Estate of Washington v. Commissioner
T.C. Memo. 2022-4

On February 2, 2022, the Tax Court issued a Memorandum Opinion in the case of Estate of Washington v. Commissioner (T.C. Memo. 2022-4). The primary issue presented in Estate of Washington was whether offers-in-compromise presented by the estate qualified for effective tax administration consideration.

No George and Martha

Estate of Washington v. CommissionerMr. Washington (Tony) wed Mrs. Washington (Lenda) in 1981. They had one child. They divorced in 2006. Mr. Washington had unpaid income tax liabilities for 2008, 2009, 2010, 2014, and 2015. Mr. Washington died in November of 2015. Ironically, the Washingtons lived in Washington, D.C.

Three provisions of the marital settlement agreement (“MSA”) are particularly relevant to this case. They relate to (i) Mr. and Ms. Washington’s retirement plans, (ii) a life insurance policy provided to Mr. Washington through his employer, and (iii) Mr. and Ms. Washington’s intentions concerning the interaction of the MSA and the Divorce Decree.

Both parties waived any right to the other’s retirement plans. Mr. Washington agreed to designate Mrs. Washington as the beneficiary of a life insurance policy on his life for so long as he was employed, and he further agreed not to borrow against or otherwise encumber such life insurance proceeds. Finally, the parties agreed that the MSA was independent of and should not be merged in or otherwise affected by the divorce decree.

Federal Income Tax Returns for 2008, 2009, and 2010 and Mr. Washington’s Death

Mr. Washington had substantial earnings in 2008, 2009, and 2010, but he did not file timely federal income tax returns for those years. The IRS inquired about Mr. Washington’s failure to file timely returns and eventually received his late-filed returns in 2014. Although the returns showed that income tax was due for each year, Mr. Washington did not pay the outstanding balances shown on the returns. The IRS assessed the tax shown on the returns together with certain additions to tax and penalties.

The IRS entered into an installment agreement with Mr. Washington permitting him to pay the outstanding balances for these years over time. Unfortunately, about a year after entering into the installment agreement, Mr. Washington died intestate, terminating the installment agreement, and leaving a significant portion of his federal tax liabilities for 2008, 2009, and 2010 unpaid. Just over two years later, the IRS recorded a lien with respect to the outstanding liabilities for these years. The IRS timely notified the Estate of the lien filing and of the right to a CDP hearing, but the Estate did not seek a hearing.

Federal Income Tax Returns for 2014 and 2015

Mr. Washington also had substantial earnings in 2014 and 2015. He failed to file a timely return for 2014, and the Estate failed to file a timely return for 2015. In 2017, Ms. Washington, as personal representative of the Estate, caused the Estate to file Mr. Washington’s income tax returns for 2014 and 2015, but it did not pay the outstanding balances shown on those returns. As with the prior years, the IRS assessed the tax shown on the returns for 2014 and 2015, together with certain additions to tax and penalties.

Additional IRS Collection Efforts

In an effort to collect Mr. Washington’s unpaid tax, on March 30, 2018, the IRS mailed to the Estate a Notice LT11, Notice of Intent to Levy and Notice of Your Right to a Hearing. The notice advised that the IRS intended to seize the Estate’s property or rights to property to collect the outstanding balance for the Relevant Tax Years and informed the Estate of the right to request a CDP hearing. The notice showed an overall balance due of $189,593 before certain penalties and interest.

On April 9, 2018, the IRS timely received from the Estate a Form 12153, Request for a Collection Due Process or Equivalent Hearing. The request listed each of the relevant tax years as the periods at issue and checked the appropriate box to request a hearing regarding a “Proposed Levy or Actual Levy.” The request was referred to IRS Appeals.

CDP Proceedings and the Estate’s Initial Offer-in-Compromise in Estate of Washington v. Commissioner

The Estate’s CDP case was assigned to Settlement Officer Darlene Macaulay. The Estate submitted a Form 656, Offer-In-Compromise, accompanied by a Form 433-A (OIC), Collection Information Statement for Wage Earners and Self-Employed Individuals. The Form 433-A (OIC) and bank statements attached to it indicated that the Estate owned a Bank of America account with a value of $34,570. The Estate offered $10,000 to settle the tax liability for the Relevant Tax Years. The Estate stated that the basis for its offer was “Doubt as to Collectibility—I do not have enough assets and income to pay the full amount.” The “Explanation of Circumstances” section of the Form 656 was, rather conspicuously, left blank.

Washington Assignment
Fighting words…

The Estate provided additional documentation to assist in the evaluation of its offer-in-compromise. Ultimately, the IRS notified the Estate that it had reached a preliminary decision to reject the Estate’s $10,000 offer because it calculated the Estate’s reasonable collection potential as far exceeding its offer. The determination was largely based on the balance of Mr. Washington’s IRC § 401(k) account at the time of his death (approximately $148,000) and the fact that the allowable expenses (that is, the expenses with priority over the federal tax liability) did not reduce the reasonable collection potential to the amount the Estate offered.

After further communication between the Estate’s counsel and Macaulay, the Estate’s CDP case was transferred from Settlement Officer Macaulay to Settlement Officer Steven Lerner. In October 2019, Lerner held the Estate’s CDP hearing. The Estate offered arguments in support of its position but declined to increase its offer.

Shortly thereafter, Lerner issued a notice of determination sustaining the notice of intent to levy and the rejection of the Estate’s offer. Lerner noted that the Estate had not challenged either the amount or the existence of the underlying tax liability, and that the Estate’s counsel had proposed no collection alternatives except for the $10,000 offer. As before, Lerner relied on the large balance of the IRC § 401(k) account at the time of Mr. Washington’s death and the expenses he thought allowable. Weighing the offer, Lerner found it to be inadequate.

The Estate timely petitioned the Tax Court Court for review of IRS Appeals’ determination. In its petition, the Estate alleged that the $10,000 offer was erroneously rejected because, in its view, the disbursements that IRS Appeals considered nonpriority expenses in fact had priority over the Estate’s unpaid federal tax liability. The Estate also cited “other reasons,” which, once again, rather conspicuously, were not specified.

The Second Offer-In-Compromise

The Estate’s submitted a revised Form 433-A (OIC) indicated that the Estate’s assets consisted of a Bank of America account with a value of $24,990. The Estate increased its offer-in-compromise amount from $10,000 to $23,990, reflecting the value of the bank account less $1,000. As in the initial Form 656, the Estate indicated the reason for the offer was “Doubt as to Collectibility—I do not have enough assets and income to pay the full amount.” But, unlike the initial form, the revised form also stated in the “Explanation of Circumstances” section: “Doubt as to Collectibility with Special Circumstances / Statement of Special Circumstances with Exhibits Follows This Page.”

Washington not special
Had to be said.

Attached to the Estate’s Form 656 was a “Supplemental Statement of Special Circumstances” that purported to show why the Estate’s $23,990 offer should be accepted. In general, the Supplemental Statement of Special Circumstances asserted that there were claims and expenses of $230,768 having priority over the Estate’s unpaid federal tax liability, including an “Unsatisfied Judgment debt” of $100,000 the Estate owed to Ms. Washington. The Supplemental Statement of Special Circumstances stated that because the amount of priority claims (i.e., $230,768) exceeded the total assets of the Estate available for distribution (i.e., $203,802), the $23,990 offer was reasonable.

On remand, the Estate’s case was assigned to Appeals Officer Charles Duff, who held a hearing with the Estate’s counsel in March 2021. After reviewing the supplemental materials forwarded to IRS Appeals, Duff determined that the beginning value of the Estate was $212,267. He also determined that only a portion of the Estate’s expenses ($91,355) was valid and senior to its unpaid federal tax liability.

These two determinations resulted in a reasonable collection potential of $120,912. Duff noted that he would not decrease the Estate’s reasonable collection potential by the value of the purported judgment debt and also declined to deduct from the Estate’s reasonable collection potential several other smaller expenses that the Estate argued were senior to the unpaid tax liability.

Offers-In-Compromise (in a Nutshell)

In general terms, an offer-in-compromise is an agreement between the Government and a taxpayer to settle a tax liability for less than the full amount owed.[1] Offers-in-compromise are authorized by IRC § 7122(a), which provides that the IRS may compromise any civil or criminal case arising under the internal revenue laws. The decision whether to accept or reject an offer-in-compromise is left to the IRS’s discretion.[2] The IRS may accept an offer-in-compromise on three grounds: (1) doubt as to liability (not at issue in this case), (2) doubt as to collectibility, and (3) the promotion of effective tax administration.[3]

Doubt as to Collectibility
Washington Doubts
As did the Tax Court

The IRS may accept an offer-in-compromise on a “doubt as to collectibility” basis when the taxpayer’s assets and income render full collection unlikely.[4] Conversely, it may reject an offer-in-compromise when the taxpayer’s reasonable collection potential exceeds the amount it proposed to pay.[5] In general, any offer substantially below the taxpayer’s reasonable collection potential is rejected unless special circumstances justify acceptance of the offer.[6] Special circumstances include:

                  1. circumstances demonstrating that the taxpayer would suffer economic hardship if the IRS were to collect from him an amount equal to the reasonable collection potential of the case; or
                  2. if no demonstration of such suffering can be made, circumstances justifying acceptance of an amount less than the reasonable collection potential of the case based on public policy or equity considerations.[7]

Compelling public policy or equity considerations exist when, 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.[8]

Promotion of Effective Tax Administration

When a taxpayer’s reasonable collection potential exceeds the taxpayer’s liability—i.e., when the IRS determines that the taxpayer is able to pay the liability in full—doubt as to collectibility is not a ground for compromise. However, the IRS may still enter into a compromise on effective tax administration grounds if

  1. collection of the full liability would cause the taxpayer economic hardship; or
  2. exceptional circumstances exist so that collection of the full liability would undermine public confidence that the tax laws are being administered in a fair and equitable manner.[9]

No compromise is permitted for effective tax administration reasons if compromise of the liability would undermine compliance by taxpayers with the tax laws.[10]

The Estate’s Hail Mary

The IRM provides that a specialized unit in the Austin, Texas appeals office considers only offers-in-compromise based on effective tax administration—specifically, effective tax administration offers referred to as “non-economic hardship effective tax administration” offers.[11] These are effective tax administration cases in which the taxpayer’s liability could be collected in full without economic hardship, but the taxpayer can nonetheless demonstrate that a compelling public policy or equity issue provides a sufficient basis for compromise.[12]

Unfortunately for the Estate, the Tax Court found that neither of the Estate’s offers qualified for consideration as an offer-in-compromise based on effective tax administration, which consideration is available only when the taxpayer is able to pay the balance in full.[13] In the present matter, A.O. Duff determined that the Estate could not pay the outstanding liability in full. (The Estate conceded as much at the hearing.) Accordingly, under the regulations and the IRM provisions on which the Estate relies, the Estate’s offer did not qualify for effective tax administration consideration and referral to the Austin Office would not have been appropriate.

Ms. Washington’s Status as a Judgment Lien Creditor

The Estate’s primary argument hinges on whether Duff made an error of law in refusing to recognize Ms. Washington as a judgment lien creditor of the Estate. Judgment lien creditors who obtain their judgments before a notice of federal tax lien is properly filed and meet certain other requirements take priority over the United States.[14] Accordingly, a taxpayer’s reasonable collection potential is reduced by amounts owed to such judgment lien creditors.[15] The Tax Court saw no error in Duff’s determination.

Whether an individual is a judgment lien creditor with priority over a federal tax lien is a question of federal law.[16] As relevant here, under the terms of the applicable regulation, to be a “judgment lien creditor” a person (1) must have a valid judgment, (2) from a court of record and competent jurisdiction, (3) for the recovery of specifically designated property or a certain sum of money.[17]

The Tax Court conceded that the Divorce Decree contains a valid Judgment and that the Superior Court of the District of Columbia is a court of record that had jurisdiction to enter the Judgment. However, the parties dispute whether the Judgment provides for Ms. Washington to recover specifically designated property or a certain sum of money. The Estate maintains that it does. The Tax Court “conclude[d] that the Estate’s position lacks merit.”

The Judgment states simply that Ms. Washington is awarded a divorce and that the superior court retains jurisdiction for the entry of an appropriate retirement order. It does not refer to any specific property or sum of money owed to Ms. Washington. Nor does it incorporate by reference any other document addressing such rights. In short, the Judgment on its face offers no support for the Estate’s argument that Ms. Washington is a judgment lien creditor.[18]

For the Estate to prevail, the Divorce Decree must have provided a judgment either (1) “for the recovery of specifically designated property” or (2) “for a certain sum of money.”[19]

It is not altogether clear on which of these two alternatives the Estate relies, but it is clear that neither one produces the Estate’s desired result.

Washington Stings

(T.C. Memo. 2022-4) Washington v. Commissioner


  1. See I.R.C. § 7122(a); Treas. Reg. § 301.7122-1(a); IRM pt.
  2. Fargo v. Commissioner, 447 F.3d 706, 712 (9th Cir. 2006), aff’g T.C. Memo. 2004-13; see also Treas. Reg. § 301.7122-1(c)(1).
  3. See Treas. Reg. § 301.7122-1(b).
  4. Treas. Reg. § 301.7122-1(b)(2).
  5. See Johnson v. Commissioner, 136 T.C. 475, 486 (2011), aff’d, 502 F. App’x 1 (D.C. Cir. 2013).
  6. See Gustashaw v. Commissioner, T.C. Memo. 2018-215, at *15-16; Mack v. Commissioner, T.C. Memo. 2018-54, at *10; Rev. Proc. 2003-71, § 4.02(2).
  7. Murphy v. Commissioner, 125 T.C. 301, 309 (2005), aff’d, 469 F.3d 27 (1st Cir. 2006); see also IRM pt. (May 10, 2013).
  8. See Treas. Reg. § 301.7122-1(b)(3)(ii); see also Murphy, 125 T.C. at 309; IRM pt.
  9. Treas. Reg. § 301.7122-1(b)(3)(i) and (ii).
  10. Treas. Reg. § 301.7122-1(b)(3)(iii).
  11. See, e.g., IRM; IRM pt.
  12. See IRM pt. and (2); see also IRM pt., Ex. 8 (noting that IRS Appeals should contact the Austin Office if “the taxpayer raises issues involving [Effective Tax Administration] Public Policy”).
  13. Murphy, 125 T.C. at 320 (Treas. Reg. § 301.7122-1(b)(3)(ii) “makes the ability to make full payment a precondition to any offer in compromise based on effective tax administration.”); see also IRM pt. (stating that “unless [the taxpayer] ha[s] the ability to full[y] pay the liability, the offer would not meet the legal standard for [effective tax administration] consideration”).
  14. See IRC § 6323(a); Treas. Reg. § 301.6323(h)-1(g).
  15. See IRM pt.; IRM pt.
  16. See In re Charco, Inc., 432 F.3d 300, 304 (4th Cir. 2005) (citing Aquilino v. United States, 363 U.S. 509, 514 (1960)); see also United States v. McDermott, 507 U.S. 447, 449-50 (1993).
  17. See Treas. Reg. § 301.6323(h)-1(g).
  18. See Travelers Indem. Co. v. Bailey, 557 U.S. 137, 150-51 (2009) (stating that a court should enforce a court order “according to its unambiguous terms”).
  19. See Treas. Reg. § 301.6323(h)-1(g).
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