T.C. Memo. 2014-46
UNITED STATES TAX COURT
STACEY L. BOGART AND TIMOTHY P. BOGART, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 4568-12L. Filed March 18, 2014.
Scott Alan Schumacher, John Alfred Clynch, Jr., and Emily J. Yamada, for
petitioners.
Lisa M. Oshiro, for respondent.
MEMORANDUM OPINION
KROUPA, Judge: This collection review matter is before the Court on the
parties’ cross-motions for summary judgment filed pursuant to Rule 121(a).1
1
All Rule references are to the Tax Court Rules of Practice and Procedure,
(continued...)
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[*2] Petitioners’ Federal tax troubles stem from the criminal conduct of their
former bookkeeper. Petitioners submitted an offer-in-compromise (OIC) of
$10,0002 to resolve deficiencies of $69,309 plus interest on the grounds that the
OIC promoted effective tax administration (ETA OIC). Respondent rejected the
ETA OIC and issued a determination notice sustaining a final notice of intent to
levy (proposed levy action). See sec. 6330(d)(1).
Respondent contends that he acted within his discretion when he rejected
the ETA OIC. Petitioners contend that respondent was obligated to accept the
ETA OIC as a matter of law. Petitioners alternatively contend that we should
remand the matter because respondent failed to adequately consider the ETA OIC
on public policy and equity grounds. We conclude that respondent has yet to
adequately consider the ETA OIC on those grounds. We will therefore deny the
cross-motions for summary judgment without prejudice and remand the matter for
respondent to consider the ETA OIC on public policy and equity grounds.
1
(...continued)
and all section references are to the Internal Revenue Code, as amended and in
effect for all times relevant, unless otherwise indicated.
2
All monetary amounts rounded to the nearest dollar.
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[*3] Background
We recite uncontested facts reflected in the petition, the stipulation of facts
and the exhibits attached to these documents. Petitioners resided in Washington
when they filed the petition.
Petitioners are a married couple with four children. They operated a
construction business during the relevant times. Petitioners treated the
construction business as an S corporation for Federal income tax purposes.
Petitioners were not wealthy, but they had accumulated $225,478 in assets in the
form of real property equity, personal property, retirement accounts and other
investments.
Before 2006 petitioners relied on Teresa Sanak to prepare Federal income
tax returns on their behalf. Petitioners expanded Ms. Sanak’s role in 2006 to serve
as the bookkeeper for the construction business. Unbeknownst to petitioners, Ms.
Sanak was a gambling addict.
Ms. Sanak stole from petitioners to feed her addiction. She systematically
siphoned funds from petitioners between September 2006 and May 2008. Ms.
Sanak avoided detection by routing the stolen funds around petitioners’ bank
accounts. All told, Ms. Sanak embezzled at least $116,000 from petitioners.
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[*4] Ms. Sanak prepared for petitioners and timely filed joint Federal income tax
returns for 2006 and 2007. The stolen funds were not reported as gross income.
Respondent later examined those returns. Petitioners uncovered Ms.
Sanak’s fraud through the course of that examination. Respondent ultimately
increased petitioners’ income and determined deficiencies for 2006 and 2007.
Petitioners reported Ms. Sanak’s conduct to local authorities and
respondent’s Office of Professional Responsibility. In 2010 Ms. Sanak pleaded
guilty to 10 counts of theft in the first degree. The State of Oregon sentenced her
to serve prison and probation terms. She was also ordered to pay petitioners
restitution of $116,000. She has yet to make any payments to petitioners. And
petitioners have not satisfied the 2006 and 2007 liabilities.
Respondent subsequently initiated the proposed levy action. Petitioners3
timely requested a collection hearing. Petitioners agreed that the tax liabilities
were correct. Settlement Officer (SO) Monica Garcia verified that the IRS met all
requirements of applicable law and administrative procedure in issuing the levy
3
Petitioners at first were represented by so-called Tax Resolution Services,
Co. (TRS). TRS twice requested additional time for petitioners to provide
information. It appears that TRS never submitted information on petitioners’
behalf. Petitioner wife then contacted the settlement officer. Petitioner wife
indicated that she would provide the information that her representative did not
provide. Petitioners then represented themselves until counsel from the tax clinic
at the University of Washington School of Law appeared in this matter.
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[*5] notice. SO Garcia also directed petitioners to submit financial information
and proposed alternative collection methods. Petitioners submitted all requested
information, the ETA OIC and two payments towards the ETA OIC. Petitioners
offered to pay a total of $10,000 to compromise the 2006 and 2007 liabilities.
SO Garcia transferred the matter to SO Brian Hefty for additional
consideration of the ETA OIC. SO Hefty focused on whether petitioners could
demonstrate economic hardship. He concluded petitioners could not. SO Hefty
also concluded that he did not “perceive” considering the ETA OIC on public
policy grounds.
SO Hefty transferred the file to SO Kimberly Lewis. SO Lewis also
concluded that the ETA OIC did not satisfy the requirements for acceptance.
Respondent issued the determination notice sustaining the proposed levy
action. Respondent verified that legal and procedural requirements were met.
Respondent indicated that petitioners’ circumstances did not warrant consideration
for compromising the liabilities to promote effective tax administration.
Petitioners timely filed the petition.
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[*6] Discussion
We must now decide whether either party is entitled to summary judgment.
We begin with the summary judgment standard and then review collection actions
generally. We then consider the proposed levy action.
A. Summary Judgment
We first consider the summary judgment standard. A motion for summary
judgment will be granted if the pleadings and other acceptable materials, together
with the affidavits, if any, show that there is no genuine dispute as to any material
fact and that a decision may be rendered as a matter of law. See Rule 121(b); Elec.
Arts, Inc. v. Commissioner, 118 T.C. 226, 238 (2002). The moving party has the
burden of proving that no genuine issue of material fact exists and that it is
entitled to judgment as a matter of law. See, e.g., Rauenhorst v. Commissioner,
119 T.C. 157, 162 (2002). The party opposing summary judgment must set forth
specific facts showing that there is a genuine issue for trial and may not rely
merely on allegations or denials in the pleadings. Rule 121(d); see also Celotex
Corp. v. Catrett, 477 U.S. 317, 322 (1986).
B. Collection Actions Generally
The Commissioner is authorized to collect an unpaid Federal tax liability by
lien or levy. Secs. 6321, 6331. The Commissioner must apprise a taxpayer of the
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[*7] taxpayer’s right to a collection hearing before an officer with the
Commissioner’s Office of Appeals (Appeals officer). Secs. 6320(a), 6330(a). The
Appeals officer conducting the collection hearing must determine whether the
Commissioner will sustain a proposed collection action. Sec. 6330(c). The
taxpayer must provide all relevant information the Appeals officer requested for
consideration of the facts and issues involved in the collection hearing. Secs.
301.6320-1(e)(1), 301.6330-1(e)(1), Proced. & Admin. Regs.
The Appeals officer must then verify that the Commissioner has satisfied all
applicable legal and administrative requirements. Sec. 6330(c)(3)(A). The
Appeals officer must consider all relevant issues a taxpayer raises. Sec.
6330(c)(3)(B). Finally, the Appeals officer must balance the intrusiveness of a
proposed collection action against the need for effective tax collection. Sec.
6330(c)(3)(C). A taxpayer may appeal a determination sustaining a proposed
collection action to this Court. Sec. 6330(d).
C. Review of the Determination Notice
We now turn to respondent’s determination. Respondent contends that he
appropriately exercised his discretion when rejecting the ETA OIC. Petitioners
disagree for two reasons. First, petitioners argue that as a matter of law their
circumstances required respondent to accept the ETA OIC for public policy or
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[*8] equity reasons. Second, petitioners contend that respondent failed to evaluate
those reasons when rejecting the ETA OIC.
1. Standard of Review
Petitioners do not contest the validity of the unpaid tax liabilities. We
therefore review respondent’s sustaining the proposed collection action for abuse
of discretion. Sego v. Commissioner, 114 T.C. 604, 610 (2000); Goza v.
Commissioner, 114 T.C. 176, 181-182 (2000). Respondent abused his discretion
if he acted in a manner that was arbitrary, capricious or without sound basis in fact
or law. See Murphy v. Commissioner, 125 T.C. 301, 320 (2005), aff’d, 469 F.3d
27 (1st Cir. 2006). We have concluded that the Commissioner abused his
discretion when he failed to adequately consider a proposed collection alternative.
See Blosser v. Commissioner, T.C. Memo. 2007-323; Harris v. Commissioner,
T.C. Memo. 2006-186.
2. Collection Alternative
We now consider the proposed collection alternative. A taxpayer may
submit an OIC as a collection alternative to a proposed levy. Sec.
6330(c)(2)(A)(iii). The Commissioner has wide discretion to accept or reject an
OIC. See Churchill v. Commissioner, T.C. Memo. 2011-182. The Commissioner
may accept an OIC when he determines that a genuine dispute as to the existence
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[*9] or amount of the correct tax liability exists or the liability exceeds the
taxpayer’s income and assets. Sec. 7122(d); sec. 301.7122-1(b)(1) and (2),
Proced. & Admin. Regs. If the Commissioner determines neither ground exists, he
may accept an OIC that promotes effective tax administration. Sec. 301.7122-
1(b)(3), Proced. & Admin. Regs.
The Commissioner may determine that an OIC would promote effective tax
administration when collection in full would create economic hardship. See sec.
301.7122-1(b)(3)(i), (iii), Proced. & Admin. Regs. If collection would not cause
economic hardship, the Commissioner may still compromise a tax liability to
promote effective tax administration when the taxpayer identifies compelling
public policy or equity considerations. See sec. 301.7122-1(b)(3)(ii), Proced. &
Admin. Regs.
Petitioners do not challenge the liabilities or their ability to satisfy them.
Respondent determined, and petitioners acknowledge, that the ETA OIC did not
meet the economic hardship standard. See sec. 301.6343-1, Proced. & Admin.
Regs. Thus, the cross-motions focus on the rejection of the ETA OIC under only
public policy and equity considerations. See sec. 301.7122-1(b)(3)(ii), Proced. &
Admin. Regs.
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[*10] The Commissioner will accept an OIC for public policy or equity reasons
only if the taxpayer demonstrates that “exceptional circumstances” exist and meets
three requirements. Sec. 301.7122-1(b)(3)(ii), (c)(3)(ii), Proced. & Admin. Regs.;
Internal Revenue Manual (IRM) pt. 5.8.11.2.2(4) (Sept. 23, 2008). First, the
taxpayer must have remained in compliance since incurring the liability and must
not have an overall compliance history that weighs against compromise. IRM pt.
5.8.11.2.2(4). Second, the taxpayer must also show he or she acted reasonably and
responsibly in incurring the liability. Id. Third, the Commissioner must also
determine that other taxpayers would view the compromise as fair and equitable.
Id. The Commissioner must base his determination on all facts and circumstances.
Sec. 301.7122-1(c)(1), Proced. & Admin. Regs.
3. Respondent’s Determination
We now consider whether either party is entitled to summary judgment
regarding the ETA OIC rejection.
a. Respondent’s Motion for Summary Judgment
We begin with respondent’s motion for summary judgment. Respondent
contends that there is no factual dispute that he acted within his discretion in
denying the ETA OIC. We disagree. Respondent argues that embezzlement does
not constitute exceptional circumstances because petitioners can claim a theft loss
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[*11] deduction. See sec. 165; sec. 1.165-8(d), Income Tax Regs. But at the
administrative level repondent did not consider whether the theft loss constituted
exceptional circumstances--even though petitioners requested relief on public
policy and equity grounds. The administrative record indicates that respondent
did not consider those grounds but focused solely on economic hardship grounds.
He merely concluded that the ETA OIC did not merit consideration under public
policy or equity grounds. Respondent did not adequately consider this issue.
Notwithstanding, respondent contends he is entitled to summary judgment
because petitioners’ circumstances do not conform with the examples provided in
the regulations.4 Petitioners counter that those examples are not the exclusive
circumstances under which the Commissioner may accept an OIC for public policy
or equity reasons. We agree with petitioners. As noted, the Commissioner has
wide discretion to accept an OIC under varying circumstances. The examples,
however, are not the only scenarios under which the Commissioner may accept an
OIC for public policy or equity reasons. See Keller v. Commissioner, T.C. Memo.
2006-166, aff’d in part, rev’d in part on another issue, 568 F.3d 710 (9th Cir.
4
Example (1) contemplates a taxpayer that was assessed a large deficiency
because the taxpayer could not manage his own financial affairs because of serious
illness. Sec. 301.7122-1(c)(3)(iv), Example (1), Proced & Admin. Regs. The
taxpayer in Example (2) has a deficiency that results from the taxpayer’s actions
based on erroneous advice from the Commissioner. Id.
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[*12] 2009). In the view of the taxpayer advocate, the Commissioner uses OICs
under public policy or equity reasons too infrequently when the deficiency stems
from third-party failures. Nina E. Olson, National Taxpayer Advocate, 2012
Annual Report to Congress, 426 (2012). The Commissioner must consider and
address collection alternatives a taxpayer raises. The fact that the examples in the
regulations differ from petitioners’ circumstances does not relieve respondent of
that requirement. Thus, respondent is not entitled to summary judgment.
b. Petitioners’ Motion for Summary Judgment
We now turn to petitioners’ arguments in support of their summary
judgment motion. First, petitioners claim that they satisfied the requirements as a
matter of law for respondent to accept the ETA OIC. See IRM pt. 5.8.11.2.2. We
disagree. It is undeniable that Ms. Sanak perpetrated a fraud against petitioners.
The Commissioner maintains, however, wide discretion when evaluating an OIC
and determining whether a taxpayer demonstrated exceptional circumstances. The
record does not establish as a matter of law that respondent was obligated to
accept the ETA OIC.
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[*13] Next, petitioners argue that respondent abused his discretion when the SO
rejected the ETA OIC without forwarding it to respondent’s NEH-ETA group.5
See id. pt. 5.8.11.2.2(1). Again, we disagree. The Appeals officer maintains
discretion to accept an OIC that promotes effective tax administration and forward
only those OICs to the NEH-ETA group. Id. The IRM does not require the
Appeals officer to forward every OIC based on public policy or equity grounds to
the NEH-ETA group. Thus, the Appeals officer could have rejected the ETA OIC
without forwarding it to the NEH-ETA group. See id. pt. 1.2.44.2.1 (Jan. 6, 2009).
Last, petitioners contend that the matter should be remanded for further
consideration because respondent did not adequately consider the ETA OIC. We
agree. Notwithstanding respondent’s wide discretion, he still must review the
issues petitioners raised during the hearing. The undeveloped record demonstrates
that respondent has not fully considered the ETA OIC as required. The record
does not allow for meaningful review. See Hoyle v. Commissioner, 131 T.C. 197,
205 (2008). Thus, we will deny the cross-motions for summary judgment without
prejudice and remand the matter for further consideration.
5
NEH stands for noneconomic hardship.
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[*14] 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,
An appropriate order will be
issued.