Bennett v. Comm'r

T.C. Memo. 2008-251
UNITED STATES TAX COURT
LESLIE B. BENNETT, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 22699-05L. Filed November 6, 2008.
Dean A. Hrbacek, for petitioner.
Susan Greene and Marilyn Ames, for respondent.
MEMORANDUM OPINION
HOLMES, Judge: Leslie Bennett offered the Commissioner
nearly $15,000 to settle her tax debt of more than $110,000. The
Commissioner admits that Bennett’s offer is more than ten times
what the Commissioner himself calculated to be the amount she
could reasonably pay. But the Commissioner nevertheless refused
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her offer, because he wanted to place part of her debt in
“currently not collectible” status--letting him try to collect
more were her finances to improve. The question is whether his
refusal to accept Bennett’s offer is an abuse of discretion.
Background
Bennett failed to file her tax returns from 1997 through
2001. She also failed to pay over the taxes for four quarters
between 2000 and 2001 that had been withheld from employees of a
company she helped run. In 2003, the Commissioner began an audit
and asked Bennett to file the missing tax returns. She did--
filing the missing returns in several batches. She also filed
her 2002 return, months after it was due. The return showed that
she owed nearly $8,000, but she failed to include any payment
with the return. The Commissioner subsequently sent Bennett a
notice that he intended to levy upon her property to collect the
2002 tax debt. He later put a lien on her property to secure the
payment of both the 2002 income-tax and other tax debts that she
owed. Bennett asked for a collection due process (CDP) hearing.
At the hearing, Bennett claimed that she had gotten right
with the tax system, promising that she was owed a refund on her
2003 taxes which she would apply to her 2004 taxes. The
Commissioner set a deadline for Bennett to provide copies of both
her 2003 and 2004 returns, along with proof of payment. Bennett
complied, but her 2003 return showed not only that she wasn’t
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putting in for a refund, but that she actually owed more than
$15,000. As with her 2002 taxes, she did not pay.
Bennett also sent the IRS a copy of a check for $5,619,
which she said was an estimated payment of her 2004 liability, as
well as an offer to compromise her 1996, 1999, 2002, and 2003
income-tax debts and the trust-fund-recovery penalties she still
owed for four quarters between 2000 and 2001.1 This first offer
was for $1,500, which the Commissioner promptly rejected as not
in the government’s best interest. It was also based on a list
of income and expenses that the Commissioner concluded were
excessive or unverifiable. Bennett responded by submitting more
documentation to support her position. After review, the
Commissioner sent a counteroffer for $31,756.81.
But then the Commissioner suspended negotiations, having
discovered that Bennett’s $5,619 estimated tax payment for 2004
never posted--it turned out that Bennett had sent in only a copy
of the check and not the check itself. What had happened was
that Bennett’s mother, who had seemed to be willing to help get
1
Taxes that employers withhold from their employees’ wages
are known as “trust fund taxes” because they are deemed a special
fund in trust for the United States under section 7501(a).
Slodov v. United States, 436 U.S. 238, 243 (1978). The
Commissioner may collect unpaid employment taxes from a
“responsible person” within the company; i.e., someone who was
required to pay over the tax. The money that’s collected is
called a trust-fund-recovery-penalty tax. Sec. 6672. (Unless
otherwise indicated, all section references are to the Internal
Revenue Code.)
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her daughter out of tax trouble, had changed her mind and now
would help only if the Commissioner would agree to a single lump-
sum payment to discharge all her daughter’s tax liability. This
was news to the Commissioner; he told Bennett that she could try
another offer-in-compromise, but must prove that she had filed
her 2004 return and fully paid any tax due.
Bennett accepted this suggestion and in late July 2005,
filed her 2004 Form 1040 and fully paid the amount due. Bennett
also included proof of a $3,000 estimated tax payment for 2005.
And she submitted a second compromise offer of $14,908.81.
Following much computational give-and-take between the two
parties, the Commissioner tendered a second counteroffer of
$54,816. Bennett then won a variety of favorable concessions on
various monthly living expenses, leading the Commissioner to
recalculate his offer a final time, lowering it to $33,484.81.
The fluidity of these negotiations sprang from the
Commissioner’s finding that many of Bennett’s expenses, including
transportation expenses and tuition for her son, were
unverifiable or somehow improper. Bennett’s leased 2002 Mercedes
(which was the largest part of her claimed $820 monthly
transportation expense), for instance, was in fact registered to
and paid for by her mother. Bennett had agreed to reimburse her
mother for the monthly payments by check, but the Commissioner
discovered that Bennett’s mother had never cashed any of them.
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Bennett’s claim for $1,000 in monthly tuition costs for her son
was likewise undermined when the Commissioner discovered that her
mother had paid most of those costs during late 2004 and early
2005.
All of this haggling ultimately went nowhere. Bennett
submitted another financial update in late September 2005 showing
that her income had dropped to an average of $4,093 in the last
seven months while her monthly expenses averaged $4,777. With
Bennett now dependent on family loans for living expenses, the
Commissioner recommended rejection of her offer in compromise and
placement of her 2002 debt on “currently not collectible” status.
Based on this determination, the Commissioner sent her a notice
of determination stating that he would indefinitely suspend his
collection activities for all years pending an improvement in
Bennett’s finances.
The Commissioner’s notice of determination cited Internal
Revenue Manual (IRM) Part 5.8.7.6(5) (Sept. 1, 2005), which
states that a “rejection may also be based on a determination
that acceptance of the [offer] is not in the ‘best interest of
the government’ per policy statement P-5-100.” The Commissioner
also cited language from the IRM authorizing rejection when a
taxpayer has an egregious history of noncompliance and a probable
likelihood of noncompliance in the future. He stated as well
that “rejection of the offer was also based on the time left on
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the collection statutes, the taxpayer’s age, earning capability
over the next several years, and the fact that her business has
the ability to generate a large profit in the near future.”
Bennett timely filed an appeal of the Commissioner’s
rejection and his decision to place her 2002 debt in currently-
not-collectible status. She argues that because her offer of
$14,908.81 exceeds her $1,468.81 collection potential, it is in
the government’s best interest, according to the Commissioner’s
own policy statement, and so the Commissioner had no
justification to reject it.
Discussion
Tax debts are typically settled in one of three ways: The
Commissioner may allow a taxpayer to pay his tax debt over time
via an installment agreement; he may declare the debt “currently
not collectible” and take no collection action until and unless
the taxpayer’s finances improve; or, he may accept a taxpayer’s
offer to compromise for less than the full debt owed. IRM pt.
5.14.1.1 (July 12, 2005), 5.16.1.1 (Sept. 19, 2005), and
5.8.1.1.3 (Sept. 1, 2005).
The parties agree that the question in this case is whether
the Commissioner abused his discretion in rejecting Bennett’s
offer and instead classifying her tax debt as currently not
collectible. We therefore look to see if the Commissioner’s
decision was grounded on an error of law or rested on a clearly
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erroneous finding of fact, or whether he applied the correct law
to fact findings that weren’t clearly erroneous but ruled in an
irrational manner. Indus. Investors v. Commissioner, T.C. Memo.
2007-93 (citing United States v. Sherburne, 249 F.3d 1121, 1125-
26 (9th Cir. 2001)); see also Cooter & Gell v. Hartmarx Corp.,
496 U.S. 384, 402-03 (1990).
The Commissioner is guided in his consideration of offers in
compromise by regulations and policies aimed at balancing the
values of treating taxpayers in similar situations similarly and
considering the special facts and circumstances of each case.
Section 301.7122-1(f)(3), Proced. & Admin. Regs., states: “No
offer to compromise may be rejected solely on the basis of the
amount of the offer without evaluating that offer under the
provisions of this section and the Secretary’s policies and
procedures regarding the compromise of cases.” These policies
and procedures are laid out in the IRM. IRM pt. 5.8.1.1. The
regulations also instruct, “The determination whether to accept
or reject an offer to compromise will be based upon consideration
of all the facts and circumstances.” Sec. 301.7122-1(c)(1),
Proced. & Admin. Regs.
The Commissioner accepts an offer in compromise on one of
three bases: doubt as to liability, doubt as to collectibility,
or promotion of effective tax administration. Sec. 301.7122-
1(b), Proced. & Admin. Regs. Bennett put her offer in the doubt-
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as-to-collectibility pigeonhole, and we look to the rules on
those kinds of offers.
IRM part 5.8.7.6(5) states that offers in compromise are to
be evaluated in terms of what is “in the ‘best interest of the
government’ per policy statement P-5-100.” That policy, in turn,
states the Commissioner will accept offers when “it is unlikely
that the tax liability can be collected in full and the amount
offered reasonably reflects collection potential.”
Bennett believes that this language from policy statement P-
5-100, (Jan. 30, 1992), conclusively defines the government’s
“best interest.” And she argues that she meets both of policy
statement P-5-100’s requirements. First, as the Commissioner
admits, her full debt is not collectible. Second, her offer of
$14,908.81 not only meets, but greatly exceeds, her collection
potential of $1,468.81. Bennett believes these two facts mean
her offer is in the government’s best interest--and that the
Commissioner’s refusal to accept it is an abuse of discretion.
Policy statement P-5-100 is not a stand-alone statement,
however, but only part of another section of the Internal Revenue
Manual: IRM part 5.8.1.1.3(1). IRM part 5.8.1.1.3(3) states: “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.” (Emphasis added.) This
language, contrary to Bennett’s contention, doesn’t require that
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the Commissioner accept an offer in compromise whenever the
amount exceeds the collection potential. Rather, it only
establishes grounds for winning consideration.
Even policy statement P-5-100 does not draw a bright line--
stating not that the IRS will accept any offer exceeding
reasonable collection potential, but only that it will do so when
“the amount offered reasonably reflects collection potential.”
It goes on to state that “taxpayers are expected to provide
reasonable documentation to verify their ability to pay.” And
IRM part 5.8.7.6 lists, as one example of an offer in compromise
that the Commissioner might reject as not in the best interest of
the government, an offer from a taxpayer who “has an egregious
history of past noncompliance and our analysis of his current
finances reveals that it will be highly unlikely the taxpayer
will be able to remain in compliance during the offer period.”
The record here also shows that the Commissioner based his
determination in part on his finding that there was a possibility
that Bennett’s circumstances might change in the near future
(i.e., before the statute of limitations for collecting her taxes
runs out). Because Bennett had so delayed filing her returns, we
find no error in the Commissioner’s conclusion that there were
eight years or more remaining before the statute would run on
most of the years in question. We also find no clear error in
the Commissioner’s conclusion that Bennett had several more years
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of earning capability. The Commissioner recognized that her
business (a public relations firm) had not been enormously
successful, but we note that she had quite low overhead (she ran
it out of her home), so we don’t find the Commissioner to be
clearly erroneous in deciding it had potential to be more
successful in the future.
We thus find no abuse of discretion in the Commissioner’s
determination. Bennett argues, however, that our decision in
Oman v. Commissioner, T.C. Memo. 2006-231, supports her argument
as a matter of law. In Oman, we also confronted the interplay
between IRM part 5.8.7.6(5) and policy statement P-5-100. Oman,
with a debt of more than $170,000 and irregular and often poor
earnings since a personal financial catastrophe, offered $1,000
to compromise his tax debt. The Commissioner refused the offer
as not being in the government’s best interest, citing as his
reasons Oman’s past noncompliance and doubt as to Oman’s
likelihood of remaining compliant in the future. As in Bennett’s
case, the Commissioner in Oman cited IRM part 5.8.7.6(5) and its
emphasis on past and future compliance as the definition of “best
interest.” Oman riposted by citing policy statement P-5-100 and
arguing that he met its two-part requirement: the debt be
currently not collectible, and the offer be greater than the
taxpayer’s current collection potential.
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Bennett claims that in Oman, the Court “analyzed policy
statement P-5-100 and IRM pt. 5.8.7.6(5) and concluded, as
applied in this case, they appear to be inconsistent regarding
the ‘best interest of the government.’ The same inconsistency
holds true in the current case.” Unfortunately, this is the most
favorable contention Bennett can extract from Oman.
Oman in fact led only to a remand for a further hearing, not
a decision for the taxpayer. It offered no firm conclusions
resolving the possible conflict between IRM part 5.8.7.6(5) and
policy statement P-5-100. Furthermore, a close reading of our
conclusion shows that our main concern with the record to that
point was the “unclear” reasoning for the “best interest”-based
rejection. Oman, T.C. Memo. 2006-231.
The Commissioner, on the other hand, compares our facts to
those of Oman and points out a crucial difference. Unlike the
“absent” record there, this case boasts a full record that makes
the Commissioner’s reasoning quite clear. Because IRM part
5.8.7.6(5) and policy statement P-5-100 are both contained in the
Commissioner’s manual of policies and procedures, they would seem
to hold equal weight. But both guidelines are in the end just
that--language guiding the Commissioner’s consideration of all
the facts and circumstances, as mandated by the regulation that
is unquestionably binding, section 301.7122-1(f)(3), Proced. &
Admin. Regs. That regulation does not compel him to accept any
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particular offer, but to consider the facts and circumstances of
the case before him. That is what he did here.
The Commissioner has diligently presented an exhaustive
narrative to justify his conclusion that accepting Bennett’s
offer would be in neither his best interest nor hers. Given the
Commissioner’s adherence to statutory prescription, we cannot say
that his rejection represents an abuse of discretion.
Decision will be entered for
respondent.