The United States Tax Court has held that the settlement officer (SO) did not abuse discretion in rejecting offer-in-compromise-effective tax administration based on economic hardship.
The court was of the opinion that petitioners have not shown that the SO’s actions were arbitrary, capricious, or without sound basis in fact or law.
Section 6330(c)(3)(C) requires that an IRS Appeals officer consider whether the 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. SO Covey considered the proposed collection action, the Baumgardners’ outstanding balance, their ability to pay an amount greater than the OIC offer amount, and that other collection alternatives were not viable options for consideration; and she concluded that the collection action was no more intrusive than necessary. The record supports SO Covey’s conclusion, and the Court concludes that she did not abuse her discretion.
The SO Covey’s conclusion that the Baumgardners’ offer amount did not reflect the full amount that the IRS could collect from them without causing economic hardship was not an abuse of discretion. The administrative record shows that SO Covey considered their arguments regarding their current and future basic living expenses and allowed them to retain net available equity in assets of $244,599 to subsidize their negative net monthly income and pay those basic living expenses. Ultimately, she reasonably determined that their equity in assets exceeded their total tax liability such that they could fully satisfy the liability without economic hardship.
The court remarked that because SO Covey’s conclusion was not arbitrary, capricious, or without sound basis in fact or law, SO Covey did not abuse her discretion in denying their offer amount of $1,825 for an OIC based on economic hardship.
This is a collection due process (CDP) case brought pursuant to section 6330(d), in which petitioners ask this Court to review the determination by the Internal Revenue Service (IRS) Independent Office of Appeals (IRS Appeals) to sustain a Notice CP90, Intent to Seize Your Assets and Notice of Your Right to a Hearing (Levy Notice), related to an income tax liability for tax year 2013 (tax year at issue).
Petitioners argued that IRS Appeals abused its discretion in denying Ralph W. Baumgardner, Jr., and Patricia L. Baumgardner’s offer-in-compromise (OIC). Petitioners also contend that the settlement officer (SO) erred in calculating the Baumgardners’ reasonable collection potential (RCP) by (i) determining that they were not entitled to increased health care expenses, (ii) determining that they were not entitled to additional transportation expenses, (iii) not reducing the quick sale values (QSV) of their non-income-producing properties for selling costs in the revised RCP, (iv) disallowing replacement housing and utilities expenses of $2,059 if their primary residence were sold, (v) disallowing future repair and maintenance expenses for their income-producing property in calculating the revised RCP, and (vi) including the net equity of Mr. Baumgardner’s whole life insurance policy in the revised RCP.
Respondent counters that IRS Appeals did not abuse its discretion in sustaining the proposed levy because (i) the Baumgardners were not entitled to increased health care expenses because they were speculative future medical costs, (ii) they were not entitled to prospective transportation ownership costs in the evaluation of their OIC because such ownership costs are excluded where they owned the vehicles and did not have any loan payments, (iii) consistent with Internal Revenue Manual (IRM) guidance, the SO properly included the QSV unreduced by selling costs of the non-income- producing properties in the revised RCP, (iv) any prospective repair expenses should not be used to reduce the RCP because the income- producing property was excluded from the revised RCP and such expenses are speculative, and (v) the net equity of Mr. Baumgardner’s whole life insurance policy was properly included in the revised RCP because such insurance is not considered a necessary expense and because the SO determined that the equity of the insurance policy was not being used for past or current expenses and therefore would not create a hardship if liquidated.
Case Details
Case Name: Estate Of Ralph W. Baumgardner, Jr., Deceased V/S Commissioner Of Internal Revenue
Citation: T.C. Memo. 2024-80
Court: US Tax Court
Coram: Marshall, Judge
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