T.C. Memo. 2009-292
UNITED STATES TAX COURT
GLENN LITWAK, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 21122-07L. Filed December 21, 2009.
Robert T. Leonard, for petitioner.
Laura L. Buckley, Karen Nicholson Sommers, and Jeffrey A.
Schlei, for respondent.
MEMORANDUM OPINION
VASQUEZ, Judge: Pursuant to section 6330(d),1 petitioner
seeks review of respondent’s determination to proceed with
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code, and all Rule references are to the Tax
Court Rules of Practice and Procedure.
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collection of his unpaid 2000, 2001, and 2002 Federal income tax
liabilities. The issue for decision is whether respondent abused
his discretion in sustaining his proposed levy.
Background
The parties submitted this case fully stipulated pursuant to
Rule 122. The stipulation of facts and the attached exhibits are
incorporated herein by this reference. Petitioner resided in
California at the time he filed his petition.
Petitioner is an attorney and real estate broker. He
operates two S corporations: Glenn Litwak, A Professional
Corporation, and GTL Realty, Inc. Both corporations pay him
wages reported on Forms W-2, Wage and Tax Statement. He also
receives net business income, which he reports on Schedules K-1,
Shareholder’s Share of Income, Credits, Deductions, etc., from
both S corporations.
Petitioner filed Federal income tax returns for 2000, 2001,
and 2002 but failed to pay the tax shown on the returns as due.
Respondent filed notices of Federal tax lien (Federal tax liens)
for tax years 2000, 2001, 2002, 2004, and 2005.
On May 5, 2006, respondent mailed a Final Notice–-Notice of
Intent to Levy and Notice of Your Right to a Hearing, for 2000,
2001, and 2002 to petitioner.
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On June 6, 2006, respondent received petitioner’s timely
filed Form 12153, Request for a Collection Due Process Hearing,
for 2000, 2001, and 2002.
Offer-in-Compromise
On December 11, 2006, respondent received petitioner’s Form
656, Offer in Compromise (OIC), as to tax liabilities for 1997,
1998, 2000, 2001, 2002, 2004, and 2005. Petitioner attached to
the OIC a Form 433-A, Collection Information Statement for Wage
Earners and Self-Employed Individuals; a Form 433-B, Collection
Information Statement for Businesses, for Glenn Litwak, A
Professional Corporation; and a Form 433-B for GTL Realty, Inc.
Petitioner offered to settle the following outstanding Federal
income tax liabilities (including interest computed to November
2006) for $15,000 based on doubt as to collectibility:
Tax Year Liability
Form 1040 1997 $69,433.27
Form 1040 1998 32,671.89
Form 1040 2000 48,884.13
Form 1040 2001 67,150.10
Form 1040 2002 33,851.78
Form 1040 2004 19,172.22
Form 1040 2005 18,812.85
Total 289,976.24
Petitioner’s counsel asserted that petitioner was unable to make
monthly payments and that petitioner’s net realizable equity in
assets was $5,250. Petitioner would be able to borrow $15,000
from family members and friends, and, accordingly, offered to
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compromise all his outstanding Federal income tax liabilities for
this amount.
Petitioner submitted a letter with his OIC which discussed
the potential dischargeability of his Federal income tax
liabilities in bankruptcy. The letter stated: “The taxpayer
desires to reach an agreement through the Offer in Compromise
Program and avoid bankruptcy. However, bankruptcy is a viable
option and consideration of an offer should be a calculated
business decision.” Petitioner’s counsel asserted that
petitioner’s Federal income tax liabilities for 1997, 1998, 2000,
2001, 2002, 2004, and 2005 were currently dischargeable or would
soon be dischargeable in bankruptcy.
Settlement Officer’s Review
On April 16, 2007, Settlement Officer Nathan August (Mr.
August) reviewed petitioner’s OIC and the attached information.
Mr. August determined that petitioner’s 2004 and 2005 Federal
income tax liabilities would not be discharged in bankruptcy. He
determined petitioner had a current ability to pay $1,390 per
month, on the basis of the difference between petitioner’s
reported $12,440 monthly income and monthly expenses of $11,050.
He noted that petitioner had an unencumbered BMW car with a
current value of $10,000.
On April 17, 2007, Mr. August sent a letter to petitioner
scheduling a meeting for July 16, 2007, and requesting additional
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documentation. Petitioner provided the documents, and Mr. August
reviewed the information therein. He analyzed the bank
statements, Forms W-2, and Schedules K-1 petitioner provided and
determined that the income figures that petitioner reported on
his Form 433-A were accurate. Thus, Mr. August determined that
petitioner received $12,440 per month in gross wages, net
business income, and interest income. Using the Internal Revenue
Service’s National Standard Allowable Expense Table, Mr. August
determined that petitioner’s total allowable monthly expenses
were $7,767 and concluded that petitioner had the ability to pay
$4,673 per month towards his delinquent tax liabilities. Mr.
August also determined that petitioner’s net realizable equity in
assets was $8,400. Accordingly, Mr. August calculated that
petitioner’s net realizable equity in assets of $8,400 plus his
future income value of $224,304 ($4,673 times 48 months) produced
a reasonable collection potential of $232,704.
Section 6330 Hearing
On August 2, 2007, Mr. August held a section 6330 hearing
with petitioner and petitioner’s counsel. During the section
6330 hearing petitioner conceded net realizable equity in assets
of $8,400.2 Petitioner’s counsel stated that petitioner could
increase his OIC to $23,000. Petitioner’s counsel asserted that
2
Petitioner later argued that the $8,400 of assets would
be exempt from the bankruptcy estate in his hypothetical ch. 7
bankruptcy.
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petitioner had offered more than his reasonable collection
potential because his outstanding Federal income tax liabilities
for all years except for 2005 would be discharged in bankruptcy.
Petitioner’s counsel informed Mr. August that petitioner intended
to file for bankruptcy in October 2008 to discharge his Federal
income tax liabilities and credit card debt.
Mr. August told petitioner that he did not believe a
bankruptcy court would discharge petitioner’s Federal income tax
liabilities because petitioner was not insolvent. Further, he
had determined that petitioner had an ability to pay $4,673 per
month towards his outstanding Federal income tax liabilities.
Petitioner’s counsel stated that petitioner was not able to
pay $4,673 per month and expected his income to decrease because
he had lost a major client. Mr. August told petitioner’s counsel
that the claim that petitioner’s income would decrease was
speculative and lacked supporting documentation. He further
determined that petitioner’s bank account deposit records
covering the last 12 months documented high income for petitioner
and his two S corporations.
On August 20, 2007, respondent mailed to petitioner a Notice
of Determination Concerning Collection Action(s) Under Section
6320 and/or 6330. Respondent rejected petitioner’s OIC of
$15,000 and sustained the proposed levy because the OIC did not
represent petitioner’s reasonable collection potential.
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OPINION
I. Jurisdiction and Standard of Review
Section 6330(a) provides that the Secretary shall furnish a
taxpayer with written notice of his right to a hearing before any
property is levied upon. Section 6330 further provides that the
taxpayer may request administrative review of the matter (in the
form of a hearing) within a 30-day period. Sec. 6330(a) and (b).
Pursuant to section 6330(c)(2)(A), a taxpayer may raise at
the section 6330 hearing any relevant issue with regard to the
Commissioner’s collection activities, including spousal defenses,
challenges to the appropriateness of the Commissioner’s intended
collection action, and alternative means of collection. Sego v.
Commissioner, 114 T.C. 604, 609 (2000); Goza v. Commissioner, 114
T.C. 176, 180 (2000).
Petitioner does not dispute his underlying Federal income
tax liabilities for 2000, 2001, or 2002 or the validity of the
Federal tax liens respondent filed for 2000, 2001, 2002, 2004, or
2005. Rather, petitioner disputes respondent’s rejection of his
OICs.3 Where the validity of the underlying tax liability is not
at issue, we review the Commissioner’s determination for abuse of
discretion. Sego v. Commissioner, supra at 610.
3
Petitioner did not formally submit an OIC of $23,000.
However, respondent has conceded that petitioner made an OIC of
$23,000.
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Under an abuse of discretion standard, a taxpayer must prove
that the Commissioner exercised his discretion arbitrarily,
capriciously, or without sound basis in fact or law. Woodral v.
Commissioner, 112 T.C. 19, 23 (1999).
II. Offer-in-Compromise
Section 7122(a) authorizes the Commissioner to compromise a
taxpayer’s outstanding liabilities. The regulations and
procedures under section 7122 provide the exclusive method of
effecting a binding nonjudicial compromise. Laurins v.
Commissioner, 889 F.2d 910, 912 (9th Cir. 1989), affg. Norman v.
Commissioner, T.C. Memo. 1987-265; Shumaker v. Commissioner, 648
F.2d 1198, 1199-1200 (9th Cir. 1981) (citing Botany Worsted Mills
v. United States, 278 U.S. 282, 288-289 (1929)), affg. in part,
revg. in part and remanding per curiam on other grounds T.C.
Memo. 1979-71.
A compromise based on “doubt as to collectibility” may be
accepted “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. With respect to OICs on this basis, we
stated in Murphy v. Commissioner, 125 T.C. 301, 309 (2005), affd.
469 F.3d 27 (1st Cir. 2006):
Generally, under * * * [the Commissioner’s]
administrative pronouncements, an offer to compromise
based on doubt as to collectibility will be acceptable
only if the offer reflects the reasonable collection
potential of the case (i.e., that amount, less than the
full liability, that the IRS could collect through
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means such as administrative and judicial collection
remedies). Rev. Proc. 2003-71, sec. 4.02(2), 2003-2
C.B. 517. * * *
See also Internal Revenue Manual (IRM), pt. 5.8.1.1.3(3) (Sept.
1, 2005) (“Absent special circumstances, a Doubt as to
Collectibility (DATC) offer amount must equal or exceed a
taxpayers [sic] reasonable collection potential (RCP) in order to
be considered for acceptance.”).
Reasonable Collection Potential
The taxpayer’s RCP includes realizable equity in assets
owned by the taxpayer as well as amounts collectible from the
taxpayer’s future income after allowing for payment of necessary
living expenses. Id. pt. 5.8.4.4.1. Generally, where an IRS
Appeals employee has followed the Commissioner’s guidelines to
ascertain a taxpayer’s RCP and rejected the taxpayer’s collection
alternative on that basis, we have found no abuse of discretion.
Lemann v. Commissioner, T.C. Memo. 2006-37; see also Schulman v.
Commissioner, T.C. Memo. 2002-129.
Petitioner made OICs of $15,000 and $23,000 to settle his
outstanding Federal income tax liabilities for 1997, 1998, 2000,
2001, 2002, 2004, and 2005. In a letter submitted with his
$15,000 OIC, petitioner threatened to file for bankruptcy.
Petitioner again threatened to file for bankruptcy at the August
2, 2007, section 6330 hearing and stated he would file for
bankruptcy in October 2008 (nearly 15 months in the future).
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Petitioner argues respondent abused his discretion by not
accepting either of petitioner’s OICs.
Mr. August determined that petitioner’s RCP was $232,704.
Petitioner did not assign any error to Mr. August’s determination
of petitioner’s $232,704 RCP in his petition. Rule 331(b)(4).
Consequently, petitioner’s $15,000 and $23,000 OICs failed to
exceed his RCP. However, once petitioner threatened to file for
bankruptcy, Mr. August took into account the potential impact of
bankruptcy on petitioner’s RCP when making his determination to
reject petitioner’s OICs and sustain the proposed levy.
When a taxpayer threatens bankruptcy, the impact of
bankruptcy on the Internal Revenue Service’s (IRS) ability to
collect must be considered. “Offers in Compromise Before
Bankruptcy”, IRM pt. 5.8.10.2.2(1) (Sept. 1, 2005). While IRS
officers are evaluating the acceptability of an OIC when the
threat of bankruptcy is a consideration, the IRM instructs them
to determine the RCP of the taxpayer. Id. pt. 5.8.10.2.2(4).
The IRM further states that analysis of the collectibility if
bankruptcy were filed, along with a financial analysis and a
determination of liabilities that would be fully discharged,
should result in the information necessary to make an informed
decision regarding the offer and to attempt negotiation with the
taxpayer. Id. pt. 5.8.10.2.2(5).
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Respondent’s determination regarding whether petitioner’s
unpaid Federal income tax liabilities could be collected by levy
if petitioner were to file for bankruptcy required an
interpretation of bankruptcy law. If respondent’s determination
was based on erroneous views of the law and petitioner’s unpaid
Federal income tax liabilities could not be collected by levy,
then we must reject respondent’s view and find that there was an
abuse of discretion. See Iannone v. Commissioner, 122 T.C. 287,
291 (2004) (citing Swanson v. Commissioner, 121 T.C. 111, 119
(2003), and Ramsdell v. Commissioner, T.C. Memo. 2003-317).
It is undisputed that petitioner’s 2005 Federal income tax
liability of approximately $18,812.85 (as of November 2006) would
not be discharged in a bankruptcy filed in October 2008. It is
also undisputed that petitioner’s 1997, 1998, 2000, 2001, and
2002 Federal income tax liabilities would be discharged in such a
bankruptcy. Respondent disputes petitioner’s contention that
petitioner’s 2004 Federal income tax liability of approximately
$19,172.22 (as of November 2006) would be discharged in such a
bankruptcy. We need not decide whether the 2004 Federal income
tax liability would be discharged.
Assuming arguendo that petitioner’s Federal income tax
liabilities for all years except 2005 would be discharged in
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bankruptcy, $18,812.854 would be collectible in personam from
petitioner. See Iannone v. Commissioner, supra at 293 (citing
Johnson v. Home State Bank, 501 U.S. 78, 84 (1991)). This
exceeds the $15,000 OIC petitioner made, and accordingly,
respondent did not abuse his discretion when he refused to accept
petitioner’s $15,000 OIC.
Next, petitioner made an OIC of $23,000. Both parties agree
that petitioner had net realizable equity in assets of $8,400.
Petitioner asserts that these assets would be exempt from the
bankruptcy estate.
Assuming arguendo that petitioner’s assertion is true and
the assets composing petitioner’s net realizable equity in assets
of $8,400 would be exempt from the bankruptcy estate, these
assets would remain encumbered by the valid Federal tax liens.
See Iannone v. Commissioner, supra at 293. Respondent’s Federal
tax liens for 2000, 2001, 2002, 2004, and 2005 have been
stipulated and are not at issue. As we stated in Iannone,
Federal tax liens are not extinguished by personal discharge in
bankruptcy. Any existing Federal tax liens remain in effect and
attach to assets owned before the date of filing the bankruptcy
petition. Iannone v. Commissioner, supra at 293 (citing 11
U.S.C. section 522(c)(2)(B) (2000) and Connor v. United States,
27 F.3d 365, 366 (9th Cir. 1994) (“A preexisting lien on
4
Petitioner owed $18,812.85 in November 2006.
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property, however, remains enforceable against that property even
after an individual’s personal liability has been discharged.”)).
Even if petitioner’s Federal income tax liabilities were
discharged in personam for all years except 2005 ($18,812.85) and
all of petitioner’s assets ($8,400) were exempt from the
bankruptcy estate, the sum of the amounts collectible from
petitioner in personam and in rem would exceed petitioner’s OIC
of $23,000. Respondent would be able to collect the 2005 Federal
income tax liability of approximately $18,812.85 from petitioner
in personam. Additionally, respondent would be able to collect
$8,400 from petitioner in rem using assets exempt from
petitioner’s estate because the Federal tax liens for 2000, 2001,
2002, 2004, and 2005 precede petitioner’s hypothetical October
2008 bankruptcy filing and those liens attached to the exempt
assets. Accordingly, respondent did not abuse his discretion
when he refused to accept petitioner’s $23,000 OIC.
In reaching our holdings, we have considered all arguments
made, and, to the extent not mentioned, we conclude that they are
moot, irrelevant, or without merit.
To reflect the foregoing,
Decision will be entered
for respondent.