T.C. Memo. 2006-231
UNITED STATES TAX COURT
RONALD W. OMAN, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 1910-05L. Filed October 30, 2006.
P filed a petition for judicial review pursuant to
sec. 6320, I.R.C., in response to a determination by R
that lien action was appropriate.
Held: The case is remanded for further
consideration by the Internal Revenue Service Office of
Appeals.
Ronald W. Oman, pro se.
Robert W. Dillard and Michael D. Zima, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
WHERRY, Judge: This case is before the Court on a petition
for judicial review of a Notice of Determination Concerning
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Collection Action(s) Under Section 6320 (Lien) of the Internal
Revenue Code.1 The issue for decision is whether respondent may
proceed with collection, in the form of a filed tax lien, of
petitioner’s Federal income tax liabilities for the 1990, 1993,
1994, 2000, and 2001 taxable years.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
The stipulations of the parties, with accompanying exhibits, are
incorporated herein by this reference. At the time this petition
was filed, petitioner resided in Altamonte Springs, Florida.
Petitioner failed to file a Federal income tax return for
1990. Petitioner filed untimely for the 1993, 1994, 1996, and
1997 taxable years and did not remit payment of the balances due.
Petitioner filed timely for 1999, 2000, and 2001, but again did
not remit sufficient payment.
The vast majority of petitioner’s tax liabilities arose in
1993 and 1994 when petitioner was president of Public Telephone
Corporation and earned over $100,000 in salary each year. In
1995, Public Telephone Corporation was seized by the Federal
Trade Commission and put into receivership. Thereafter,
petitioner held a series of seasonal and odd jobs and relied on
friends and family for housing, food, and other bare necessities.
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code (Code) of 1986, as amended.
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Petitioner also struggled with alcohol, drugs, and depression,
for which he entered rehabilitation in the fall of 2003.
As of 2004, petitioner’s outstanding tax liabilities for the
years 1990, 1993, 1994, 1996, 1997, 1999, 2000, and 2001 totaled
$169,145.97. On February 9, 2004, respondent received from
petitioner a Form 656, Offer in Compromise, offering to pay
$1,000 based on doubt as to collectibility. Petitioner also
provided a Form 433-A, Collection Information Statement for Wage
Earners and Self-Employed Individuals, indicating that he was
unemployed, lived with friends, received money from his parents
“from time to time” and had no assets.
Respondent thereafter evaluated petitioner’s offer,
preparing, inter alia, a “Full Pay Worksheet” dated February 17,
2004, and income/expense and asset/equity tables dated July 16,
2004. The worksheet indicated that petitioner’s total ability to
pay was zero and stated that “Initial Analysis indicates a Low-
Income Taxpayer that can’t pay with assets at this time”. The
income/expense table reflected that petitioner had monthly income
and allowed expenses of $653 and $1,012, respectively, for a $359
monthly negative cashflow, and that “the amount that could be
paid” was zero. The asset/equity table showed that petitioner
had a “total minimum value” of zero.
Nevertheless, respondent rejected petitioner’s $1,000 offer-
in-compromise because petitioner had “an egregious history of
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past non-compliance”, and respondent’s “analysis of * * *
[petitioner’s] current finances reveals that it will be highly
unlikely * * * [petitioner] will be able to remain in compliance
during the offer terms.” Therefore, respondent concluded “it
would not be in the best interest of the government”. In the
“REJECTION NARRATIVE” prepared in connection with the letter
informing petitioner of the rejection, dated August 10, 2004,
respondent noted that petitioner’s “reasonable collection
potential” was zero.
Shortly before rejecting the offer-in-compromise,
respondent, on July 22, 2004, filed a Notice of Federal Tax Lien
in Seminole County, Florida, with respect to petitioner’s 1990,
1993, 1994, 1996, 1997, 1999, 2000, and 2001, income tax
liabilities. Respondent then, on July 23, 2004, issued to
petitioner a corresponding Notice of Federal Tax Lien Filing and
Your Right to a Hearing Under IRC 6320 for the taxable years
1990, 1993, 1994, 2000, and 2001.2 In response, petitioner
2
Taxable years 1996, 1997, and 1999, were not covered by
this notice because respondent had previously issued, on October
25, 2000, a Notice of Federal Tax Lien Filing and Your Right to a
Hearing under IRC 6320 for these years and petitioner had not
timely requested a hearing in response to that notice.
Respondent had also previously issued, on January 25, 1999, a
Final Notice of Intent to Levy and Notice of your Right to a
Hearing for taxable years 1993 and 1994, and petitioner had also
not timely requested a hearing in response to that notice.
Because petitioner’s requests for a hearing on the proposed levy
for 1993 and 1994, and the filed lien as to 1996, 1997, and 1999,
were filed late, petitioner was afforded an equivalent
(continued...)
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submitted a Form 12153, Request for a Collection Due Process
Hearing, which was received by respondent on August 11, 2004.
Petitioner stated his disagreement with the lien as follows:
“I’M GOING THROUGH OFFER AND COMPROMISE AS WE SPEAK”.
Respondent’s Appeals Office conducted a collection hearing
by telephone with petitioner on December 14, 2004. During that
interview, petitioner continued to press for acceptance of his
offer-in-compromise. Thereafter, on January 3, 2005, respondent
issued the above-mentioned notice of determination for the 1990,
1993, 1994, 2000, and 2001 taxable years, sustaining the filing
of the notice of lien in July of 2004.3 An attachment to the
notice addressed the issues raised by the taxpayer and stated, as
relevant here: “The rejection of your offer in compromise has
been sustained by Appeals based on IRM 5.8.7.6(5), that due to
your egregious history of non-compliance it is in the best
2
(...continued)
administrative hearing for these collection actions. Equivalent
administrative hearings are not appealable to this Court. See
secs. 6320(b)(2), 6330(b)(2); Inv. Research Associates, Inc. v.
Commissioner, 126 T.C. 183, 189-191 (2006); Orum v. Commissioner,
123 T.C. 1, 8-11 (2004), affd. 412 F.3d 819 (7th Cir. 2005).
3
Respondent had earlier issued to petitioner a Decision
Letter Concerning Equivalent Hearing Under Section 6330 (Levy) of
the Internal Revenue Code sustaining levy action as to taxable
years 1993 and 1994, and a Decision Letter Concerning Equivalent
Hearing Under Section 6320 (Lien) of the Internal Revenue Code
sustaining the filing of a Federal tax lien with respect to
taxable years 1996, 1997, and 1999. See supra note 2.
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interest of the government not to accept your offer in
compromise.”
OPINION
I. Collection Action
A. General Rules
If a taxpayer liable to pay taxes fails to do so after
demand for payment, the tax liability becomes a lien in favor of
the United States against all of the taxpayer’s real and personal
property and rights to such property. Sec. 6321. The lien
arises at the time the assessment is made and continues until the
liability is satisfied or becomes unenforceable by reason of
lapse of time. Sec. 6322. The Secretary is obliged to notify
the taxpayer that a notice of a Federal tax lien has been filed
within 5 business days of filing and of the administrative
appeals available to the taxpayer. Sec. 6320(a). Upon timely
request a taxpayer is entitled to a hearing before the Internal
Revenue Service Office of Appeals regarding the propriety of the
filing of the lien. This hearing is conducted in accordance with
the procedural requirements of section 6330. Sec. 6320(b) and
(c).
The taxpayer is entitled to appeal the determination of the
Appeals Office, made on or before October 16, 2006, to the Tax
Court or a U.S. District Court, depending on the type of tax at
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issue. Sec. 6330(d).4 Where the validity of the underlying tax
liability is properly at issue, the Court will review the matter
de novo. Sego v. Commissioner, 114 T.C. 604, 610 (2000); Goza v.
Commissioner, 114 T.C. 176, 181-182 (2000). The Court reviews
any other administrative determination for an abuse of
discretion. Sego v. Commissioner, supra at 610; Goza v.
Commissioner, supra at 182. An abuse of discretion has occurred
if the “Commissioner exercised * * * [his] discretion
arbitrarily, capriciously, or without sound basis in fact or
law.” Woodral v. Commissioner, 112 T.C. 19, 23 (1999).
Petitioner does not dispute the existence or amounts of the
underlying tax liabilities. Accordingly, the Court’s standard of
review is abuse of discretion.
B. Review for Abuse of Discretion
Among the issues that may be raised at the Appeals Office
and are reviewed for an abuse of discretion are “challenges to
the appropriateness of collection” and “offers of collection
alternatives” such as an offer-in-compromise. Sec.
6330(c)(2)(A). The Court does not conduct an independent review
of what would be an acceptable offer-in-compromise; rather it
gives due deference to the Commissioner’s discretion. Murphy v.
Commissioner, 125 T.C. 301, 320 (2005); Woodral v. Commissioner,
4
Determinations made after Oct. 16, 2006, are appealable
only to the Tax Court. See Pension Protection Act of 2006, Pub.
L. 109-280, sec. 855, 120 Stat. 1019.
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supra at 23. The Court reviews the Appeals officer’s rejection
of an offer-in-compromise to decide whether the rejection was
arbitrary, capricious, or without sound basis in fact or law.
Murphy v. Commissioner, supra at 320; Woodral v. Commissioner,
supra at 23.
Section 7122(a) authorizes the Secretary to compromise any
civil case arising under the internal revenue laws. In general,
the decision to accept or reject an offer, as well as the terms
and conditions agreed to, are left to the discretion of the
Secretary. Sec. 301.7122-1(c)(1), Proced. & Admin. Regs.
However, regulations promulgated under section 7122 provide that
“No offer to compromise may be rejected solely on the basis of
the amount of the offer without evaluating that offer under the
provisions” of the regulations “and the Secretary’s policies and
procedures regarding the compromise of cases.” Sec. 301.7122-
1(f)(3), Proced. & Admin. Regs.
The grounds for compromise of a tax liability are doubt as
to liability, doubt as to collectibility, and promotion of
effective tax administration. Sec. 301.7122-1(b), Proced. &
Admin. Regs. Petitioner based his offer-in-compromise on doubt
as to collectibility, which “exists in any case where the
taxpayer’s assets and income are less than the full amount of the
liability.” Sec. 301.7122-1(b)(2), Proced. & Admin. Regs. In
determining the taxpayer’s ability to pay, the individual facts
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and circumstances of the taxpayer’s case are considered and the
taxpayer is permitted “to retain sufficient funds to pay basic
living expenses.” Sec. 301.7122-1(c)(2), Proced. & Admin. Regs.
The Internal Revenue Manual (IRM) contains guidelines for
rejection of offers-in-compromise. IRM sec. 5.8.7.6(5) (Nov. 15,
2004), which respondent relied on in rejecting petitioner’s
offer, states:
An offer rejection may also be based on a determination
that acceptance of the specific offer at hand is not in
the "best interest of the government", per policy
statement P-5-100. Rejections under this provision
should not be routine and should be fully supported by
the facts outlined in the rejection narrative. Offers
rejected under this section require the review and
approval of the second level manager; that is,
Territory Manager for the field or Department Manager
for COIC [Centralized Offers in Compromise]. Examples
of situations that may warrant rejection as not being
in the "best interest of the government" include:
Recent compliance satisfies offer processability
criteria, however the taxpayer has an egregious history
of past non-compliance and our analysis of his current
finances reveals that it will be highly unlikely the
taxpayer will be able to remain in compliance during
the offer terms.
Policy statement P-5-100 (Jan. 30, 1992), on which the IRM
relies, states:
The Service will accept an offer in compromise when it
is unlikely that the tax liability can be collected in
full and the amount offered reasonably reflects
collection potential. An offer in compromise is a
legitimate alternative to declaring a case currently
not collectible or to a protracted installment
agreement. The goal is to achieve collection of what
is potentially collectible at the earliest possible
time and at the least cost to the Government.
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In cases where any offer in compromise appears to be a
viable solution to a tax delinquency, the Service
employee assigned the case will discuss the compromise
alternative with the taxpayer and, when necessary,
assist in preparing the required forms. The taxpayer
will be responsible for initiating the first specific
proposal for compromise.
The success of the offer in compromise program will be
assured only if the taxpayers make adequate compromise
proposals consistent with their ability to pay and the
Service makes prompt and reasonable decisions.
Taxpayers are expected to provide reasonable
documentation to verify their ability to pay. The
ultimate goal is a compromise which is in the best
interest of both the taxpayer and the Service.
Acceptance of an adequate offer will also result in
creating for the taxpayer an expectation of a fresh
start toward compliance with all future filing and
payment requirements. [Emphasis added.]
IRM sec. 5.8.7.6(5) and policy statement P-5-100, as applied
in this case, appear to be inconsistent regarding the “best
interest of the government”. IRM sec. 5.8.7.6(5) pertains to
rejecting offers if they are “not in the ‘best interest of the
government’, per policy statement P-5-100", while policy
statement P-5-100 describes the dollar amount of offers which are
in the “best interest” of the government and encourages such
compromises. The “goal” of the offer-in-compromise program,
according to policy statement P-5-100, is to collect what is
potentially collectible as early as possible, and the “ultimate
goal” is to find a compromise that is in the “best interest of
both the taxpayer and the Service.” Policy statement P-5-100
does not mention “egregious past non-compliance”. It instead
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mentions “creating for the taxpayer an expectation of a fresh
start toward future compliance”.
According to policy statement P-5-100, it appears the “best
interest of the government” is a compromise that is also in the
best interest of the taxpayer and which collects the potentially
collectible amount, or more, at the earliest possible time. In
the instant case, respondent determined that petitioner’s
reasonable collection potential was zero. Pursuant to policy
statement P-5-100, it appears that acceptance of petitioner’s
$1,000 offer is in respondent’s best interest as it is also in
petitioner’s best interest and permits respondent to collect more
than respondent determined was potentially collectible otherwise.
It would also afford petitioner “a fresh start toward future
compliance”.
The Internal Revenue Manual does contain a provision that
allows for rejection of offers that exceed the reasonable
collection potential. IRM sec. 5.8.7.6.1 (Nov. 15, 2004)
states:
(1) Policy statement P-5-89 establishes that
offers may be rejected on the basis of public policy if
acceptance might in any way be detrimental to the
interests of fair tax administration, even though it is
shown conclusively that the amount offered is greater
than could be collected by any other means, if no
Effective Tax Administration (ETA) issues exist.
Note: This section should not be confused with IRM
5.8.11.2.2 under Effective Tax Administration (ETA)
offers.
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(2) A decision to reject an offer for public
policy reason(s) should be based on the fact that
public reaction to the acceptance of the offer could be
so negative as to diminish future voluntary compliance
by the general public. Decisions to reject offers for
this reason should be rare.
Example: Below are some examples of situations that may
warrant rejection based on a public policy decision.
The taxpayer has openly encouraged others to refuse to
comply with the tax laws.
Suspicion that the financial benefits of a criminal
activity are concealed or the criminal activity is
continuing.
(3) An offer will not be rejected for public
policy grounds solely because:
(a) It would generate considerable public
interest, some of it critical.
(b) A taxpayer was criminally prosecuted for tax
or non-tax violation.
(4) The rejection narrative should discuss the
specific public policy issues.
(5) Rejections of this type require the approval
of the SB/SE Compliance Area Director in the field or
SB/SE Compliance Services Field Director for COIC.
[Emphasis omitted.]
Policy statement P-5-89 does not specifically reference
“egregious past non-compliance”, but appears to provide that in
some cases it may be a legitimate basis for rejecting an offer
that exceeds the reasonable collection potential. However, IRM
sec. 5.8.7.6.1 provides that respondent should discuss and
document the specific public policy issues relevant to the case
in the rejection narrative. Respondent did not reference either
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IRM sec. 5.8.7.6.1 or policy statement P-5-89 in the rejection
narrative. Rather, respondent referenced IRM sec. 5.8.7.6(5) as
the reason for rejecting petitioner’s offer.
Offers-in-compromise contain default provisions. IRM sec.
5.19.7.3.20.5(1) (Feb. 1, 2004) provides that “Taxpayers must
agree to the future compliance provisions when offers are
accepted. The taxpayer must timely file all tax returns and pay
all taxes due during the compliance period. The compliance
period is five years from the acceptance date or until the offer
amount is paid in full, whichever is longer.” It further
provides “Failure to adhere to the compliance terms could result
in the default of the OIC and reinstatement of compromised
liabilities.” IRM sec. 5.19.7.3.20.5(4) (Feb. 1, 2004). Form
656 Item 8(n) elaborates by providing that if the taxpayer
fail[s] to meet any of the terms and conditions of the
offer and the offer defaults, then the IRS may:
-immediately file suit to collect the entire unpaid
balance of the offer
-immediately file suit to collect an amount equal to
the original amount of the tax liability as liquidating
damages, minus any payment already received under the
terms of this offer
-disregard the amount of the offer and apply all
amounts already paid under the offer against the
original amount of the tax liability
-file suit or levy to collect the original amount of
the tax liability, without further notice of any kind.
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Respondent argues that doubt as to future compliance is a
sufficient reason to reject an offer-in-compromise. Respondent
contends that although the default provision of an offer-in-
compromise affords respondent some protection, it is not enough.
Respondent notes, citing Robinette v. Commissioner, 123 T.C. 85
(2004), revd. 439 F.3d 455 (8th Cir. 2006), that where taxpayers
violate the future compliance condition, courts have not always
found violations to be material and do not always allow
respondent to terminate an offer. The Court is not convinced by
respondent’s speculative argument. Courts have found offers-in-
compromise materially breached and have allowed termination of
the offer in appropriate cases where taxpayers fail to make
payments agreed to in the offer-in-compromise, fail to pay off
the amount compromised, or fail to pay taxes owed during the 5-
year period after the offer has been accepted. E.g., United
States v. Feinberg, 372 F.2d 352, 357-358 (3d Cir. 1965); United
States v. Lane, 303 F.2d 1, 4 (5th Cir. 1962); Roberts v. United
States, 225 F. Supp. 2d 1138, 1148 (E.D. Mo. 2001); United States
v. Wilson, 182 F. Supp. 567, 571 (D.N.J. 1960).
II. Conclusion
Taking into account the inconsistency of IRM sec. 5.8.7.6(5)
and policy statement P-5-100, the “best interest of the
government” reasoning behind respondent’s rejection of
petitioner’s offer is unclear. Absent clarification, the Court
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cannot conclude whether it was an abuse of discretion for
respondent to proceed with collection for the reasons and on the
authority set forth in the determination letter. The Court will
remand the case to respondent’s Appeals Office for further
consideration and clarification.
To reflect the foregoing,
An appropriate order will
be issued.