T.C. Memo. 2008-26
UNITED STATES TAX COURT
ROBERT M. SCHARRINGHAUSEN, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 4427-06L. Filed February 12, 2008.
Richard L. Fahey, for petitioner.
Karen Sommers, for respondent.
MEMORANDUM OPINION
HOLMES, Judge: Robert Scharringhausen files income tax
returns but does not always pay the tax due, a habit that finds
him owing more than $30,000 for the tax years 2001-03. The
Commissioner assessed the amount due, and filed a notice of
federal tax lien (NFTL) to protect the government’s interest
against the many other creditors Scharringhausen has accumulated.
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Scharringhausen offered to compromise his tax bill for $750, but
the IRS returned his offer because he hadn’t paid his 2004 tax
bill either. His main argument is that this was an abuse of
discretion.
Background
Scharringhausen’s history of not paying his taxes reaches
back at least to the early ’90s--there is an outstanding judgment
against him for nearly $500,000 for unpaid income taxes for 1991
and 1992, and for trust-fund-recovery-penalty taxes for 1990 and
1991.1 He and some of the firms he controlled also had other
problems, and later in the decade he served a short sentence for
bankruptcy fraud. After being released, he went back into
business, but failed to file returns in 1999 and 2000. See
Scharringhausen v. United States, 91 AFTR 2d 651, 2003-1 USTC
par. 50,224 (S.D. Cal. 2003) (enforcing summons for records of
offshore credit card use).
1
Taxes that employers withhold from their employees’ wages
are known as “trust fund taxes” because they are deemed a special
fund in trust for the United States under section 7501(a).
Slodov v. United States, 436 U.S. 238, 243 (1978). The
Commissioner may collect unpaid employment taxes from a
“responsible person” within the company; i.e., someone who was
required to pay over the tax. The money that’s collected is
called a trust-fund-recovery-penalty tax. Sec. 6672. (Unless
otherwise indicated, all section references are to the Internal
Revenue Code and Regulations for the years at issue, and the one
Rule reference is to Rule 122 of the Tax Court Rules of Practice
and Procedure.)
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In 2001 he filed an untimely return showing that he owed no
tax, but the Commissioner later assessed a deficiency for that
year of slightly more than $1000. For 2002 and 2003,
Scharringhausen filed timely returns that showed tax due, but he
had not made estimated tax payments and did not pay the taxes
with the return. The Commissioner assessed the tax shown on the
returns for those years along with additions and interest for a
total balance of over $30,000. For his 2004 year,
Scharringhausen again filed a return--this one showing more than
$16,000 owed--but again made no estimated tax payments and no
payment with the return.
About the same time he filed his 2004 return,
Scharringhausen offered to settle his 2001-03 tax debt for a mere
$750, citing “doubt as to collectibility.” The Commissioner
returned this offer as “nonprocessable” because Scharringhausen
was “noncompliant” in that he had failed to pay his 2004 taxes.
After rejecting the compromise offer, the Commissioner filed an
NFTL for the years 2001-03. Scharringhausen received a
Collection Due Process (CDP) Notice of the NFTL and then timely
requested a CDP hearing. He also submitted a new offer-in-
compromise (OIC), offering to settle his unpaid 2004 tax bill as
well, again on grounds of doubtful collectibility. This time he
submitted a Form 433-A Collection Information Statement for Wage
Earners and Self-employed Individuals reflecting 21 creditors’
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judgments against him totaling nearly $1.3 million. But he
refused to have the settlement officer conducting the CDP hearing
consider this new offer, preferring to have it “worked on” by the
IRS Appeals office in Tennessee to which he had sent it.
This left the settlement officer conducting the hearing with
nothing to do but review Scharringhausen’s IRS records and the
transcripts reflecting the IRS’s rejection of Scharringhausen’s
first offer (for 2001-03), verify whether all applicable legal
and administrative requirements had been met, and consider
Scharringhausen’s contention that the tax lien was improperly
filed and should be withdrawn. She concluded the hearing by
sustaining the lien and issuing a notice of determination.
Scharringhausen, a resident of California when he filed his
petition, appeals. The parties stipulated the facts and
submitted the case for decision without trial under Rule 122.
Discussion
Once a taxpayer fails to pay taxes after the IRS has sent
him a demand for payment, his tax liability becomes a lien in
favor of the United States against all of his real and personal
property. Sec. 6321. Filing a notice of that lien is
nevertheless important because it gives the lien priority against
later-filing competing creditors. See sec. 6323(a); Behling v.
Commissioner, 118 T.C. 572, 575 (2002). It also opens a short
window of time during which a taxpayer may demand a hearing to
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check whether the Commissioner properly filed the lien, and take
a second look at whether the filing should be sustained. This
hearing is also a taxpayer’s chance to raise an innocent-spouse
defense, offer collection alternatives, or demonstrate that the
Government’s collection effort is overly intrusive even after
taking into account the need to efficiently collect taxes.
Scharringhausen isn’t challenging his underlying tax
liability, so we review the Commissioner’s determination to see
if he abused his discretion. See Sego v. Commissioner, 114 T.C.
604, 610 (2000); Goza v. Commissioner, 114 T.C. 176, 182 (2000).
Courts generally hold that a decisionmaker abuses his discretion
“when [he] makes an error of law * * * or rests [his]
determination on a clearly erroneous finding of fact * * * [or]
‘applies the correct law to facts which are not clearly erroneous
but rules in an irrational manner’.” United States v. Sherburne,
249 F.3d 1121, 1125-26 (9th Cir. 2001) (quoting Friedkin v.
Sternberg, 85 F.3d 1400, 1405 (9th Cir. 1996)); see also Cooter &
Gell v. Hartmarx Corp., 496 U.S. 384, 402-03 (1990) (same).
We can distill Scharringhausen’s objections to the notice of
determination into two: that the Commissioner didn’t follow
correct procedures in filing the lien, and that the Commissioner
should have accepted his first offer to compromise the taxes
involved.
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A. Was the Lien Properly Filed?
The federal tax lien is imposed automatically once the
assessment is made. Sec. 6321. No one disputes that the
Commissioner properly assessed Scharringhausen’s 2001-03 taxes
before the NFTL’s filing in May 2005, that he mailed notice-and-
demand letters to Scharringhausen within 60 days of each
assessment’s date, and that the taxes remain unpaid. Thus the
settlement officer correctly found that the NFTL was not filed
prematurely, or in violation of IRS procedures. Scharringhausen
(as best we can tell) argues that the NFTL was nevertheless
procedurally improper because section 6323(j)(1) gives discretion
to the Commissioner to withdraw a lien if, for example, it would
facilitate tax collection. Sec. 6323(j)(1)(C). This is a true
statement, but we’re hard pressed to see how withdrawing the NFTL
could possibly help collect the tax, given that Scharringhausen
had over $1 million in other outstanding judgments against him.
Nor did Scharringhausen satisfy the other provision of
section 6323 that he cited in the record--section 6323(j)(1)(D)--
which allows the NFTL to be withdrawn if doing so would be in the
best interests of the taxpayer and the United States. Though we
don’t doubt that the withdrawal of the lien would benefit
Scharringhausen, we’re equally hard pressed to see how it would
benefit the United States, since the 21 judgment liens already in
place against Scharringhausen make it much more likely that
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withdrawing the lien would simply cause the government to lose
its priority status against other creditors.2
B. Was It an Abuse of Discretion Not To Reconsider
Rejection of Scharringhausen’s First OIC?
Scharringhausen also contends that his offer to compromise
his 2001-03 taxes was improperly returned as “nonprocessable”
because he failed to pay his 2004 taxes. He cites Chavez v.
United States, 93 AFTR 2d 2004-2386, at 2004-2391 (W.D. Tex.
2004) to support his contention that a “blanket” refusal to
process an OIC for noncompliance is an abuse of discretion. We,
however, have held that “reliance on a failure to pay current
taxes in rejecting a collection alternative does not constitute
an abuse of discretion.” Giamelli v. Commissioner, 129 T.C. 107,
111-12 (2007). And at least the Fifth, Sixth, and Seventh
Circuits agree with us. Christopher Cross, Inc., v. United
States, 461 F.3d 610, 613 (5th Cir. 2006); Orum v. Commissioner,
412 F.3d 819, 821 (7th Cir. 2005), affg. 123 T.C. 1 (2004);
Living Care Alternatives of Utica, Inc. v. United States, 411
F.3d 621, 630-31 (6th Cir. 2005).
2
The two other reasons for granting relief from the filing
of a NFTL are that the IRS didn’t follow proper procedures, sec.
6323(j)(1)(A), and that the taxpayer involved is current on an
installment agreement, sec. 6323(j)(1)(B). The first is not
present here--the settlement officer reviewed the procedural
checklist and found the IRS had done its job correctly; the
second doesn’t apply because Scharringhausen had no installment
agreement.
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In Orum v. Commissioner, 412 F.3d at 821, Judge Easterbrook
explained:
It would not do the Treasury any good if
taxpayers used the money owed for 2004 to pay
taxes due for 1998, the money owed for 2005
to pay taxes for 1999, and so on. That would
spawn more collection cycles yet leave a
substantial unpaid balance. The Service’s
goal is to reduce and ultimately eliminate
the entire tax debt, which can be done only
if current taxes are paid while old tax debts
are retired. * * *
Scharringhausen nevertheless claims that the Commissioner
violated his own Internal Revenue Manual (IRM) procedures in not
reconsidering the rejection of his OIC. The IRM, however, has no
force of law and gives no rights to taxpayers. Fargo v.
Commissioner, 447 F.3d 706, 713 (9th Cir. 2006), affg. T.C. Memo.
2004-13; Thoburn v. Commissioner, 95 T.C. 132, 141 (1990). And
we are puzzled by Scharringhausen’s insistence that the lien was
improperly sustained because his 2001-03 OIC was improperly
rejected, when he refused to have his 2001-04 offer considered as
a collection alternative. It is no abuse of discretion not to
consider what a taxpayer asks not to be considered.
Scharringhausen’s final argument is that “[t]he IRS’[s]
current processes continue to prevent taxpayers from utilizing
the Offer in Compromise by imposing barriers to entry and
unnecessarily returning offers.” This is not reason for finding
an abuse of discretion in this case--establishing a general
procedure for deciding when to accept OIC and when to proceed by
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lien or levy is, as Judge Easterbrook concluded, “the sort of
decision committed to executive officials.” Orum, 412 F.3d at
821. That the IRS has exercised that discretion by limiting
compromises based on doubt as to collectibility to those
taxpayers suffering from real financial hardship, rather than to
those trying to give the IRS tsuris by making multiple lowball
offers and frustrating efforts to chase assets that have possibly
moved offshore is perfectly reasonable.
Because there are no grounds on which to overturn the filing
of the NFTL, it is sustained and
Decision will be entered for
respondent.