Tax Court in Brief | Serna v. Commissioner | Collection Due Process, Offer in Compromise, and Hardship

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Tax Litigation:  The Week of June 27th, 2022, through July 1st, 2022

Serna v Commissioner, T.C. Memo. 2022-66 | June 27, 2022 | Urda, J.| Dkt. No. 13202-19L


Short Summary: In this collection due process (CDP) case Alejandro Serna sought review pursuant to sections 63201 and 6330 of a determination by the IRS Office of Appeals upholding the filing of a notice of federal tax lien (NFTL) with respect to an unpaid federal income tax liability for Serna’s 2016 tax year. Serna earned $38,990 in wages in 2016. He also received during that year a retirement distribution of $322,970. Serna used a portion of the funds to buy a home for his estranged wife and four children. Based on his late-filed 2016 federal income tax return, the IRS assessed the tax reported, as well as interest and penalties for the late filing (approx. total, $70,000). The IRS sent Serna a notice and demand for payment. In response Serna submitted an offer in compromise (OIC), proposing to settle the liability for $10,000 based on doubt as to collectability. Serna’s OIC was assigned to an appeals officer who analyzed his assets, income, and liabilities. The IRS rejected the OIC on the grounds that (1) his tax liabilities were less than his reasonable collection potential and (2) the special circumstances Serna noted did not warrant acceptance. Serna appealed the OIC rejection, asserting—as he did before—that the OIC qualified for acceptance because two of his four children suffered from developmental disabilities and that the house was essential to them. The IRS issued a notice of NFTL. Serna requested a CDP hearing, again on grounds relating to his children’s medical challenges. Later, Serna submitted his 2018 return, which claimed only one of his sons as a dependent. On September 12, 2019, the settlement officer issued to Serna both a rejection memorandum relating to his appeal and a notice of determination sustaining the NFTL filing. The IRS informed Serna that the account would be placed in currently-not-collectible status.  The settlement officer decided, however, that rejection was appropriate because Serna had sufficient equity ($152,000) to fully pay his liability. No information warranted the withdrawal of the NTFL filing, but the case—based on additional expenses of Serna—nonetheless was returned “for no further action.”

Key Issues:

  • Whether the Office of Appeals abused its discretion in rejecting Serna’s OIC of $10,000, which was premised upon the particular hardship that the lien would work on Serna’s children.

Primary Holdings:

  • The Office of Appeals did not abuse its discretion either in rejecting the OIC or in sustaining the NFTL filing. Nothing in the record justified disturbing the settlement offer’s conclusion that the IRS could collect more than the $10,000 OIC without imposing economic hardship. While the Tax Court may have reached a different result, that does not justify a finding of an abuse of discretion.

Key Points of Law:

  • Abuse of Discretion. Where the underlying tax liability is not at issue, the Tax Court reviews the settlement officer’s decision for abuse of discretion. Sego v. Commissioner, 114 T.C. 604, 610 (2000); Goza v. Commissioner, 114 T.C. 176, 182 (2000). The Tax Court must uphold the settlement officer’s determination unless it is arbitrary, capricious, or without sound basis in fact or law. See Murphy v. Commissioner, 125 T.C. 301, 320 (2005), aff’d, 469 F.3d 27 (1st Cir. 2006). The Tax Court reviews the record to determine whether the settlement officer (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. See 26 U.S.C. § 6330(c)(3).
  • IRS Manual on Collections. The calculation of a taxpayer’s reasonable collection potential is central to the evaluation of an OIC. Churchill v. Commissioner, T.C. Memo. 2011-182, 2011 WL 3300235, at *3; see Internal Revenue Manual (IRM)8.5.1.
  • Conceding Issues. If a taxpayer does not allege in his or her petition that the settlement officer failed to satisfy a requirement and has set forth no specific facts to that effect, the issue is deemed conceded. See Rule 331(b)(4); Rockafellor v. Commissioner, T.C. Memo. 2019-160, at *12.
  • Offer In Compromise. 26 U.S.C. 7122(a) authorizes the IRS to compromise an outstanding tax liability on grounds that include the promotion of effective tax administration. See Treas. Reg. § 301.7122-1(b)(3), (c)(3). The decision to accept or reject an OIC is within the IRS’s discretion. See 26 U.S.C. § 7122(a). The Tax Court will uphold that decision if the basis therefore may be reasonably discerned. See Melasky v. Commissioner, 151 T.C. 93, 106 (2018), aff’d, 803 F. App’x 732 (5th Cir. 2020); Kasper v. Commissioner, 150 T.C. 8, 24–25 (2018)
  • Effective Tax Administration. A settlement to promote effective tax administration is justified (i) when it is determined that full collection could be achieved but would “cause the taxpayer economic hardship within the meaning of [Treas. Reg.] § 301.6343-1,” or (ii) when exceptional circumstances exist such that collection of the full liability would undermine public confidence that the tax laws are being administered in a fair and equitable manner. See Reg. § 301.7122-1(b)(3)(i), (ii).
  • Economic Hardship. “An offer to compromise based on economic hardship generally will be considered acceptable when, even though the tax could be collected in full, the amount offered reflects the amount the [IRS] can collect without causing the taxpayer economic hardship.” Proc. 2003-71, § 4.02(3)(a), 2003-2 C.B. 517, 517. Treasury Regulation section 301.6343-1(b)(4) defines economic hardship as the inability to pay reasonable basic living expenses. When making this assessment, a settlement officer may take into account the taxpayer’s use of monthly income to support dependents who have no other means, the taxpayer’s ability to borrow against the equity of assets, and the taxpayer’s ability to meet basic living expenses were assets liquidated to pay outstanding tax liabilities. See Treas. Reg. § 301.7122-1(c)(3).
  • Public Policy. A compromise based on public policy or equity considerations will be justified only where, because of exceptional circumstances, collection of the full liability would undermine public confidence that the tax laws are being administered in a fair and equitable manner. See Reg. § 301.7122-1(b)(3)(ii). A taxpayer proposing a compromise on this basis must demonstrate circumstances that justify a compromise even though a similarly situated taxpayer may have paid his liability in full. Id.; see Garber v. Commissioner, T.C. Memo. 2015-14, at *14–15. The relevant regulations do not set forth a specific standard for evaluating an OIC on these grounds. See Treas. Reg. § 301.7122-1(c)(3)(iv). The Commissioner thus must weigh a taxpayer’s facts and circumstances, and he has broad discretion in deciding whether to accept such an offer. Mason v. Commissioner, T.C. Memo. 2021-64, at *17–18.
  • NFTL Protection, Not Collection. An NFTL filing principally protects the IRS’s interest in a property against other creditors. See Balsamo v. Commissioner, T.C. Memo. 2012-109, 2012 WL 1231985, at *3. The IRS must levy on that filing to collect the tax liability. See 26 U.S.C. § 6330(a), (b). When an account is placed in the “currently-not-collectible” status, no levy action can be taken. “Such status may be available where, based on the taxpayer’s assets, equity, income, and expenses, the taxpayer has no apparent ability to make payment on the outstanding tax liability.” Foley v. Commissioner, T.C. Memo. 2007-242, 2007 WL 2403732, at *2. Currently-not-collectible status does not impinge on the IRS’s entitlement “to take steps to protect IRS interests, such as by filing an NFTL.” Reynolds v. Commissioner, T.C. Memo. 2021-10, at *34.

Insights:  This case is an example of what may be deemed a hardship in the mind of the taxpayer is not a hardship that can overturn an IRS settlement officer’s decision to not accept an offer in compromise of a federal tax liability. The IRS settlement officers reviewed the documentation submitted by Serna and recognized his sensitive situation involving his estranged wife and children-in-need. But, Serna unquestionably had equity in real estate that could have been used to satisfy his tax liabilities, and he did not help his cause with the IRS or the Tax Court by presenting conflicting evidence to support his claim of non-collectability.2020). No public policy or equity grounds were presented that would convince the Tax Court that the settlement officer abused her discretion in rejecting the OIC.

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