Samuel v. Comm'r

T.C. Memo. 2007-312

UNITED STATES TAX COURT

DAVID L. SAMUEL, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 8431-05L. Filed October 15, 2007.

P filed a petition for judicial review in response
to R’s determination to proceed with collection by lien
and/or levy of assessed income tax liabilities, plus
additions to tax and interest, for 1996-2002. R’s
settlement officer rejected P’s offer-in-compromise
because it was not a viable alternative to collection.
The settlement officer, applying guidelines established
by the Internal Revenue Manual, determined that P
should include in the amount of his offer-in-compromise
the value of certain “dissipated assets”, which,
because of the dissipation, became unavailable for
payment of P’s delinquent income tax obligation. The
settlement officer required this inclusion,
notwithstanding that some of the assets had been used
for proper purposes.
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Held: R’s rejection of P’s offer-in-compromise
was an abuse of discretion, and this case will be
remanded to the IRS Appeals Office so that P may make a
revised offer reflecting a reduced amount of dissipated
assets.

William A. Neilson and Douglas L. Salzer, for petitioner.

Linda A. Neal, for respondent.

MEMORANDUM OPINION

NIMS, Judge: This case arises from a petition for judicial

review filed in response to a Notice of Determination Concerning

Collection Action(s) Under Section 6320 and/or 6330. Unless

otherwise indicated, all section references are to the Internal

Revenue Code in effect for the years in issue as amended, and all

Rule references are to the Tax Court Rules of Practice and

Procedure. The issue for decision is whether respondent’s

rejection of petitioner’s offer-in-compromise was an abuse of

discretion.

Background

This case was submitted fully stipulated pursuant to Rule

122, and the facts are so found. The stipulations of the

parties, with accompanying exhibits, are incorporated herein by

this reference. At the time he filed the petition, petitioner

resided in Louisiana.
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Petitioner is a practicing physician specializing in adult

and pediatric urology. He operates his own medical practice,

David L. Samuel, M.D., A Professional Medical Corporation.

Petitioner is also a partner in Pontchartrain Lithotripsy, LLC.

Prior to starting his own practice, petitioner practiced with

another urologist until sometime in 2002.

Beginning on February 3, 2003, petitioner began filing

delinquent individual income tax returns for 1996-2002. The

dates on which petitioner filed the returns and the Internal

Revenue Service (IRS) assessed the taxes due are as follows:

Year Date Return Filed Date Taxes Assessed
1996 January 26, 2004 March 8, 2004
1997 February 3, 2003 March 24, 2003
1998 February 3, 2003 March 31, 2003
1999 February 3, 2003 March 24, 2003
2000 February 3, 2003 March 3, 2003
2001 February 3, 2003 March 3, 2003
2002 October 3, 2003 November 3, 2003

The so-called “TXMODA” computer transcripts of petitioner’s IRS

accounts for each of these years show adjusted gross income

posted from petitioner’s tax returns as follows:

Year AGI
1996 $187,108
1997 220,250
1998 205,492
1999 303,558
2000 140,213
2001 177,566
2002 211,991
 - 4 -

Petitioner did not remit any payments for the amounts due on

these returns when they were filed.

Respondent assessed the taxes shown on the above returns.

Calculated as of January 1, 2005, petitioner owed in excess of

$773,368 for the tax years 1996-2002, inclusive.

In October 2004, petitioner filed his 2003 individual income

tax return. Withheld taxes for 2003 exceeded total tax by

$8,016. The excess withheld taxes combined with an estimated tax

payment of $15,600 resulted in a $23,616 overpayment of tax for

2003. This overpayment was applied to petitioner’s 1996 unpaid

tax liability.

Respondent sent the following collection notices to

petitioner for unpaid Federal income taxes: Notice of Federal

Tax Lien Filing and Your Right to a Hearing Under IRC 6320, dated

October 2, 2003, for the 1997-2001 tax years; a Final Notice -

Notice of Intent to Levy and Notice of Your Right to a Hearing,

dated February 10, 2004, for 2002; a Final Notice - Notice of

Intent to Levy and Notice of Your Right to a Hearing, dated March

8, 2004, for 1996; and a Notice of Federal Tax Lien Filing and

Your Right to a Hearing Under IRC 6320, dated April 1, 2004, for

1996. (Neither party has explained this 1996 discrepancy.)

Petitioner timely requested a hearing in response to each of

these Notices. On each Form 12153, Request for a Collection Due

Process Hearing, petitioner stated that he was preparing a Form
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433-A, Collection Information Statement for Wage Earners and

Self-Employed Individuals, and a Form 433-B, Collection

Information Statement for Businesses, in order to submit an

offer-in-compromise for his tax liabilities.

On July 8, 2004, petitioner submitted a Form 656, Offer in

Compromise, along with two different Forms 433-A (both dated June

1, 2004) and a Form 433-B for his professional corporation.

Petitioner submitted the offer on the basis of “doubt as to

collectibility”. Petitioner was not then, and is not now,

contesting his 1996-2002 income tax liabilities. Petitioner

offered to pay $30,000 to compromise his 1996-2002 tax

liabilities. This was a short-term deferred payment offer

payable in monthly installments of $1,250 for 24 months.

On one of the Forms 433-A, petitioner indicated that he

operated David L. Samuel, M.D., P.C., and identified this

corporation as his employer for the prior 4 years. Petitioner

listed his assets as $1,409.89 in a checking account, a house

valued at $330,000 (with a loan balance of $322,025), and

furniture/personal effects worth $10,000. Petitioner indicated

that he was the plaintiff in a $25,000 civil lawsuit for unpaid

wages. Petitioner showed his only source of income as monthly

wages of $7,963. Petitioner reported monthly expenses of: $976

for food, clothing, and miscellaneous (noted as the statutory

allowance); $1,024 for housing and utilities (noted as the
 - 6 -

statutory allowance); $50 for health care; $2,470 for taxes;

$2,750 for court-ordered payments (child support); and $250 for

other expenses (later identified as attorney’s fees for

representation in the instant matter). The second Form 433-A

contained the same information as the first, except that it

reported gross monthly wages of $8,144.10 and monthly medical

expenses of $41.20.

The Form 433-B for David L. Samuel, M.D., P.C., reflected

that petitioner was the only shareholder. The total

accounts/notes receivable of the medical corporation was shown as

$87,388.73. The only other assets disclosed on the Form 433-B

were $613.74 in a bank account, $200.22 of cash on hand, and

office furniture valued at $4,000. In the “Investments” section,

petitioner listed one share of Pontchartrain Lithotripsy, LLC,

with a value of $10,000. Total monthly income for petitioner’s

professional corporation consisted of $26,435.20 in gross

receipts and $4,416 in dividends for a total of $30,851.20.

Petitioner reported monthly expenses totaling $33,523.93 for the

professional corporation.

Petitioner’s offer-in-compromise was accepted for processing

and forwarded to respondent’s New Orleans Compliance Office for

investigation.

Petitioner requested a face-to-face hearing at the New

Orleans Appeals Office, to which the IRS agreed. The face-to-
 - 7 -

face hearing was conducted in New Orleans on January 31, 2005.

During the face-to-face hearing, petitioner disclosed that he

sold an interest in Fairway Medical Center (FMC) in June 2003,

for $108,000 and refinanced his home in September 2003, for a net

cash payment to him of $25,158. Petitioner also discussed his

ownership interest in Pontchartrain Lithotripsy, LLC, from which

he reported $51,922 of income in 2003, but which he designated on

the Form 433-B as a $10,000 investment held by his professional

corporation. Petitioner explained that his $10,000 initial

investment in Sabine Lithotripsy, LLC (which dissolved into four

entities, one of which was Pontchartrain Lithotripsy, LLC)

entitles him to access a medical mobile unit for use in his

medical practice. He also receives monthly income receipts,

which he said are deposited into his business account. After the

hearing, petitioner provided a list of the monthly income

received from Pontchartrain Lithotripsy. This income totaled

$61,440 for 2004.

Petitioner clarified other issues at the hearing. He

indicated that the lower of the two monthly income amounts on the

different Forms 433-A, $7,963, should be used for consideration

of the offer-in-compromise. Petitioner asserted that his

interest in his professional corporation is limited to the value

of the medical and office equipment (which he estimated to be

$3,630) and that a patient list in the urology field has little
 - 8 -

or no value. Petitioner also gave details regarding the

abovementioned lawsuit against his previous employer to collect

back wages. He said that billings show that he is entitled to

$60,000 plus interest.

On February 10, 2005, the settlement officer sent petitioner

a letter with her preliminary determination. She stated her

position that petitioner had “dissipated assets” with a disregard

of his outstanding tax liabilities when he sold his interest in

FMC and refinanced his home. She reasoned that at the time the

transactions occurred, the outstanding assessed balances due to

the IRS exceeded the amounts realized from the dissipated assets.

In addition, she noted that none of the funds were remitted to

the IRS, and she took the position that petitioner did not use

any of the funds for necessary expenses. She said that unless

petitioner increased his offer to $163,158 ($30,000 initial offer

amount plus 100 percent of the dissipated asset values), she

would assume that petitioner was not interested in pursuing the

matter further, and that she would recommend that Appeals issue a

notice of determination.

The settlement officer indicated that her preliminary

determination did not represent a final amount determined to be

an acceptable offer. She noted that she did not include in the

reasonable collection potential calculation any amounts for
 - 9 -

petitioner’s interest in his civil lawsuit, his ownership

interest in his medical practice, or his interest in

Pontchartrain Lithotripsy.

On March 2, 2005, petitioner responded to the preliminary

determination letter. In his letter he said that when he “lost

his job” practicing with another urologist in 2002, he

accumulated substantial debt setting up his new medical practice

and paying necessary living expenses and fell behind on his child

support payments. The letter claimed that the payments made from

the funds realized from the FMC sale in July and home refinancing

in September 2003, were necessary to pay judgments rendered

against him and to avoid additional legal proceedings.

Petitioner provided details on the distribution of the proceeds

of these two transactions. He alleged that he distributed the

$108,000 from the sale of his interest in FMC as follows:

Payee Payment Amount
City Bank (credit card debt)* $13,591.78
City Bank (credit card debt)* 12,468.72
First USA (credit card payoff) 2,745.69
MBNA (credit card payoff)** 30,000.00
IRS (2003 estimated tax payment) 15,600.00
Child support payments 5,464.02
Hibernia Bank (loan repayment) 8,820.20
Whitney Bank (credit line) 4,709.59
William A. Neilson (legal fees) 4,000.00
Paul Lea (legal fees) 5,000.00
Diane Cherry (legal fees) 3,000.00
Pedalhore (accounting fees) 1,600.00
Fintech (accounting fees) 1,000.00

*Payment pursuant to court judgments
**Lawsuit filed against petitioner
 - 10 -

From the refinance of his residence petitioner received a net

amount of $25,158. Petitioner used $11,000 to pay delinquent

child support and transferred the remaining $14,158 to his

professional corporation (which was used to pay a supplier,

malpractice insurance, delinquent telephone charges, and

payroll).

Also in his response to the preliminary determination,

petitioner asserted that the attorney’s fees were an allowable

necessary expense because they were necessary for his

representation before the IRS with respect to his current tax

matters. He closed the letter by saying he thought negotiation

of an offer-in-compromise was possible given his belief that he

did not dissipate assets and that he is allowed to claim

attorney’s fees as an expense.

On March 8, 2005, the settlement officer sent a letter to

petitioner stating that her positions on the dissipated assets

and attorney’s fees remained unchanged. Petitioner did not

respond to this letter and never increased his offer.

On April 8, 2005, Appeals issued petitioner a notice of

determination sustaining the proposed collection actions. The

summary of determination concluded that petitioner’s proposed

collection alternative was not a viable option. The notice

indicated Appeals’ finding that the IRS could collect more than

the $30,000 offer. The notice referred to the discovery of the
 - 11 -

dissipated assets during consideration of the offer-in-

compromise. The notice acknowledged the $15,600 payment to the

IRS but pointed out that the remaining $117,558 was distributed

to other creditors. It noted that petitioner was given the

opportunity to increase his offer but declined to do so. The

notice also stated that

The proposed levy action balances the need for
efficient collection with the concern that it be no
more intrusive than necessary because your offer-in-
compromise does not outweigh the government’s need for
efficient collection of your tax liabilities. Your
collection alternative was considered however we find
that it is not a viable alternative given the facts and
evidence raised.

The settlement officer’s Appeals Case Determination (Case

Determination) reflects that in recommending petitioner’s offer

based on doubt as to collectibility be rejected, she calculated

petitioner’s future income potential plus his net realizable

equity (NRE) in assets to get the reasonable collection potential

for the case.

In determining petitioner’s NRE, the settlement officer

decided that petitioner had dissipated assets in disregard of his

tax liabilities when he sold his interest in FMC and when he

refinanced his home. She considered the assets dissipated

because petitioner realized the funds after his tax liabilities

for 1996-2002 had accrued and after the amounts due for 1997-2001

were assessed, and he used all of the funds to pay other
 - 12 -

creditors, with the exception of the $15,600 payment to the IRS.

She determined that 100 percent of the $133,158 received from the

dissipated assets should be included in petitioner’s NRE with the

possible exception of the $15,600 paid to the IRS, the $5,000

legal fees incurred in the lawsuit against his former employer,

and the $5,464 paid for child support. She reached this

conclusion despite recognizing that the assets were dissipated

before the offer-in-compromise was made. The settlement officer

did not include any amount for the value of petitioner’s

residence in NRE, having determined that he had no equity. She

also expressed doubt as to whether petitioner reported an

accurate value for his interest in his medical corporation,

noting the comparatively low value of equipment totaling $3,630

given that the business had gross income in excess of $300,000 in

2003. The settlement officer did not account for petitioner’s

interests in his medical corporation or Pontchartrain Lithotripsy

in calculating NRE. The settlement officer determined

petitioner’s future income collection potential to be $946 per

month, which, over 60 months (the multiplier for a short-term

deferred payment offer) amounted to $56,760.

In response to the notice of determination, petitioner filed

a petition with this Court.
 - 13 -

Discussion

Before a levy may be made on any property or right to

property, a taxpayer is entitled to notice of the Commissioner’s

intent to levy and notice of the right to a fair hearing before

an impartial officer of the IRS Appeals Office. Secs. 6330(a)

and (b), 6331(d). Section 6320 provides that after the filing

of a Federal tax lien under section 6323, the Secretary shall

furnish written notice. This notice must advise the taxpayer of

the opportunity for administrative review in the form of a

hearing, which is generally conducted consistent with the

procedures set forth in section 6330(c), (d), and (e). Sec.

6320(c).

Where, as here, the underlying tax liability is not at

issue, our review of the notice of determination under section

6330 is for abuse of discretion. See Sego v. Commissioner, 114

T.C. 604, 610 (2000); Goza v. Commissioner, 114 T.C. 176, 182

(2000). This standard does not require us to decide what we

think would be an acceptable offer-in-compromise. Murphy v.

Commissioner, 125 T.C. 301, 320 (2005), affd. 469 F.3d 27 (1st

Cir. 2006). Rather, our review is to determine whether

respondent’s rejection of petitioner’s offer-in-compromise was

arbitrary, capricious, or without sound basis in fact or law.

Id.
 - 14 -

At the hearing, taxpayers may raise challenges to “the

appropriateness of collection actions” and may make “offers of

collection alternatives, which may include the posting of a bond,

the substitution of other assets, an installment agreement, or an

offer-in-compromise.” Sec. 6330(c)(2)(A). The Appeals officer

must consider those issues, verify that the requirements of

applicable law and administrative procedures have been met, and

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.” Sec. 6330(c)(3)(C). As his

collection alternative, petitioner chose to make an offer-in-

compromise. In the case before us, petitioner disputes

respondent’s rejection of his offer-in-compromise.

Section 7122(a) authorizes the Secretary to compromise any

civil or criminal case arising under the internal revenue laws.

Section 7122(c) provides that the Secretary shall prescribe

guidelines for evaluation of whether an offer-in-compromise

should be accepted. 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), affg. T.C.

Memo. 2004-13; sec. 301.7122-1(c)(1), Proced. & Admin. Regs.

The section 7122 regulations set forth three grounds for

compromise of a taxpayer’s liability. These grounds are doubt as
 - 15 -

to liability, doubt as to collectibility, and the promotion of

effective tax administration. Sec. 301.7122-1(b), Proced. &

Admin. Regs. Petitioner seeks a compromise based on doubt as to

collectibility.

The Secretary may compromise a tax liability based on doubt

as to collectibility 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. Generally, under the

Commissioner’s administrative procedures, an offer-in-compromise

based on doubt as to collectibility will be acceptable only if it

reflects the taxpayer’s “reasonable collection potential”. Rev.

Proc. 2003-71, sec. 4.02(2), 2003-2 C.B. 517. Both parties

appear to agree that petitioner’s reasonable collection potential

is substantially less than his tax liability which, as above

noted, stood at more than $773,368, as of January 1, 2005. The

parties obviously disagree as to petitioner’s collection

potential.

The IRS has developed guidelines and procedures for the

submission and evaluation of offers to compromise under section

7122. Rev. Proc. 2003-71, supra. In furtherance thereof, the

Internal Revenue Manual (IRM) contains extensive guidelines for

evaluating offers-in-compromise. 1 Administration, Internal
 - 16 -

Revenue Manual (CCH), sec. 5.8, at 16,253. Both petitioner and

respondent focus substantial attention in their briefs to the

issue of “Dissipation of Assets”, discussed below.

The IRM provides in part, in “Dissipation of Assets”,

section 5.8.5.4, at 16,339-6, the following:

(1) During an offer investigation it may be
discovered that assets (liquid or non-liquid) have been
sold, gifted, transferred, or spent on non-priority
items and/or debts and are no longer available to pay
the tax liability. This section discusses treatment of
the value of these assets when considering an offer in
compromise.

* * * * * * *

(2) Once it is determined that a specific asset has
been dissipated, the investigation should address
whether the value of the asset, or a portion of the
value, should be included in an acceptable offer
amount.

(3) Inclusion of the value of dissipated assets
must clearly be justified in the case file and
documented on the ICS/AOIC history. * * *

(4) When the taxpayer can show that assets have been
dissipated to provide for necessary living expenses, these
amounts should not be included in the reasonable collection
potential (RCP) calculation.

* * * * * * *

(5) If the investigation clearly reveals that assets
have been dissipated with a disregard of the outstanding tax
liability, consider including the value in the reasonable
collection potential (RCP) calculation. [Emphasis added.]
 - 17 -

It is not totally clear how dissipated assets can be “no longer

available to pay the tax liability” (see (1), above) while at the

same time included in the “reasonable collection potential (RCP)

calculation” (see (5), above).

The settlement officer apparently considered herself

required to apply this rather cryptic guideline, and under an

abuse of discretion standard we are not at liberty to challenge

her judgment that it should be used. However, under the abuse of

discretion standard, we must assure that the guideline is

correctly applied.

The Appeals Case Determination states that

Appeals preliminary determination of Dr. Samuel’s net
realizable equity (NRE) in his assets is that it should
include 100% of his dissipated assets totaling $133,158 with
the possible exception of the $15,600 paid for his 2003
estimated tax payment, his legal fees of $5,000 incurred in
association with his civil law suit against his prior
employer and $5,464 paid for child support. He has no net
realizable equity in his personal residence given that quick
sale value (QSV) is used and offset against his mortgage of
$322,000. Since his mortgage exceeds the QSV of $320,000
(80% of FMV determined to be at $400,000), he has no equity
to include in his NRE. Appeals believes that his interest
in his medical corporation exceeds that which was reported
at the face-to-face hearing to be the value of the equipment
totaling $3,630. This is an on-going business that had
gross income in excess of $300,000 in 2003.

The Appeals Case Determination goes on to state that

Dr. Samuel was provided the opportunity to increase his
offered amount to at least include amounts he realized
pursuant to his dissipated assets in order that his offer
receive further consideration. He declined to so do.
 - 18 -

The $15,600 which Dr. Samuel paid for his 2003 estimated tax

payment should have been excluded from the dissipated assets

category, and if Appeals was in doubt about the includability of

the $5,000 incurred in association with Dr. Samuel’s civil law

suit and the $5,464 paid for child support, these amounts should

have been excluded also. It was an abuse of discretion not to do

so.

It is represented in his brief that petitioner has been

current on all of the filings and payments of his taxes, starting

with 2003. It appears from the Appeals Case Determination that

petitioner has in fact minimal assets from which cash could be

realized, but that he has a medical practice that produces a

fairly substantial amount of income. Clearly, then, any IRS

recovery from petitioner would have to come principally, if not

entirely, from his medical practice income.

In connection with its consideration of petitioner’s offer-

in-compromise, Appeals prepared the following table to illustrate

petitioner’s future income potential. The Case Determination

states that the table is intended to show that petitioner’s

future income potential is more than his $30,000 offer.

Total Income Necessary Living Expenses
Source Gross Claimed Allowed

Wages/salaries $7,963 Natl.Std $976 $953
T/P expenses
Wages/salaries Housing & 1,024 1,034
spouse utilities
Interest Transportation 0 0
Net business Health care 50 100
 - 19 -

income Taxes 2,470 2,180
Rental income Court ordered 2,750 2,750
Pensions T/P pmts.
Child/dependent
care 0
Pensions spouse
Child support Life insurance
Alimony Secured debts
Other: Representation 250 0
IRA dstrbtn. Other:

Total income 7,963 Total expense 7,520 7,017

Net difference 946

Net difference times (a, b or c) = FIP [Future income potential]

Net difference = $946 x 60 $56,760

(a) If the taxpayer is making a cash offer (offering to pay
within 90 days or less) multiply the net difference by 48 or the
number of months remaining on the statute.

(b) If the taxpayer is making a short term deferred
payment offer (offering to pay within 2 years) multiply
the net difference by 60 or the number of months remaining
on the statute, whichever is shorter.

(c) If the taxpayer is making a deferred payment offer
(offering to pay over the life of the statute), use the
deferred payment chart to determine the number of months.

Petitioner points out that 2 Administration, Internal

Revenue Manual (CCH), section 5.15.1.10(3), at 17,662, allows as

a necessary expense accounting and legal fees if representation

before the IRS is needed or meets the necessary expense tests.

The costs must be related to solving the current controversy. In

calculating petitioner’s future income potential, the settlement

officer failed to allow monthly payments of $250 which petitioner

was making to his tax attorney in connection with the current

controversy. The corrected income potential would thus be

$41,760.
 - 20 -

The Appeals Case Determination takes the position that

Appeals was not required to counteroffer petitioner’s offer-in-

compromise, but petitioner points out that 1 Administration,

Internal Revenue Manual (CCH), section 5.8.4.6., at 16,308,

provides that in the course of processing the case, if the

taxpayer’s offer must be increased in order to be recommended for

acceptance, the taxpayer must be contacted by letter or telephone

advising the taxpayer “to amend the offer to the acceptable

amount”. In the present case, petitioner should have been

advised that instead of 100 percent of the dissipated assets,

totaling $133,158, an acceptable amount would be $133,158 less

$26,064 ($15,600 plus $5,000 plus $5,464), or $107,094. Appeals’

failure to do so was an abuse of discretion, and we so hold.

Petitioner should be given the opportunity to revise his

offer-in-compromise to reflect the $107,094, referred to above.

However, since petitioner appears to lack any substantial assets

outside his medical practice which could provide a source for

paying any compromise amount, it is obvious, as previously

observed, that any payments would come from his medical earnings.

The table prepared by Appeals, above, unquestionably reveals that

petitioner has ample income in excess of his $30,000 offer

payable over 24 months.
 - 21 -

We shall remand this case to Appeals for a 60-day period

within which petitioner may, if he so chooses, revise the amount

of his offer-in-compromise and suggest new terms of payment in

accordance herewith.

An appropriate order

will be issued.