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Elkins v. Commissioner (T.C. Memo. 2020-110)

On July 16, 2020, the Tax Court issued a Memorandum Opinion in the case of Elkins v. Commissioner (T.C. Memo. 2020-110). The primary issue before the court in Elkins was whether Appeals abused its discretion when it sustained the rejection of the petitioner’s offer-in-compromise (OIC) on the ground that it was not in the best interest of the Government.

Computational Adjustments to Partner’s Liabilities After Conclusion of Partnership-Level Proceeding

The petitioner stipulated to decision in a separate partnership case, which found that the partnership (of which the petitioner was a partner) was a sham. The Tax Court granted judgment in favor of the IRS based on the stipulations of the petitioner and others.

Once the decision in a partnership-level proceeding is final, the IRS is permitted to assess computational adjustments that do not require partner-level determinations against a partner without first issuing a notice of deficiency. See IRC § 6225; IRC § 6230(a)(1); Adkison v. Commissioner, 129 T.C. 97, 102 (2007), aff’d, 592 F.3d 1050 (9th Cir. 2010); Treas. Reg. § 301.6231(a)(6)-1(a).

In 2013 the IRS made computational adjustments to petitioner’s returns consistent with the Tax Court’s decision in the partnership case. After providing notice of these adjustments to Dr. Elkins, the IRS assessed against him more than $10 million in income tax deficiencies, accuracy-related penalties, and interest.

The Offer in Compromise Submission

In early 2014, the petitioner submitted a Form 656 (Offer in Compromise) to the IRS Centralized Offer in Compromise (COIC) unit proposing to settle his $10m tax debt for $17,500. In his Form 656 and a supporting statement the petitioner premised his OIC on doubt as to collectability, noting that he was 71 years old, his wife had filed for divorce, he was unemployed, and he had no substantial assets or income.

He asserted that his reasonable collection potential (RCP) was limited to $15,500, the purported value of an art collection and wine that he owned. He enclosed $3,500 with his OIC and represented that, upon acceptance, he would pay the remaining balance of $14,000 within five months.

Regarding RCP, the IRS has promulgated guidelines for the evaluation of offers. See, e.g., Churchill v. Commissioner, T.C. Memo. 2011-182 (2011). The calculation of a taxpayer’s RCP occupies a central place in those guidelines. Id.; see also IRM 5.8.5.1. A settlement officer derives the RCP from her estimate of a taxpayer’s assets and likely future income. See IRM 5.8.5.4; IRM 5.8.5.20. Likely future income, in turn, is determined by multiplying a taxpayer’s monthly disposable income (gross income minus necessary living expenses) by a certain number of months. See IRM 5.8.5.22; IRM 5.8.5.25.

The petitioner submitted with his OIC a Form 433-A (Collection Information Statement for Wage Earners and Self-Employed Individuals), which was accompanied by three months of bank statements. He reported monthly household income of $2,000 from Social Security and identified only a few personal assets: $600 held in bank accounts, a leased 2014 Audi A6 with a $630 monthly payment that started on December 30, 2013 (8 days before he submitted his OIC request), an art collection valued at $8,000, and wine valued at $7,500. The petitioner also claimed total monthly household expenses of $4,000.

The financial relationship between the petitioner and his ex-wife was very strange and incredibly intertwined. The Tax Court explains some of the relationships, obligations, and support between and betwixt the two, but it ultimately does not unravel the rats’ nest. Although the petitioner submitted a revised OIC a year later increasing the amount from $17,500 to $33,000-$36,000 (depending on the term), he did not submit a revised Form 656 or a new Form 433-A.

The IRS stumbled onto an article (thanks, Google) recounting a bankruptcy of a company in 2000, which netted the executives (including the petitioner) $60m, “most of it going to [the petitioner] himself.” The article also stated that his art collection was worth $8m.

The Rejection

The IRS rejected the OIC proposal, calculating his RCP as $71,200. The petitioner immediately offered $71,500. The IRS noted in a “rejection memorandum” that the IRS saw no evidence of financial hardship and concluded that the petitioner had structured his affairs to artificially qualify for currently-not-collectible status. The IRS noted that, even after submission of his OIC in 2014, the petitioner lived a comfortable lifestyle that afforded him surplus cash for living expenses and allowed for him to drive a luxury car, eat out regularly, and travel frequently. The IRS observed that the petitioner had “strong employment prospects” but chose not to pursue them. Finally, the IRS observed that the petitioner’s willingness to repeatedly increase his offer amount indicated that he had access to funds beyond his RCP.

The Appeal and Subsequent Rejection

The petitioner appealed the rejection, and after some very contentious back and forth between the IRS and the petitioner’s representative, the settlement officer (SO) sustained the offer specialist’s rejection on the ground that the offer was not in the best interest of the Government. The SO also cited that the petitioner’s annual income appeared to have been “structured to decrease on a yearly basis since the posting of the TEFRA assessments.”

The SO summarized that the petitioner’s actions were not wholly credible, lack financial documentation, and the offer funds are not supported by the petitioner’s current yearly income. She concluded that it was apparent that the petitioner was not acting truthfully and likely had the ability to pay a significantly larger amount on his tax debt than has been offered. The case was closed, a notice of determination was filed sustaining the NFTL and the rejection of the OIC. The petitioner timely petitioned the Tax Court for redetermination.

Through substantial legal analysis, the Tax Court came to the conclusion that Exam and Appeals had come to – the petitioner’s finances did not add up. Consequently, the Tax Court found that the SO had not abused her discretion in rejecting the OIC.

(T.C. Memo. 2020-110) Elkins v. Commissioner

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