William E. Gustashaw & Nancy D. Gustashaw v. Commissioner ( 2018 )

T.C. Memo. 2018-215UNITED STATES TAX COURT
WILLIAM E. GUSTASHAW AND NANCY D. GUSTASHAW, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 23873-14L. Filed December 27, 2018.
Harris L. Bonnette, Jr., for petitioners.
Nathan M. Swingley and Timothy A. Lohrstorfer, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
BUCH, Judge: The Gustashaws filed this collection case pursuant to
section 6330(d) to challenge the Commissioner’s notice of determination
sustaining a notice of intent to levy for 2000 and 2003 Federal income tax
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[*2] liabilities.1 They argue that the settlement officer abused his discretion in
denying their offer-in-compromise. Additionally the Gustashaws contend that the
settlement officer erred in calculating their reasonable collection potential by
overvaluing an investment partnership, including the cash value of a life insurance
policy, and failing to properly account for the Gustashaws’ out-of-pocket health
care and vehicle expenses.
The settlement officer did not abuse his discretion in denying the
Gustashaws’ offer-in-compromise because the Gustashaws’ reasonable collection
potential far exceeded their final offer amount. He also did not err in calculating
the values of the investment partnership and allowance for health care and vehicle
expenses. Although the settlement officer erred by including the cash value of the
life insurance policy, we find his error harmless, because after omission of the
value of the life insurance policy, the Gustashaws’ reasonable collection potential
still exceeded their final offer.
1
Unless otherwise indicated, all section references are to the Internal
Revenue Code at all relevant times. All monetary amounts are rounded to the
nearest dollar.
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[*3] FINDINGS OF FACT
For a large portion of Mr. Gustashaw’s career he worked for various
companies in food and beverage operations management. Near retirement he
changed fields and became the vice president of a company in the pharmaceutical
industry. In this role Mr. Gustashaw was given stock options as part of his
compensation.
In the late 1990s, around the time Mr. Gustashaw was retiring, the
Gustashaws’ financial adviser encouraged them to create an estate plan. As part of
this plan the Gustashaws created the Gustashaw Family Declaration of Trust, an
irrevocable trust that owns a life insurance policy insuring the lives of Mr. and
Mrs. Gustashaw. The trustees of the irrevocable trust are the Gustashaws’ sons,
and the beneficiaries are the Gustashaws’ three children. Between 1997 and 2009
the Gustashaws made $15,000 annual gifts to the irrevocable trust to fund the life
insurance premiums. Their final payments occurred in 2010 and 2011 when they
made smaller payments of $7,500.
After retiring in 2000 Mr. Gustashaw exercised stock options and generated
$8,007,376 of income. To help minimize taxes the Gustashaws’ financial planner
suggested that they engage in a custom adjustable rate debt structure, commonly
referred to as a CARDS transaction, which they did. The Gustashaws’ returns
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[*4] were audited in 2003, and a notice of deficiency was issued in 2006. In the
Gustashaws’ prior proceeding in this Court, Gustashaw v. Commissioner, T.C.
Memo. 2011-195, aff’d, 696 F.3d 1124 (11th Cir. 2012), the Gustashaws conceded
deficiencies in tax and were found liable for penalties relating to their CARDS
transaction. The Gustashaws appealed, and our decision was affirmed by the U.S.
Court of Appeals for the Eleventh Circuit. The Commissioner assessed the tax
and penalties for the years in issue, and the Gustashaws made a partial payment of
$4,500,000.
On September 11, 2012, the Commissioner issued a notice of intent to levy
for 2000 and 2003 to collect unpaid portions of the Gustashaws’ liabilities. The
Gustashaws timely requested a hearing and stated that they wanted to pursue an
installment agreement or an offer-in-compromise.
I. Collection Hearing
The settlement officer assigned to the Gustashaws’ hearing scheduled a
telephone conference and requested that the Gustashaws provide a completed
Form 433-A, Collection Information Statement for Wage Earners and Self-
Employed Individuals, a completed tax return for 2011, and proof of estimated tax
payments for 2012.
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[*5] At the collection hearing the settlement officer reviewed the Gustashaws’
Form 433-A and supporting financial information. The financial information
listed a real estate limited partnership with CHI Investments Corp. (investment
partnership) valued at $199,347 and an insurance policy owned by the irrevocable
trust valued at $169,425. They also listed vehicle ownership and operating
expenses of $985 and $785, respectively, and out-of-pocket health care expenses
of $640. The Gustashaws’ counsel informed the settlement officer that they were
in the process of submitting an offer-in-compromise.
A. First Offer-in-Compromise
A few weeks later the settlement officer received the Gustashaws’ first
offer-in-compromise for $750,000 to compromise 1998 through 2003 Federal
income tax liabilities. The offer included Form 656, Offer in Compromise, Form
433-A (OIC), Collection Information Statement for Wage Earners and Self-
Employed Individuals, a supplemental statement requesting acceptance of the
offer under effective tax administration, life expectancy calculations, a copy of the
irrevocable trust instrument, and the required payment.
They also included with their offer a letter from the investment partnership’s
president, which they used to substantiate the value of their interest. The letter
included a list of the Gustashaws’ investments “valued for custodial holding
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[*6] purposes at the amount of principal left in the Fund”, totaling over $400,000.
The president stated in her letter that the funds are illiquid and “[t]here is no
market for regular sale of these funds.” Despite their illiquidity the president
stated that “there is a possible secondary market to which a FINRA Broker/Dealer
may have access, however I am unaware of how to access that myself. About
three years ago one of our investors did sell their Fund holdings on this secondary
market, but I believed they received less [than] $.50 on the dollar valuation.” The
Gustashaws provided a handwritten document and supporting Schedules K-1,
Partner’s Share of Income, Deductions, Credits, etc., showing $9,767 of
distributions from the investment partnership in 2011 but provided no other
documentation substantiating its value.
Their supplemental statement requested that the offer be considered under
effective tax administration, specifically economic hardship. They argue, among
other things, that liquidating their assets would leave them without adequate
retirement funds and “they would not have the resources to pay their necessary
living expenses”, including out-of-pocket health care expenses and vehicle
expenses.
Finally, a copy of the irrevocable life insurance trust instrument indicated
that it was established by the Gustashaws for the benefit of their three children.
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[*7] The Gustashaws’ sons were appointed as trustees and pursuant to article III of
the trust instrument, it is “irrevocable and unamendable.”
The settlement officer informed the Gustashaws that, because their
liabilities exceeded their assets and income and because of their involvement in a
tax shelter, an effective tax administration offer-in-compromise was inappropriate
and their offer would be processed as a doubt as to collectibility offer.2
B. Revised Offer-in-Compromise
The Gustashaws submitted a revised offer-in-compromise in June 2014
under doubt as to collectibility with special circumstances. They argue that
because of their age and lack of employment, the Commissioner’s collection of the
full liability would leave them unable to cover basic living expenses and such a
situation constitutes an economic hardship.
As part of their revised offer the Gustashaws included an updated financial
statement on Form 433-A (OIC) and Form 433-A. Their revised Form 433-A
(OIC) included, among other items, the investment partnership with a value of
$162,197, discounted to $129,758, vehicle operating expenses of $1,330, and out-
of-pocket health care expenses of $757. They did not include the value of the
2
See sec. 301.7122-1(b)(3), Proced. & Admin. Regs. (an effective tax
administration offer is appropriate only when the taxpayer’s assets and income
exceed the liability and the taxpayer is able to cover the liability in full).
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[*8] irrevocable life insurance trust or vehicle ownership expenses. Their revised
Form 433-A listed the value of the investment partnership as $162,197 and the
cash value of the life insurance policy in the irrevocable trust as $211,795.
Additionally they listed vehicle ownership expenses of $918 despite having zero
loan balances and no monthly payments on their vehicles, vehicle operating
expenses of $412, and out-of-pocket health care expenses of $757.
After reviewing the Gustashaws’ documents the settlement officer inquired
about a $7,588 out-of-pocket health care expense included in the Gustashaws’
calculation. The Gustashaws informed the settlement officer that the expense
occurred as a result of Mrs. Gustashaw’s procedure to remove a benign tumor and
that she would undergo further screening in the future. The Gustashaws included
with their response Schedules A for 2012 and 2013 indicating significant medical
expenses.
The following week the settlement officer informed the Gustashaws of his
calculations. He valued the investment partnership at $405,493, discounted at
60% for a quick sale value of $162,197, and he valued the irrevocable life
insurance trust as a dissipated asset at $230,435, discounted 20% for a quick sale
at $184,348. Additionally the settlement officer excluded vehicle ownership
expenses, allowed $644 in operating expenses, and accepted all but one of the
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[*9] Gustashaws’ out-of-pocket health care expenses. The settlement officer
determined that the $7,583 expense for Mrs. Gustashaw’s procedure was a one-
time expense and excluded it from his calculation. He allowed $283 for health
care expenses, which is more than the national standard.
The Gustashaws’ counsel and the settlement officer continued their
correspondence over the summer, but during this time Mr. Gustashaw suffered a
serious leg injury that required hospitalization. This delayed negotiations, and by
August several issues in the offer calculation remained unsettled.
Around the middle of August the Gustashaws’ counsel sent the settlement
officer a letter disputing the values assigned to the investment partnership and the
irrevocable life insurance trust and asked the settlement officer to take into
account Mr. Gustashaw’s recent leg injury. The Gustashaws argued that the
investment partnership was worthless and unmarketable. They included a
followup letter from the president of the investment partnership stating that “it is
unlikely that you could find a secondary market for sale of the funds and the
structure of the private placement memorandum does not allow for liquidation of
fund investments.” Her letter further stated that two holdings had sold on the
secondary market, but that “they sold at less than 50 cents on the dollar of
remaining principal at that time.” Finally she informed the Gustashaws that she
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[*10] was “not a FINRA broker or rep” and “cannot say with complete and total
certainty that [they] might not be able to find some secondary market”.
The Gustashaws also argue that the settlement officer improperly included
the full cash value of the life insurance policy owned by the irrevocable trust.
They point out that the irrevocable trust, created in 1997, is the owner of the
policy, and although an older life insurance policy was converted into a new
policy within the trust on August 5, 2005, the life insurance policy cannot be a
dissipated asset because the notice of deficiency was not issued until almost a year
and a half later. They contend that the value of the policy should not be included
as a dissipated asset because the Gustashaws are not the owners of the policy and
the planning occurred long before their trouble with the Internal Revenue Service.
To support this position they submitted two additional documents to the settlement
officer. One of those documents was a statement from American United Life
Insurance Co. that lists “TR Gustashaw Fam Declar of TR” as the owner of the life
insurance policy, a contract date of July 22, 2005, and a cash value of $230,435.
Finally the Gustashaws disputed the out-of-pocket heath care and vehicle
expenses that the settlement officer allowed. They argue that considering Mrs.
Gustashaw’s operation and Mr. Gustashaw’s leg injury, the settlement officer
should allow the full amount of the Gustashaws’ claimed out-of-pocket health care
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[*11] expenses. They further argue that, although the Gustashaws are not making
payments on their current vehicles, they will need to replace those vehicles in the
future.
The settlement officer informed the Gustashaws that he was not able to
accept their position on the investment partnership, life insurance trust, and out-of-
pocket health care and vehicle expenses. But agreeing to an adjustment for Mr.
Gustashaw’s leg injury and for other undisputed items, the settlement officer
adjusted their reasonable collection potential to $2,300,683. Despite this
reduction the settlement officer informed the Gustashaws that he was unable to
recommend acceptance of their $1,507,413 offer. He suggested that if the
Gustashaws amended their offer to the amount he had determined to be their
reasonable collection potential, he would recommend acceptance. The following
day the Gustashaws submitted an amended offer for $1,650,000.
The settlement officer issued a notice of determination sustaining the levy
notice on September 2, 2014. In his report the settlement officer detailed his
calculation of the Gustashaws’ reasonable collection potential and their request for
a doubt as to collectibility offer-in-compromise with special circumstances.
The Gustashaws filed a timely petition with the Court on October 7, 2014,
while residing in Indiana. In their petition they challenge the determination as to
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[*12] tax years 1998 through 2003, arguing that the settlement officer “erred and
abused his discretion in not approving the petitioners’ offer in compromise made
as an alternative to enforced collection”. The Court dismissed as to all years
except 2000 and 2003 because the notice of determination was only for those
years.
II. Trial
The Gustashaws and the Commissioner set forth many of the same
arguments at trial that they had raised in the collection hearing. But the
Commissioner also raised one new argument at trial and on brief. He argues that
even if the Gustashaws’ reasonable collection potential is adjusted for potential
errors, the settlement officer’s rejection of the offer will still be within his
discretion because the corrected reasonable collection potential still exceeds the
Gustashaws’ final offer. He further contends that any potential miscalculations
would be harmless error because the Gustashaws’ offer and their reasonable
collection potential are too far apart.
OPINION
The question before the Court is whether the settlement officer abused his
discretion in rejecting the Gustashaws’ offer-in-compromise and sustaining the
Commissioner’s levy notice for their 2000 and 2003 Federal tax liabilities.
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[*13] Specifically the Gustashaws argue that the settlement officer erred in
overvaluing a partnership investment and an irrevocable life insurance trust, and
understating out-of-pocket health care and vehicle expenses.
I. Offer-in-Compromise
“The Secretary may compromise any civil or criminal case arising under the
internal revenue laws prior to reference to the Department of Justice”.3 The
regulations provide guidance for the acceptance of such compromises under
section 7122 and include three grounds for the compromise of a liability: (1)
doubt as to liability, (2) doubt as to collectibility, and (3) promotion of effective
tax administration.4 When a taxpayer’s liability exceeds assets and income, as is
the case here, the Secretary is authorized to accept an offer based on doubt as to
collectibility.
When, as here, the underlying liability is not at issue, we review the
settlement officer’s determination for abuse of discretion.5 In reviewing for abuse
of discretion we do not conduct an independent review of the collection
3
Sec. 7122(a).
4
Sec. 301.7122-1(b), Proced. & Admin. Regs.
5
See Sego v. Commissioner, 114 T.C. 604, 610 (2000); Goza v.
Commissioner, 114 T.C. 176, 181-182 (2000).
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[*14] alternatives, and we do not substitute our judgment for that of the settlement
officer; we review only to determine whether the settlement officer’s decision was
arbitrary, capricious, or without sound basis in fact or law.6
A. Doubt as to Collectibility With Special Circumstances
In determining a doubt as to collectibility offer the settlement officer must
determine the taxpayer’s ability to pay.7 A settlement based on a taxpayer’s ability
to pay allows the taxpayer to retain sufficient funds to cover reasonable basic
living expenses, with such expenses determined by evaluating the individual facts
and circumstances.8 These facts and circumstances include the taxpayer’s “age,
health, marital status, number and age of dependents, education or occupational
training, work experience and present and future employment status.”9 Generally
the Commissioner will reject a doubt as to collectibility offer-in-compromise if the
taxpayer’s reasonable collection potential exceeds the offer.10 A taxpayer’s
6
See Klein v. Commissioner, 149 T.C. __, __ (slip op. at 12) (Oct. 3, 2017);
Murphy v. Commissioner, 125 T.C. 301, 320 (2005), aff’d, 469 F.3d 27 (1st Cir.
2006).
7
Sec. 301.7122-1(c)(2), Proced. & Admin. Regs.
8
Sec. 301.7122-1(c)(2)(i), Proced. & Admin. Regs.
9
Internal Revenue Manual (IRM) pt. 5.8.4.3(2) (May 10, 2013).
10
See, e.g., Johnson v. Commissioner, 136 T.C. 475, 486 (2011), aff’d, 502
(continued...)
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[*15] reasonable collection potential is the amount the Commissioner “could
collect through other means, including administrative and judicial collection
remedies.”11 A settlement officer’s rejection of an offer below the taxpayer’s
reasonable collection potential generally is not an abuse of discretion.12
In certain cases the Commissioner “may accept an offer of less than the
total reasonable collection potential of a case if there are special circumstances.”13
Special circumstances include, as argued by the Gustashaws, “circumstances
demonstrating that the taxpayer would suffer economic hardship if the IRS were to
collect from him an amount equal to the reasonable collection potential”.14
Generally an economic hardship occurs when collection of the taxpayers’ full
collection potential leaves them unable to cover reasonable basic living
10
(...continued)
F. App’x 1 (D.C. Cir. 2013); Brombach v. Commissioner, T.C. Memo. 2012-265,
at *21; see also Rev. Proc. 2003-71, sec. 4.02(2), 2003-2 C.B. 517, 517.
11
Rev. Proc. 2003-71, sec. 4.02(2); see Murphy v. Commissioner, 125 T.C.
at 309.
12
See, e.g., Murphy v. Commissioner, 125 T.C. 301; McClanahan v.
Commissioner, T.C. Memo. 2008-161, 95 T.C.M. (CCH) 1625 (2008); Lemann v.
Commissioner, T.C. Memo. 2006-37.
13
Rev. Proc. 2003-71, sec. 4.02(2); IRM pt. 5.8.4.3(3).
14
Murphy v. Commissioner, 125 T.C. at 309.
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[*16] expenses.15 Factors indicating economic hardship include the taxpayers’
advanced age, poor health, medical catastrophe, disability, dependents with special
needs, and inability to meet basic living expenses when borrowing against equity
in the their assets.16
When considering an offer-in-compromise based on doubt as to
collectibility with special circumstances, the settlement officer must consider
section 301.7122-1(b)(3)(iii), Proced. & Admin. Regs., which requires that he
reject an offer-in-compromise if acceptance “would undermine compliance by
taxpayers with the tax laws.”17
The Gustashaws argue that their doubt as to collectibility offer should be
considered under special circumstances. They contend that they would suffer
15
Sec. 301.7122-1(b)(3)(i), Proced. & Admin. Regs.; IRM pt. 5.8.4.2 (May
10, 2013).
16
Sec. 301.7122-1(c)(3), Proced. & Admin. Regs.; IRM pt. 5.8.11.2.1 (Sept.
23, 2008); see McClanahan v. Commissioner, 95 T.C.M. (CCH) at 1627; Lemann
v. Commissioner, T.C. Memo. 2006-37.
17
Sec. 301.7122-1(b)(3)(iii), Proced. & Admin. Regs.; Rev. Proc. 2003-71,
sec. 4.02(3)(a); IRM pt. 5.8.11.2.1(8), pt. 5.8.4.2; see, e.g., Johnson v.
Commissioner, T.C. Memo. 2007-29, 93 T.C.M. (CCH) 885, 889-890 (2007),
aff’d sub nom. Keller v. Commissioner, 568 F.3d 710 (9th Cir. 2009); Lindley v.
Commissioner, T.C. Memo. 2006-229, 92 T.C.M. (CCH) 363, 366-367 (2006),
aff’d sub nom. Keller v. Commissioner, 568 F.3d 710 (9th Cir. 2009); Barnes v.
Commissioner, T.C. Memo. 2006-150, 92 T.C.M. (CCH) 31, 36-37 (2006), aff’d
sub nom. Keller v. Commissioner, 568 F.3d 710 (9th Cir. 2009).
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[*17] economic hardship if the Commissioner collected an amount equal to their
reasonable collection potential, leaving them unable to cover reasonable basic
living expenses because of their age and health. The Gustashaws point to Mr.
Gustashaw’s recent leg injury and Mrs. Gustashaw’s removal of a benign tumor as
factors indicating economic hardship. The Gustashaws argue that because of their
age and lack of employment and Mr. Gustashaw’s having been retired for roughly
16 years, an offer equal to their reasonable collection potential would leave them
unable to cover basic living expenses and result in economic hardship.
The settlement officer did not abuse his discretion in failing to accept the
Gustashaws’ economic hardship argument. Contrary to cases cited by the
Gustashaws, the record is clear that the settlement officer considered the
Gustashaws’ economic hardship arguments but ultimately found them lacking.
Even if we accept the Gustashaws’ argument that they would suffer economic
hardship, we would not find that the settlement officer abused his discretion. The
Gustashaws’ liabilities are the result of participation in a tax shelter; acceptance of
the offer “would place the Government in the unenviable role of an insurer against
poor business decisions by taxpayers” and “[i]t would be particularly inappropriate
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[*18] for the Government to play that role here”.18 Reducing the risks associated
with tax shelters would undermine compliance with the tax laws; therefore the
settlement officer’s rejection of the offer was appropriate.19
Because we do not substitute our judgment for that of the settlement
officer,20 and because the settlement officer’s decision was not arbitrary,
capricious, or without sound basis in fact or law,21 we find that the settlement
officer did not abuse his discretion in denying the Gustashaws’ claim for an offer-
in-compromise based on economic hardship.
B. The Gustashaws’ Assets
The Gustashaws further argue that the settlement officer erred in calculating
their reasonable collection potential by overvaluing an investment partnership and
including the full cash value of a life insurance policy as a dissipated asset. They
18
Lindley v. Commissioner, 92 T.C.M. (CCH) at 367.
19
See, e.g., Johnson v. Commissioner, 93 T.C.M. (CCH) at 890; Barnes v.
Commissioner, 92 T.C.M. (CCH) at 36.
20
See Murphy v. Commissioner, 125 T.C. at 320; McClanahan v.
Commissioner, 95 T.C.M. (CCH) at 1628.
21
See Klein v. Commissioner, 149 T.C. __, __ (slip op. at 12) (Oct. 3, 2017)
(citing Murphy v. Commissioner, 125 T.C. at 320).
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[*19] contend that the settlement officer’s erroneous valuation was an abuse of
discretion.
1. Investment Partnership Value
In considering an offer-in-compromise the Commissioner values a
taxpayer’s assets at their net realizable equity.22 Net realizable equity is the “quick
sale value (QSV) less amounts owed to secured lien holders with priority over the
federal tax lien”.23 The Commissioner generally calculates the quick sale value at
80% of the fair market value of the asset.24
The Gustashaws’ initial Form 433-A assigned a value in the investment
partnership of $199,347, while later Forms 433-A assigned a value of $162,197
and finally $129,758 after a 20% discount. They submitted letters from the
president of the investment partnership indicating that the value of the partnership
was difficult to determine and “[t]here is no market for regular sale of these
funds.” The letters referenced sales where, to the president’s knowledge, sellers
received “$.50 on the dollar” for their interest. The Gustashaws did not provide
22
IRM pt. 5.8.5.4.1(1) (Sept. 30, 2013).
23
IRM pt. 5.8.5.4.1(1).
24
IRM pt. 5.8.5.4.1(3).
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[*20] any other evidence relating to the investment partnership’s value and argue
that it is worthless with an appropriate value of zero.
The settlement officer did not abuse his discretion in using a 60%
discounted quick sale value for the partnership investment. The record shows that
the settlement officer used the values reported by the Gustashaws and reviewed
the accompanying documents indicating sales generating less than 50 cents on the
dollar. These documents do not conclude that the investment partnership is
worthless, only that it would be difficult to sell on the secondary market.
Additionally the president’s letter indicates that she is not a broker of these types
of deals, simply stating that any discount a buyer “would want would probably
erase a majority of the remaining value”. Finally the letters indicate a possibility
of selling the investment partnership interest on the secondary market through a
Financial Industry Regulatory Authority (FINRA) broker or dealer. Despite this
information the Gustashaws did not contact a FINRA broker and failed to produce
further documentation regarding the value of the investment partnership.
Without any further evidence as to the investment partnership’s value the
settlement officer assigned a discount value of 60%, a discount far greater than
advised in the Internal Revenue Manual. The settlement officer’s determination of
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[*21] the investment partnership’s value is reasonably based on the information
provided by the Gustashaws and is not an abuse of discretion.
2. Life Insurance Policy
The settlement officer included in his calculation of the Gustashaws’
reasonable collection potential a discounted cash value of the life insurance policy
held by the irrevocable life insurance trust. He included the discounted cash value
as a dissipated asset. A dissipated asset is “any asset (liquid or non-liquid) that
has been sold, transferred, or spent on non-priority items or debts and that is no
longer available to pay the tax liability.”25 But if the taxpayer can show that the
dissipated asset was “necessary for the production of income or the health and
welfare of the taxpayer or their family”, then the asset will not be included in their
reasonable collection potential.26
The reason to include dissipated assets in a taxpayer’s reasonable collection
potential “is to deter delinquent taxpayers from wasting money that they owe and
should pay as tax.”27 While this may seem harsh because “[i]t treats a taxpayer as
25
Johnson v. Commissioner, 136 T.C. at 487; I.R.M. 5.8.5.18(1) (Sept. 30,
2013).
26
IRM pt. 5.8.5.18(1).
27
McAvey v. Commissioner, T.C. Memo. 2018-142, at *12 (citing Johnson
(continued...)
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[*22] having money that he actually doesn’t[,] * * * not including dissipated
assets in RCP would create a perverse incentive to be profligate: A taxpayer with
a large tax debt could waste his money on nonessential goods and then plead
poverty when the taxman came.”28 Generally dissipated assets are excluded from a
taxpayer’s reasonable collection potential, but a settlement officer can look back
three years from the taxpayer’s offer date and include any dissipated assets.29
Additionally the settlement officer can include assets as dissipated assets
where it can be shown the taxpayer sold, transferred, encumbered or
otherwise disposed of assets in an attempt to avoid the payment of the
tax liability or used the assets or proceeds (other than wages, salary,
or other income) for other than the payment of items necessary for the
production of income or the health and welfare of the taxpayer or
their family, after the tax has been assessed or within six months prior
to the tax assessment.[30]
The settlement officer can also include assets, because of their specific timing, that
occurred “after notification of an examination”.31
27
(...continued)
v. Commissioner, 136 T.C. at 486-487).
28
Alphson v. Commissioner, T.C. Memo. 2016-84, at *10.
29
IRM pt. 5.8.5.18(2).
30
IRM pt. 5.8.5.18(1).
31
IRM pt. 5.8.5.18(6).
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[*23] The Gustashaws made $15,000 premium payments to the life insurance
policy owned by the irrevocable trust from 1997 to 2009 and made $7,500
premium payments in 2010 and 2011. These payments were not “necessary for the
production of income or the health and welfare of the * * * [Gustashaws] or their
family”.32
Because the Gustashaws’ returns were examined in 2003, some of the
premium payments to the irrevocable trust are dissipated assets. But the premium
payments made before the Gustashaws’ examination are not dissipated assets;
therefore the amount the settlement officer determined as a dissipated asset, the
cash surrender value of the life insurance policy, incorrectly includes the premium
payments made before the Gustashaws’ examination. While this timing
potentially affects the Gustashaws’ reasonable collection potential, a
“[d]etermination of their exact RCP would be a meaningless exercise” because the
Gustashaws’ reasonable collection potential far exceeds their final offer when any
error is corrected.33
32
See IRM pt. 5.8.5.18(1).
33
Estate of Duncan v. Commissioner, T.C. Memo. 2016-204, at *22 n.5,
aff’d, 890 F.3d 192 (5th Cir. 2018).
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[*24] The settlement officer erred by including the discounted value of the life
insurance policy as a dissipated asset. It is undisputed that the Gustashaws did not
have an ownership interest in the policy; it was owned by an irrevocable trust.
And we need not decide the precise extent to which some of the premium
payments may have been dissipated assets because it would be a meaningless
exercise. The exact amount of premium payments that might be includible in the
Gustashaws’ assets is immaterial because “we uphold determinations when the
taxpayer’s OIC was far less than the correct RCP.”34
C. The Gustashaws’ Expenses
The Gustashaws argue that the settlement officer erred in disallowing their
out-of-pocket health care expenses and vehicle ownership and operation expenses.
They contend that the settlement officer’s failure to grant these allowances is an
abuse of discretion.
34
Alphson v. Commissioner, at *16-*17 (citing Carter v. Commissioner,
T.C. Memo. 2007-25, 93 T.C.M. (CCH) 861 (2007), aff’d in part, vacated in part
sub nom. Keller v. Commissioner, 568 F.3d 710 (9th Cir. 2009)).
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[*25] 1. Out-of-Pocket Health Care Expenses
A settlement officer must give full consideration to the taxpayer’s age and
health when determining allowable out-of-pocket health care expenses.35
Taxpayers claiming “more than the total allowed by the out-of-pocket health care
standard, may be allowed more than the standard if they provide documentation to
substantiate and justify the additional expenses.”36 Additionally when confronted
with special circumstances, the settlement officer must take into account any long-
term illnesses, medical conditions, disabilities, and care for dependents with
special health needs.37
The settlement officer did not abuse his discretion in determining the
Gustashaws’ out-of-pocket health care expenses. He accepted all but one of them,
allowed their expenses to exceed the national standard, took into consideration
Mr. Gustashaw’s leg injury, and properly excluded the nonrecurring expenses of
$7,588.
35
IRM pt. 5.8.4.3(2), pt. 5.15.1.7(3)(b) (Oct. 2, 2012).
36
IRM pt. 5.15.1.8(8) (Oct. 2, 2012).
37
Sec. 301.7122-1(c)(3), Proced. & Admin. Regs.; see IRM pt. 5.8.4.2(4)
(“Factors establishing special circumstances under DATCSC are the same as those
considered under ETA.”).
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[*26] The Gustashaws argue that the one-time expense of $7,588 is representative
of the future health care expenses the Gustashaws might incur, but they provide no
support for their claim that this expense or any other health care expense will
occur in the future. Instead they rely on the argument that medical expenses
increase as people age. It is not an abuse of discretion for a settlement officer to
set aside speculative future expenses if the record does not support their
inclusion.38 The settlement officer reviewed the Gustashaws’ out-of-pocket health
care expenses and allowed all but one, an expense that the parties agree is
nonrecurring, and such action is not arbitrary or capricious.
2. Motor Vehicle Expenses
A settlement officer is required to factor in taxpayers’ necessary
transportation expenses in computing their reasonable collection potential.39
Transportation expenses are necessary if “they are used by taxpayers and their
families to provide for their health and welfare and/or the production of income.”40
Transportation expenses include ownership expenses for the purchase or lease of a
38
Brombach v. Commissioner, at *24-*25.
39
IRM pt. 5.8.5.22.3 (Sept. 30, 2013), pt. 5.15.1.7(4).
40
IRM pt. 5.8.5.22.3(1).
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[*27] vehicle and operating expenses to keep the vehicle on the road.41 For
ownership expenses a taxpayer is “allowed the local standard or the amount
actually paid, whichever is less, unless the taxpayer provides documentation to
verify and substantiate that the higher expenses are necessary.”42 If a taxpayer
owns and uses a vehicle, but there is no loan or lease payment, the taxpayer is
entitled only to operating expenses.43
The Gustashaws’ live in a community without adequate public
transportation and need their vehicles to provide for their health and welfare. This
much is clear. But because they own each of their vehicles outright, making no
payments, the settlement officer disallowed ownership expenses. The Gustashaws
argue that the settlement officer abused his discretion by not allowing the local
standard for ownership expenses. They contend that their vehicles will need
replacing in the future and that the settlement officer should adjust the allowance
to allow for their life expectancies and monthly shortfall.
Internal Revenue Manual pt. 5.15.1.7(4)(b) is clear. Because the
Gustashaws own their vehicles outright and do not make payments, they are
41
IRM pt. 5.8.5.22.3(2).
42
IRM pt. 5.8.5.22.3(3).
43
IRM pt. 5.15.1.7(4)(b).
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[*28] entitled only to the local standard for operating expenses. The settlement
officer followed the Internal Revenue Manual and did not abuse his discretion in
disallowing the Gustashaws’ request for ownership expenses.44
II. The Gustashaws’ Request for Remand
The Gustashaws argue that the settlement officer’s abuse of discretion
requires a remand. They also contend that any correction of the settlement
officer’s errors requires a remand so the parties can continue negotiations. The
Commissioner disagrees, arguing that even if we disagree with one of the
settlement officer’s conclusions, remand is not appropriate for harmless error. He
cites Lindley v. Commissioner, T.C. Memo. 2006-229, 92 T.C.M. (CCH) 363(2006), aff’d sub nom. Keller v. Commissioner, 568 F.3d 710 (9th Cir. 2009), for
the proposition that even if the settlement officer erred in his calculations, the
Gustashaws’ reasonable collection potential would still exceed their last offer, and
rejection under these circumstances would not be an abuse of discretion.
We agree. The Court on numerous occasion has found that although a
settlement officer erred in his calculations, the error did not change the result of
44
See Levin v. Commissioner, T.C. Memo. 2018-172, at *32 (“This Court
has generally held that there is no abuse of discretion when an Appeals officer
relies on guidelines published in the Internal Revenue Manual”.); see also
Thompson v. Commissioner, 140 T.C. 173 (2013); Aldridge v. Commissioner,
T.C. Memo. 2009-276; Etkin v. Commissioner, T.C. Memo. 2005-245.
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[*29] the hearing because the taxpayer’s reasonable collection potential still
exceeded the taxpayer’s final offer when the error was corrected.45
After correction of the settlement officer’s inclusion of the full cash value of
the irrevocable life insurance trust, the Gustashaws’ corrected reasonable
collection potential still exceeds their final offer by over $500,000. Because the
Gustashaws did not establish economic hardship and because it is within the
settlement officer’s discretion to deny an offer below a taxpayer’s reasonable
collection potential, we find that the settlement officer did not abuse his discretion
and remand would be improper.
III. Conclusion
The Gustashaws have not shown that the settlement officer’s actions were
arbitrary, capricious, or without sound basis in fact or law. Although the
settlement officer did err in his inclusion of the life insurance policy’s cash value,
the error was harmless and the settlement officer did not abuse his discretion in
rejecting the Gustashaws’ offer.
45
See, e.g., Carter v. Commissioner, 93 T.C.M. (CCH) at 866; Lindley v.
Commissioner, 92 T.C.M. (CCH) at 367.
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[*30] To reflect the foregoing,
Decision will be entered for
respondent.