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United States Tax Court
T.C. Memo. 2022-4
ESTATE OF ANTHONY K. WASHINGTON, DECEASED,
LENDA WASHINGTON, PERSONAL REPRESENTATIVE,
Petitioner
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent
—————
Docket No. 20410-19L.
Filed February 2, 2022.
—————
Charles A. Ray, Jr., for petitioner.
Jacob Russin and Jeffrey E. Gold, for respondent.
MEMORANDUM OPINION
TORO, Judge: This is a collection due process (CDP) case. The
estate of Anthony K. Washington, deceased, Lenda Washington,
personal representative (Estate), seeks review pursuant to
section 6330(d)(1) 1 of a determination by the Internal Revenue Service
(IRS) Independent Office of Appeals (IRS Appeals), dated October 18,
2019, as supplemented on June 17, 2021. That determination, as
supplemented, sustained a notice of intent to levy to collect
Mr. Washington’s unpaid income tax liabilities for the taxable years
2008 to 2010, 2014, and 2015 (Relevant Tax Years) and rejected the
Estate’s offers-in-compromise. The Commissioner of Internal Revenue
has moved for summary judgment under Rule 121, contending that no
1 Unless otherwise indicated, all statutory references are to the Internal
Revenue Code (I.R.C. or Code), Title 26 U.S.C., in effect at all relevant times, all
regulation references are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in
effect at all relevant times, and all Rule references are to the Tax Court Rules of
Practice and Procedure. We round all monetary amounts to the nearest dollar.
Served 02/02/22
2
[*2] material facts remain in dispute and that IRS Appeals’
determination was proper as a matter of law. We agree and will
therefore grant the Commissioner’s motion.
Background
The following facts are based on the parties’ pleadings and motion
papers, including the declarations and exhibits attached thereto.
See Rule 121(b). The facts are stated solely for the purpose of ruling on
the Commissioner’s motion and not as findings of fact in this case.
See Whistleblower 769-16W v. Commissioner, 152 T.C. 172, 173 (2019).
Ms. Washington resided in Washington, D.C., when the petition in this
case was filed. 2
I.
Mr. and Ms. Washington’s Marriage and Divorce
The decedent, Mr. Washington, whose income tax liabilities for
the Relevant Tax Years are the subject of this case, married
Ms. Washington in 1981. The couple had one son. In 2006, Mr. and
Ms. Washington were divorced.
A.
The Divorce Decree
The divorce was finalized by the Superior Court of the District of
Columbia, which issued its Findings of Fact, Conclusions of Law and
Judgment of Absolute Divorce (Divorce Decree) on June 6, 2006.
2 Our Court has yet to rule on whether the residence of an estate’s executor (or
personal representative) determines appellate venue under section 7482(b)(1).
See Estate of Clack v. Commissioner, 106 T.C. 131, 140–41 (1996) (concluding it was
unnecessary to decide the question of proper appellate venue for a federal estate tax
case); id. at 145–49 (Gerber, J., concurring) (concluding that appellate venue depends
on domicile of decedent); id. at 142 (Chabot, J., concurring in result) (agreeing with
Judge Gerber on appellate venue); id. at 152, 159–67 (Parker, J., dissenting)
(concluding that appellate venue depends on residence of executor of estate). But see
Estate of Thompson v. Commissioner, 382 F.3d 367, 374 n.12 (3d Cir. 2004) (concluding
without significant discussion that residence of executor controls in federal estate tax
case), aff’g T.C. Memo. 2002-246; Estate of Israel v. Commissioner, 159 F.3d 593, 595
(D.C. Cir. 1998) (reaching the same conclusion in federal income tax case), rev’g and
remanding 108 T.C. 208 (1997). But we need not decide the issue here because we
discern no differences that would affect the outcome of this case in the precedent of the
U.S. Court of Appeals for the District of Columbia Circuit, where Ms. Washington
resided, and that of the U.S. Court of Appeals for the Fourth Circuit, where
Mr. Washington apparently was domiciled when he died and where the Estate is being
administered. See Golsen v. Commissioner, 54 T.C. 742 (1970), aff’d, 445 F.2d 985
(10th Cir. 1971).
3
[*3] Two provisions of the Divorce Decree are relevant to this case.
The first is the Judgment entered by the court, and the second is a
Finding of Fact with respect to a Marital Settlement Agreement (MSA)
entered into by the parties as of June 2, 2006.
The Judgment section of the Divorce Decree provided as follows:
JUDGMENT
WHEREFORE, it is by the Court, this 6th day of June,
2006,
ORDERED, ADJUDGED AND DECREED, that the
Plaintiff, Lenda P. Washington, be and hereby is, awarded
an absolute divorce from the Defendant, Anthony
Washington, on the ground that the parties have lived
separate and apart, without cohabitation and without
interruption, for at least one year next preceding the filing
of the Complaint for Absolute Divorce.
PROVIDED, HOWEVER, that pursuant to D.C. Code
Section 16-920 (Suppl., 2004) this Judgment shall become
effective to dissolve the bonds of matrimony thirty (30)
days after the docketing of this Judgment unless either
party applies for a Stay with the Superior Court or the
Court of Appeals of the District of Columbia, and
FURTHER PROVIDED, that the Court reserves
jurisdiction for the entry of the appropriate retirement
order.[3]
Paragraph 7 of the Findings of Fact of the Divorce Decree
explained:
The parties entered into a comprehensive Marital
Settlement Agreement dated June 2, 2006 . . . , which
resolved all issues between the parties. There are no issues
remaining to be resolved by the Court, other than the
granting of the divorce and entry of the Order with respect
to Defendant’s retirement plan.
3 At a remote hearing on November 16, 2021, the Estate represented that, to
its knowledge, the superior court did not enter such an order.
4
[*4]
B.
The MSA
The MSA, in turn, stated that the parties had separated and lived
apart since on or about January 12, 2002, and,
In view of the separation, the parties . . . [were] desirous of
settling and determining their obligations to each other
and all of their property rights; the custody and support of
their son, the maintenance and support of each of the
parties by the other; as well as all other rights, claims,
relationships or obligations between them arising out of
[Mr. and Ms. Washington’s] marriage or otherwise.
Three provisions of the MSA are particularly relevant to this case.
They relate to (1) Mr. and Ms. Washington’s retirement plans, (2) a life
insurance policy provided to Mr. Washington through his employer, and
(3) Mr. and Ms. Washington’s intentions concerning the interaction of
the MSA and the Divorce Decree.
1.
Provision Regarding Retirement Plans
With respect to the retirement plans, section 4.6(c) of the MSA
provided:
Waiver of Pension and Retirement Rights. Except as
otherwise set forth herein, each party hereby expressly
waives any legal right he or she may have under any
federal or state law as a spouse or former spouse, or person
with an insurable interest, or otherwise, to participate as a
“spouse” or “former spouse” or payee or alternate payee or
beneficiary or otherwise under the other party’s pension,
profit sharing, retirement, . . . 401(k), . . . or other similar
plans, programs or accounts, including, but not limited to,
the right to receive any benefit whether in the form of a
lump sum distribution or a lump sum death benefit, or a
single and/or joint and/or joint and survivor annuity, or a
pre-retirement survivor annuity, or a survivor annuity, or
otherwise. . . . Each party agrees to execute all documents
necessary to implement the provisions of this paragraph.
In an effort to comply with the intent of this article; (i) if a
party is unable for any reason to change the beneficiary or
the death benefits of his or her pension, profit sharing, or
other form of retirement or deferred income plan, or any
5
[*5] other plan referred to in the paragraph above, or (ii) if a
party files an election subsequent to the date of execution
of this Agreement but such election is for any reason
ineffective and the benefits are, in fact, paid to the
surviving party contrary to the intention of this paragraph,
or, (iii) if a party fails to designate a beneficiary and the
plan provides for payment to the “spouse” or “former
spouse,” then in any of such events the surviving party
shall, and except as otherwise provided in this Agreement,
at the direction of and at the sole discretion of the
decedent’s personal representative, either: (A) disclaim
any entitlement to any benefits received or receivable; or
(B) assign all rights to receive such benefits to the estate of
the deceased party or the person designated by the
decedent or the decedent’s personal representative to
receive such benefits; or (C) pay the . . . [net] after-tax
benefits over to the estate of the deceased party or to the
person designated by the decedent or by the decedent’s
personal representative.
2.
Provision Regarding Life Insurance
With respect to the life insurance policy, section 5.0 and 5.1 of the
MSA provided:
LIFE INSURANCE
The parties’ son is currently named as the beneficiary of
the Husband’s life insurance through his employment with
a face amount of $100,000.[4] The Husband agrees to
irrevocably elect the Wife as the beneficiary of this
coverage on his life for so long as he is employed, and
further agrees not to borrow against or otherwise
encumber such life insurance proceeds. The Husband
agrees that his notarized signature on page 12[5] of this
Agreement constitutes his irrevocable designation of the
Wife as such beneficiary, and directs Radio One, upon
receipt of a copy of this paragraph and the signature page,
4 At the November 16, 2021, remote hearing, the Estate did not dispute that
the life insurance proceeds were in fact paid to Mr. and Ms. Washington’s son upon
Mr. Washington’s death.
5 The signatures appear on page 13 (not page 12) of the MSA.
6
[*6]
. . . to effectuate the intent of this paragraph by so listing
the Wife as the irrevocable beneficiary.
3.
Provision Regarding Interaction with Divorce Decree
Finally, with respect to the interaction of the MSA and the
Divorce Decree, section 11.0 and 11.1 of the MSA provided:
MERGER OF
DIVORCE
AGREEMENT
IN
DECREE
OF
The parties shall be bound by all the terms of this
Agreement in resolving the pending divorce case . . .
between them in the District of Columbia. The parties
further agree that this Agreement shall be independent of
and shall not be merged in or otherwise affected thereby.
II.
The Estate’s Tax Liabilities and IRS Collection Efforts
A.
Federal Income Tax Returns for 2008, 2009, and 2010 and
Mr. Washington’s Death
Mr. Washington had substantial earnings in 2008, 2009, and
2010, but did not file timely federal income tax returns for those years.
The IRS inquired about Mr. Washington’s failure to file timely returns
and eventually received his late-filed returns in 2014. Although the
returns showed that income tax was due for each year, Mr. Washington
did not pay the outstanding balances shown on the returns. The IRS
assessed the tax shown on the returns together with certain additions
to tax and penalties. The IRS also entered into an installment
agreement with Mr. Washington permitting him to pay the outstanding
balances for these years over time.
Unfortunately, on November 10, 2015, about a year after entering
into the installment agreement, Mr. Washington died intestate,
terminating the installment agreement, and leaving a significant
portion of his federal tax liabilities for 2008, 2009, and 2010 unpaid.
Just over two years later, on December 22, 2017, the IRS recorded
a lien with respect to the outstanding liabilities for these years. The IRS
timely notified the Estate of the lien filing and of the right to a CDP
hearing, but the Estate did not seek a hearing.
7
[*7]
B.
Federal Income Tax Returns for 2014 and 2015
Mr. Washington also had substantial earnings in 2014 and 2015.
He failed to file a timely return for 2014, and the Estate failed to file a
timely return for 2015.
In 2017, Ms. Washington, as personal
representative of the Estate, caused the Estate to file Mr. Washington’s
income tax returns for 2014 and 2015, but it did not pay the outstanding
balances shown on those returns. As with the prior years, the IRS
assessed the tax shown on the returns for 2014 and 2015, together with
certain additions to tax and penalties.
C.
Additional IRS Collection Efforts
In an effort to collect Mr. Washington’s unpaid tax, on March 30,
2018, the IRS mailed to the Estate a Notice LT11, Notice of Intent to
Levy and Notice of Your Right to a Hearing. The notice advised that the
IRS intended to seize the Estate’s property or rights to property to collect
the outstanding balance for the Relevant Tax Years and informed the
Estate of the right to request a CDP hearing. The notice showed an
overall balance due of $189,593 before certain penalties and interest.
On April 9, 2018, the IRS timely received from the Estate a
Form 12153, Request for a Collection Due Process or Equivalent
Hearing. The request listed the Relevant Tax Years as the periods at
issue and checked the appropriate box to request a hearing regarding a
“Proposed Levy or Actual Levy.” The request was referred to IRS
Appeals.
III.
CDP Proceedings and the Estate’s Initial Offer-in-Compromise
The Estate’s CDP case was assigned to Settlement Officer
Darlene J. Macaulay. The Estate submitted a Form 656, Offer In
Compromise, accompanied by a Form 433-A (OIC), Collection
Information Statement for Wage Earners and Self-Employed
Individuals. The Form 433-A (OIC) and bank statements attached to it
indicated that the Estate owned a Bank of America account with a value
of $34,570. The Estate offered $10,000 to settle the tax liability for the
Relevant Tax Years. The Estate stated that the basis for its offer was
“Doubt as to Collectibility—I do not have enough assets and income to
pay the full amount.” The “Explanation of Circumstances” section of the
Form 656 was left blank.
After some initial communications with the Estate, Settlement
Officer Macaulay referred the case to the IRS Centralized Offer in
8
[*8] Compromise (COIC) unit. Following communications from the
COIC unit, the Estate provided additional documentation to assist in
the evaluation of its offer-in-compromise. Ultimately, the COIC unit
notified the Estate that it had reached a preliminary decision to reject
the Estate’s $10,000 offer because it calculated the Estate’s reasonable
collection potential as far exceeding its offer. The determination was
largely based on the balance of Mr. Washington’s section 401(k) account
at the time of his death (approximately $148,000) and the fact that the
allowable expenses determined by the COIC unit (that is, the expenses
with priority over the federal tax liability) did not reduce the reasonable
collection potential to the amount the Estate offered. The case was
returned to Settlement Officer Macauley.
After further communication between the Estate’s counsel and
Settlement Officer Macaulay, the Estate’s CDP case was transferred
from Settlement Officer Macaulay to Settlement Officer Steven A.
Lerner. On October 2, 2019, Settlement Officer Lerner held the Estate’s
CDP hearing. The Estate offered arguments in support of its position
but declined to increase its offer.
Shortly thereafter, Settlement Officer Lerner issued a notice of
determination sustaining the notice of intent to levy and the rejection of
the Estate’s offer. Settlement Officer Lerner noted that the Estate had
not challenged either the amount or the existence of the underlying tax
liability, and that the Estate’s counsel had proposed no collection
alternatives except for the $10,000 offer. Like the COIC unit,
Settlement Officer Lerner relied on the large balance of the section
401(k) account at the time of Mr. Washington’s death and the expenses
he thought allowable, and found the Estate’s offer inadequate.
IV.
Tax Court Proceedings and Remand to IRS Appeals
On November 15, 2019, the Estate timely petitioned our Court for
review of IRS Appeals’ determination. In its petition, the Estate alleged
that the $10,000 offer was erroneously rejected because, in its view, the
disbursements that IRS Appeals considered nonpriority expenses in fact
had priority over the Estate’s unpaid federal tax liability. The Estate
also cited “other reasons” that were not specified.
A.
The Commissioner’s First Motion for Summary Judgment
and the Estate’s Revised Offer-in-Compromise
On November 19, 2020, the Commissioner moved for summary
judgment. The Estate opposed the motion. In its opposition the Estate
9
[*9] argued, among other things, that IRS Appeals had overstated the
Estate’s reasonable collection potential by double-counting the balance
of the section 401(k) account. Discussions between the parties ensued.
On February 25, 2021, the Estate sent a letter to the
Commissioner’s counsel referencing a conference call in which the
parties had discussed remanding the case to IRS Appeals for further
consideration if the Estate would provide additional information
regarding its offer. Attached to that letter was, as the Estate put it, a
“resubmi[ssion]” of the Estate’s offer, including revised Forms 433-A
(OIC) and 656 and certain additional documentation.
The Estate’s revised Form 433-A (OIC) indicated that the Estate’s
assets consisted of a Bank of America account with a value of $24,990.
The Estate increased its offer-in-compromise amount from $10,000 to
$23,990, reflecting the value of the bank account less $1,000. As in the
initial Form 656, the Estate indicated the reason for the offer was
“Doubt as to Collectibility—I do not have enough assets and income to
pay the full amount.” But, unlike the initial form, the revised form also
stated in the “Explanation of Circumstances” section: “Doubt as to
Collectibility with Special Circumstances / Statement of Special
Circumstances with Exhibits Follows This Page.”
Attached to the Estate’s Form 656 was a “Supplemental
Statement of Special Circumstances” that purported to show why the
Estate’s $23,990 offer should be accepted. In general, the Supplemental
Statement of Special Circumstances asserted that there were claims and
expenses of $230,768 having priority over the Estate’s unpaid federal
tax liability, including an “Unsatisfied Judgment debt” of $100,000 the
Estate owed to Ms. Washington. The Supplemental Statement of
Special Circumstances stated that because the amount of priority claims
(i.e., $230,768) exceeded the total assets of the Estate available for
distribution (i.e., $203,802), the $23,990 offer was reasonable.
To support the position set forth in the Supplemental Statement
of Special Circumstances, the Estate provided an informal accounting of
its expenses, copies of the supplemental information originally provided
to Settlement Officer Macaulay, a copy of the Divorce Decree, excerpts
from the MSA, and other supporting materials.
B.
Remand to IRS Appeals
The Commissioner’s counsel forwarded to IRS Appeals the
Estate’s revised Forms 433-A (OIC) and 656, including the
10
[*10] Supplemental Statement of Special Circumstances and other
supporting documentation.
The Commissioner then moved the Court to remand the Estate’s
case to IRS Appeals for a supplemental administrative hearing for the
purpose of reviewing the additional information and potentially
negotiating an offer-in-compromise. The Court issued an order granting
the Commissioner’s motion and remanding the case to IRS Appeals on
March 18, 2021.
C.
Supplemental Determination on Remand and
Commissioner’s New Motion for Summary Judgment
the
On remand, the Estate’s case was assigned to Appeals Officer
Charles E. Duff. Appeals Officer Duff held a hearing with the Estate’s
counsel on March 31, 2021. After reviewing the supplemental materials
forwarded to IRS Appeals, Appeals Officer Duff determined that the
beginning value of the Estate was $212,267. 6 He also determined that
only a portion of the Estate’s expenses ($91,355) was valid and senior to
its unpaid federal tax liability. 7 These two determinations resulted in a
reasonable collection potential of $120,912. Appeals Officer Duff noted
that he would not decrease the Estate’s reasonable collection potential
by the value of the purported judgment debt and also declined to deduct
from the Estate’s reasonable collection potential several other smaller
expenses that the Estate argued were senior to the unpaid tax liability.
The Estate provided Appeals Officer Duff with additional
documentation after the March 31 hearing, including informal estate
While the Estate claimed that the beginning value should be $203,802,
Appeals Officer Duff calculated the value by adding the following amounts: 2017
proceeds from a Fidelity section 401(k) account of $154,156; a Bank of America account
balance of $56,629; veterans’ benefits, Social Security benefits, and employer vacation
pay of $5,489; and 2016 distributions from a Fidelity account of $7,722. Appeals
Officer Duff then reduced the sum of those amounts ($223,996) by “allowed debits and
checks” of $11,729. These allowed debits and checks included, among other things,
approximately $9,000 in ATM cash withdrawals after Mr. Washington’s death, $1,000
in checks drawn on the Estate’s account after Mr. Washington’s death, and an
overdraft fee.
6
7 These expenses consisted of the following: federal estate tax of $45,123;
Maryland estate tax of $10,668; a tax preparation fee of $1,500; “state allowed costs”
of $17,306; and burial, cleaning, moving, rent, and parking expenses of $16,128. We
note that the sum of these amounts is $90,725, rather than $91,355, but a transposition
error appears to have led Appeals Officer Duff to use the latter number, to the Estate’s
benefit.
11
[*11] accountings, bank statements, and other records. On April 29,
2021, the Estate’s counsel faxed to Appeals Officer Duff explanations of
the Estate’s arguments regarding special circumstances warranting
acceptance of the Estate’s offer-in-compromise.
The special
circumstances consisted of the purported $100,000 debt to
Ms. Washington (which the Estate argued was supported by a judgment
lien) and the Estate’s payment of a loan on an automobile that was
transferred to Mr. and Ms. Washington’s son after Mr. Washington’s
death. Appeals Officer Duff continued the hearing in a separate
conference on May 10, in which he and counsel for the Estate discussed
the arguments presented in the April 29 facsimile. Appeals Officer Duff
determined that those arguments did not support finding “special
circumstances” that would warrant acceptance of the Estate’s offer-incompromise.
On June 17, 2021, Appeals Officer Duff issued a supplemental
notice of determination rejecting the Estate’s $23,990 offer and
sustaining the notice of intent to levy. In the supplemental notice,
Appeals Officer Duff found that (1) the requirements of any applicable
law or administrative procedure were met and that IRS records
confirmed the proper issuance of the notice and demand, notice of intent
to levy, and notice of a right to a CDP hearing; (2) an assessment was
properly made for each tax and period listed on the CDP notice and that
notice and demand for payment was mailed to the Estate’s last known
address; (3) there was a balance due when the notice of intent to levy
was issued; (4) Appeals Officer Duff had no prior involvement with
respect to the Relevant Tax Years; and (5) the IRS followed all legal and
procedural requirements, and the actions taken or proposed were
appropriate under the circumstances.
Following the issuance of the supplemental notice, we denied the
Commissioner’s first motion for summary judgment without prejudice
to his right to renew the motion based on the supplemental notice.
On September 9, 2021, the Commissioner filed the motion for
summary judgment now before us. The Estate filed a response opposing
the motion (Opposition), and the Commissioner filed a reply. We held a
remote hearing on the Commissioner’s motion on November 16, 2021, at
which both parties appeared and were heard.
We turn now to discussing the merits of the Commissioner’s
motion.
12
[*12]
I.
Discussion
Summary Judgment
The purpose of summary judgment is to expedite litigation and
avoid costly, time-consuming, and unnecessary trials. Fla. Peach Corp.
v. Commissioner, 90 T.C. 678, 681 (1988). The Court may grant
summary judgment when there is no genuine dispute as to any material
fact and a decision may be rendered as a matter of law. Rule 121(b);
Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), aff’d, 17
F.3d 965 (7th Cir. 1994). In deciding whether to grant summary
judgment, we construe factual materials and inferences drawn from
them in the light most favorable to the nonmoving party (here, the
Estate). Sundstrand Corp., 98 T.C. at 520.
The Estate argued in its Opposition that material facts remain in
dispute in this case. At the hearing, however, both parties agreed that
all remaining disputes are with respect to questions of law rather than
questions of fact. Accordingly, the parties agree that we may properly
resolve this case through summary adjudication.
II.
CDP Issues
A.
The CDP Process
Pursuant to section 6321, the Federal Government obtains a lien
against “all property and rights to property, whether real or personal”
of any person liable for federal tax upon demand for payment and failure
to pay. See Iannone v. Commissioner, 122 T.C. 287, 293 (2004). The lien
arises when tax is assessed. See I.R.C. § 6322.
The Code also authorizes the IRS to levy on (i.e., to seize) property
or property rights of any person who is liable for any tax and has failed
to pay that tax after proper notice and demand. I.R.C. §§ 6331,
7701(a)(11)(B), (12)(A)(i); see also Ramey v. Commissioner, 156 T.C. 1,
2–3 (2021). Because the power to levy is a strong remedy for collecting
unpaid tax, the Code, in section 6330, gives taxpayers the right to a
hearing with IRS Appeals (a CDP hearing). I.R.C. § 6330(b)(1); Ramey,
156 T.C. at 2.
At the CDP hearing, IRS Appeals must verify that the
requirements of any applicable law or administrative procedure have
been met. I.R.C. § 6330(c)(1). Additionally, IRS Appeals generally must
consider any issues raised by the taxpayer. I.R.C. § 6330(c)(3)(B). This
13
[*13] includes offers of collection alternatives, such as offers-incompromise. I.R.C. § 6330(c)(2)(A)(iii). Finally, IRS Appeals must
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.” I.R.C. § 6330(c)(3)(C). See generally Byers v. Commissioner,
740 F.3d 668, 672 (D.C. Cir. 2014), aff’g T.C. Memo. 2012-27; Moosally
v. Commissioner, 142 T.C. 183, 187 (2014); Weber v. Commissioner, 138
T.C. 348, 354 (2012).
B.
Offers-in-Compromise
In general terms, an offer-in-compromise is an agreement
between the Government and a taxpayer to settle a tax liability for less
than the full amount owed. See I.R.C. § 7122(a); Treas. Reg. § 301.71221(a); Internal Revenue Manual (IRM) 8.23.1.1.1(1) (Aug. 23, 2021). 8
Offers-in-compromise are authorized by section 7122(a), which provides
that the Secretary may compromise any civil or criminal case arising
under the internal revenue laws. The decision whether to accept or
reject an offer-in-compromise is left to the Secretary’s discretion. Fargo
v. Commissioner, 447 F.3d 706, 712 (9th Cir. 2006), aff’g T.C. Memo.
2004-13; see also Treas. Reg. § 301.7122-1(c)(1).
The Secretary may accept an offer-in-compromise on three
grounds: (1) doubt as to liability, (2) doubt as to collectibility, and
(3) the promotion of effective tax administration.
See Treas.
Reg. § 301.7122-1(b). Doubt as to liability is not at issue in this case.
1.
Doubt as to Collectibility
The Secretary may accept an offer-in-compromise on a “doubt as
to collectibility” basis when the taxpayer’s assets and income render full
collection unlikely. Id. subpara. (2). Conversely, the Secretary may
reject an offer-in-compromise when the taxpayer’s reasonable collection
potential exceeds the amount it proposed to pay. See Johnson v.
8 The provisions of the IRM can be instructive in understanding the IRS’s
interpretation of a statute, see Ginsburg v. Commissioner, 127 T.C. 75, 87 (2006), and
in ascertaining the procedures the IRS expects its employees to follow, see Wadleigh v.
Commissioner, 134 T.C. 280, 294 (2010). The IRM does not, however, have the force of
law. See Marks v. Commissioner, 947 F.2d 983, 986 n.1 (D.C. Cir. 1991), aff’g T.C.
Memo. 1989-575; Vallone v. Commissioner, 88 T.C. 794, 807 (1987).
14
[*14] Commissioner, 136 T.C. 475, 486 (2011), aff’d, 502 F. App’x 1 (D.C.
Cir. 2013).
In general, any offer substantially below the taxpayer’s
reasonable collection potential is rejected unless special circumstances
justify acceptance of the offer. See Gustashaw v. Commissioner, T.C.
Memo. 2018-215, at *15–16; Mack v. Commissioner, T.C. Memo. 201854, at *10; Rev. Proc. 2003-71, § 4.02(2), 2003-2 C.B. 517, 517. Special
circumstances include:
(1) circumstances demonstrating that the taxpayer would
suffer economic hardship if the IRS were to collect from
him an amount equal to the reasonable collection potential
of the case or (2) if no demonstration of such suffering can
be made, circumstances justifying acceptance of an amount
less than the reasonable collection potential of the case
based on public policy or equity considerations.
Murphy v. Commissioner, 125 T.C. 301, 309 (2005), aff’d, 469 F.3d 27
(1st Cir. 2006); see also IRM 5.8.4.2 (May 10, 2013). Compelling public
policy or equity considerations exist when, because of exceptional
circumstances, collection of the full liability would undermine public
confidence that the tax laws are being administered in a fair and
equitable manner.
See Treas. Reg. § 301.7122-1(b)(3)(ii); see also
Murphy, 125 T.C. at 309; IRM 5.8.4.2(4).
2.
Promotion of Effective Tax Administration
When a taxpayer’s reasonable collection potential exceeds the
taxpayer’s liability—i.e., when the Secretary determines that the
taxpayer is able to pay the liability in full—doubt as to collectibility is
not a ground for compromise. But the Secretary may still enter into a
compromise on effective tax administration grounds if (1) collection of
the full liability would cause the taxpayer economic hardship or
(2) exceptional circumstances exist so that collection of the full liability
would undermine public confidence that the tax laws are being
administered in a fair and equitable manner. Treas. Reg. § 301.71221(b)(3)(i) and (ii). No compromise is permitted for effective tax
administration reasons if compromise of the liability would undermine
compliance by taxpayers with the tax laws. Id. subdiv. (iii).
15
[*15]
3.
Offers-in-Compromise and IRS Appeals Procedures
When an offer-in-compromise is made at a CDP hearing, IRS
Appeals generally forwards the offer to the COIC unit, which
investigates the offer and either accepts it or recommends that IRS
Appeals reject it. See IRM 8.22.7.10.1.1(1) and (2) (Aug. 26, 2020). If the
COIC unit recommends rejection, IRS Appeals reconsiders disputed
items. Id. 8.22.7.10.1.1(3).
In certain circumstances, an IRS Appeals officer evaluating an
offer-in-compromise may request assistance from a specialized unit. See
id. 8.22.7.4.2(1) and (2), 8.23.3.3.1.3 and .4 (Aug. 18, 2017). But even in
those cases, IRS Appeals retains jurisdiction over the offer-incompromise and its disposition. See id. 8.22.7.10.1.1(3), 8.23.3.3.1.4(7)–
(9).
C.
Standard of Review
Section 6330(d)(1) does not prescribe the standard of review that
this Court should apply in reviewing an IRS administrative
determination in a CDP case. The framework for that review is set out
in our cases.
When the validity of the underlying tax liability is properly at
issue in a collection review proceeding, the Court will review the matter
de novo. Giamelli v. Commissioner, 129 T.C. 107, 111 (2007); Davis v.
Commissioner, 115 T.C. 35, 39 (2000). When (as here) the underlying
liability is not properly before us, we review the determination for abuse
of discretion. Byers v. Commissioner, 740 F.3d at 675 (citing Tucker v.
Commissioner, 676 F.3d 1129, 1135–37 (D.C. Cir. 2012), aff’g 135 T.C.
114 (2010) and T.C. Memo. 2011-67); Giamelli, 129 T.C. at 111; Sego v.
Commissioner, 114 T.C. 604, 610 (2000); Goza v. Commissioner, 114 T.C.
176, 182 (2000). That is, we do not substitute our own judgment for that
of IRS Appeals and do not decide de novo whether we would have
reached the same determination as IRS Appeals. Rather, we decide
whether IRS Appeals’ determination was arbitrary, capricious, or
without sound basis in fact or law. Murphy, 125 T.C. at 320.
16
[*16] Because the underlying tax liability is not at issue in this case,
we review Appeals Officer Duff’s supplemental determination for abuse
of discretion. 9
III.
Application of CDP Principles to the Estate’s Case
The Commissioner argues that Appeals Officer Duff was correct
when he rejected the Estate’s offers-in-compromise and sustained the
notice of intent to levy. The Estate argues that Appeals Officer Duff’s
determination was an abuse of discretion. For the reasons described
below, we agree with the Commissioner. We address each of the Estate’s
arguments in turn.
A.
Failure to Satisfy Verification Requirements
The Estate first claims that Appeals Officer Duff abused his
discretion by failing to satisfy the verification requirements of
section 6330(c)(1). That provision states that “[t]he appeals officer shall
at the hearing obtain verification from the Secretary that the
requirements of any applicable law or administrative procedure have
been met.” I.R.C. § 6330(c)(1).
The Estate argues that Appeals Officer Duff failed to satisfy this
requirement because provisions of the IRM required that the Estate’s
offers-in-compromise be forwarded to a specialized unit in Austin, Texas
(Austin Office), for consideration. 10 In the Estate’s view, Appeals Officer
Duff’s (and the other Appeals officers’) failure to forward the Estate’s
offers to the Austin Office constituted an abuse of discretion.
We disagree.
The IRM provisions the Estate cites establish that the Austin
Office considers only offers-in-compromise based on effective tax
9 As the Estate recognizes in its Opposition, when this Court remands a case
to IRS Appeals, we review the position taken in the last supplemental determination
instead of any prior notices. See Kelby v. Commissioner, 130 T.C. 79, 86 (2008).
Accordingly, we focus here on Appeals Officer Duff’s determination.
10 In 2002, the IRS established the Austin Office “[i]n order to develop
consistency in the interpretation and application” of the rules regarding offers-incompromise submitted on an “Effective Tax Administration” basis. See IRM
5.8.11.5.1(2) (Oct. 4, 2019); see also T.D. 9007, 2002-2 C.B. 349. See generally
Treas. Reg. § 301.7122-1.
17
[*17] administration. See, e.g., IRM 5.8.11.3.2(1) (Aug. 5, 2015),
5.8.11.5.1. 11 Moreover, the Austin Office investigates only a specific
subset of effective tax administration offers referred to as “non-economic
hardship effective tax administration” offers. These are effective tax
administration cases in which the taxpayer’s liability could be collected
in full without economic hardship, but the taxpayer can nonetheless
demonstrate that a compelling public policy or equity issue provides a
sufficient basis for compromise. 12 See id. 5.8.11.3.2(1) and (2); see also
id. 8.23.3.4.1(2), Ex. 8 (noting that IRS Appeals should contact the
Austin Office if “the taxpayer raises issues involving [Effective Tax
Administration] Public Policy”).
Neither of the Estate’s offers qualified for consideration as an
offer-in-compromise based on effective tax administration. Such
consideration is available only when the taxpayer is able to pay the
balance in full.
Murphy, 125 T.C. at 320 (Treasury
Regulation § 301.7122-1(b)(3)(ii) “makes the ability to make full
payment a precondition to any offer in compromise based on effective
tax administration.”); see also IRM 5.8.11.5(2) (Oct. 4, 2019) (“[U]nless
[the taxpayer] ha[s] the ability to full[y] pay the liability, the offer would
not meet the legal standard for [effective tax administration]
consideration.”). Here, Appeals Officer Duff determined that the Estate
could not pay the outstanding liability in full. And the Estate conceded
as much at the hearing. Accordingly, under the regulations and the IRM
provisions on which the Estate relies, the Estate’s offer did not qualify
for effective tax administration consideration and referral to the Austin
Office would not have been appropriate. 13
11 For example, IRM 5.8.11.5.1(3) states:
Only after consideration has been given to all other potential bases for
acceptance (e.g. [Doubt as to Liability, Doubt as to Collectibility, Doubt
as to Collectibility with Special Circumstances], and/or [Effective Tax
Administration] based on economic hardship) will [Effective Tax
Administration]-Public Policy/Equity be considered. Therefore, all
cases must have been completely developed under all other bases
before transfer will be accepted by the Austin Group . . . .”
These “non-economic hardship” effective tax administration offers are
sometimes referred to in the IRM as “NEH-ETA” offers, see, e.g., IRM 5.8.11.3.2(1), or
“ETA Public Policy” or “ETA Public Policy/Equity” offers, see, e.g., id. 5.8.1.15.5(2)
(Apr. 20, 2021), 5.8.11.3.2.1(4) (Oct. 4, 2019), 8.23.3.4.1(1) (Aug. 18, 2017).
12
13 In reaching this conclusion, we assume, solely for the sake of argument, that
the IRM provisions the Estate cites apply to IRS Appeals Officers and not just to
18
[*18] B.
Rejection of Offers-in-Compromise Based on Allegedly
Erroneous Reasonable Collection Potential Calculations
The Estate’s remaining arguments boil down to a claim that
Appeals Officer Duff abused his discretion in rejecting the Estate’s
revised offer-in-compromise because he miscalculated the Estate’s
reasonable collection potential. We address these arguments below.
1.
Ms. Washington’s Status as a Judgment Lien
Creditor
The Estate’s primary argument on this score hinges on whether
Appeals Officer Duff made an error of law in refusing to recognize
Ms. Washington as a judgment lien creditor of the Estate. Judgment
lien creditors who obtain their judgments before a notice of federal tax
lien is properly filed and meet certain other requirements take priority
over the United States. See I.R.C. § 6323(a); Treas. Reg. § 301.6323(h)1(g). Accordingly, a taxpayer’s reasonable collection potential is reduced
by amounts owed to such judgment lien creditors. See IRM 5.8.4.3.1(1)
(Apr. 30, 2015), 5.8.5.4.1(1) (Sept. 30, 2013). As we explain below,
however, we see no error in Appeals Officer Duff’s determination.
Whether an individual is a judgment lien creditor with priority
over a federal tax lien is a question of federal law. See In re Charco, Inc.,
432 F.3d 300, 304 (4th Cir. 2005) (citing Aquilino v. United States,
363 U.S. 509, 514 (1960)). See generally United States v. McDermott,
507 U.S. 447, 449–50 (1993). As relevant here, under the terms of the
applicable regulation, to be a “judgment lien creditor” a person (1) must
have a valid judgment, (2) from a court of record and competent
collection personnel, as the Commissioner contends. Moreover, in light of our
conclusion, we need not address whether section 6330(c)(1) in fact requires an IRS
Appeals officer to verify that the officer’s own actions at a CDP hearing (as opposed to
actions undertaken by IRS personnel outside of IRS Appeals before the hearing)
comply with the “requirements of any applicable law or administrative procedure.”
But consider section 6330(c)(1) (requiring that an IRS Appeals officer obtain
verification “from the Secretary,” not from IRS Appeals) and Treasury Regulation
§ 301.6330-1(e)(1) (“Prior to issuance of a determination, Appeals is required to obtain
verification from the IRS office collecting the tax that the requirements of any
applicable law or administrative procedure with respect to the proposed levy have been
met.” (emphasis added)).
19
[*19] jurisdiction, (3) for the recovery of specifically designated property
or a certain sum of money. See Treas. Reg. § 301.6323(h)-1(g). 14
There is no dispute here that the Divorce Decree contains a valid
Judgment and that the Superior Court of the District of Columbia is a
court of record that had jurisdiction to enter the Judgment. But the
parties dispute whether the Judgment provides for Ms. Washington to
recover specifically designated property or a certain sum of money. The
Estate maintains that it does. We conclude that the Estate’s position
lacks merit.
a.
Text of the Judgment
To begin with, the Judgment states simply that Ms. Washington
is awarded a divorce and that the superior court retains jurisdiction for
the entry of an appropriate retirement order. The Judgment does not
refer to any specific property or sum of money owed to Ms. Washington.
Nor does it incorporate by reference any other document addressing
such rights. In short, the Judgment on its face offers no support for the
Estate’s argument that Ms. Washington is a judgment lien creditor. See
Travelers Indem. Co. v. Bailey, 557 U.S. 137, 150–51 (2009) (stating that
a court should enforce a court order “according to its unambiguous
terms”).
Despite the Judgment’s silence with respect to any property
rights or any monetary award for Ms. Washington, the Estate argues
that the Judgment is ambiguous and that arrangements outside the four
14 Treasury Regulation § 301.6323(h)-1(g) further provides, in relevant part:
In the case of a judgment for the recovery of a certain sum of money, a
judgment lien creditor is a person who has perfected a lien under the
judgment on the property involved. A judgment lien is not perfected
until the identity of the lienor, the property subject to the lien, and the
amount of the lien are established. Accordingly, a judgment lien does
not include an attachment or garnishment lien until the lien has
ripened into judgment, even though under local law the lien of the
judgment relates back to an earlier date. If recording or docketing is
necessary under local law before a judgment becomes effective against
third parties acquiring liens on real property, a judgment lien under
such local law is not perfected with respect to real property until the
time of such recordation or docketing. If under local law levy or seizure
is necessary before a judgment lien becomes effective against third
parties acquiring liens on personal property, then a judgment lien
under such local law is not perfected until levy or seizure of the
personal property involved. . . .
20
[*20] corners of a divorce judgment can sometimes be made part of the
judgment through the doctrines of merger 15 and incorporation. 16 In
particular, the Estate contends that Ms. Washington obtained a
judgment lien for $100,000—the amount of life insurance proceeds to
which, according to the Estate, Ms. Washington was entitled under the
MSA—because the MSA was incorporated into the Divorce Decree.
The Estate’s arguments raise significant threshold questions,
including (1) whether the text of the Judgment is unambiguous and
therefore forecloses reliance on documents outside the Judgment, and
(2) if the text of the Judgment is ambiguous (thereby permitting review
of the record of the divorce proceedings and the MSA), whether the
prerequisites for incorporation have in fact been satisfied. But we need
not resolve these questions here, because even assuming they should be
resolved in favor of the Estate, the Estate still would not prevail.
b.
Lack of Substantive Support for the Estate’s
Position
As already noted, Ms. Washington’s claim rests on section 5.1 of
the MSA, addressing life insurance. That section states:
The parties’ son is currently named as the beneficiary of
the Husband’s life insurance through his employment with
a face amount of $100,000. The Husband agrees to
irrevocably elect the Wife as the beneficiary of this
coverage on his life for so long as he is employed, and
further agrees not to borrow against or otherwise
encumber such life insurance proceeds. The Husband
15 Although approaches vary among jurisdictions, an outside agreement may
be merged into the divorce judgment. When that happens, the agreement typically is
extinguished, and the rights and obligations of the parties are governed exclusively by
the divorce decree. See, e.g., Doris Del Tosto Brogan, Divorce Settlement Agreements:
The Problem of Merger or Incorporation and the Status of the Agreement in Relation to
the Decree, 67 Neb. L. Rev. 235, 245 (1988). As a result, the terms of an agreement
merged into a divorce decree generally may be enforced through contempt proceedings
(and modified by the court), but do not provide the parties with a cause of action based
on contractual rights. See id. at 244; Duffy v. Duffy, 881 A.2d 630, 638–39 (D.C. 2005).
16 By contrast to merger, an agreement that is incorporated (but not merged)
into a divorce decree typically survives as a separate agreement and is rendered res
judicata for purposes of any subsequent action. See Brogan, supra, at 247. Such
agreements generally are less easily modified by the court, see, e.g., Blount v. Padgett,
261 A.3d 200, 205 n.8 (D.C. 2021); Duffy, 881 A.2d at 640, but often can be enforced
directly by the parties in a breach of contract action, see Brogan, supra, at 245.
21
[*21] agrees that his notarized signature on page [13] of this
Agreement constitutes his irrevocable designation of the
Wife as such beneficiary, and directs Radio One
[Mr. Washington’s employer], upon receipt of a copy of this
paragraph and the signature page, . . . to effectuate the
intent of this paragraph by so listing the Wife as the
irrevocable beneficiary.
For the Estate to prevail, the Divorce Decree must have provided
a judgment either (1) “for the recovery of specifically designated
property” or (2) “for a certain sum of money.”
See Treas.
Reg. § 301.6323(h)-1(g). It is not altogether clear on which of these two
alternatives the Estate relies, but it is clear that neither one produces
the Estate’s desired result.
i.
“Specifically Designated Property”
Take the first alternative. If the Estate’s argument is that the
Divorce Decree represents a judgment “for the recovery of specifically
designated property” in the form of the life insurance policy, then
Appeals Officer Duff’s analysis did not affect Ms. Washington’s
purported interest. Appeals Officer Duff did not include the proceeds of
the life insurance policy in the reasonable collection potential
computation. Therefore, even if Ms. Washington had obtained a
judgment lien with respect to that “specifically designated property”
(that is, the life insurance policy), it would have been irrelevant to
Appeals Officer Duff’s analysis, and he could not have committed any
error adverse to the Estate with respect to it. Put another way, even if
we were to agree with the Estate that the Divorce Decree gave
Ms. Washington a priority claim with respect to the life insurance policy
(a proposition on which we express no view), Appeals Officer Duff’s
determination left that claim untouched because he disregarded the life
insurance policy as an asset of the Estate when determining the Estate’s
reasonable collection potential. Put yet another way, with respect to the
life insurance policy, Appeals Officer Duff’s reasonable collection
potential computations in effect treated Ms. Washington’s interest as
having priority over the United States’ claim.
ii.
“Certain Sum of Money”
Turn next to the second alternative. If the Estate’s argument is
that the Divorce Decree represents a judgment “for a certain sum of
money,” the argument fails for at least three reasons.
22
[*22] First, the text of section 5.1 of the MSA makes plain that
Ms. Washington’s opportunity to obtain $100,000 was entirely
contingent, not a judgment for a certain sum of money collectible
immediately. See, e.g., Don King Prods., Inc. v. Thomas, 945 F.2d 529,
534 (2d Cir. 1991) (“[T]he assignment of a right to receive income
contingent upon the occurrence of a future event . . . does not convey a
present interest to the assignee.”); Carrillo v. Coors, 901 P.2d 214, 217
(N.M. Ct. App. 1995) (surveying the applicable law and concluding that,
absent a contrary statutory provision, “financial obligations in a divorce
decree do not give rise to a judgment lien unless they are for a fixed sum
which is collectible immediately”). For Ms. Washington to be entitled to
recover under the policy, Mr. Washington would have had to die while
employed by Radio One, his employer when he executed the MSA, and
Radio One would have had to retain in force the insurance coverage from
the date of the Divorce Decree to the date of Mr. Washington’s death.
But the Divorce Decree left Mr. Washington free to stop working for
Radio One or to stop working altogether. And, of course, the Divorce
Decree could not prevent Radio One from discontinuing the life
insurance arrangement.
So, as of the date of the Judgment,
Ms. Washington did not have, and could not seek execution based on, a
judgment for a certain sum of money. 17
Second, the Estate argues that if Mr. Washington lost his job, or
if Radio One decided to terminate the life insurance coverage, the MSA
would require Mr. Washington to obtain alternative coverage or
otherwise act to replace the lost benefit to Ms. Washington. We question
the Estate’s reading of the MSA. But, even if the Estate were correct in
its reading, the argument goes to show that any rights Ms. Washington
obtained under section 5.1 of the MSA represented at best a commitment
by Mr. Washington to undertake one or more specific actions other than
the payment of money. 18 An obligation to take such actions is not a
judgment for a sum of money.
17 To the extent the Estate maintains that Ms. Washington’s claim against the
Estate arose on Mr. Washington’s death, when it became clear that Ms. Washington
would not receive the property specified by the Divorce Decree, that claim for money
damages has not been reduced to judgment and therefore could not yet give rise to
judgment lien creditor status.
18 Ms. Washington further maintains that Mr. Washington breached the MSA
by failing to notify his employer that Ms. Washington was the new beneficiary under
the policy. We are not so sure. The MSA required Mr. Washington to designate Ms.
Washington as the beneficiary of his life insurance coverage and then stated: “The
23
[*23] Finally, the regulations specifically provide that “[i]n the case of
a judgment for the recovery of a certain sum of money, a judgment lien
creditor is a person who has perfected a lien under the judgment on the
property involved.” Treas. Reg. § 301.6323(h)-1(g). In determining
whether a lien is perfected, “we look first to the local law setting forth
the lien procedure and its legal consequences.” Don King Prods., Inc.,
945 F.2d at 533 (quoting Hartford Provision Co. v. United States, 579
F.2d 7, 9 (2d Cir. 1978)); see also Johnson v. Commissioner, T.C. Memo.
1999-284, 1999 WL 667281, at *3 n.6 (noting that the regulations
require a judgment lien creditor to comply with local law for creating
and perfecting a judgment). Under the law of the District of Columbia,
for a money judgment to create a lien, the judgment or decree generally
must be “filed and recorded in the office of the Recorder of Deeds of the
District of Columbia.” See D.C. Code §§ 15-101(a), 15-102(a) (2021). The
Estate offered no evidence either before IRS Appeals or in this Court
that it recorded the Judgment as contemplated by D.C. law. Nor does
the Estate argue that Ms. Washington perfected a lien by any other
means, such as by following the procedures described in D.C.
Code § 15-301–323. The Estate argues that no recording is required
under the facts in this case. Opposition at 19. The Estate offers no
authority for this proposition, and the only potentially relevant rule we
have found—D.C. Code § 46-204(b) 19—does not help the Estate, as the
MSA makes no provision for the payment of alimony or maintenance. 20
In short, based on the foregoing, even assuming the MSA should
be viewed as incorporated into the Judgment, Appeals Officer Duff did
Husband agrees that his notarized signature on page [13] of this Agreement
constitutes his irrevocable designation.” Thus, Mr. Washington arguably fulfilled his
obligation under the MSA simply by signing the MSA. From that point, any party,
including Ms. Washington, could have presented the MSA to Radio One and requested
the change. It is not clear to us why the Estate should be held responsible for the
failure to change the beneficiary of the life insurance policy, nor why the United States
should bear the financial burden of Ms. Washington’s failure to undertake a
ministerial act on her own.
D.C. Code § 46-204(b) provides: “An award of alimony, child support, or
maintenance is a money judgment that becomes absolute, vested, and upon which
execution may be taken, when it becomes due.”
19
20 We also note that D.C. Code § 15-101(a) provides that a judgment or decree
for the payment of money rendered in the Superior Court of the District of Columbia
ceases to have any operation or effect 12 years “from the date when an execution might
first be issued thereon, or from the date of the last order of revival thereof.” The
Divorce Decree at issue here was issued in 2006, and the record does not contain any
order of revival. See D.C. Code § 15-103 (2021); see also Massey v. Massey, 210 A.3d
148, 151, 153–54 (D.C. 2019).
24
[*24] not err in refusing to treat Ms. Washington as a judgment lien
creditor in his reasonable collection potential computation.
2.
Inclusion of Proceeds from Section 401(k) Account in
Reasonable Collection Potential
The Estate also argues that a portion of the proceeds of
Mr. Washington’s section 401(k) account should not be included in its
reasonable collection potential because Ms. Washington, as personal
representative, has the right to designate herself rather than the Estate
as the account’s beneficiary. 21 Accordingly, the Estate contends that it
has no interest in that portion of the section 401(k) account proceeds
unless Ms. Washington acts to designate the Estate as beneficiary, and
therefore that the United States’ tax lien cannot attach to the proceeds.
In support, the Estate again argues that the terms of the MSA
were incorporated in the Divorce Decree, “grant[ing Ms. Washington]
the right to designate a beneficiary of those plan proceeds when, as in
this case, no beneficiary has been designated.” Opposition at 23. And
we once again disagree with the Estate’s interpretation of the MSA.
The relevant section of the MSA is titled “Waiver of Pension and
Retirement Rights” and provides as follows:
Except as otherwise set forth herein, each party hereby
expressly waives any legal right he or she may have under
any federal or state law as a spouse or former spouse, or
person with an insurable interest, or otherwise, to
participate as a “spouse” or “former spouse” or payee or
alternate payee or beneficiary or otherwise under the other
party’s . . . 401(k) . . . plan, . . . including, but not limited to,
the right to receive any benefit whether in the form of a
lump sum death benefit . . . .
The upshot is that, in signing the MSA, Ms. Washington
disclaimed any right to Mr. Washington’s section 401(k) account, even if
21 Solely for the sake of analysis, we assume for purposes of this discussion that
the Estate properly raised this argument with Appeals Officer Duff at the CDP
hearing, although the Commissioner disagrees.
25
[*25] she otherwise would have had rights to that account under federal
or state law. To enforce this arrangement, the MSA goes on to provide:
In an effort to comply with the intent of this article; (i) if a
party is unable for any reason to change the beneficiary or
the death benefits of his or her . . . plan . . . , or, (ii) if a
party files an election subsequent to the date of execution
of this Agreement but such election is for any reason
ineffective and the benefits are, in fact, paid to the
surviving party contrary to the intention of this paragraph,
or, (iii) if a party fails to designate a beneficiary and the
plan provides for payment to the “spouse” or “former
spouse,” then in any of such events the surviving party
shall . . . at the direction of and at the sole discretion of the
decedent’s personal representative, either: (A) disclaim
any entitlement to any benefits received or receivable; or
(B) assign all rights to receive such benefits to the estate of
the deceased party or the person designated by the
decedent or the decedent’s personal representative to
receive such benefits; or (C) pay the next after-tax benefits
over to the estate of the deceased party or to the person
designated by the decedent or the decedent’s personal
representative.
The text of the MSA shows that the personal representative’s
authority to direct the assignment or payment of benefits is triggered by
certain conditions. Namely, Mr. Washington must have failed to change
his beneficiary successfully or to provide for a beneficiary, with the
result that Ms. Washington is paid benefits under the terms of the plan
(contrary to the intent of the MSA). None of these conditions was
triggered here. Mr. Washington’s section 401(k) plan did not make any
payments to Ms. Washington as a former spouse. Accordingly, the
enforcement provisions of section 4.6(c) of the MSA remained dormant,
and the personal representative simply had no occasion to exercise any
rights under those provisions.
Moreover, as the Commissioner points out, the actions of the plan
and Ms. Washington herself belie any assertion that the MSA gave the
personal representative a plenary right to change the beneficiary of
Mr. Washington’s section 401(k) account after his death. The balance of
Mr. Washington’s section 401(k) account was always included as an
asset of the Estate in reports Ms. Washington filed with the State of
26
[*26] Maryland’s “orphan’s court.” 22 And that balance was eventually
deposited in the Estate’s bank account.
The Estate’s claim that the personal representative was entitled
to change the beneficiary of the section 401(k) account after
Mr. Washington’s death and before any distributions were made (thus,
defeating the United States’ lien on those proceeds) also flies in the face
of the relevant regulations.
Treasury Regulation § 1.401-1(b)(4)
provides that a plan like the one in which Mr. Washington participated
“is for the exclusive benefit of employees or their beneficiaries.” The
regulations go on to explain that “[t]he term ‘beneficiaries’ of an
employee within the meaning of section 401 includes the estate of the
employee, dependents of the employee, persons who are the natural
objects of the employee’s bounty, and any persons designated by the
employee to share in the benefits of the plan after the death of the
employee.” Treas. Reg. § 1.401-1(b)(4) (emphasis added). A personal
representative is not the employee, and if a plan were to allow the
personal representative to direct proceeds of the plan at will following
the employee’s death, that plan would not comply with section 401. See
id.
Based on the foregoing, we conclude that Appeals Officer Duff did
not abuse his discretion in determining that the section 401(k) proceeds
were properly includible in the Estate’s reasonable collection potential.
3.
Other Alleged Reasonable
Calculation Errors
Collection
Potential
The Estate further contends that certain other expenses were
erroneously excluded from the Estate’s reasonable collection potential
and that Appeals Officer Duff “double-counted” items in calculating
reasonable collection potential. 23 But we have consistently held that
errors in reasonable collection potential calculations are harmless, even
when considering offers-in-compromise made on a “doubt as to
collectibility with special circumstances” basis, when the correct, or
allegedly correct, reasonable collection potential is still greater than a
22 The orphan’s courts are Maryland’s probate courts.
A.2d 812, 816 (Md. 2000).
Radcliff v. Vance, 757
23 For example, the Estate alleges that Appeals Officer Duff erroneously
included in the reasonable collection potential computation veterans’ benefits that
were ultimately returned and a $20,000 tuition payment for the benefit of the
Washingtons’ son, of which $10,000 was returned.
27
[*27] taxpayer’s offer. See, e.g., Gustashaw, T.C. Memo. 2018-215,
at *23–24 & n.33 (citing Estate of Duncan v. Commissioner, T.C. Memo.
2016-204, at *22 n.5, aff’d, 890 F.3d 192 (5th Cir. 2018)) (finding that in
evaluating the taxpayers’ revised offer-in-compromise submitted on a
“doubt as to collectibility with special circumstances” basis, the
settlement officer made errors in calculating the taxpayers’ reasonable
collection potential; however, the errors were harmless because the
taxpayers’ reasonable collection potential, even when adjusted for the
settlement officer’s errors, far exceeded the offer-in-compromise
amount); see also Tucker v. Commissioner, 676 F.3d at 1136–37 (holding
that this Court is not barred from upholding a settlement officer’s
rejection of an offer-in-compromise even when the settlement officer
made errors in calculating the taxpayer’s reasonable collection
potential). 24
Aside from the Estate’s arguments relating to the life insurance
and section 401(k) account proceeds, which we have addressed above,
none of the remaining errors alleged by the Estate is significant
enough—either alone or combined with others—to reduce the Estate’s
reasonable collection potential below the amount of its revised offer-incompromise. Therefore, even if the Estate’s assertions were correct, the
mistakes would constitute harmless error and would not amount to an
abuse of discretion. See Estate of Duncan, T.C. Memo. 2016-204, at *22
n.5 (“Determination of [the taxpayer’s] exact [reasonable collection
potential] would be a meaningless exercise where (as here) the
taxpayers admitted that their reasonable collection potential exceeded
their offer . . . .”); see also Tucker v. Commissioner, 676 F.3d at 1137 (“If
the agency’s mistake did not affect the outcome, if it did not prejudice
the petitioner, it would be senseless to vacate and remand for
reconsideration.” (quoting PDK Labs. Inc. v. DEA, 362 F.3d 786, 799
(D.C. Cir. 2004))).
24 Alphson v. Commissioner, T.C. Memo. 2016-84, at *16 (“Even if the
settlement officer makes some errors in calculating the reasonable collection potential,
we uphold determinations when the taxpayer’s offer-in-compromise was far less than
the correct reasonable collection potential.”); Johnson v. Commissioner, T.C. Memo.
2007-29, 2007 WL 415319 (finding that when error in reasonable collection potential
calculations is corrected, and reasonable collection potential still exceeds offer-incompromise amount, the erroneous calculation did not amount to an abuse of
discretion), aff’d in part sub nom. Keller v. Commissioner, 568 F.3d 710 (9th Cir. 2009);
Lindley v. Commissioner, T.C. Memo. 2006-229, 2006 WL 3040938, at *6 (finding that
settlement officer’s errors in calculating reasonable collection potential “were harmless
because, even when corrected, [the taxpayers’] reasonable collection potential exceeds
their offer amount”), aff’d in part sub nom. Keller v. Commissioner, 568 F.3d 710.
28
[*28] C.
Consideration of Special Circumstances
Finally, the Estate argues that Appeals Officer Duff abused his
discretion by not fully or properly considering the factors listed in IRM
5.8.11.3.2 to assist IRS employees in determining whether special
circumstances warrant acceptance of an offer-in-compromise in an
amount less than a taxpayer’s reasonable collection potential. It is not
necessary for an IRS Appeals officer to “specifically list in the notice of
determination every single fact that [he] considered in arriving at the
determination” that no special circumstances exist.
Johnson v.
Commissioner, 2007 WL 415139, at *5. Additionally, IRM provisions
are not binding, nor do they confer specific rights on taxpayers. 25 In any
event, the record shows that Appeals Officer Duff did consider the
Estate’s Supplemental Statement of Special Circumstances and the
facsimile sent to Appeals Officer Duff on April 29, 2021, and determined
that special circumstances warranting the acceptance of the Estate’s
revised offer on a “doubt as to collectibility with special circumstances”
basis were not present.
The Estate’s main contention in the Supplemental Statement of
Special Circumstances was that the Estate was insolvent, in large part
because of Ms. Washington’s alleged judgment lien on the Estate. As we
have previously discussed in Part III.B.1 above, we see no error in
Appeals Officer Duff’s determination that any claims Ms. Washington
might have with respect to Mr. Washington’s life insurance proceeds
should not affect the Estate’s reasonable collection potential
calculations.
The Estate raised other arguments 26 in its Opposition alleging
special circumstances. But the record indicates that the Estate failed to
raise these arguments either during the initial hearing or during the
supplemental hearing. In the circumstances here, we cannot hold that
Appeals Officer Duff abused his discretion by not considering arguments
25 See supra cases cited note 8; see also Fargo v. Commissioner, 447 F.3d at 713
(explaining that the IRM does not have force of law, certain provisions are merely
advisory in nature, and the IRM gives IRS Appeals officers considerable discretion to
accept or reject offers-in-compromise); Riland v. Commissioner, 79 T.C. 185 (1982)
(finding that the failure to abide by procedures contained in the IRM is not a violation
of due process).
26 The special circumstances alleged included Ms. Washington’s service to the
Estate as personal representative, her advancing of funds to the Estate (which were
ultimately reimbursed from the Estate’s account), and her time and effort expended in
resolving the Estate’s state and federal tax liabilities.
29
[*29] that were not presented to him. See Giamelli, 129 T.C. at 115;
see also Boulware v. Commissioner, 816 F.3d 133, 136 (D.C. Cir. 2016),
aff’g T.C. Memo. 2014-80.
Even assuming that these arguments were properly before IRS
Appeals, we would not find their rejection to be an abuse of discretion
on the facts of this case. When boiled down to their essence, the Estate’s
arguments amount to a plea (1) that Mr. and Ms. Washington’s son be
permitted to retain $100,000 in life insurance proceeds paid to him
under the policy maintained by Mr. Washington’s employer, (2) that
Ms. Washington (who, under the MSA, was supposed to have received
the life insurance proceeds) be permitted to recover instead $100,000
from a retirement account to which she had disclaimed all rights, and
(3) that the United States be required to compromise its claim for tax
due on the substantial income that Mr. Washington earned during the
Relevant Tax Years. We do not see how effective tax administration
could possibly support such a result. See Treas. Reg. § 301.71221(b)(3)(iii).
IV.
Conclusion
For the reasons set out above, the Commissioner is entitled to
judgment as a matter of law.
To reflect the foregoing,
An appropriate order and decision will be entered.
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