TAX COURT OPINION

Case: Ronald J. & June M. Speltz
Docket Number: 15382-03L
Judge: Cohen
Opinion Type: reported
Filed: 03/23/2005
Pages: 10

124 T.C. No. 9 . UNITED STATES TAX COURT RONALD J. AND JUNE M. SPELTZ, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No. 15382-03L. Filed March 23, 2005. Ps incurred AMT liability as a result of Ps partially paid the tax liability and exercise of incentive stock options in 2000. declined precipitously in value after the date of exercise. submitted an offer in compromise with respect unpaid balance. compromise and filed a lien on Ps' property. Held: was not an abuse of discretion to reject Ps' ,offer in compromise and to continue the lien. The IRS rejected the offer in thei·r .The stock to the It Timothy J. Carlson, for petitioners. Albert B. Kerkhove and Stuart D. Murray, for respondent. SERVED .NAR 2 3 2005 - 7 - The only real Forms 433-A and 656 have been prepared and filed with the IRS as an Offer in Compromise. estate owned by the taxpayers is their personal residence * property, and therefore, unenforceable. Such residence constitutes exempt the IRS' attempted lien is * *. Petitioners' Request for a Collection Due Process Hearing was signed by their then attorney. On February 12, 2003, a telephone conference was held between respondent's Appeals Officer Eugene H. DeBoer (DeBoer) and petitioners' attorney. On February 13, 2003, DeBoer wrote to petitioners' attorney a letter summarizing their discussion and stating the following: In regards to your question about changes to the alternative minimum tax laws. At this time there is no pending legislation that would retroactively change how the AMT was computed for 2000. Accordingly, the tax as reported appears to be correct. Neither petitioners nor their attorney responded to the February 13, 2003, letter from DeBoer. Instead, petitioners' attorney contacted their Senator and the Taxpayer Advocate Service. On August 12, 2003, a Notice of Determination Concerning Collection Action(s) Under Section 6320 and/or 6330 was sent to petitioners. The attachment to the notice explained the determination as follows: - 9 - for summary judgment. In their petition, petitioners do not allege any specific abuse of discretion with respect to the notice of determination. Instead, they refer to their communications with the Taxpayer Advocate's Office and to the office of their Senator. Discussion Section 6321 imposes a lien in favor of the United States on all property and rights to property of a person when a demand for (cid:16)042the payment of the person's taxes has been made and the person fails to pay those taxes. Section 6322 provides that such a lien arises when an assessment is made. To protect the Government's rights to recover its unpaid taxes, section 6323(a) provides that the .IRS may file a notice of Federal tax lien in order to e.stablish the priority of its claims against the taxpayer's other creditors. In the Internal Revenue Service Restructuring and Reform Act of 1998 (RRA 1998), Pub. L. 105-206, sec. 3401, 112 Stat. 746, Congress enacted sections 6320 (pertaining to liens) and 6330 (pertaining to levies) to provide protections for taxpayers in tax collection matters. Se.ction 6320 requires that the Secretary notify a person who has failed to pay a tax liability of the filing of a notice of lien under section 6323. The notice required by section 6320 must be provided not more than 5 business days after the day of the filing of the.notice of lien, SEC. 7122(c). Standards for Evaluation of Offers.-- (1) In general.--The Secretary shall 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. (2) Allowances for basic living expenses.-- (A) In general.--In prescribing guidelines under paragraph (1), shall develop and publish schedules of national and local allowances designed to provide that taxpayers entering into a compromise have an adequate means to provide for basic living expenses. the Secretary (B) U.se of schedules.--The guidelines the facts and circumstances shall provide that officers and employees of the Internal Revenue Service shall determine, on the basis of of each taxpayer, whether the use of schedules published under subparagraph (A) appropriate and shall not use the schedules to the extent such use would result in the taxpayer not having adequate means to provide för basic living expenses. the is (3) Special rules relating to treatment of offers.--The guidelines under paragraph (1) shall provide that-- (A) an officer or employee of the Internal Revenue Service shall not reject an offer-in-compromise from a low-income taxpayer solely on the basis of the offer; and the amount of (B) in the case of an offer-in- compromise which relates only to issues of liability of the taxpayer-- (i) such offer shall not be rejected solely because the Secretary is unable to locate the taxpayer's return - 13 - (A) Taxpayer is incapable of earning a living because of a long term illness, medical condition, or disability, and it is reasonably foreseeable that taxpayer's financial resources will be exhausted providing for care and support during the course of condition; the (B) Although taxpayer has certain monthly that income, providing for the care of dependents with no other means of support; and income is exhausted each month in (C) Although taxpayer has certain assets, the equity in taxpayer is unable to borrow against those assets and liquidation of outstanding tax liabilities would render the taxpayer unable to meet basic living expenses. the those assets to pay The regulation states that no compromise m.ay be entered into if such compromise of liability would undermine compliance by the taxpayer with the tax laws. Sec. 301.7122-1(b)(3)(iii), Proced. & Admin. Regs. Paragraph (c)(3)(ii) then sets forth factors that support (but are not conclusive of) a determination that a compromise would undermine compliance with the tax laws. These factors include: (A) A taxpayer who has a history of noncompliance with the filing and payment requirements of the Internal Revenue Code; (B) a taxpayer who has taken deliberate action to avoid the payment of taxes; and (C) a taxpayer who has encouraged others to refuse to comply with the tax laws. Sec.. 301.7122-1(c) (3) (ii), Proced. & Admin. Regs. The regulation continues: (iii) The following examples illustrate the types of cases that may be compromised by the Secretary, at the Secretary's discretion, under the economic hardship provisions of paragraph (b)(3)(i) of this section: - 15 - 301.7122-1(b)(3)(ii), Proced. & Admin. Regs. Some examples where a compromise is allowed for purposes of public policy and equity are: (1) A taxpayer who was hospitalized regularly for a number of years and was unable, at that time, to manage his financial affairs and (2) a taxpayer learns at audit that he was given erroneous advice and is facing additional taxes, penalties, and additions to tax. Sec. 301.7122-1(c)(3)(iv), Proced, & Admin. Regs. In addition to the regulations, detailed instructions concerning offers in compromise are contained in the Internal Revenue Manual, sections 5.8. Relevant portions are as follows: Sec. 5.8.11.2.2 (05-15-2004) Public Policy or Equity Grounds 1. Where there is no Doubt as to Liability (DATL), no the Service may Doubt as to Collectibility (DATC), and the liability could be collected in full without causing economic hardship, compromise to promote Effective Tax Administration (ETA) where compelling public policy or equity considerations identified by the taxpayer provide a sufficient basis for accepting less than full payment. Compromise is authorized on this basis only where, due to exceptional circumstances, collection in full would undermine public confidence that administered in a fair and equitable manner. Because the Service assumes that Congress imposes tax liabilities only where it determines it is fair to do so, compromise on these grounds will be rare. the tax laws are being 2. The Service recognizes that compromise on these grounds will often raise the issue of disparate treatment of in full and whose liabilities arose under substantially similar circumstances. Taxpayers seeking compromise on this basis taxpayers who can pay - 17 - the penalties now offered to compromise all and interest on terms more favorable than those contained in the prior settlement offer, arguing that TEFRA [Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. 97-248, 96 Stat. 324] the liabilities accrued in large part due to the actions of during the audit and litigation. the Tax Matters Partner is unfair and that (TMP) * * * Note: the taxpayers are the Service should In both of these examples, essentially claiming that Congress enacted unfair statutes and are arguing that use its compromise authority to rewrite those statutes based on a perception of unfairness. Compromise for that reason would not promote effective tax administration. authority under Section 7122 is not so broad as to allow the Service to disregard or override the judgments of Congress. Revenue Manual to 16,385-8.] Internal (CCH), sec. 5.8.11.2.2, at 16,385-7 [1 Administration, The compromise We need not detail in this opinion the complexities of the AMT imposed by sections 55 and 56 or the taxation of ISOs under sections 421 and 422. Petitioners do not dispute the applicability of those sections or the computations under them. The tax liability in this case was based on petitioners' reporting on their Form 1040 for 2000. Nonetheless, petitioners devote a substantial portion of their posthearing memorandum to arguing that: The Speltzes request for relief under the OIC the IRS or this Court from the unintended harm being caused them by Statute, the rote application of the AMT ISO Statute, does not in a position where Section put 7122 is undermining Congressional intent with respect to any other statute--including the AMT ISO' Statute. Rather, based on their special circumstances in their particular situation, of the rote and literal application revenue laws is imposing an impossible- the internal - 19.- adoption of the AMT. In many different contexts, literal application of the AMT has led to a perceived hardship, but challenges based on equity have been uniformly rejected. See, e.g., Alexander v. Commissioner, 72 F.3d 938 (1st Cir. 1995), affg. T.C. Memo. 1995-51; Okin v. Commissioner, 808 F.2d 1338 .(9th Cir. 1987), affg. T.C. Memo. 1985-199; Warfield v. Commissioner, 84 T.C. 179 (1985); Huntsberry v. Commissioner, 83 T.C. 742, 747-753 (1984); Prosman v. Commissioner, T.C. Memo. 1999-87; Klaassen v. Commissioner, T.C. Memo. 1998-241, affd.. without published opinion 182 F.3d 932 (10th Cir. 1999). In Kenseth v. Commissioner, 259 F.3d 881, 885 (7th Cir. 2001), a.ffg. 114 T.C. 399 (2000), the Court of Appeals for the Seventh Circuit commented: * * especially when the it is not a feasible judicial undertaking to achieve global equity in taxation * means suggested for eliminating one inequity (that which Kenseth argues is created by the alternative minimum income tax) consists of creating another inequity (differential tax of were a feasible judicial undertaking, not be a proper.one, equity in taxation being a political rather than.a jural concept. fixed and contingent treatment for purposes of that it still would And if it legal fees). * * * Most recently, in Commissioner v. Banks, 543 U.S. , 125 S.Ct. 826 (2005), the U.S. Supreme Court emphasized that the issue of the effect of the AMT on cases such as Kenseth v. Commissioner, supra, involving the deductibility of attorney's fees, has partially been addressed by Congress. We believe that here, too, the solution must be with Congress. - 23 - (2005 rev.). Because of sections 421(a) and 422, regular tax at ordinary rates that would normally be imposed on compensation is not imposed on the receipt or exercise of ISOs. See sec. 83(a), (e)(1). The offset, however, is that ISOs are treated as "tax preference items" for AMT purposes in section 56(b) (3). In addition to affecting the time of taxation, the complexity of statutes applicable to stock options involves differences between taxation at ordinary income rates and capital gains rates. See generally Luckman v. Commissioner, supra at 386-387. Accepting petitioners' position would result in nullification of a portion of the statutory scheme by administrative or judicial action. We cannot conclude that section 7122 gives the Court a license to make adjustments to complex tax laws on a case-by-case basis. Cf. Rank v. United States, 345 F.2d 337, 344-345 (5th Cir. 1965) (describing other circumstances in which "the attention of Congress was once again focused on this highly complex, if not controversial, question of employee stock options"). Moreover, we cannot conclude that it is an abuse of discretion for the Appeals officer to decline to do so. In this case, we conclude that the Appeals officer correctly applied the provisions of the regulations and of the Internal Revenue Manual, specifically those portions cautioning against granting relief based on inequity where to do so would undermine congressional intent. - 25 - petitioners' offer in compromise if the motion for summary judgment is denied. Petitioners have repudiated this suggestion and asked us to decide this case on the arguments presented. In view of petitioners' position, for purposes of this case, that they should not be required to pay any more than the amount that they offered, 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. See Rule 121(b). We are not in a position to determine the amount or duration of any installments that petitioners could or should be required to pay. The only issue before us is whether there was an abuse of discretion in refusing the offer in compromise in the amount of $4,457 and concluding that the lien filed by the IRS should remain in place. As respondent points out, any levy on particular assets of petitioners that the IRS proposes to pursue in the future will also require notice and an opportunity to be heard under section 6320 or 6330. Petitioners may submit another offer in compromise. Petitioners' income and expenses may change. We conclude, however, that there was no abuse of discretion in declining to accept petitioners' offer dated November 2, 2001, and continuing the lien in effect. Order and Decision will be entered for respondent.