Layton v. Comm'r

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.