On January 12, 2021, the Tax Court issued a Memorandum Opinion in the case of Boettcher v. Commissioner (T.C. Memo. 2021-3). The issue presented in Boettcher v. Commissioner was whether the settlement officer failed to properly consider the installment agreement requested by the petitioners.

Background to Boettcher v. Commissioner

Petitioner-husband was a news-correspondent-turned-college-professor and petitioner-wife was an attorney (likely not a tax attorney, as you’ll see).  The petitioners delinquently filed their tax returns, but, apparently, they accurately reported the amount of tax due on each return.  The trouble was, however, the petitioners’ income tax withholdings covered only a fraction of their reported liabilities.  The IRS assessed a failure to file penalty under IRC § 6651(a)(1), failure to timely pay tax penalty under IRC § 6651(a)(2) and a failure to timely pay estimated tax under IRC § 6654.

The IRS issued the petitioners a notice of intent to levy for the unpaid liabilities for the three years at issue, which notice apprised the petitioners of their right to request a CDP hearing. The petitioners timely filed a Form 12153 (Request for a Collection Due Process or Equivalent Hearing), on which they checked the box for “installment agreement.” They did not identify any other issues.

Appeals requested financial documentation including a Form 433-A, as well as their signed 2014 and 2015 tax returns. The petitioners completed the form, but they did not send either tax return. The petitioners explained that the 2014 return had only recently been mailed to the IRS, and the return for 2015 was not yet due. The letter sent by the petitioners also set out their installment agreement request, proposing to pay $1,000 per month. Not unsurprisingly, the taxpayers did not complete the Form 433-A accurately.

The settlement officer held the telephone CDP hearing as scheduled. During the hearing, the petitioners broached the proposed installment agreement, but the settlement officer took the position that they were not in compliance with their estimated tax obligations and thus ineligible for a collection alternative. The petitioners disagreed, and the settlement officer gave them a week to address this issue. Ultimately, the settlement officer concluded that the petitioners were barred from collection alternatives on two grounds. First, they had failed to file their 2015 tax return. Second, they failed to provide the financial material requested in the initial scheduling letter.

Here’s where it gets interesting. Although the settlement officer informed the petitioners of the first problem, which they remedied by sending her a copy of their 2015 return, the settlement officer failed to apprise the petitioners of the second purported defect. Soon thereafter, the settlement officer concluded that the proposed installment agreement should be rejected because the petitioners had a greater ability to pay then reflected in their proposal. In her notes, the settlement officer refused to credit the petitioners’ 433-A, stating that it was not fully completed. Ultimately, Appeals issued a notice of determination sustaining the proposed levy and rejecting the installment agreement request.

Abuse of Discretion

In a Tax Court case where the underlying tax liabilities are not at issue, the Tax Court reviews the determination of Appeals for abuse of discretion. Sego v. Commissioner, 114 T.C. 604, 610 (2000); Goza v. Commissioner, 114 T.C. 176, 182 (2000). In reviewing for abuse of discretion, the Tax Court will uphold Appeals’ determination unless it is arbitrary, capricious, or without sound basis in fact or law. See, e.g., Murphy v. Commissioner, 125 T.C. 301, 320 (2005), aff’d, 469 F.3d 27 (1st Cir. 2006); Taylor v. Commissioner, T.C. Memo. 2009-27.

Nature of CDP Hearing

At the CDP hearing a settlement officer must verify that the requirements of any applicable law or administrative procedure have been met, consider any relevant issues the taxpayers raised, and consider whether any proposed collection action balances the need for the efficient collection of taxes with the legitimate concern of the taxpayers that any collection action be no more intrusive than necessary. IRC § 6330(c)(3).  Importantly, CDP hearings are designed to be a forum for considering taxpayers’ legitimate disagreement with collection actions.  Charnas v. Commissioner, T.C. Memo. 2015-153, *12.  Therefore, it is critical to question whether a taxpayer’s concern has been properly addressed in a CDP hearing. Id.; see also Blosser v. Commissioner, T.C. Memo. 2007-323.

Analysis

It should be noted at the outset that the Tax Court found itself “unable to properly evaluate whether the settlement officer abused her discretion” based on the evidence presented to the court.

The Tax Court was “left perplexed as to the reasons for rejecting the Form 433-A,” which the settlement officer had rejected out of hand due to perceived omissions in bank information and investments, as well as business income and distributions.  With respect to the first concern, the 433-A “plainly contains bank and investment information.” As to the second concern, the settlement officer, herself, noted that the taxpayers had no income other than wages…therefore, there would be no business income or distributions to report.

The settlement officer also screwed up (my words, not the Tax Court’s) by failing to allow for standard expenses when calculating the amount that the IRS believed the taxpayers were able to pay. Had she done so, the petitioners’ monthly net income would have been $728, less than the $1,000 they were proposing to pay under the installment agreement. However, nothing on the record speaks to the settlement officer’s reasoning in rejecting the installment agreement based on the ability to pay more than offered, and the Tax Court believes that the settlement officer’s reasoning is crucial to determining whether she abused her discretion.

I’m not saying that Felicia had anything to do with this, but I am not foreclosing the possibility…

Outright Rejection of Installment Agreement = Abuse of Discretion

As noted above, the settlement officer chose to reject the petitioners’ installment agreement outright rather than giving them the opportunity either to accept the amount she believed they were able to pay or to make a counteroffer. The Tax Court has previously found an outright rejection of an installment agreement in similar circumstances to constitute an abuse of discretion. See Leslie v. Commissioner, T.C. Memo. 2016-171, at *28-*29, aff’d, 725 F. App’x 597 (9th Cir. 2018). Again, however, the record is silent, offering the Tax Court no chance to weigh the propriety of the settlement officer’s determination.

Reason for Rejection Must be Included in Notice of Determination

The IRS defended the rejection of the installment agreement on the grounds that the petitioners failed to supply the financial information requested by the settlement officer. This purported failure, however, was not cited in the notice of determination as a reason for rejection. The Tax Court notes that it cannot uphold a notice of determination on grounds other than those actually relied upon by the settlement officer. See SEC v. Chenery Corp., 332 U.S. 194, 196 (1947); Leslie, T.C. Memo. 2016-171, at *27-*28.

(T.C. Memo. 2021-4) Boettcher v. Commissioner

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