IRS OIC Johnson, (2011) 136 TC No. 23
The Tax Court has upheld IRS’s determination to reject an individual’s proposed offer in compromise (OIC) and sustain collection action against him. IRS’s determination, which was in part based on the inclusion of certain dissipated assets in the taxpayer’s reasonable collection potential (RCP), wasn’t an abuse of discretion.
Under Code Sec. 7122, IRS will consider an OIC offer in compromise where: (1) the taxpayer is unable to pay the tax; (2) there is doubt as to the taxpayer’s liability for the tax; or (3) a compromise would promote effective tax administration because collection of the full amount of tax would cause economic hardship for the taxpayer, or compelling public policy or equity considerations provide a sufficient basis for compromising the liability.
For an OIC based on doubt as to collectability, IRS considers an offer acceptable if it reasonably reflects the amount IRS could collect through other means. (Rev Proc 2003-71, 2003-2 CB 517) In some cases, IRS may discover in its investigation that assets are no longer available to pay the tax liability because they have been sold, given away, or spent on “non-priority” items or debts. Once it has been determined that a specific asset has been “dissipated” in this manner, the investigation should address whether the value of the asset, or a portion of its value, should be included in an acceptable offer amount.
Part 188.8.131.52 of the Internal Revenue Manual (IRM) lists the following considerations in determining whether the value of a dissipated asset should be included in a taxpayer’s RCP:
• when the asset was dissipated in relation to when the offer was submitted;
• when the asset was dissipated in relation to the liability;
• how the asset was dissipated;
• how any funds realized from the dissipation of assets were used; and
• the value of dissipated assets and the taxpayer’s interest in those assets.
If the taxpayer establishes that the dissipated asset was used for necessary living expenses, then IRM pt. 184.108.40.206.(4) instructs the settlement officer not to include it in the RCP calculation. However, if the taxpayer fails to substantiate the disposition of the funds, then the settlement officer may consider their full value as part of the RCP.
Case Particulars. In ’99, Stephen Johnson, an investment banker, established a Singapore-based investment firm in which he held a 50% ownership interest. In ’99 and 2000, his primary sources of regular income were his salary from the firm and tribal income that he received annually as a member of the Saginaw Chippewa Indian Tribe.
During ’99 and 2000, Johnson liquidated a number of investments which, when combined with his other earnings, resulted in $1.7 and $1.8 million in adjusted gross income (AGI) for each year. He filed returns for these years in 2002, but didn’t pay any taxes.
In 2007, IRS notified Johnson that a Federal tax lien had been filed for his ’99 and 2000 liabilities, then it issued a levy notice two days later. Johnson timely requested a collection due process (CDP) hearing. The resulting CDP process, which included three formal OICs and both formal and informal amendments, took nearly four years.
Johnson’s first formal OIC was submitted in 2007. It offered $225,000 to settle an estimated $2,324,895 liability. The settlement officer calculated Johnson’s RCP at $707,386 and recommended rejecting the offer. Johnson then submitted an informal proposal to amend the original OIC upward to $456,064, but then amended it downward to $350,000.
After a series of discussions, Johnson submitted an amended offer to pay $400,000 over eight months in December of 2008. This offer was amended a week later to make the payments over a slightly longer period. The settlement officer recommended accepting this offer after calculating Johnson’s RCP to be $364,392, but the officer’s manager rejected his recommendation.
Another settlement officer was assigned to the case. This officer calculated Johnson’s RCP to be $513,872 and advised him that a short-term cash offer of $500,000, with an additional $20,000 down payment, would be acceptable. However, Johnson’s representative informed the new settlement officer that the investment firm was winding up and Johnson could no longer afford the payment schedule in the December 2008 OIC. Additionally, he claimed that he had used most of his assets to fund the firm’s business operations and cover his living expenses, so his only remaining asset was his post-distribution interest in a technology investment fund worth $60,000. Johnson had his representatives amend the OIC down to $140,000, consisting of $80,000 of payments that he already made and his remaining $60,000 asset. The settlement officer rejected this informal offer.
The Office of Appeals issued its notice of determination on April 17, 2009, and Johnson filed a petition with the Tax Court alleging that his $140,000 offer was reasonable in light of his financial situation. Johnson was granted a supplemental administrative hearing. Another settlement officer conducted the hearing and determined that Johnson’s RCP was approximately $568,408 (approximately a quarter of what he owed). At a face-to-face conference, the parties discussed Johnson’s dissipation of $277,000 from the technology investment fund in 2008. Johnson claimed it was used to pay his representatives in connection with the Tax Court case, fund the OIC payment, and cover his personal living expenses, with the rest going towards his investment firm. However, he failed to provide any documentation substantiating these claims.
After further correspondence, Johnson’s representatives reiterated his $140,000 OIC, and the settlement officer determined that none of his proposals were acceptable. The settlement officer included in her calculation of Johnson’s RCP about $220,000 worth of dissipated assets. The settlement officer recommended, and the Office of Appeals issued, a supplemental notice sustaining the proposed lien and levy actions. Johnson argued that the Appeals Office abused its discretion in rejecting his OICs.
The Tax Court sided with IRS. The Tax Court held that IRS’s initial rejection of Johnson’s $400,000 OIC wasn’t an abuse of discretion, finding that the $400,000 OIC had been either amended or withdrawn at the time that Appeals made its original determination. And in any event, even if the offer had still been pending, rejecting that offer was still reasonable because: (i) Johnson had stated that he couldn’t make the payments that the OIC called for, thus rendering its execution pointless; and (ii) the settlement officer had determined that his RCP exceeded that amount, and it was thus contrary to the government’s interest.
Having concluded that the only offer pending during the supplemental hearing was the $140,000 offer, the Tax Court then determined that this amount was inadequate. The $140,000 included $80,000 that had already been paid in connection with earlier offers plus an additional $60,000–in effect, limiting his entire collection potential to the value of a single asset. Even if Johnson’s RCP wasn’t as great as the $445,181 calculated by the settlement officer, the Court found that Johnson’s RCP exceeded $60,000, and the settlement officer therefore properly concluded that he wasn’t eligible to compromise his liability basedw on doubt as to collectibility.
The Tax Court upheld the settlement officer’s rejection of Johnson’s OIC on three alternate grounds: the inclusion of Johnson’s liquidated investments as dissipated assets; the amount held in his personal bank accounts; and his projected future disposable income. The liquidated investments were properly included based on Johnson’s failure to show that he used those amounts for necessary living expenses, and the amount in his bank accounts was greater than 10% of the offered $60,000.
Further, Johnson’s argument that he should be projected as having no future income other than his tribal income was rejected. Even though his business was in the process of winding up, his argument reflected a misunderstanding between being temporarily unemployed and permanently unemployable, and the settlement officer reasonably concluded that Johnson was readily employable. Additionally, Johnson’s claim to reduce his monthly income by $3,000 in loan payments per month failed where he didn’t show that payment of this debt was necessary for either the production of income or the health and welfare of his family.
Johnson’s argument that the Office of Appeals reneged on previous acceptances of his OICs failed where no settlement officer actually accepted, or had the authority to accept, any of his offers. Finally, his claim that the CDP proceedings were “more intrusive than necessary” in violation of Code Sec. 6330(c)(3)(C), based on their length and the number of settlement officers assigned, was misguided where that provision applied to collection actions, not the CDP process, and where the duration of the case was largely attributable to Johnson’s actions.
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