Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca8-05-03054/USCOURTS-ca8-05-03054-0/pdf.json

Parties Involved:
Commissioner of Internal Revenue
Respondent
June M. Speltz
Petitioner
Ronald J. Speltz
Petitioner

Document Text:

United States Court of Appeals

FOR THE EIGHTH CIRCUIT

___________

No. 05-3054

___________

Ronald J. Speltz; June M. Speltz * 

* 

Petitioners, * 

* 

v. * Appeal from the 

* United States Tax Court.

Commissioner of Internal Revenue, * 

* 

Respondent. *

___________

Submitted: February 13, 2006

Filed: July 14, 2006

___________

Before LOKEN, Chief Judge, BOWMAN, and SMITH, Circuit Judges.

___________

SMITH, Circuit Judge.

Appellants Ronald and June Speltz ("Taxpayers") incurred substantial tax

liability under the alternative minimum tax ("AMT") after exercising an incentive

stock option. After the time of exercise, the stock value greatly declined. However,

the tax liability remained. Taxpayers paid a portion of their tax liability and later

made an offer-in-compromise ("OIC") to settle the balance. The Internal Revenue

Service ("IRS") rejected the OIC. Taxpayers then appealed to the United States Tax

Court, which granted summary judgment to the IRS. We affirm.

Appellate Case: 05-3054 Page: 1 Date Filed: 07/14/2006 Entry ID: 2067600
-2-

I. Background

Ronald Speltz worked as an engineer and senior manager for McLeod USA

Network Services, Inc., a regional telephone company in Iowa. In the 2000 tax year,

he earned approximately $75,000 in wages. As part of his compensation, Speltz

received incentive stock options ("ISOs") to acquire McLeod stock. During the 2000

tax year, Speltz exercised his ISOs to purchase 2,070 shares of McLeod stock for

$34,254—$711,118 below the market value of the stock. Unfortunately, the stock

price declined dramatically through the year, going from approximately $104.56 per

share on March 10 to approximately $.80 per share on December 30. Eventually the

Taxpayers sold the 2,070 shares for $1,647. 

On their Form 1040 for the 2000 tax year, Taxpayers reported regular taxes of

$18,678 and $224,869 in AMT. The large AMT resulted from inclusion of the entire

$711,118 in the computation of the taxpayer's AMT liability notwithstanding the

enormous decline in the stock's value. After credit for federal income tax withheld,

the balance of Taxpayers' tax liability for year 2000 was $210,065. After an additional

payment with the filing of their tax return, Taxpayers still owed $192,184.77.

Taxpayers further whittled the balance paying $75,000 during 2001, receiving a $600

tax reduction for the year 2000, and receiving credit for overpayments for tax years

2001 and 2002 of $16,870 and $12,455 respectively. 

In November 2001, Taxpayers submitted to the IRS a Form 656, Offer in

Compromise ("OIC"). The OIC offered cash payment of $4,457, the cash value of

Ronald Speltz's life insurance policy, to settle the remaining tax liability, which then

exceeded $125,000. Taxpayers explained that they had insufficient assets and income

to pay the full amount owed, gave examples of the lifestyle impact the liability

caused, and expressed frustration over the unfairness of their situation. 

Revenue Officer Robert Dallas notified Taxpayers by letter that their OIC had

been reviewed and rejected because the IRS "determined that [Taxpayers] have the

Appellate Case: 05-3054 Page: 2 Date Filed: 07/14/2006 Entry ID: 2067600
-3-

ability to pay [their] liability in full within the time provided by law." Taking into

account their net equity in assets of $77,948 and available future income of $113,568,

Dallas determined Taxpayers' ability to pay was $191,516—an amount greater than

the remaining balance of $148,744.64.

Taxpayers then requested a collection due process hearing to appeal the

decision made by Dallas. The IRS Appeals Office issued a Notice of Determination

that sustained the lien filing and rejected the OIC. Despite Taxpayers' arguments

regarding collectibility, equity, hardship, and public policy, the Notice of

Determination merely stated that "there is no pending legislation to retroactively

adjust how the alternative minimum tax is computed."

Taxpayers then brought a petition for review in the United States Tax Court,

contending that the IRS abused its discretion. The IRS moved for summary judgment

but argued alternatively that if summary judgment were not granted, the Tax Court

should remand the case for further consideration of the Taxpayers' OIC. The IRS

essentially conceded that it erred in calculating the Taxpayers' ability to pay.

Specifically, the IRS seemed to acknowledge that Dallas and the Appeals Office

failed to follow the Internal Revenue Manual in making certain computations relating

to the Taxpayers' ability to pay. 

Taxpayers disputed the IRS's request for remand and argued that the Tax Court

should enter an order that the OIC be accepted. The Tax Court instead granted the

IRS's motion for summary judgment, concluding that "differences as to the

calculation of [Taxpayers'] ability to pay installments are not material and do not

preclude resolution of this case on summary judgment." The Tax Court noted that the

Taxpayers may submit another OIC and that the Taxpayers' income and expenses may

change. However, the Tax Court concluded that there was no abuse of discretion in

declining to accept Taxpayers' OIC dated November 2, 2001.

Appellate Case: 05-3054 Page: 3 Date Filed: 07/14/2006 Entry ID: 2067600
1

 H.R. Conf. Rep. No. 105-599, at 289 (1998) provides

[T]he conferees expect that the present regulations will be expanded so

as to permit the IRS, in certain circumstances, to consider additional

factors (i.e., factors other than doubt as to liability or collectibility) in

determining whether to compromise the income tax liabilities of

individual taxpayers. For example, the conferees anticipate that the IRS

will take into account factors such as equity, hardship, and public policy

where a compromise of an individual taxpayer's income tax liability

would promote effective tax administration. The conferees anticipate

that, among other situations, the IRS may utilize this new authority to

resolve longstanding cases by forgoing penalties and interest which have

accumulated as a result of delay in determining the taxpayer's liability.

The conferees believe that the ability to compromise tax liability and to

make payments of tax liability by installment enhances taxpayer

compliance. In addition, the conferees believe that the IRS should be

flexible in finding ways to work with taxpayers who are sincerely trying

to meet their obligations and remain in the tax system. Accordingly, the

conferees believe that the IRS should make it easier for taxpayers to

enter into offer-in-compromise agreements, and should do more to

educate the taxpaying public about the availability of such agreements.

-4-

II. Discussion

26 U.S.C. § 7122(a) provides that "[t]he Secretary may compromise any civil

. . . case arising under the internal revenue laws." In 1998, § 7122 was amended by

adding subsection (c), which requires the IRS to "prescribe guidelines for officers and

employees of the Internal Revenue Service to determine whether an

offer-in-compromise is adequate and should be accepted to resolve a dispute." The

post-1998 IRS regulations state that an OIC may be accepted on three grounds: (1)

doubt as to liability; (2) doubt as to collectibility; and (3) promotion of effective tax

administration. 26 C.F.R. § 301.7122-1(b); see also H.R. Conf. Rep. No. 105-599, at

289 (1998).

1

 Taxpayers claim that their OIC should have been accepted due to doubt

as to collectibility and promotion of effective tax administration. 

Appellate Case: 05-3054 Page: 4 Date Filed: 07/14/2006 Entry ID: 2067600
-5-

A. Reviewability

Before reaching the merits, we must first address the Commissioner's argument

that the agency's rejection of an OIC is an exercise of administrative discretion that

is not subject to judicial review. In support, the Commissioner cites 26 U.S.C. §

7122(a), which states that "[t]he Secretary may compromise any civil . . . case arising

under the internal revenue laws." The Commissioner contends that the word "may"

means that the decision whether to accept or reject a compromise is made solely at the

Secretary's discretion. Under the Commissioner's reasoning, the Secretary's discretion

is unreviewable pursuant to the Supreme Court's decision in Heckler v. Chaney, 470

U.S. 821 (1985).

We disagree. The Secretary's discretion is not unfettered, as the regulations set

forth "grounds for compromise," § 301.7122-1(b), and "special rules for evaluating

offers to compromise," § 301.7122-1(c). The decision in Heckler v. Chaney dealt with

§ 701(a)(2) of the Administrative Procedure Act, and the FDA's decision not to

initiate an enforcement action. 470 U.S. at 830. In the case at bar, the Tax Court was

granted the power to review "any relevant issue relating to . . . an offer-incompromise." 26 U.S.C. § 6330(c), (d)(1)(A). Under 26 U.S.C. § 7482, Congress

granted courts of appeal authority to review Tax Court decisions and did not exclude

offers-in-compromise. While the acceptance or rejection of an OIC may be

discretionary, the IRS must follow statutory and regulatory criteria in exercising its

discretion, and we may review the IRS's decision for an abuse of discretion. See

Olsen v. United States, 414 F.3d 144, 150 (1st Cir. 2005); see also H.R. Conf. Rep.

No. 105-599, at 266 (1998) ("Where the validity of the tax liability is not properly

part of the appeal, the taxpayer may challenge the determination of the appeals officer

for abuse of discretion."). Therefore, while the Commissioner is correct that "the

Judicial Branch does not instruct the Executive Branch how to make executive

decisions," Orum v. Commissioner, 412 F.3d 819, 821 (7th Cir. 2005), the Judiciary

does decide whether the executive decisions conform to law or represent an abuse of

executive discretion. See id.

Appellate Case: 05-3054 Page: 5 Date Filed: 07/14/2006 Entry ID: 2067600
-6-

B. Doubt as to Collectibility

On the merits, the Taxpayers posit that the IRS abused its discretion by

refusing the OIC for two reasons: (1) doubt as to collectibility; and (2) promotion of

effective tax administration. We disagree. 

"Doubt as to collectibility exists in any case where the taxpayer's assets and

income are less than the full amount of the liability." 26 C.F.R. § 301.7122-1(b)(2).

"A determination of doubt as to collectibility will include a determination of ability

to pay." § 301.7122-1(c)(2)(i). The regulations require the Secretary to "permit

taxpayers to retain sufficient funds to pay basic living expenses." Id. The permissible

amount of basic living expenses "will be founded upon an evaluation of the

individual facts and circumstances presented by the taxpayer's case" but "guidelines

published by the Secretary on national and local living expense standards will be

taken into account." Id. 

Here, the Taxpayers argue that the IRS misapplied the regulations and the

Internal Revenue Manual in computing the Taxpayers' basic living expenses.

(Appellants' Br. at 31–36). Specifically, the Taxpayers argue that the IRS's failure to

follow its own procedures caused it to conclude erroneously that the Taxpayers'

ability to pay was greater than their liability. Taxpayers assert that a proper

application of the procedures would have shown that the their liability exceeded their

ability to pay. Taxpayers thus contend that the Tax Court's grant of summary

judgment to the IRS was improper because a genuine issue of material fact remained

as to the Taxpayers' ability to pay. 

Appellate Case: 05-3054 Page: 6 Date Filed: 07/14/2006 Entry ID: 2067600
2

$82,224 + $59,719=$141,943. 

$82,224 represents "the revised future income by allowing additional tax

expense" that the IRS calculated before the Tax Court. (App. at 197–98). Officer

Dallas determined the amount to be $113,568—a difference of $31,344.

$59,719 represents the net realizable equity calculated by the IRS before the

Tax Court, which reduced the amount calculated by Officer Dallas. (App. at 196, n.8).

Dallas calculated this figure to be $77,948—a difference of $18,229. The difference

is the result of two corrections (1) allowing the Taxpayers to keep one of their two

cars so that Ronald Speltz can drive to work so that he can earn a living and pay off

his tax debt, see Internal Revenue Manual § 5.8.5.3.3; and (2) taking into account the

penalties that would be assessed for early liquidation of their retirement assets, see

Internal Revenue Manual § 5.8.5.3.8.

Officer Dallas determined that the Taxpayers' total ability to pay was $191,516,

making the total difference in ability-to-pay calculations of the IRS before the Tax

Court $49,573.

3

(App. at 198). 

-7-

Taxpayers claim that the IRS calculated the Taxpayers' ability to pay at

$141,943.2

 Because this is less than the Taxpayers' liability of $148,745,3 Taxpayers

contend that—according to the IRS's own numbers before the Tax Court—Revenue

Officer Dallas erred when he concluded that the Taxpayers' ability to pay exceeded

their liability. Thus, Taxpayers assert it was an abuse of discretion for the IRS to deny

Taxpayers' OIC on the basis of erroneous computations that resulted in the erroneous

conclusion that their ability to pay exceeded their tax liability.

However, before the Tax Court, the IRS suggested some revised computations

and requested remand for further consideration of Taxpayers' OIC in the event that

the IRS's motion for summary judgment was denied. Notably, the Taxpayers' response

to summary judgment took the position that no remand was needed and instead asked

the Tax Court to decide the case on the arguments presented. In the words of the Tax

Appellate Case: 05-3054 Page: 7 Date Filed: 07/14/2006 Entry ID: 2067600
8

Court, the Taxpayers took the position that "they should not be required to pay any

more than the amount that they offered." Id. As a result of Taxpayers' position, the

Tax Court concluded that "differences as to the calculation of their ability to pay

installments are not material and do not preclude resolution of this case on summary

judgment." Id. The Tax Court held that no abuse of discretion occurred in declining

to accept Taxpayers' OIC. The Tax Court noted that the Taxpayers may submit

another OIC and that the Taxpayers' income and expenses may change.

We affirm the Tax Court's decision. The Tax Court did not review the question

of whether the IRS may have abused its discretion in calculating the Taxpayers'

ability to pay because it was never asked to do so. Because the issue was not

presented to the Tax Court, it is not properly before us. As noted by the Tax Court,

the Taxpayers may make another OIC to settle their tax liability. Should the IRS then

erroneously compute the Taxpayers' ability to pay, the Taxpayers may then appeal

that decision through the agency and the Tax Court, allowing each the opportunity

to correct any alleged error before presenting the issue to this court.

C. Promotion of Effective Tax Administration

The IRS is authorized to compromise tax liability for promotion of effective

tax administration in two situations: (1) where "although collection in full could be

achieved, collection of the full liability would cause the taxpayer economic hardship

within the meaning of § 301.6343-1"; and (2) "where compelling public policy or

equity considerations identified by the taxpayer provide a sufficient basis for

compromising the liability." § 301.7122-1(b)(3)(i), (ii). With respect to the former,

§ 301.6343-1 states that the economic hardship condition applies if satisfaction of the

liability "will cause an individual taxpayer to be unable to pay his or her reasonable

basic living expenses." § 301.6343-1(b)(4)(i). With respect to the latter, a

"[c]ompromise will be justified only where, due to exceptional circumstances,

collection of the full liability would undermine public confidence that the tax laws are

being administered in a fair and equitable manner." § 301.7122-1(b)(3)(ii). Further,

Appellate Case: 05-3054 Page: 8 Date Filed: 07/14/2006 Entry ID: 2067600
9

the latter requires the taxpayer "to demonstrate circumstances that justify compromise

even though a similarly situated taxpayer may have paid his liability in full." Id.

We hold that the Taxpayers failed to establish that the IRS abused its discretion

on the basis of the promotion of effective tax administration when it refused the

Taxpayers' OIC. The factors outlined in 26 C.F.R. § 301.7122-1(c)(3)(iii)(A-C) that

support a finding of "economic hardship" describe more dire circumstances than the

contentions made by the Taxpayers. The same is true with respect to the "public

policy and equity" claim, as the examples outlined in 26 C.F.R. § 301.7122-

1(c)(3)(iv)(Examples 1-2), are distinguishable from the complaints set forth by the

Taxpayers in this case. Based upon the record before us, we hold that the IRS did not

abuse its discretion by refusing to accept the Taxpayers' $4,457 OIC. 

III. Conclusion

The IRS's rejection of the Taxpayers' OIC is reviewable for an abuse of

discretion by this court. However, on this record, we find no abuse of discretion, and

we affirm the judgment of the Tax Court. 

______________________________

Appellate Case: 05-3054 Page: 9 Date Filed: 07/14/2006 Entry ID: 2067600