Opinion
7274-19L
06-07-2022
MICHAEL E. HAVENNER, DECEASED, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Adam B. Landy Special Trial Judge.
On November 20, 2020, both petitioner and respondent filed cross-motions for summary judgment. The motions by the parties and the record raise questions as to the effect of the August 8, 2012, judgment against petitioner in favor of Severn Savings Bank on petitioner's net realizable equity and reasonable collection potential for purposes of the submitted offer in compromise.
Facts
The factual statements below are made for the purpose of discussion. They are not necessarily the findings of fact that will be made by the Court if a written report is filed pursuant to section 7459.
Unless otherwise indicated, all statutory references are to the Internal Revenue Code, Title 26 U.S.C., in effect at all relevant times, and all regulation references are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times.
Petitioner and his non-petitioning spouse timely filed their income tax returns for taxable years 2009 and 2010 (the "Taxable Years at Issue"). Thereafter, the IRS selected petitioner's returns for examination. Following the examination, respondent proposed an adjustment to income tax and penalty for the Taxable Years at Issue and issued Notices of Deficiency. Petitioner defaulted on the Notices of Deficiency, and respondent assessed the income tax deficiency and penalty on May 5, 2014, for the Taxable Years at Issue.
On May 29, 2017, respondent issued to petitioner a Notice LT 11, Notice of Intent to Levy and Notice of Your Right to a Hearing (Levy Notice). The Levy Notice indicated that petitioner owed the IRS $44,706.08 and $31,310.65, respectively, for the Taxable Years at Issue. The Levy Notice also instructed petitioner that he may file an appeal to the proposed levy by requesting a Collection Due Process hearing (I.R.C. § 6330), using the enclosed Form 12153, Request for a Collection Due Process Hearing or Equivalent Hearing.
Petitioner completed and timely returned Form 12153 on June 26, 2017, indicating the proposed levy as his basis for requesting a hearing. He also requested an offer in compromise, on the grounds of promoting effective tax administration and doubt as to collectibility with special circumstances, as his proposed collection alternative to the proposed levy. On January 29, 2018, petitioner filed Forms 433-A (OIC) and 656 with the Settlement Officer to request the IRS's consideration of an offer in compromise. Petitioner initially offered $25,000 to compromise his income tax liability for taxable years 2008 through 2010. On Form 433-A (OIC), petitioner listed total assets of approximately $66,000 and net monthly income of approximately $207.00.
Pertinent to this discussion, petitioner listed real property, a personal residence, on Form 433-A (OIC) having no asset equity for purposes of the offer in compromise. Specifically, petitioner stated that the personal residence had a $178,437.00 encumbrance, a mortgage from Wells Fargo, on his real property and on August 8, 2012, a judgment was entered against petitioner and the non-petitioning spouse in favor of Severn Savings Bank for $633,741.70. Of note, the IRS issued to petitioner a Notice of Federal Tax Lien related to the Taxable Years at Issue on December 1, 2015. After review of the offer in compromise, respondent determined that petitioner had $174,727.00 of net equity in assets, including equity in the personal residence of $104,747.80. This inclusion of equity in assets was determined by an Offer Examiner, and the Settlement Officer concurred in the net equity analysis during the hearing. At the conclusion of the original and supplemental hearings, respondent's Settlement Officer sustained the rejection of petitioner's offer in compromise and sustained the proposed collection action.
Discussion
1. Offer in Compromise
An offer in compromise is an agreement between the IRS and a taxpayer to settle a tax liability for less than the full amount owed. See I.R.C. § 7122(a); Treas. Reg. § 301.7122-1(a); Internal Revenue Manual (IRM) 8.23.1.1(3) (April 18, 2016). Respondent has the authority to enter into either an offer in compromise based on effective tax administration or doubt as to collectibility with special circumstances when a taxpayer can establish that full collection would cause them economic hardship, or if there are compelling public policy or equity considerations. IRM 8.23.3.8 (Oct. 15, 2014). In an offer in compromise based on effective tax administration, the taxpayer does not dispute being financially capable of paying the liability in full, while in an offer in compromise based on doubt as to collectibility, a taxpayer does not have the ability to pay in full and does not dispute being capable of paying more than the amount being offered. Id.
The decision whether to accept or reject an offer-in-compromise is left to the Secretary's discretion. 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). In reviewing a Settlement Officer's determination, we do not decide for ourselves the reasonableness of the taxpayer's proposed offer. See Murphy v. Commissioner, 125 T.C. 301, 320 (2005), aff'd, 469 F.3d 27 (1st Cir. 2006). Our review instead is limited to determining whether the Settlement Officer abused her discretion-that is, whether her decision to reject petitioner's offer was arbitrary, capricious, or without sound basis in fact or law. Id.
2. Calculation of Reasonable Collection Potential and Net Realizable Equity
Reasonable collection potential (RCP) is defined as the amount that can be collected from all available means, including administrative and judicial collection remedies. IRM 5.8.4.3(2) (Jan. 18, 2018). The amount collectible from the taxpayer's net realizable equity in assets will ordinarily be included in calculating the RCP for offer purposes. IRM 5.8.4.3.1(1) (April 30, 2015). For offer purposes, assets are valued at net realizable equity. IRM 5.8.5.4.1(1) (Sept. 30, 2013). Net realizable equity is the quick sale value less amounts owed to secured lien holders with priority over the federal tax lien, if applicable, and applicable exemption amounts. Id.
Conclusion
The Court desires the parties' additional views on the effect of the August 8, 2012, judgment on the offer in compromise, and, particularly, on the following questions:
1. Whether the August 8, 2012 Severn Savings Bank judgment was a judgment against petitioner and the non-petitioning spouse in their individual capacities;
2. Whether the Severn Savings Bank judgment was secured and junior to the Wells Fargo mortgage but senior to the Notice of Federal Tax Lien filed on December 1, 2015; and
3. If Severn Savings Bank is a judgment creditor and the judgment is senior to the Notice of Federal Tax Lien, what effect, if any, do these facts have on the Settlement Officer's determination to sustain the rejection of the offer in compromise, specifically as it relates to her determination of petitioner's net realizable equity and reasonable collection potential.
Given the foregoing, it is
ORDERED that, on or before July 1, 2022, each party shall file a response addressing the effect of the Severn Savings Bank judgment on petitioner's offer in compromise and responding to the three questions posed by this Order.