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Abraham v. Commissioner (T.C. Memo. 2021-97)

On August 3, 2021, the Tax Court issued a Memorandum Opinion in the case of Abraham v. Commissioner (T.C. Memo. 2021-97). The primary issue presented in Abraham was whether the settlement officer abused its discretion in rejecting the petitioners’ offer in compromise and by not performing a bankruptcy analysis.

Abraham v. CommissionerInitial Observations about Abraham v. Commissioner

Father Abraham three wives—Hagar, Sarah, and Keteurah. Jerry Abraham had one wife. Her name was Debra.

The Returns and Failure to Pay

On their 2012-2016 returns, the Abrahams reported between $215,000 and $300,000 each year. They did not, however, fully “pay” their liabilities. The IRS assessed for each year the reported liability, an addition to tax for failure to timely pay under IRC § 6651(a)(2), an addition to tax for failure to pay estimated tax under IRC § 6654, and statutory interest.

OIC Submission and Rejection

The IRS issued a notice informing the petitioners of the filing of an NFTL with respect to the 2012-2016 tax years and apprising them of their right to request a CDP hearing pursuant to IRC § 6320. The petitioners timely submitted Form 12153 (Request for a Collection Due Process or Equivalent Hearing), on which they indicated their interest in an OIC.

The case thereafter was assigned to a settlement officer, who requested that the petitioners submit, inter alia, an OIC and supporting documentation. They did so, submitting: (1) Form 656 (Offer in Compromise)—proposing to settle their tax liabilities for $50,000 (the liabilities were closer to $200,000), (2) Form 433-A (OIC) (Collection Information Statement for Wage Earners and Self-Employed Individuals), and (3) their 2017 tax return and supporting financial documentation.

After consideration of the petitioners’ positions and conducting her own investigation into their income, expenses, and assets, the offer specialist concluded that the OIC should be rejected.

The CDP Hearing and Threat of Bankruptcy

The settlement officer concurred in the offer specialist’s analysis. She held a CDP hearing with Mr. Abraham on November 20, 2019, at which she explained that the petitioners did not qualify for an OIC because they had sufficient income and assets to pay their liabilities in full and that there was no indication of any economic hardship. The settlement officer urged an installment agreement, which Mr. Abraham abjectly rejected. After stating that he “may file bankruptcy,” Mr. Abraham sought (and received) confirmation that he could request Tax Court review of the settlement officer’s determination.

No Abuse of Discretion

IRC § 7122(a) authorizes the IRS to compromise an outstanding tax liability on grounds including doubt as to collectibility, the ground that the petitioners urged. See Treas. Reg. § 301.7122-1(b)(2). The IRS may compromise a tax liability on this basis where the taxpayer’s assets and income render full collection unlikely. Id. Conversely, the IRS may reject an OIC when the taxpayer’s reasonable collection potential (RCP) exceeds the amount he proposes to pay. See Johnson v. Commissioner, 136 T.C. 475, 486 (2011), aff’d, 502 F. App’x 1 (D.C. Cir. 2013). Generally, a settlement officer is directed to reject any offer substantially below the taxpayer’s RCP unless special circumstances justify acceptance of such an offer. See Mack v. Commissioner, T.C. Memo. 2018-54, at *10; Rev. Proc. 2003-71, § 4.02(2).

In reviewing the settlement officer’s determination, the Tax Court does not make an independent evaluation of what would be an acceptable collection alternative. See Thompson v. Commissioner, 140 T.C. 173, 179 (2013); Murphy v. Commissioner, 125 T.C. at 320; see also Randall v. Commissioner, T.C. Memo. 2018-123, at *9. Rather, the Tax Court’s review is limited to determining whether the settlement officer abused her discretion—that is, whether her decision to reject a taxpayer’s offer was arbitrary, capricious, or without sound basis in fact or law. See Thompson, 140 T.C. at 179; see also Murphy, 125 T.C. at 320. A settlement officer does not abuse her discretion when she relies on relevant Internal Revenue Manual (IRM) provisions in evaluating collection alternatives. Eichler v. Commissioner, 143 T.C. 30, 39 (2014).

A Reminder on Accidental Concessions

The petitioners did not allege in their petition, nor did they argue at any later point that the settlement officer failed to consider “whether any proposed collection action balances the need for the efficient collection of taxes with the legitimate concern of the person that any collection action be no more intrusive than necessary.” See IRC § 6330(c)(3)(C). They, thus, have conceded this issue. See Rule 331(b)(4); see also Ansley v. Commissioner, T.C. Memo. 2019-46, at *19.

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