Love, TC Memo 2019-92
The Tax Court has upheld the IRS’s decision to reject a taxpayer’s proposed offer-in-compromise and to decline to abate interest and failure-to-pay additions to tax.
Background. The IRS may enter into an offer-in-compromise to reduce a taxpayer’s outstanding tax liability if, among other reasons, there is doubt as to collectibility. (Reg. §301.7122-1(b)(2))
The IRS may compromise a tax debt on the basis of doubt as to collectibility where the taxpayer’s assets and income make it unlikely that the IRS will be able to collect the entire balance. (Reg. §301.7122-1(c)(2)) IRS can look at the taxpayer’s expenses, such as school costs. But the Internal Revenue Manual instructs settlement officers (SOs) that private school tuition is an allowable expense only if required for a physically or mentally challenged child and no public education providing similar services is available. (Internal Revenue Manual 18.104.22.168(3) (Nov. 17, 2014))
Interest on tax liabilities arises automatically under Code Sec. 6601. But Code Sec. 6404(e)(1)(B) authorizes the IRS to abate assessed interest on any payment to the extent that any unreasonable error or delay in such payment is attributable to an IRS employee being erroneous or dilatory in performing a ministerial or managerial act.
A managerial act is an administrative act involving the temporary or permanent loss of records or the management of personnel. A ministerial act is a procedural or mechanical act that does not involve the exercise of judgment or discretion. (Reg. §301.6404-2(b))
The Tax Court reviews the IRS’s decision to not abate interest under the abuse of discretion standard. (Code Sec. 6404(h)(1))
The IRS has “first time abate” policy, which offers an administrative waiver of additions to tax for failure to pay a tax liability on time. (Internal Revenue Manual 22.214.171.124.3.2.1 (Nov. 21, 2017)) To qualify for this waiver, the taxpayer must not have had any unreversed additions to tax imposed under Code Sec. 6651 for any of the preceding three years. (Internal Revenue Manual 126.96.36.199.3.2.1(4))
In reviewing a SO’s determinations regarding offers-in-compromise and whether to abate interest, the Tax Court considers whether she: (1) properly verified that the requirements of applicable law or administrative procedure have been met, (2) considered any relevant issues the taxpayer raised, and (3) considered whether any proposed collection action balances the need for the efficient collection of taxes with the legitimate concern of the taxpayer that any collection action be no more intrusive than necessary.” (Code Sec. 6330(c)(3))
Facts. Danny Love, a taxpayer, filed Federal income tax returns for 2012, 2013, and 2014. For all those years, he did not pay the full amount of tax due, and the IRS assessed for those years the tax he did not pay plus interest plus additions to tax for failure to pay.
On January 18, 2017, Love submitted a timely request for a collection due process (CDP) hearing, expressing interest in an offer-in-compromise (OIC).
On February 22, 2017, Love submitted a Form 656, Offer in Compromise, proposing to settle his outstanding tax liabilities for $1,500.
On August 29, 2017, a settlement officer (SO1) recommended rejection of Love’s OIC, finding that he had the ability to pay the tax liabilities in full and that there were no special circumstances warranting a hardship exception. She specifically declined to include as an allowable expense monthly tuition of $1,162 that Love paid to enable his children to attend a private high school.
SO1’s calculations showed that Love had monthly household income of $12,758 and allowable monthly expenses of $11,046, yielding disposable monthly income of $1,712. After reviewing Love’s reported assets, SO1 concluded that he had a reasonable collection potential (RCP) of $217,438, consisting of equity in assets of $42,814 plus the ability to pay $174,624 in future monthly installments.
SO1 proposed an installment agreement requiring payments of $600 per month. Love stated that he could not afford that amount and instead proposed a single lump-sum payment of $5,000. SO1 replied that she could not accept that offer because Love had the financial ability to pay his tax liabilities in full.
In October 2017 the case was reassigned to a new settlement officer, SO2.
Love requested abatement of assessed interest for all three years and abatement of the additions to tax. SO2 explained that she had shown no grounds justifying abatement of interest but invited him to supply documentation supporting abatement of the additions to tax.
Love submitted a Form 843, Claim for Refund and Request for Abatement, arguing that his failures to pay were excusable because he had been forced to use his retirement savings to maintain his family’s standard of living.
On the basis of Love’s reported income for those years and his overall financial situation, SO2 determined that he could pay his Federal tax liabilities on time. Concluding that reasonable cause for failure to pay did not exist, SO2 denied Love’s abatement request.
Noting that the IRS had assessed failure-to-pay additions to tax against Love on three prior occasions—for 2009, 2010, and 2011—SO2 further determined that she could not abate the 2013 and 2014 additions to tax under an administrative “first time abatement” policy.
On January 30, 2018, the IRS issued Love a notice of determination. The notice explained the reasons for denying Love’s OIC and his requests for abatement of assessed interest and failure-to-pay additions to tax.
Love timely petitioned the Tax Court for review, contending that the SOs erred in rejecting his proposed OIC, in declining to abate interest, and in declining to abate the additions to tax.
Decision. The Tax Court first found that, since nothing in the record indicated that Love had a prior opportunity to challenge his liability for the failure-to-pay additions to tax, it should review Love’s request for redetermination of this liability de novo. But the court reviewed under an abuse-of-discretion standard SO1’s decision to reject Love’s OIC and SO2’s denial of Love’s request for abatement of interest.
Love disputed his underlying liability for the additions to tax. He first contended that SO2 should have found him eligible for the IRS “first time abate” policy. But Love’s account transcripts for 2009-2011 showed that he had been assessed a failure-to-pay addition to tax for each of those years and that none of these assessments had been abated or reversed. The court found that SO2 correctly determined that Love was ineligible for “first time abatement.”
Denial of offer-in-compromise. The Tax Court’s review of the record revealed that SO1 conducted a thorough review of Love’s account, determined that the liabilities in question had been properly assessed, and verified that all other requirements of applicable law and administrative procedure were followed.
Love’s main contention at trial was that SO1 abused her discretion in rejecting his proposed OIC. Love submitted an OIC based on doubt as to collectibility. At that time his tax liabilities for 2012-2014 were almost $40,000. But he had an RCP of $217,438—an amount, the Tax Court found, vastly exceeding the offers he made.
But Love contended that the analysis of his monthly disposable income did not take into account all of his expenses, chiefly his children’s private school tuition. But the court found that his children’s private school tuition did not fit the Internal Revenue Manuals criteria.
In any event, the court found, any error by SO1 in calculating Love’s monthly disposable income was harmless in evaluating his OIC. His equity in assets alone, $42,814, vastly exceeded his OIC. And the installment agreement he actually executed showed that he had the financial ability to pay his assessed tax liabilities in full.
For all these reasons, the Tax Court concluded that SO1 did not abuse her discretion in rejecting his OIC.
Abatement of Interest. Love did not identify, during the CDP process or at trial, any unreasonable error or delay by SO2 in performing any ministerial or managerial act. The CDP process as a whole was completed in about a year.
Love raised different issues at different stages of the process and engaged in protracted negotiations concerning the installment agreement and the OIC. Both SOs responded promptly to his communications, and their consideration of his proposals involved the exercise of judgment or discretion.
The Tax Court found that SO2 did not abuse her discretion in denying Love’s request for abatement of interest.
References: For discussion of offers-in-compromise, see FTC 2d/FIN ¶T-9600 et seq.; United States Tax Reporter ¶71224. For abatement of interest because of unreasonable error or delay, see FTC 2d/FIN ¶T-3951; United States Tax Reporter ¶64044.