority in the context of a

collection hearing. See sec. 6330.

1. Section 7122

We first look to the Commissioner’s authority to com-

promise an unpaid tax liability. The Commissioner is

required to collect all Federal income tax liabilities. Sec.

6301. The Commissioner has discretion, however, to com-

promise an unpaid tax liability. Sec. 7122(a). The pertinent

regulations set forth doubt as to collectibility as one of three

grounds for compromising an unpaid tax liability. Sec.

301.7122–1(b)(2), Proced. & Admin. Regs. Doubt as to collect-

ibility exists where a taxpayer’s assets and income are less

than the taxpayer’s unpaid tax liability. Id.

2. Section 6330

We now turn to the Commissioner’s exercise of this com-

promise authority in the context of a collection hearing. A

taxpayer has a right to a collection hearing with an Appeals

officer before the Commissioner can levy on the taxpayer’s

property. Sec. 6330. The Appeals officer may consider an OIC

proposed during a collection hearing. Sec. 6330(c)(2)(A)(iii). A

taxpayer must propose an OIC for it to be considered during

the collection hearing. See Sullivan v. Commissioner, T.C.

Memo. 2009–4; Godwin v. Commissioner, T.C. Memo. 2003–

289, aff ’d, 132 Fed. Appx. 785 (11th Cir. 2005).

3. Interaction of Sections 7122 and 6330

We now address whether the Commissioner can be

required to reopen an OIC based on doubt as to collectibility

that he returned to a taxpayer years before a collection

hearing commenced. Petitioner urges us to adopt the theory

that respondent can be required to do so. See sec.

6330(c)(2)(A)(iii). We decline to adopt petitioner’s theory for

two reasons.

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(248) REED v. COMMISSIONER 255

First, adopting the theory petitioner advances would

impermissibly expand the Commissioner’s authority to com-

promise an unpaid tax liability. The Commissioner must

evaluate an OIC proposed during a collection hearing

according to his authority to compromise an unpaid tax

liability. See secs. 6330, 7122; Johnson v. Commissioner, 136

T.C. 475, 484–485 (2011), aff ’d, 502 Fed. Appx. 1 (D.C. Cir.

2013). Here, petitioner requested in 2011 that respondent

consider the 2008 offer based on doubt as to collectibility.

Taxpayers must submit current financial data when pro-

posing an OIC based on doubt as to collectibility. See Sul-

livan v. Commissioner, T.C. Memo. 2009–4; Godwin v.

Commissioner, T.C. Memo. 2003–289. The theory petitioner

advances would impermissibly expand the Commissioner’s

authority by allowing the Commissioner to evaluate an OIC

based on doubt as to collectibility using a taxpayer’s past

financial circumstances. See sec. 7122(d)(1); see, e.g., Internal

Revenue Manual (IRM) pt. 5.8.5.3(1) (Oct. 22, 2010) (finan-

cial data should be no more than six months old); IRM pt.

5.15.1.1(4) (Oct. 2, 2012) (same).

Presently, for example, petitioner’s theory would have

allowed petitioner to effectively propose an OIC based on

doubt as to collectibility in 2011 using his financial data from

2008. Respondent, in turn, would be forced to evaluate the

OIC based on doubt as to collectibility using financial data

that only by mere chance reflects petitioner’s then-current

financial circumstances.

And second, adopting the theory petitioner advances would

substantially interfere with the statutory scheme Congress

created. Taxpayers may currently seek administrative review

of the Commissioner’s rejecting an OIC. Sec. 7122(e). Tax-

payers currently have no right, however, to seek review of

the Commissioner’s returning an OIC. Sec. 301.7122–

1(f)(5)(ii), Proced. & Admin. Regs. The theory petitioner

advances would, in effect, create additional layers of adminis-

trative and judicial review of the Commissioner’s returning

an OIC before a collection hearing commences. See sec.

6330(d). Petitioner’s theory would not create analogous layers

of review, however, for the Commissioner’s returning an OIC

after a collection hearing concludes. See id. Whether a tax-

payer may access these new layers of review would therefore

depend on when the Commissioner returns an OIC. Peti-

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256 141 UNITED STATES TAX COURT REPORTS (248)

tioner offers no, and we can find no, reasonable explanation

for such disparate treatment based only on when the

Commissioner returns an OIC.

D. Rejecting the 2004 Offer

We now turn to respondent’s rejecting the 2004 offer. Peti-

tioner submitted the 2004 offer based on doubt as to collect-

ibility. An OIC based on doubt as to collectibility is accept-

able if it reflects the taxpayer’s reasonable collection poten-

tial (RCP). Murphy v. Commissioner, 125 T.C. at 309; Rev.

Proc. 2003–71, sec. 4.02(2), 2003–2 C.B. 517, 517. An OIC

will generally be rejected if the RCP meets or exceeds the

amount offered in the OIC. IRM pt. 5.8.4.3 (May 10, 2013).

The value of dissipated assets may be included in a tax-

payer’s RCP. See Tucker v. Commissioner, T.C. Memo. 2011–

67, aff ’d, 676 F.3d 1129 (D.C. Cir. 2012); IRM pt. 5.8.5.16

(Oct. 22, 2010).

SO White reviewed the account transcripts and other

information in respondent’s files relating to respondent’s

rejecting the 2004 offer. SO White determined that Houston

Appeals had rejected the 2004 offer based on its finding that

petitioner received and dissipated approximately $258,000

from the real estate sale in 2001. SO White determined that

Houston Appeals had properly included the dissipated real

estate proceeds in the calculation of an acceptable offer

amount. SO White further determined that respondent’s

rejecting the 2004 offer was proper based on a reasoned anal-

ysis of the facts before her. Accordingly, respondent did not

abuse his discretion in sustaining the proposed levy action in

light of his rejecting the 2004 offer. 6

E. Returning the 2008 Offer

We now turn to respondent’s returning the 2008 offer. The

Commissioner has an established policy of requiring tax-

payers to be in compliance with current filing and estimated

tax payment requirements to be eligible for collection alter-

6 Moreover, it appears that petitioner may have been precluded from

even raising this issue at the collection hearing in 2011 because it was

raised and considered at the administrative hearing on petitioner’s appeal

of the rejection of the 2004 offer. See sec. 6330(c)(4); Perkins v. Commis-

sioner, 129 T.C. 58, 63 (2007). Respondent does not raise this argument,

however, and we therefore need not decide this issue.

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(248) REED v. COMMISSIONER 257

natives. See Otto’s E–Z Clean Enters., Inc. v. Commissioner,

T.C. Memo. 2008–54. Accordingly, the Commissioner does not

abuse his discretion by returning an OIC based on a tax-

payer’s failure to meet current tax obligations.

Scharringhausen v. Commissioner, T.C. Memo. 2008–26

(citing Christopher Cross, Inc. v. United States, 461 F.3d 610,

613 (5th Cir. 2006)).

SO White reviewed the files and transcripts pertaining to

2007 and 2008. SO White testified, and the record confirms,

that petitioner was required to pay an addition to tax for

failure to pay estimated tax for 2007. SO White found this

addition to tax arose from petitioner’s failure to meet his cur-

rent estimated tax obligations at the time he submitted the

2008 offer for consideration. SO White determined that

respondent’s returning the 2008 offer was proper based on a

reasoned analysis of the facts before her. Accordingly,

respondent did not abuse his discretion in sustaining the pro-

posed levy action in light of his returning the 2008 offer.

F. Conclusion

Petitioner did not raise any other meritorious challenges to

SO White’s determination to sustain the proposed collection

action. Nor did petitioner otherwise introduce any credible

evidence or persuasive arguments that would convince us

that SO White acted in a manner that was arbitrary, capri-

cious or without a sound basis in fact or law.

The record reflects that SO White verified that respondent

satisfied all applicable legal and administrative require-

ments, considered all relevant issues petitioner raised, and

balanced the intrusiveness of the proposed collection actions

against the need for effective tax collection. See sec. 6330(c).

We therefore conclude SO White did not abuse her discretion

by sustaining the proposed collection action.

We have considered all arguments made in reaching our

decision, and, to the extent not mentioned, we conclude that

they are moot, irrelevant, or without merit.

To reflect the foregoing,

Decision will be entered for respondent.

f

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