T.C. Memo. 2011-194
UNITED STATES TAX COURT
LILLIAN LAYTON, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 24455-10L. Filed August 11, 2011.
Lillian Layton, pro se.
Jonathan J. Ono, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
COHEN, Judge: This case was commenced in response to a
Notice of Determination Concerning Collection Action(s) with
respect to petitioner’s Federal income tax liability for 2004.
The issue for determination is whether it was an abuse of
discretion for the Internal Revenue Service (IRS) Appeals Office
to reject petitioner’s offer-in-compromise (OIC) after including
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a dissipated asset in calculating her reasonable collection
potential (RCP). All section references are to the Internal
Revenue Code.
FINDINGS OF FACT
Some of the facts have been stipulated, and the stipulated
facts are incorporated in our findings by this reference.
Petitioner resided in Hawaii at the time she filed her petition.
Petitioner filed her Federal income tax return for 2004 on
or about October 17, 2005. After the return was examined by the
IRS, a notice of deficiency was sent to petitioner on February
20, 2007. Petitioner filed a petition in this Court, which was
docketed as case No. 8780-07. A stipulated decision was entered
on May 23, 2008, in which petitioner agreed to a deficiency of
$9,155 for 2004. The deficiency and related interest were duly
assessed on July 7, 2008, but the assessed amounts have not been
fully paid.
On June 1, 2009, a Notice of Intent to Levy and Notice of
Your Right to a Hearing was sent to petitioner with respect to
the 2004 unpaid liability. Petitioner requested a hearing under
section 6330. Petitioner submitted an OIC in the amount of
$7,500 and provided financial data to support the OIC. The
Appeals Office determined that petitioner had the ability to pay
in full $13,064.49, the then balance of her liability for 2004,
and rejected the OIC. Petitioner submitted statements from the
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custodian of her Individual Retirement Accounts (IRAs) during the
Appeals Office review that showed she received total IRA
distributions of $57,602 in 2009. The Appeals officer calculated
petitioner’s necessary living expenses as $44,472 and deducted
this amount from the total IRA distributions. In determining
petitioner’s ability to pay, the Appeals officer included in
petitioner’s assets the remaining $13,130 of the IRA
distributions that had been used to pay other debts. After a
series of exchanges between petitioner and Appeals, a notice of
determination was sent to petitioner sustaining the proposed
levy.
OPINION
Section 6330 provides for notice and opportunity for a
hearing before the IRS may levy upon the property of any person.
Under section 6330(c)(3), the determination to proceed with a
collection action “shall take into consideration * * * whether
any proposed collection action balances the need for the
efficient collection of taxes with the legitimate concern of the
person that any collection action be no more intrusive than
necessary.”
Petitioner does not now challenge her underlying
liability, and she is precluded from doing so because she
received a notice of deficiency for 2004. See sec.
6330(c)(2)(B). Accordingly, we review the Appeals Office’s
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determination for abuse of discretion. See Sego v. Commissioner,
114 T.C. 604, 610 (2000). An action constitutes an abuse of
discretion if it is arbitrary, capricious, or without sound basis
in fact or law. Giamelli v. Commissioner, 129 T.C. 107, 111
(2007).
Section 7122(a) authorizes compromise of a taxpayer’s
Federal income tax liability in accordance with guidelines to be
adopted by the Treasury. The grounds for compromise of a
tax liability include doubt as to collectibility. Sec. 301.7122-
1(b)(2), Proced. & Admin. Regs. Doubt as to collectibility,
“exists in any case where the taxpayer’s assets and income are
less than the full amount of the liability.” Id. Generally,
under the Commissioner’s administrative guidelines, an offer to
compromise based on doubt as to collectibility will be acceptable
only if it reflects the RCP. See Internal Revenue Manual (IRM),
pt. 5.8.1.1.3(3) (Mar. 16, 2010); see also Rev. Proc. 2003-71,
sec. 4.02(2), 2003-2 C.B. 517, 517 (stating that an offer will be
considered acceptable if it reflects the taxpayer’s RCP). Where
the Appeals officer has followed the IRS guidelines to ascertain
a taxpayer’s RCP and has rejected the taxpayer’s collection
alternative on that basis, we generally have found no abuse of
discretion. See McClanahan v. Commissioner, T.C. Memo. 2008-161;
Lemann v. Commissioner, T.C. Memo. 2006-37.
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Where a taxpayer has dissipated assets in disregard of the
taxpayer’s outstanding Federal income taxes, the dissipated
assets may be included in the calculation of the minimum amount
that is to be paid under an acceptable OIC. See IRM pt.
5.8.5.4(5) (Sept. 1, 2005). A dissipated asset is defined as any
asset (liquid or not liquid) that has been sold, transferred, or
spent on nonpriority items and/or debts and is no longer
available to pay the tax liability. See Samuel v. Commissioner,
T.C. Memo. 2007-312; IRM pt. 5.8.5.4(1) (Sept. 1, 2005). When
the taxpayer can show that assets have been dissipated to provide
for necessary living expenses, these amounts should not be
included in the RCP calculation, including for example,
“dissolving an IRA account to pay for necessary living expenses
during unemployment”. IRM pt. 5.8.5.4(4) (Sept. 1, 2005).
Petitioner acknowledges that she withdrew funds from her IRA
and that she paid debts other than the balance of her tax
liability for 2004. She explains that she was unemployed for 3
years and has been unable to pay the balance. She has not,
however, challenged the calculation of her RCP or otherwise shown
that it was an abuse of discretion for the Appeals Office to
reject her OIC. Respondent’s counsel has referred to other
alternatives to avoid levy, but they are not within our
jurisdiction to review the notice of determination in this case.
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Upon due consideration of the entire record, we must sustain the
notice of determination.
Decision will be entered for
respondent.