United States Court of Appeals
Fifth Circuit
F I L E D
UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT August 21, 2006
Charles R. Fulbruge III
No. 05-30606 Clerk
CHRISTOPHER CROSS, INC.,
Plaintiff – Appellant,
v.
UNITED STATES OF AMERICA,
Defendant – Appellee.
Appeal from the United States District Court
for the Eastern District of Louisiana
Before JONES, Chief Judge, and BARKSDALE and BENAVIDES, Circuit
Judges.
BENAVIDES, Circuit Judge:
This case concerns whether an Internal Revenue Service (“IRS”)
appeals officer abused her discretion in returning an offer in
compromise submitted by Christopher Cross, Inc. (“Taxpayer”).
Specifically, Taxpayer challenges the appeals officer’s reliance on
the Internal Revenue Manual. For the reasons set forth below, we
find that the appeals officer acted within her discretion in
rejecting Taxpayer’s offer in compromise. Therefore, we affirm the
district court’s dismissal of Taxpayer’s claims.
I. BACKGROUND
The facts are undisputed. Taxpayer admittedly owes the IRS
unpaid employment taxes for the periods ending March 31, 2002, June
30, 2002, September 30, 2002, and December 31, 2002. On December
10, 2002, the IRS issued to Taxpayer a Notice of Intent to Levy
with respect to unpaid employment taxes, including penalties and
interest, for the first three quarters of 2002. On May 5, 2003,
the IRS issued Taxpayer another Notice of Intent to Levy with
respect to unpaid employment taxes, including penalties and
interest, for the fourth quarter of 2002. Taxpayer’s assessed
liability totaled $134,078. In response to each Notice of Intent
to Levy, Taxpayer requested a Collection Due Process (“CDP”)
hearing. See I.R.C. § 6330. IRS Appeals Officer Brenda Esser (the
“Officer”) conducted a CDP hearing respecting both Notices.
On August 13, 2003, Taxpayer submitted an offer in compromise
(the “Offer”) with respect to employment taxes due for all four
quarters. In the Offer, Taxpayer proposed to pay a total of
$85,000 under a deferred-payment schedule. On September 10, 2003,
the Officer returned Taxpayer’s Offer, stating that, “[Taxpayer]
failed to make its federal tax deposits timely for the entire two
quarters prior to the quarter [Taxpayer] submitted the offer
. . . . Unless and until [Taxpayer] can demonstrate a willingness
and ability to meet these circumstances, [Taxpayer] does not
qualify for offer-in-compromise consideration.”
On the same day, the Officer issued a Notice of Determination
upholding the proposed levy to collect unpaid employment taxes as
set forth in the two Notices of Intent to Levy. Specifically, the
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Officer stated that (1) the IRS had met all statutory, procedural,
and administrative requirements before issuing the Notices of
Intent to Levy; (2) Taxpayer had not presented an acceptable
payment alternative; and (3) the proposed levy balanced the need
for efficient tax collection with Taxpayer’s legitimate concern
that the collection action be no more intrusive than necessary.
Additionally, the Officer stated that Taxpayer’s Offer was
“nonprocessable” because Taxpayer had not timely made federal tax
deposits and because Taxpayer had more than sufficient equity in
its current accounts receivable and moveable assets to pay the tax
debts at issue.
Taxpayer filed suit seeking review of the Notice of
Determination. In its complaint, Taxpayer alleged that the IRS had
violated its statutory rights under the Internal Revenue Code by
failing to consider the Offer. The Government subsequently filed
a motion to dismiss, claiming, inter alia, that Taxpayer failed to
state a valid claim upon which relief could be granted under
Federal Rule of Civil Procedure 12(b)(6).
The district court dismissed the case for failure to state a
claim. It held that the IRS’s procedures for declaring offers to
compromise “nonprocessable” violated neither the Taxpayer’s due
process rights nor the Internal Revenue Code and that the Officer
was within her discretion and authority to reject Taxpayer’s offer
to compromise. Taxpayer filed a motion for reconsideration, which
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the court denied. Taxpayer appeals.
II. STANDARD OF REVIEW
“In a collection due process case in which the underlying tax
liability is properly at issue, the Tax Court (and hence this
Court) reviews the underlying liability de novo and reviews the
other administrative determinations for an abuse of discretion.”
Jones v. Comm’r, 338 F.3d 463, 466 (5th Cir. 2003) (citing Craig v.
Comm’r, 119 T.C. 252, 260 (2002)); see Living Care Alternatives of
Utica v. United States, 411 F.3d 621, 626 (6th Cir. 2005) (holding
that, when there is no challenge to the validity of the underlying
tax liability at the CDP hearing, the appeals officer’s decision is
reviewed under an abuse of discretion standard). Furthermore,
several other circuits have held that “Congress likely contemplated
review for a clear abuse of discretion in the sense of clear
taxpayer abuse and unfairness by the IRS, lest the judiciary become
involved on a daily basis with tax enforcement details that
Congress intended to leave with the IRS.” Robinette v. Comm’r, 439
F.3d 455, 459 (8th Cir. 2006) (internal quotation marks omitted);
see Olsen v. United States, 414 F.3d 144, 150 (1st Cir. 2005);
Living Care, 411 F.3d at 631. We adopt this standard.
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III. DISCUSSION
A. Statutory Framework
Consideration of an offer in compromise submitted in the
context of a CDP hearing is governed by section 7122 of the
Internal Revenue Code, which sets out the exclusive method of
compromising federal tax liabilities. See Olsen, 414 F.3d at 153;
I.R.C. § 7122. Specifically, section 7122 provides that the
“Secretary may compromise any civil or criminal case arising under
the internal revenue laws prior to reference to the Department of
Justice for prosecution or defense . . . .” I.R.C. § 7122(a)
(emphasis added). The statute further specifies that the
“Secretary shall prescribe guidelines for officers and employees of
the [IRS] to determine whether an offer-in-compromise is adequate
and should be accepted to resolve a dispute.” I.R.C. § 7122(c).
The Treasury regulations state that “[t]he IRS may . . . return an
offer to compromise a tax liability if it determines that the offer
was submitted solely to delay collection or was otherwise
nonprocessable.” 26 C.F.R. § 301.7122-1(d)(2). The Internal
Revenue Manual (the “Manual”) provides specific circumstances in
which an offer is “nonprocessable.” One such circumstance is when
an in-business taxpayers has failed to timely deposit, file, and
pay “all required employment tax returns for the two (2) preceding
quarters prior to filing the offer . . . .” I.R.M. §
5.8.3.4.1(1)(a).
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B. The Officer Did not Clearly Abuse her Discretion in
Returning the Offer
Taxpayer argues that the Officer did not have the authority to
return the Offer based upon a provision of the Manual, and,
therefore, the Officer abused her discretion. We find no abuse of
discretion. Even assuming the Manual is not law and assuming that
an appeals officer should not rely upon the Manual in making its
determination, the Officer in this case acted within her
discretion. While the Officer cited the Manual in making her
determination, we are not judging the appropriateness of that
citation. Instead, we judge whether the Officer abused her
discretion in returning the Offer.
The Officer’s determination was in accordance with the
Internal Revenue Code and Treasury regulations. The Internal
Revenue Code provides that the Secretary, through its agents, may
compromise a civil case. See I.R.C. § 7122(a). The statute also
orders the Secretary to promulgate guidelines to assist the
officers in determining the adequacy of an offer. I.R.C.
§ 7122(c). The Treasury regulations provide those guidelines and
state that a “nonprocessable” offer may be returned to the
taxpayer. 26 C.F.R. § 301.7122-1(d)(2).
Here, the Officer acted under the power granted to her by the
Internal Revenue Code to settle or not settle this civil case. See
I.R.C. § 7122(a). She determined that the Offer was inadequate
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because Taxpayer was not current on the payment of its estimated
tax for two periods ending March 31, 2003 and June 30, 2003. See
I.R.C. § 7122(c). Based on this inadequacy, she returned the Offer
as “nonprocessable” under the Treasury regulations. See 26 C.F.R.
§ 301.7122-1(d)(2). The failure to timely pay owed taxes is a
perfectly reasonable basis for rejecting an offer in compromise
relating to other unpaid taxes. Whether or not she properly relied
on the Manual, the Officer made a determination grounded in the
discretion afforded to her by law and provided a reasonable basis
for finding the Offer inadequate.1 Therefore, the Officer did not
clearly abuse her discretion in returning the Offer.
Furthermore, Taxpayer has offered no viable support for its
contention that the Officer cannot utilize the guidelines set forth
in the Manual when making the discretionary decision to return a
submitted offer in compromise. See Living Care, 411 F.3d at 631.
It therefore has “failed to present sufficient evidence to justify
a remand.” Id. In sum, the Officer did not clearly abuse her
discretion in returning the Offer, and the record evinces no clear
taxpayer abuse or unfairness by the IRS. See id.
We find additional support for finding no clear abuse of
1
Additionally, the Officer supported her decision by finding
the following: (1) the IRS had met all statutory, procedural, and
administrative requirements before issuing the Notices of Intent
to Levy; (2) Taxpayer had not presented an acceptable payment
alternative; and (3) the proposed levy balanced the need for
efficient tax collection with Taxpayer’s legitimate concern that
the collection action be no more intrusive than necessary.
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discretion in Living Care. The Sixth Circuit, addressing whether
the IRS may reject a plan to present an offer in compromise,
unequivocally stated that the “taxpayer must be current on payments
for the previous two quarters to be eligible to submit an offer in
compromise.” Living Care, 411 F.3d at 630. Accordingly, it held
that the “IRS was well within its discretion to reject [the
taxpayer’s] plan to present an offer in compromise.” Id. at 631.
We join the Sixth Circuit in finding no clear abuse of discretion
where an appeals officer makes a “fully support[ed]” decision
regarding the processability of an offer.2 Id. at 630.
IV. CONCLUSION
Our review of the Officer’s determination is for clear abuse
of discretion. Under that standard, the Officer made a reasoned
decision under the Internal Revenue Code and Treasury regulations.
Moreover, Taxpayer has failed to present authority stating the
contrary. Therefore, Taxpayer has not stated a claim upon which
relief can be granted. Accordingly, we AFFIRM the dismissal of
2
The Seventh Circuit similarly has held that an appeals
officer’s consideration of a taxpayer’s failure to remit
estimated tax was not an abuse of discretion when that appeals
officer denied a second CDP hearing to a taxpayer who had failed
to comply with a previous installment plan designed to eliminate
tax liabilities. See Orum v. Comm’r, 412 F.3d 819, 820–21 (7th
Cir. 2005). Although the officer in Orum relied on the failure
to remit estimated tax and here the Officer relied on the failure
to timely remit, the Seventh Circuit’s holding is persuasive in
determining that such reliance is a valid reason for an appeals
officer’s decision and within the officer’s discretion.
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Taxpayer’s claims.
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