T.C. Mem o. 2 01 4- 81

UNITED STAT ES TAX COURT
ALFRED A. PORRO, JR. AND JOAN ATKINS PORRO, Pe ti ti on ers v. COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt

Doc ke t No . 14 53 1- 10 L. Fil edMay 6, 20 14
.
Jo se phA. DiRu zzo , III, Sanpr eetK. Dhal iwal , andJen ni fer C orrea R ie ra, fo r pe ti ti on ers . DerekP. Ric hm anan d Wil li am Lee Bl ag g, fo r res po nd en t.

MEMORANDUM OPINION JAC OBS, Jud ge : Th e p art ie s s ub mitte d thi s ca se ful ly sti pu la te d p ur su an t to Ru le 12 2. Th e is su e fo r de ci si on is whet he r res po nd en t’s s et tl em en t o ffi cer ab us edhe r di sc ret io n i n re jecti ng pe ti ti on ers ’ of

fer- in -co m

pr om is e as an al te rn at iv e to co ll ect io n o f pe ti ti on ers ’ unpa idFed eral in co m e ta x l iabi li ti es for- 2 -

[* 2] y ears 19 90 an d 1 99 1 b y way of l ev y . For the reas on s s etforth in fra, we fi nd th atres po nd en t’s s ettl em en t o ffi cer d idno t ab us e h er d is cret io n. Unl es s o th erwi se in di cat ed , all sec ti on refe ren ces are t o the Int ern al Rev enue Co de , as a m en de d andineffec t atall rel ev an t t im es , andall Ru le refe ren ces are t o the Tax C ou rt Rul es of P ract ic e an d P ro cedur e. At the ti m e th ey fil edth ei r pe ti ti on , pet it io ne rs res id edinFlo rid a. Bac kg ro un d On M ay 6, 2 00 5, the Int ern al Rev enue Serv ic e (IR S) i ss ue d ano ti ce o f de fic ie nc y

to pe ti ti on ers fory ears 19 89 th ro ug h 1 99 2 i nc lu si ve . On Ju ly 20, 2 00 5, pe ti ti on ers fil edth e p et it io n i n thi s C ou rt a t d oc ke t No . 13 39 8- 05 for red et erm in at io n o f th e d et erm in at io ns setforth inth e n ot ic e o f de fic ie nc y . On May 2, 20 07 , a st ip ul at edde ci si on was e nt eredpu rs ua ntto whi chitwas a gr eed th atpe ti ti on ers were n otli ab le foran y de fic ie nc ie s o r pe na lt ie s fo r y ears 19 89 or 19 92 bu t wer e li ab le forde fic ie nc ie s an d p en al ti es fory ears 19 90 an d 1 99 1 a s fo ll ows : Frau d p en al ty

Year Defi ci en cy sec . 66 63 (a) 19 90 $4 9,7 61 $1 8,6 60 19 91 78 ,94 6 29,6 05- 3 -

[* 3] As o f Ju ne 12 , 20 13 , th e as se ss edba lanc es du e fo r y ears 19 90 an d 1 99 1 wer e $2 29 ,15 2.4 3 and$3 40 ,12 8.7 1, re sp ect iv el y . On Au gu st24 , 20 09 , th e IRS sen t p et it io ne rs a Fi na l No ti ce o f In te ntto Lev y an d No ti ce o f You r Ri gh t t o aHeari ng , adv is in g the m th atth e IRS in te nd ed to pro ceedby lev y

to co ll ectpe ti ti on ers ’ unpa id19 90 an d 1 99 1 F ed eral tax li ab il it ie s. Th atno ti ce i nf orm edpe ti ti on ers th atif the y so de si red , th ey

co ul d h av e a h eari ng (se ct io n 6 33 0 h eari ng ) on th e m at te r by con ta ct in g the IRS Offi ce o f App eal s. OnSep te m

be r 12 , 20 09 , pet it io ne rs sen t the IRS a F orm 12 15 3, Re qu es t fo r a Co ll ect io n Du e Pro ces s o r Equ iv al en t Hearin g, i n wh ic h the y st at edth ey wis he d t o p ro po se a co ll ect io n a lt ern at iv e to th e p ro po se d l ev y . On Ap ril 19 , 20 10 , Set tl em en t Offi cer Lav ern e Bu rk s co nduc te d aface -to face he ari ng with p et it io ne rs ’ rep res en ta ti ve , Davi d B erm an . They di sc us se d
co ll ect io n a lt ern at iv es bu t wer e unabl e to reac h an a gr eem en t. OnJu ne 2, 2 01 0, th e IRS Offic e o f App eal s m ai le d p et it io ne rs a Not ic e o f Det erm in at io n Co nc ern in g C ol le ct io n Act io n( s) Und er Se ct io n 6 32 0 and/o r 63 30 (no ti ce o f de te rm in at io n) in fo rm in g the m th atth e IRS ’ de te rm in at io n t o l ev y onpe ti ti on ers ’
as se ts was s us ta in ed . On Ju ne 25 , 20 10 , pet it io ne rs pe ti ti on edth e Co urt u nd er se ct io n 6 33 0( d) to rev ie w th e d et erm in at io n o f th e IRS Offic e o f App eal s. Inth ei r pe ti ti on , pet it io ne rs st at edth atth e IRS fai le d t o p ur su e a l es s i nt ru si ve co ll ect io n- 4 -

[* 4] alt ern at iv e, in as m

uc h a s p et it io ne rs ha d “ ag reedto imm ed ia te ly liqui da te all
as se ts , INCLUDING RESIDENCE [i.e., the ir M ia m i h om e] andpay all pro ceed s to IRS fo r [the ] ta x c la im eddu e”. On Au gu st25 , 20 11 , th e IRS reque st edpe ti ti on ers ’ cas e b e rem an de d t o the IRS Ap pe al s Off

ic e in ord er t o a ffo rdpe ti ti on ers an ot he r se ct io n 6 33 0 h eari ng . The Co urt g ran te d thi s re qu es t o n Au gu st26 , 20 11
. On No ve m

be r 7, 2 01 1, Se tt le m en t Offi cer B urks ren ewedwork in g o n pe ti ti on ers ’ cas e. Sh e atte m pt edto reac h M r. Berm anby pho ne bu t was un su cces sf

ul . She th enwrot e h im

a le tt er wi th reg ardto sch edul in g ano th er se ct io n 6 33 0 h eari ng . On No ve m

be r 17 , 20 11 , pe ti ti on ers m ai le d alet te r to th e IRS inwhi chth ey

1 of fere d t o s et tl e th ei r unpa idFed eral in co m e ta x l iabi li ti es for $4 0,0 00 . Sett le m en t Offi cer B urks sp ok e with p et it io ne rs by tele ph on e o n No ve m be r 21 , 20 11 . She in fo rm edpe ti ti on ers th atth ey ha d t o fi le Fo rm

65 6, Offe r in Co m

pr om is e, an d Fo rm 43 3- A, Col le ct io n In fo rm at io n S ta te m en t fo r W ag e Earn ers an d S el fEm pl oyed In di vi du al s, i n o rd er t o m ak e anoff er-i n- co m pr om is e. Inpo in t o f fac t, pe ti ti on ers ha d s ub m it te d F orm s 6 56 an d 4 33 -A, bu t the form s wer e m ai le d t o the By th is ti m e itap pe ars Mr. Berm anha d c eas edrep res en ti ng pe ti ti on ers . 1- 5 -

[* 5] wron g IR S d ep art m en t. Eve ntua ll y , th e fo rm s m ad e th ei r way to Set tl em en t Offi cer B urks
. Pet it io ne rs ’ $4 0,0 00 set tl em en t o ffer refl ect eda ch an ge inth ei r fi na nc es . Pet it io ne rs ha d re ti redan d l iqui da te d the ir i nt eres ts ina bu si ne ss cal le d Terra Fi rm a, In c., inFeb ru ary 20 11 , recei vi ng $7 0,0 00 . Furthe r, pe ti ti on ers so ldth ei r Mi am i h om e o n J un e 6 , 20 11 , recei vi ng ne t p ro ceed s o f $1 53 ,77 8.2 6. Pe ti ti on ers in fo rm edth e IRS th atth e p ro ceed s fr om bo thtrans act io ns wou ldbe us edto set tl e th ei r ta x l iabi li ti es . Pet it io ne rs ’ cas e was trans ferr edto Set tl em en t Offi cer S ha ri Gro pa ckon Ju ne 1, 2 01 2. Se tt le m en t Offi cer Gro pa ckrev ie wedpe ti ti on ers ’ of fer- in
co m pr om is e an d a ss oc ia te d fi nanc ia l d oc um en ta ti on . She de te rm in edth at pe ti ti on ers ’ m on th ly liv in g e xp en se s ex ceed edth ei r m on th ly inc om e b y ap pr ox im at el y

$5 61 . Sett le m en t Offi cer Gro pa ck di d n otha ve su ffi ci en t in fo rm at io n t o d et erm in e p reci se ly the am ou ntof p et it io ne rs ’ as se ts , bu t o n the ba si s o f th e d oc um en ta ti on av ai labl e, sh e d et erm in edpe ti ti on ers ’ equi ty val ue in
va rio us ass et s t ot al edalm os t $ 40 0,0 00
. Set tl em en t Offi cer Gro pa ckhe lda face -to -fac e se ct io n 6 33 0 h eari ng with pe ti ti on ers onJu ly 12, 2 01 2. Atth e m eet in g, p et it io ne rs in fo rm edSet tl em en t Offi cer Gro pa ckth atth ei r m on th ly exp en se s ex ceed edth ei r m on th ly inc om e an d- 6 -

[* 6] th atth ey

were u si ng th e p ro ceed s fr om bo th th e sa le of the Mi am i h om e an d th e li qu id at io n o f th ei r in te res ts inTerra Fi rm a, In c., to he lp pay th ei r li vi ng ex pe ns es . Peti ti on ers ’ ot he r as se ts were al so di sc us se d. Se tt le m en t Offi cer Gro pa ckde te rm in edth ata ho us e in Ru th erfo rd , New Jer se y (New Je rs ey

ho us e),
was own edby pet it io ne rs . Peti ti on ers di sp ut edth atde te rm in at io n, cl ai m in g the y ha d n o i nt eres t i n the New Jer se y ho us e b ecau se itha d b eentrans ferr edto th ei r so n b y way of aqu it cl ai m

de edda te d M ay

21 , 20 06
. Afterdi sc us si ng th ei r cas e

2 with S et tl em en t Offi cer Gro pa ck , pet it io ne rs in crea se d the am ou ntof the ir o ffer
in -co m pr om is e fro m

$4 0,0 00 to $5 0,0 00
. Set tl em en t Offi cer Gro pa ckcal cu la te d p et it io ne rs ’ reas on ab le co ll ect io n po te nt ia l t o b e $ 33 4,1 25 . In re ach in g h er co nc lu si on , sh e in cl ud edinhe r cal cu la ti on s (1 ) cas h andbankacco un ts to ta li ng $4 5,5 07 ; (2 ) furn itur e an d pe rs on al effe ct s v al ue d a t $ 43 0; (3) anin te res t i n an Op pe nh ei m er In ve stm en t Fundto ta li ng $1 ,84 5; (4) th e lo anva lu e o f li fe i ns ur an ce o f $4 4,8 92 ; an d (5 ) pe ns io ns /IRA/4 01 (k ) as se ts of $ 10 ,66 0.
Inrev ie win g the qu it cl ai m de ed , we no te th atth e le ga l d es cri pt io n o f th e 2 pr op erty is in co m pl et e. The d eedst at es : “ Als o kno w as Lo t _

__ , Blo ck__

_, o n th e ta x m ap forth e Bo ro ug h o f Ru th erfo rd , Cou nty of B erg en , Sta te of Ne w Je rs ey .” W e al so no te th ateach pl ace ada te ap pe ars , th e d at e is alt ered , in cl ud in g th e ex pi rat io n d at e o f th e n ot ary publ ic ’s comm is si on . Peti ti on ers di d n otoff er an ex pl an at io n fo r th es e o m is si on s o r al te rat io ns .- 7 -

[* 7] Als o i nc lu de d i n the cal cu la ti onof p et it io ne rs ’ reas on ab le co ll ect io n po te nt ia l wer e am ou nt s fo r th e fo ll owi ng di ss ip at edass et s: (1) $1 53 ,77 8.2 6
rece iv edby pet it io ne rs fro m th e sa le of the Mi am i h om e; (2) $7 0,0 00 rece iv ed fro m th e li qu id at io n o f pe ti ti on ers ’ in te res ts inTerra Fi rm a, In c.; and(3) $7 ,01 3 3
as th e equi ty in the New Jer se y ho us e. Set tl em en t Offi cer Gro pa ckin cl ud edth e pr oc eed s fr om

th e sa le s o f th e Mi am i h om e an d p et it io ne rs ’ in te res t i n Terra Fi rm a, In c., “be cau se th e ta xp ay ers di d n otsh ow wh ere the m on ey went .” Sh e in cl ud edth e equi ty val ue of t he New Jer se y ho us e b ecau se of n um ero us in co ns is te nc ie s i n p et it io ne rs ’ st at em en ts as t o the own ers hi p o f th e New Je rs ey ho us e. Inth is reg ard , pet it io ne rs in it ia ll y cla im edth atth ey

ha d p ur ch as edth e New Je rs ey

ho us e o n b eh al f of

th ei r so n b ecau se at the ti m e h e was a min or , bu t th ey lat er ac kn owl ed ge d tha t the ir s on ha d re ach edth e ag e o f m ajor ity sev eral y ears be fo re the ho us e was pu rch as ed . Sett le m en t Offi cer Gro pa ckno te d i n the IRS c as e act iv ity

fil e th at(1) th e New Je rs ey pro pe rty ass es sm en t re co rd s re fle ct ed Mr. Po rro as the own er o f th e New Je rs ey ho us e in 20 07 , 20 08 , 20 09 , 20 10 , and 20 11 , and(2) anInt ern etsearchof p ro pe rty tit le reco rd s i nd ic at edpe ti ti on ers own edth e p ro pe rty.
See i nf ra p p. * 8- *9 fora di sc us si on with re sp ectto th e m etho do lo gy 3 res po nd en t u se d i n d et erm in in g p et it io ne rs ’ equi ty in the New Jer se y ho us e.- 8 -

[* 8] Set tl em en t Offi cer Gro pa ckwas m in df ul of M r. Po rro ’s cri min al co nv ic ti on in19 99 an d tha t the U.S. Departm en t o f Ju st ic e h ada res ti tu ti on li enlas ti ng un ti l 20 24 ag ai ns t al l p ro pe rty he o wne d. She no te d i n the IRS ca se act iv ity fil e th at 4 th e Dep art m en t o f Ju st ic e h adbe engarn is hi ng ap pr ox im at el y $2 20 of M r. Po rro ’s
m on th ly Soci al Secu rity

pay m en ts an d tha t M r. Po rro owedm or e th an$2 02 ,00 0 i n res ti tu ti on to th e Ban k o f New York. Set tl em en t Offi cer Gro pa ckco nf irmed th atpe ti ti on ers ’ m on th ly exp en se s co nt in ue d t o e xc eedth ei r m on th ly inc om e an d the m on th ly defi ci t atth e ti m e was $1 ,73 3. Sh e n ot edinth e IRS cas e act iv ity fil e th at [i]f I were t o u se th is de fic itan d m ut ti pl e [s ic ] by 10 y ears , ap pr ox im at el y

whatwe ha ve to co ll ecton , th enth e ta xp ay ers wou ld ne edto us e $ 20 7,9 60 to li ve onforth e n ex t 1 0 years t o m eetba si c li vi ng ex pe ns es . There fo re, I wo ul d h av e to reduc e th e ta xp ay ers ’ RCP b y th is am ou nt . Add it io na ll y , with the res ti tu ti on li enhavi ng pr io rity , th at ’s an a dd it io na l $ 20 0,0 00 . I will ha ve to reac h o utto th e DOJ [J us ti ce Dep art m en t] to see ex act ly wha t re m ai ns , if an yth in g. I al so have to see if i nt eres t i s ap pl ic ab le
. Thi s wo ul d re du ce the tax pa y ers ’ ab il ity to pay to ab ou t $ 10 0,0 00
. Mr. Po rro was fo un d g ui lty of m ai l fr au d andof s up pl y in g b an ks with fa ls e 4 in fo rm at io n andothe r st at em en ts inco nn ect io n wi th hi s at te m pt s t o s ecu re l in es of cred itan d b us in es s l oa ns . On Oct ob er 1 4, 1 99 9, the U.S. Dist ric t Co urt fo r th e Dis tri ctof Ne w Jer se y

sen te nc edhi m

to 70 m on th s i m

pr is on m en t an d fi ve y ears of supe rv is edrel eas e. Mr. Po rro ’s sen te nc e al so in cl ud eda jud gm en t o rd eri ng hi m to pa y res ti tu ti on to th e Ban k o f New York b ecau se he frau du le nt ly obt ai ne d alo an fro m th atbankwhi chul ti m at el y res ul te d i n ane t l os s o f $2 08 ,66 1.- 9 -

[* 9] Set tl em en t Offi cer Gro pa cksp ok e with aDepa rtment o f Ju st ic e o ffi ci al on Ju ly 17, 2 01 2. Sh e le arn edth atas o f Ju ly 13, 2 01 2, M r. Po rro owed$1 99 ,97 8.2 2 inres ti tu ti on to th e Ban k o f New York. Sh e subtract edth e am ou ntof the
res ti tu ti on de btfro m

th e am ou ntsh e d et erm in edas the va lu e o f pe ti ti on ers ’ equi ty inth e New Je rs ey

ho us e b ecau se at the sec ti on 63 30 he ari ng pe ti ti on ers “ di d
m en ti on a fed eral res ti tu ti on li enonth e p ro pe rty.” 5 On J ul y 17 , 20 12 , Set tl em en t Offi cer Gro pa cksp ok e with M r. Po rro by te le ph on e. Sh e in fo rm edhi m th atsh e wou ldreco m

m en d a ccep tanc e o f a $1 00 ,00 0 o ffer -in -co m

pr om is e o f pe ti ti on ers ’ unpa idFed eral tax li ab il it ie s. Mr . Po rro rep li edth atth e la rg es t am ou ntpe ti ti on ers co ul d p ay witho utbo rro win g ad di ti on al fun ds was $ 50 ,00 0, the same am ou ntpe ti ti on ers ha d o ffer ed
. The ne xtday , Set tl em en t Offi cer Gro pa ckco m pl et eda fi na l re vi ew of pe ti ti on ers ’ fin an ces . She co nf irmed he r pr ev io us de te rm in at io n tha t p et it io ne rs ’
reas on ab le co ll ect io n p ot en ti al was $ 33 4,1 25
. On J ul y 23 , 20 12 , th e IRS App eal s Off ic e is su eda Supp le m en ta l No ti ce o f Dete rm in at io n C on cern in g C ol le ct io n Act io n( s) Und er Se ct io n 6 32 0 and/o r 63 30 (s up pl em en ta l n ot ic e o f de te rm in at io n) . In the supp le m en ta l n ot ic e o f
Set tl em en t Offi cer Gro pa ckals o re du cedth e am ou ntof p et it io ne rs ’ equi ty 5 inth e New Je rs ey

ho us e to tak e in to acco un t a $ 25 ,00 0 m ortg ag e o n the pro pe rty.- 10 -

[* 10 ] de te rm in at io n, the IRS re jecte d p et it io ne rs ’ $5 0,0 00 off er-i n- co m pr om is e, st at in g tha t o n the ba si s o f anan al y si s o f th ei r fi na nc ia l ci rcu m st an ces , pet it io ne rs co ul d a ffo rdto pay

m or e th anth e am ou ntoff ered
. Dis cu ss io n I. St an dardof R ev ie w Thi s ca se in vo lv es a rev ie w of the IRS’ det erm in at io n t o p ro ceedwith
co ll ect io n o f pe ti ti on ers ’ unpa idFed eral in co m e ta x l iabi li ti es for 19 90 an d 1 99 1 by way of l ev y . Sect io n 6 33 0 h eari ng s co nc ern in g l ev ie s ar e co nduc te d i n acco rd an ce wi th sec ti on 63 30 (c). At the sec ti on 63 30 he ari ng a ta xp ay er m ay rai se any rel ev an t i ss ue s re la ti ng to th e unp ai d t ax , in cl ud in g s po us al de fen se s, ch al le ng es to th e ap pr op ria te ne ss of the co ll ect io n a ct io n, an d o ffer s o f co ll ect io n al te rn at iv es . A tax pa y er m ay ch al le ng e th e ex is te nc e o r am ou ntof the un de rlyin g ta x l iabi li ty onl y

if h e/ sh e d idno t re cei ve a no ti ce o f de fic ie nc y or o th erwi se ha ve anop po rtu ni ty to d is pu te th e li ab il ity . Sec. 6 33 0( c)(2 )(B) ; s ec. 3 01 .63 30 -1 (e)( 3) , Q&A-E2 , Pro ced . & Adm in . Reg s. Pet it io ne rs ha d re cei ve d ano ti ce o f de fic ie nc y an d l it ig at edth e d efi ci en ci es inth is Co urt. Thu s, the y m ay no t ch al le ng e th e ex is te nc e o r am ou nt s o f th e d efi ci en ci es fory ears 19 90 an d 1 99 1. Afte r th e Co m

m is si on er i ss ue s a n ot ic e o f de te rm in at io n, a t ax pay er m ay pe ti ti on th is Co urt fo r rev ie w th ereo f. Sec. 6 33 0( d) (1 ). The C ou rt’s re vi ew of th e- 11 -

[* 11 ] Co m

m is si on er’s d et erm in at io n i s s ub ject t o the pro vi si on s o f se ct io n 6 33 0. Bec au se pe ti ti on ers do no t d is pu te th e und erl y in g t ax li ab il it ie s fo r 19 90 an d 1 99 1,
we rev ie w th e IRS ’ de te rm in at io n fo r ab us e o f di sc ret io n. Se e Seg o v . Co m m is si on er, 1 14 T.C. 60 4, 6 10 (20 00 ); Go za v . Comm is si on er, 1 14 T.C. 17 6, 18 1- 18 2 (2 00 0) . An ab us e o f di sc ret io n i s d efi ne d a s an y act io n tha t i s un reas on ab le , arb itrary or cap ric io us , cle arl y un lawfu l, o r la ck in g aso un d b as is in factor l aw. Tho r Po wer Too l Co . v. Co m m is si on er, 4 39 U.S. 52 2, 5 32 -5 33 (1 97 9) ; Woo dr al v. Co m

m is si on er, 1 12 T.C. 19 , 23 (19 99 ). II. Pet it io ne r’s Argu m en ts Pet it io ne rs fir starg ue th atSet tl em en t Offi cer Gro pa ck ’s reject io n o f th ei r $5 0,0 00 off

er-i n- co m pr om is e co ns ti tu te d an abu se of d is cret io n b ecau se he r cal cu la ti on of t he ir r eas on ab le co ll ect io n p ot en ti al was fl awedinth at(1) Set tl em en t Offi cer Gro pa ckfai le d t o fu ll y an d p ro pe rly acco un t fo r Mr. Po rro ’s
res ti tu ti on ob li ga ti on s an d the effe ctof tho se ob li ga ti on s o n p et it io ne rs ’ as se ts ; (2 ) Set tl em en t Offi cer Gro pa ckerro ne ou sl y in cl ud edth e p ro ceed s fr om th e sa le of pe ti ti on er’s Mi am i h om e an d the li qu id at io n o f pe ti ti on ers ’ in te res ts inTerra Fi rm a, In c., as di ss ip at edass et s; an d (3 ) Set tl em en t Offi cer Gro pa ckerre d b y in cl ud in g the New Jer se y ho us e as on e o f pe ti ti on ers ’ as se ts .- 12 -

[* 12 ] Seco nd , pet it io ne rs arg ue th atev enif Se tt le m en t Offi cer Gro pa ck ’s
reas on ab le co ll ect io n p ot en ti al cal cu la ti onwas c orrectpe ti ti on ers were en ti tl edto av ai l the m se lv es of a“ sp eci al cir cu m st an ces ” ex cep ti on th atpe rm it s the
acce pt an ce o f of

fers les s tha n atax pa y er’s rea so nabl e co ll ect io n p ot en ti al . W e no w rev ie w each of p et it io ne rs ’ arg um en ts intu rn . III. The Set tl em en t Offi cer’s Re as on ab le Co ll ect io n P ot en ti al Cal cu lati on A. Mr. Po rro ’s Res ti tu ti on Obl ig at io ns As o f Ju ly 13, 2 01 2, M r. Po rro was re qu ire d t o p ay $1 99 ,97 8.2 2 a s res ti tu ti on ari si ng ou t o f hi s 1 99 9 c riminal co nv ic ti on . Peti ti on ers po in t o utth at whe n c riminal res ti tu ti on ob li ga ti on s ar e im po se d u nd er 1 8 U.S.C. s ec. 3 66 3A (2 00 6) , 18 U.S.C. sec . 36 13 (20 06 ) pr ov id es th ata li enau to m at ic al ly aris es onall of th e as se ts an d p ro pe rty int eres ts of the res ti tu ti on de bt or . Peti ti on ers ass ertth at Set tl em en t Offi cer Gro pa ckfai le d t o c on du cta “ th or ou ghin ve st ig at io n” to de te rm in e th e “ tru e equi ty avai labl e to Pet it io ne rs forin cl us io n i n the ir R CP”. Co nt inui ng , pet it io ne rs ass ert : “ Set tl em en t Offi cer Gro pa cksh ou ldha ve un de rtake n am or e th ro ug h ana lysis , as m an da te d b y th e st atut e, to de te rm in e h ow m uc h asal e o f Pet it io ne rs ’ as se ts wou ldhave actua ll y y ie ld edinli gh t o f Alfr ed Po rro ’s res ti tu ti on ob li ga ti on s.”- 13 -

[* 13 ] Pet it io ne rs ass ert io ns are n otpe rs ua si ve . Con tra ry to pe ti ti on ers ’ as se rti on s, th e rec or d d em on strat es th atSettl em en t Offi cer Gro pa ckdi d i nv es ti ga te th e true equi ty val ue of p et it io ne rs ’ as se ts av ai labl e fo r in cl us io n i n the ir r eas on ab le
co ll ect io n p ot en ti al be fo re the is su an ce o f th e supp le m en ta l n ot ic e o f de te rm in at io n. Se tt le m en t Offi cer Gro pa ckacco un te d fo r pe ti ti on ers ’ ne ga ti ve m on th ly inc om e an d the m on th ly $22 0 g arn is hm en t fr om Mr. Po rro ’s Soc ia l Secu rit y paym en ts an d re du cedth e equi ty val ue of the ass et s av ai labl e to pe ti ti on ers by the $1 99 ,97 8.5 2 re st itut io n o bl ig at io n o ut st an di ng as o f Ju ly 13, 20 12
. Pet it io ne rs ad di ti on al ly ass ertth atSet tl em en t Offi cer Gro pa ckerre d b y ap pl y in g the en ti re re st itut io n o bl ig at io n a ga in stth e equi ty in the New Jer se y ho us e. Pet it io ne rs m ai nt ai n the res ti tu ti on ob li ga ti on sh ou ldhave be enap pl ie d ag ai ns t the equi ty in al l o f th ei r as se ts . The se ass ert io ns are al so unpe rs ua si ve . Sett le m en t Offi cer Gro pa ckno te d inth e IRS cas e act iv ity

fil e th atdu rin g the face -to -fac e se ct io n 6 33 0 h eari ng , pe ti ti on ers di d “ m en ti on a fed eral res ti tu ti on li enonth e p ro pe rty”. Con se qu en tl y , we can no t s ay

th atSet tl em en t Offi cer Gro pa ck ab us edhe r di sc ret io n i n app lying th e fu ll am ou ntof M r. Po rro ’s res ti tu ti on ob li ga ti onag ai ns t the New Jer se y ho us e. Inan y cas e, m on ey

is fun gi bl e. See, e.g ., Uni te d S ta te s v . Spe rry Co rp ., 49 3 U.S.- 14 -

[* 14 ] 52 , 62 n.9 (19 89 ); B ob ro w v. Co m m is si on er, T.C. Mem o. 2 01 4- 21 ; O’Neil v. Co m m is si on er, T.C. Mem o. 2 01 2- 33 9. Ap pl y in g the res ti tu ti on ob li ga ti on ag ai ns t an y

si ng le ass etreduc es pe ti ti on ers ’ to ta l equi ty val ue inall th ei r as se ts an d, the refo re, reduc es th e am ou ntof p et it io ne rs ’ reas on ab le co ll ect io n p ot en ti al
. 6 Insu m , we fin d tha t Se tt le m en t Offi cer Gro pa ckpro pe rly acco un te d fo r Mr. Po rro ’s res ti tu ti on ob li ga ti on an d tha t s he pro pe rly redu cedpe ti ti on ers ’ reas on ab le
co ll ect io n p ot en ti al to refl ectth atob li ga ti on . B. Dis si pa te d As se ts Pet it io ne rs ass ertth atSet tl em en t Offi cer Gro pa ckerre d b y in cl ud in g the $1 53 ,77 8.2 6 o f ne t p ro ceed s the y rece iv edfro m

th e 2 01 1 s al e o f th ei r Mi am i h om e an d the $7 0,0 00 inpro ceed s ar is in g fr om th e 2 01 1 l iqui da ti on of the ir i nt eres ts in Terra F irma, Inc., a to ta l o f $2 23 ,77 8.2 6, as di ss ip at edass et s. Pet it io ne rs m ai nt ai n th es e m on ey s wer e u se d t o p ay th ei r ne ces sary

li vi ng ex pe ns es . Dis si pa te d a ss et s ar e th os e as se ts th atha ve be enso ld , trans ferr ed , or s pe nt on no np rio rit y

it em s o r de bt s i n d is reg ardof a n o ut st an di ng tax li ab il ity . Tagg art v. Co m m is si on er, T.C. Mem o. 2 01 3- 11 3; see Jo hn so n v . Comm is si on er, 1 36 T.C.

Pet it io ne rs ’ arg um en t tha t the New Jer se y ho us e sh ou ldno t h av e b een 6 in cl ud edinth e li stof the ir a ss et s i s a s ep arat e arg um en t an d i s d is cu ss edin fra p p. *1 6- *1 9.- 15 -

[* 15 ] 47 5, 4 87 (20 11 ), aff’d, 5 02 Fed . App x. 1 (D.C. Cir . 20 13 ). The In te rn al Rev enue Man ua l (I RM) pro vi de s tha t s ettl em en t o ffi cers are t o d et erm in e whe th er su chdi ss ip at edass et s ex is t an d are n o l on ge r av ai labl e to pay a ta x l iabi li ty. See IRM pt . 5.8 .5.1 6( 2) (Oct . 22 , 20 10 ). The d et erm in at io n a s t o the in cl us io n o f th e va lu e o f a t ax pa y er’s d is si pa te d a ss et s i n h is /h er re as on ab le co ll ect io n p ot en ti al is ba se d o n a ll fact s an d c irc um st an ces of the cas e, i.e., ea chcas e m us t b e ev al ua te d
on it s o wn m eri t. Id . pt . 5.8 .5.1 6( 1) . Sett le m en t o ffi cers are co un se le d tha t “ [i]f th e ta xp ay er d oe s n otpro vi de in fo rm at io n s ho win g the di sp os it io n o f fund s fr om tra ns ferr edass et s, co ns id er al l o f th es e am ou nt s i n an a ccep tabl e o fferam ou nt .” Id . pt . 5.8 .5.1 6( 5) . The t ax pa y er i s t o b e co nt act ed(pr efer ab ly by tel ep ho ne ) an d affo rd edth e o pp ortu ni ty to ex pl ai n o r ve rif y th e d is po si ti on of the ass et . Id. p t. 5.8 .5.1 6( 8)
. At the sec ti on 63 30 he ari ng , pet it io ne rs in fo rm edSet tl em en t Offi cer Gro pa ckth atth ey

were u si ng th e p ro ceed s fr om th e sa le of the ir M ia mi h om e an d li qu id at io n o f th ei r in te res ts inTerra Fi rm a, In c., to pay th ei r li vi ng ex pe ns es . Prev io us ly, pe ti ti on ers ha d s tate d tha t the y wou ldus e th os e p ro ceed s t o s et tl e th ei r unpa idFed eral in co m e ta x l iabi li ti es . Alth ou gh pe ti ti on ers cla im edto ha ve us ed th e $ 22 3,7 78 .26 ($1 53 ,77 8.2 6 fr om th e sa le of the Mi am i h om e an d $ 70 ,00 0 fr om th e li qu id at io n o f pe ti ti on ers ’ in te res ts inTerra Fi rm a, In c.) i n p ro ceed s t o p ay- 16 -

[* 16 ] th ei r li vi ng ex pe ns es , Settl em en t Offi cer Gro pa ckno te d i n the IRS ca se act iv ity fil e th atpe ti ti on ers di d n otdo cu m en t wh ere the paym en ts went . W e rev ie wedpe ti ti on ers ’ ba nkreco rd s, b utwe were u nabl e to id en ti fy ho w th e pr oc eed s fr om

th e sa le of the Mi am i h om e an d the li qu id at io n o f th e TerraFirm a, In c. in te res ts were u se d. Itap pe aredth atth e p ro ceed s fr om th e sa le of the Mi am i ho m e were qui ck ly spe nt , des pi te pe ti ti on ers ’ st at em en ts to th e IRS th atth e pr oc eed s wo ul d b e h el d t o s et tl e th ei r unpa idFed eral in co m e ta x l iabi li ti es . As
res po nd en t’s co un se l n ot es inbri ef, b etweenMarc h andDecem be r 20 11 , pe ti ti on ers di ss ip at edm or e th an$1 62 ,00 0. Pe ti ti on ers ha ve th e b ur de n t o es tabl is h tha t the pro ceed s fr om th e sa le of the Mi am i h om e an d the li qu id at io n o f pe ti ti on ers ’ in te res ts inTerra Fi rm a, In c., were ex pe nd edforth ei r ne ces sary an d
reas on ab le li vi ng ex pe ns es . To co nc lu de , we can no t s ay th atSettl em en t Offi cer Gro pa ckab us edhe r di sc ret io n i n c ha ract eri zi ng th e sa le pro ceed s as di ss ip at ed
as se ts inth e cal cu la ti on of p et it io ne rs ’ reas on ab le co ll ect io n p ot en ti al
. C. Owner sh ip of t he New Jer se y Hou se Pet it io ne rs co nt en d tha t the y do no t o wn the New Jer se y ho us e an d tha t Set tl em en t Offi cer Gro pa ckerre d i n i nc lu di ng th e v al ue of the New Jer se y ho us e inpe ti ti on ers ’ reas on ab le co ll ect io n p ot en ti al . Peti ti on ers co rrec tl y no te th atth e Co urt i ni ti al ly loo ks to Sta te law t o d et erm in e wha t ri gh ts a ta xp ay er h as in- 17 -

[* 17 ] pro pe rty the Gov ern m en t s eek s t o re ach , andth ento Fed eral law t o de te rm in e whe th er the tax pa y er’s St at e-d el in eat edrig ht s qua li fy as “pr op erty ” o r

“ rig ht s t o p ro pe rty” with inth e co m pa ss of F ed eral tax law. See Dry e v . Uni te d St at es , 52 8 U.S. 4 9, 5 8 (1 99 9) . Und er tha t an al y si s, p et it io ne rs ass ertth ey were no t the own ers of the pro pe rty. Befo re ad dr es si ng pe ti ti on ers ’ sp eci fic arg um en ts , we are co ns tra in edto no te th atev enif we a gr eedwith p et it io ne rs an d d is reg ard edth e v al ue of the New Je rs ey ho us e, itwou ldno t af

fectth e o ut co m e o f th is cas e. Pet it io ne rs ’ reas on ab le
co ll ect io n p ot en ti al , as d et erm in edby Sett le m en t Offi cer Gro pa ck , aft er t ak in g in to acco un t M r. Po rro ’s res ti tu ti on ob li ga ti on an d wi th ou t co ns id eri ng th e v al ue of th e New Je rs ey

ho us e, is $1 27 ,13 4, wh ic h i s g reat er tha n the $5 0,0 00 pe ti ti on ers off

eredas we ll as t he $1 00 ,00 0 a m ou ntSet tl em en t Offi cer Gro pa ck
su gg es te d a s an acce pt ab le off er-i n- co m pr om is e. Andas r es po nd en t’s co un se l
no te s, IRM p t. 5 .8.5 .5.2 (5 ) (Oct . 22 , 20 10 ) st at es th atif the va lu e o f a t ax pa y er’s
as se ts othe r th anth e tr an sf erre d p ro pe rty at is su e is gre at er tha n the tax pa y er’s of fer- in -co m

pr om is e am ou nt , th atoff

er s ho ul d b e reject ed
. Pet it io ne rs pu rch as edth e New Je rs ey ho us e in 19 86 . Peti ti on ers pro vi de d Set tl em en t Offi cer Gro pa ckwith aqu it cl ai m de ed , dat edMay 21, 2 00 6, wh ic h reci te s tha t p et it io ne rs gra nt edKevi n P orro , th ei r so n, the New Jer se y ho us e fo r- 18 -

[* 18 ] $1 00 . Butas r es po nd en t’s co un se l n ot es , th e qui tc la im de edis in co m

pl et e, inth atpart o f th e le ga l d es cri pt io n o f th e p ro pe rty was n otfil le d o utan d a ll of the da te s wer e al te red , in cl ud in g the ex pi rat io n d at e o f th e n ot ary publ ic ’s
co m m is si on . Furthe r, New Je rs ey pro pe rty ass es sm en t re co rd s l is t M r. Po rro as th e o wne r of

th e New Je rs ey

ho us e fro m

20 07 th ro ug h 2 01 1. As res po nd en t’s
co un se l n ot es , th is in di cat es th atth e d eedwas n otreco rd ed . Peti ti on ers cla im th at th e St at e “ reco rdis no t co nc lu si ve , esp eci al ly in l ig htof aful ly execu te d d eed in di cat in g tha t Pe ti ti on ers trans ferr edth e p ro pe rty.” Thus , pet it io ne rs arg ue th at Set tl em en t Offi cer Gro pa cksh ou ldha ve un de rta ke n am or e subs tant ia l an al y si s o f th e o wne rs hi p o f th e New Je rs ey ho us e. Thi s ar gu m en t, tho ug h, und erm in es pe ti ti on ers ’ po si ti onth atSet tl em en t Offi cer Gro pa ckig no redNew Jer se y Sta te law inde te rm in in g wh atrig ht s p et it io ne rs ha d i n the New Jer se y ho us e. In any cas e, Set tl em en t Offi cer Gro pa ckwas n otrequi redto co nduc t a f urth er in ve st ig at io n. Se e Dal to n v . Comm is si on er, 6 82 F.3d14 9 (1 stCir . 20 12 ), rev ’g T.C. Mem o. 2 01 1- 13 6 and13 5 T.C. 3 93 (20 10 ). Mo reo ve r, we are m in df ul th at tra ns fers be twee n re la te d p art ie s ar e ex am in edwith s pe ci al scr ut in y , see Est at e o f Ro se n v . Comm is si on er, T.C. Mem o. 2 00 6- 11 5, an d i t i s p et it io ne rs who are ob li ge d t o re so lv e an y

co nt rad ic ti on s i n the reco rdas t o the own ers hi p o f th e New Je rs ey ho us e. Set tl em en t Offi cer Gro pa ckdo cu m en te d i n the IRS ca se act iv ity fil e- 19 -

[* 19 ] he r th ou gh t p ro ces s i n d et erm in in g tha t p et it io ne rs were the own ers of the New Je rs ey

ho us e. W e can no t s ay

th athe r de te rm in at io n i s u nr eas on ab le or arb itrary. Pet it io ne rs ne xtarg ue th atSet tl em en t Offi cer Gro pa ckfai le d t o fo ll ow the gu id el in es of I RM p t. 5 .8.5 .5.2 (2 ) (Oct . 22 , 20 10 ) reg ard in g the tre atm en t o f as se ts he ldby a no m in ee o r al te r eg o. Inm ak in g thi s ar gu m en t, i t ap pe ars th at pe ti ti on ers are as se rti ng th atth ey he ldth e New Je rs ey

ho us e as a no m in ee fo r th ei r so n. Bu t p et it io ne rs pro vi de d n o d oc um en ta ti on to in di cat e th atth e New Je rs ey ho us e was ev er h el d fo r th e b en efi t o f th ei r so n. An d we are m in df ul th atalt ho ug h in it ia ll y pe ti ti on ers cla im edth atth e h ou se was p ur ch as edinMr. Po rro ’s nam e be cau se th ei r so n was a m in orat the ti m e, th ey ev en tu al ly aban do ne d thi s cl ai m whe n i t b ecame clearitwas u nt ru e. IV. Sp eci al Cir cu m st an ces Inso m e cas es , th e IRS m ay acce ptanoff

er-i n- co m pr om is e o f le ss th anth e am ountof atax pay er’s rea so nabl e co ll ect io n p ot en ti al if the re ar e “ sp eci al ci rcu m st an ces .” See R ev . Pro c. 20 03 -7 1, s ec. 4 .02 (2 ), 20 03 -2 C.B. 5 17 , 51 7. Sp eci al cir cu m st an ces are: (1) cir cum st an ces de m on strat in g tha t the tax pa y er wou ldsu ffereco no m ic hard sh ip if the IRS wer e to co ll ectfro m hi m /h er anam ou nt equa l t o the reas on ab le co ll ect io n p ot en ti al an d (2 ) co m pe ll in g p ub li c p ol ic y

or- 20 -

[* 20 ] equi ty con si de rat io ns th atpro vi de a su ffi ci en t b as is for co m pr om is e. Leag o v. Co m m is si on er, T.C. Mem o. 2 01 2- 39 ; s ee M ur ph y v. Co m mis si on er, 1 25 T.C. 30 1, 3 09 (20 05 ), aff’d, 4 69 F.3d27 (1s t Ci r. 20 06 ). The IR M i ns tru ct s s ettl em en t of fic ers to gi ve co ns id erat io n t o e co no m ic hard sh ip an d p ub li c p ol ic y or e qu ity whe n i nv es ti ga ti ng an y

off er-i n- co m pr om is e. IRM p t. 5 .8.4 .2(1 ) (Jun e 1 , 20 10 ). Set tl em en t o ffi cers are d ire ct edto IRM p t. 5 .8.1 1 (S ep t. 2 3, 2 00 8) , whi ch di sc us se s fa ct or s t o c on si de r whe n atax pa y er ra is es th e is su e o f eco no mic ha rd sh ip , in cl ud in g a ge , em pl oym en t s ta tu s, d ep en de nt s, co stof l iv in g i n the area , an d e xtrao rd in ary ci rcu m st an ces su chas m ed ic al cat as tro ph e o r na tu ral di sa st er. Id . pt . 5.8 .11 .2.1 (5 ). Pet it io ne rs ass ertth atSet tl em en t Offi cer Gro pa ckig no redth e g ui da nc e o f th e IRM an d fa il edto tak e in to acco un t the factth atMr. Po rro was re ti red , th at pe ti ti on ers ’ on ly inc om e was fro m So ci al Secu rit y , andth atpe ti ti on ers ha d t o draw on th ei r sa vi ng s t o p ay

th ei r li vi ng ex pe ns es . Peti ti on ers ’ as se rti on is in co rrec t. Afte r Set tl em en t Offi cer Gro pa ckacco un te d fo r Mr. Po rro ’s res ti tu ti on ob li ga ti on , sh e ackno wled ge d tha t M r. Po rro was re ti red , th atpe ti ti on ers ’ in co m e cam e fro m

th ei r So ci al Secu rit y

be ne fit s, an d tha t the ir m on th ly inc om e was $1 ,73 3 l es s tha n the ir m on th ly exp en se s. Ex trapo la ti ng th es e am ou nt s o ve r a 1 0- y ear p eri od , Set tl em en t Offi cer Gro pa ckde te rm in edth atpe ti ti on ers wou ldex pe nd- 21 -

[* 21 ] m or e th an$2 00 ,00 0 fr om sav in gs onth ei r ba si c li vi ng ex pe ns es . She reduc edpe ti ti on ers ’ reas on ab le co ll ect io n p ot en ti al by that am ou nt . Thu s, ev en th ou gh Set tl em en t Offi cer Gro pa ckde te rm in edth atpe ti ti on ers ’ reas on ab le
co ll ect io n p ot en ti al was $ 33 4,1 25 , sh e was wil li ng to acce pton ly $10 0,0 00 in
sa ti sf act io n o f pe ti ti on ers ’ unpa idFed eral in co m e ta x l iabi li ti es . 7 V. Oth er Ma tt ers Co ns id eredat the Sect io n 6 33 0 Hea rin g Sect io n 6 33 0( c)(1 ) an d (3 ) pr ov id es th atth e se tt le m en t o ffi cer m us t v eri fy th atth e requi rem en ts of app li cab le law an d a dm in is tra ti ve pro cedur e h av e b een m etan d m

us t co ns id er wh ethe r th e p ro po se d c ol le ct io n a ct io n b al an ces th e n eed fo r th e eff

ic ie ntco ll ect io n o f ta xe s wi th th e le gi ti m at e co nc ernof the tax pa y er tha t an y co ll ect io n a ct io n b e n o m or e in tru si ve th anne ces sary . In the supp le m en ta l
no ti ce o f de te rm in at io n, Se tt le m en t Offi cer Gro pa ckst at edth atsh e v eri fie d tha t

Pet it io ne rs als o re fer t o s ec. 3 01 .71 22 -1 (b )(3 ), Pro ced . & Adm in . Reg s., 7 arg ui ng th atanoff

er-i n- co m pr om is e m ay

be en te redin to to pro m ot e eff ect iv e ta x adm in is tra ti on (whi chco ns ti tu te s a s pe ci al cir cu m st an ce) wh enitis de te rm in ed th at , altho ug h c ol le ct io n i n fu ll co ul d b e ach ie ve d, co ll ect io n o f th e fu ll li ab il ity co ul d c au se th e ta xp ay er ec on om ic hard sh ip . Both p art ie s ag ree tha t p et it io ne rs ’ unpa idFed eral in co m e ta x l iabi li ti es can no t b e co ll ect edinful l. Co ns eque nt ly, pe ti ti on ers were n oten ti tl edto anoff er-i n- co m pr om is e b as edoneffe ct iv e ta x adm in is tra ti on . In an y

cas e, th e fac to rs supp orti ng su chanoff er-i n- co m pr om is e, as pro vi de d i n s ec. 3 01 .71 22 -1 (c)( 3) , Pro ced . & Adm in . Reg s., are bro ad ly sim il ar to th os e d is cu ss edth ro ug ho utth e rem ai nd er o f th is op in io n andwere u se d b y Set tl em en t Offi cer Gro pa ck
.- 22 -

[* 22 ] th e requi rem en ts of a ll ap pl ic ab le law an d a dm in is tra ti ve pro cedur e were m etan d tha t s he de te rm in edth atth e le vy app ro pr ia te ly bal an cedth e n eedfor effi ci en t co ll ect io n o f ta xe s wi th pe ti ti on ers ’ co nc ernth atth e co ll ect io n a ct io n b e no m or e in tru si ve th anne ces sary . W e h av e n o re as on to do ub t the tru th fu ln es s o f th es e st at em en ts . In s um , we are s at is fie d tha t the m an da te s o f se ct io n 6 33 0( c)(1 )
an d (3 ) have be enm et . To re fle ctth e fo reg oi ng , Deci si on wil l b e en te red fo r res po nd en t.