Opinion
No. EP-03-CA-0478-FM.
July 27, 2004
REPORT AND RECOMMENDATION OF THE MAGISTRATE JUDGE
On this day came to be considered Defendant's Motion for Summary Judgment [Rec. No. 6], Plaintiff's Motion for Summary Judgment [Rec. No. 8], Plaintiff's Response to Defendant's Motion for Summary Judgment [Rec. No. 9], and Defendant's Response to Plaintiff's Motion for Summary Judgment and Reply to Plaintiff's Response [Rec. No. 12]. The motions for summary judgment were referred to United States Magistrate Judge Norbert Garney on June 7, 2004, for a Report and Recommendation. [Rec. No. 16] After due consideration, and for the reasons stated below, it is RECOMMENDED that Defendant's motion be GRANTED and that Plaintiff's motion be DENIED.
Reference to the record filings contained in the Clerk's Office file is designated as "Rec. No." followed by the docket number of the filed document.
BACKGROUND
Plaintiff was employed by E.C. Trucking, Inc. for over twenty years, including the calendar years 1998-2001. [Rec. No. 1, p. 2; Rec. No. 6, Govt. Exh. 1] The corporation, which has since declared Chapter 11 bankruptcy and is no longer in business, failed to pay payroll taxes. [Rec. No. 1, p. 2; Rec. No. 6, Govt. Exh. 4] On October 12, 2001, the Internal Revenue Service proposed a Trust Fund Recovery Penalty of $40,511.31, pursuant to 26 U.S.C. § 6672, against Plaintiff as a responsible party. [Rec. No. 9, Plaintiff's Exh. 1; Rec. No. 12, attachment] In a statement made to the I.R.S., Plaintiff claimed to be an office manager for the corporation. [Rec. No. 6, Govt. Exh. 1] In her complaint, she alleges she was a clerk/secretary. [Rec. No. 1, p. 2] The trust fund penalty represents the portion of the employment taxes withheld from the employees of the corporation, but not paid over by the corporation to the I.R.S. [Rec. No. 6, p. 1-2]
In the explanation of circumstances for her offer in compromise for economic hardship, Plaintiff stated that the corporation ceased operations in 1997. [Rec. No. 6, Govt. Exh. 4]
The penalty was assessed for periods ending September 30, 1998, December 31, 1998, March 31, 1999, September 30, 1999, December 31, 1999, September 30, 2000, and December 31, 2000. As of May 5, 2003, the aggregate unpaid balance of assessments was $40,437.83 [Rec. No. 6, Govt Exh. 7]
The notice stated, "As secretary, Ms. Siquieros was directly involved in directing the work, the workers, negotiating contracts and properly account [sic] for payment of trust fund taxes but failed to do so by preferring other creditors." [Rec. No. 9, Plaintiff's Exh. 1]
In a letter dated September 22, 2003, to the I.R.S. Appeals Division, Plaintiff's counsel asserted that Plaintiff had no independent responsibility in the corporation. [Rec. No. 9, Plaintiff's Exh. 6] He asserted that Plaintiff was made a secretary of the corporation so that she could prepare and sign checks and other paperwork. She was made an officer by the owner to handle clerical work for him. Directed by her supervisor, she prepared charges for the employees for the number of hours worked, and for the amount the supervisor decided to pay them. She was not a shareholder or director in the corporation. Moreover, counsel stated that Plaintiff is 67 years old, insolvent, and in poor health.
On May 20, 2002, Plaintiff submitted an Offer in Compromise of $100 for the reason that full payment of the amount owed would cause an economic hardship. [Rec. No. 9, Plaintiff's Exh. 8] The Compliance Division of the I.R.S. rejected her offer on October 11, 2002, stating that the offer was less than her "reasonable collection potential," and she did not explain why payment would create a hardship. The I.R.S. made a counter-offer of $12,269.70. [Rec. No. 9, Plaintiff's Exh. 9] Plaintiff rejected the counter-offer and requested an appeal. [Id., Plaintiff's Exh. 10] On November 13, 2002, the I.R.S. Appeals Office notified Plaintiff that it received her appeal, but that it needed additional financial information from her. [Id.] Further, the Settlement Officer proposed an alternative to the offer: to file a lien and report it as uncollectible for the remaining ten years of the collection statute. [Id.]
Plaintiff checked the box for "Effective Tax Administration," acknowledging that she owed the full amount, but due to her exceptional circumstances, full payment would cause economic hardship, or would be unfair and inequitable. [Rec. No. 9, Plaintiff's Exh. 6] Plaintiff refers to this offer as "OIC-ETA" [Rec. No. 9, Plaintiff's Exh. 12]
In a letter dated January 13, 2003, the Settlement Officer addressed Plaintiff's correspondence of December 12, 2002, concerning her "ETA" offer to compromise of $100, and advised her that it could not recommend acceptance of her offer. [Id., Plaintiff's Exh. 11] The Settlement Officer further stated in the letter that he would consider an offer of $13,814.47, and that he would recommend that the account be reported as "currently not collectible." [Id.] Therefore, the lien would be filed, but no action would be taken until significant improvement in Plaintiff's financial situation occurred, or until the collection action expired. [Id.]
See footnote 5, supra.
On May 14, 2003, the I.R.S. sent notice to Plaintiff of the Federal Tax Lien filing, and of her right to a collection due process ("CDP") hearing before the I.R.S. Appeals Office under 26 U.S.C. § 6320. [Rec. No. 1, p. 2; Rec. No. 6, Appendix #1 and Gov't Exh. 7] Plaintiff requested a "CDP" hearing. [Id.] On June 11, 2003, Plaintiff submitted an offer in compromise for $4,000 on the basis of "Doubt as to Liability." [Rec. No. 6, Govt Exh. 3] On August 20, 2003, a CDP hearing was held telephonically. [Id.]
Plaintiff checked the box "Doubt as to Liability," which means the taxpayer does not believe she owes the amount assessed. [Rec. No. 6, Govt Exh. 3] Her stated reason for challenging liability is that she was not a responsible party and did not act willfully. [Id.]
On September 15, 2003, Plaintiff requested the I.R.S. review the denial of her ETA offer, and provide a description of the evidence it had against her. [Rec. No. 9, Plaintiff's Exh. 4] In a letter dated September 18, 2003, she resubmitted her previously rejected ETA offer in compromise of $100 as a collection alternative. [Id., Plaintiff's Exh. 12] She wrote again on September 19, 2003, stating that she was resubmitting her previously rejected ETA offer, and requested the I.R.S. consider I.R.M. 5.5.5.1. et al. in determining whether to uphold the tax penalty assessment. [Id., Plaintiff's Exh. 5] In further correspondence from Plaintiff on September 22 and September 25, she questioned liability on her part due to a lack of independent authority with respect to corporate matters. [Id., Plaintiff's Exh. 6, 7]
Plaintiff attached copies of sections 5.7.5.1, 5.7.5.3, and 5.7.3.1 of the Internal Revenue Manual ("I.R.M.") to her September 19, 2003, letter.
On October 23, 2003, the I.R.S. Appeals Division issued a Notice of Determination Concerning Collection Action(s) under Section 6320 and/or 6330, rejecting her offer based on doubt as to liability, and sustaining the tax lien filing. [Rec. No. 1, Plaintiff's Exh. 3] The notice advised Plaintiff of her right to file a complaint for judicial review within thirty days.
PROCEDURAL HISTORY
Plaintiff instituted this action on November 19, 2003, seeking judicial review of the Notice of Determination. In her complaint, she challenges Defendant's determination not to accept her Offer in Compromise in settlement of her federal tax liabilities as an abuse of discretion. [Rec. No. 1] She requests the Defendant be directed to accept her offer in compromise, and further demands a jury trial. [Id.]
There is no Seventh Amendment right to a jury trial in actions against the United States, unless the right is clearly provided in the legislation creating the cause of action. See Lehman v. Nakshian, 453 U.S. 156, 164 (1981). Neither 26 U.S.C. § 6320 nor § 6330 provide for a trial by jury. See Brown Brothers Concrete, Inc. v. United States, No. 3:01-CV-1257-J-21TJC, 2002 WL 31002878 (M.D. Fla. Jul. 26, 2002). Moreover, actions pursuant to § 6330(d) have been treated as actions for administrative review, limited to the administrative record, and without the right to a jury trial. Hart, 291 F.Supp.2d at 640.
On January 16, 2004, Defendant filed an answer [Rec. No. 5] and a motion for summary judgment with supporting brief. [Rec. No. 6] On February 5, 2004, Plaintiff filed a motion for summary judgment pursuant to Rule 56 of the Federal Rules of Civil Procedure. [Rec. No. 8] Plaintiff filed a response to Defendant's motion for summary judgment on February 9, 2004. [Rec. No. 9] On February 25, 2004, Defendant filed a response to Plaintiff's motion for summary judgment and a reply to Plaintiff's response. [Rec. No. 12] The motions for summary judgment were referred to this Court on June 7, 2004, for a Report and Recommendation. [Rec. No. 16]
ISSUE
The issue for determination is whether the Internal Revenue Service abused its discretion in refusing to accept Plaintiff's offers to compromise her federal tax liability.
DISCUSSION
Some courts have construed a motion for summary judgment as a motion for judgment, seeking affirmance of the I.R.S.'s determination, because a "motion for summary judgment under Rule 56 of the Federal Rules of Civil Procedure . . . makes no procedural sense when a district court is asked to undertake judicial review of agency action." See Cavanaugh v. United States, No. 03-250, 2004 WL 880442, *1 (D.N.J. Mar. 23, 2004) (citing MRCA Information Services v. United States, 145 F. Supp.2d 194, 195 n. 3 (D. Conn. 2000); see also Olenhouse v. Commodity Credit Corp., 42 F.3d 1560, 1579-80 (10th Cir. 1994); Lodge Tower Ass'n v. Lodge Properties, Inc., 880 F.Supp. 1370, 1374 (D. Colo. 1995).
Summary judgment should be granted only where "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." FED. R. CIV. P. 56(c). The party that moves for summary judgment bears the initial burden of informing the Court of the basis for its motion, and identifying those portions of the record, which it believes demonstrate the absence of a genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 2553 (1986). However, the movant need not negate the elements of the non-movant's case. Id.; Gunaca v. State of Texas, 65 F.3d 467, 469 (5th Cir. 1995). If the moving party fails to meet this initial burden, the motion must be denied, regardless of the non-movant's response. Tubacex, Inc. v. M/V Risan, 45 F.3d 951, 954 (5th Cir. 1995).
Once the movant has met its burden, the non-movant must go beyond the pleadings and designate specific facts showing that there is a genuine issue for trial. See, e.g., Celotex, 477 U.S. at 324, 106 S.Ct. at 2553. If the non-movant fails to meet this burden, then summary judgment is appropriate. Tubacex, 45 F.3d at 954. The party opposing a properly supported motion cannot discharge his burden by resting upon the mere allegations and denials in his pleadings. See Anderson v. Liberty Lobby, 477 U.S. 242, 248-49, 106 S.Ct. 2505, 2510 (1986). Instead, the party must present affirmative evidence in order to defeat a properly supported motion for summary judgment. See id.
The Court must view facts and inferences in the light most favorable to the party opposing the motion. White v. FCI USA, Inc., 319 F.3d 672, 674 (5th Cir. 2003). A genuine factual dispute precludes a grant of summary judgment if the evidence would permit a reasonable jury to return a verdict for the non-moving party. See id. After adequate time for discovery, summary judgment is proper against a party who fails to make a showing sufficient to establish the existence of an element essential to his case and as to which he will bear the burden of proof at trial. Celotex, 477 U.S. at 322, 106 S.Ct. at 2552.
B. Collection Due Process Hearing Judicial Review under 26 §§ 6320 and 6330
Section 6320 provides that the I.R.S. cannot proceed with the collection of taxes by imposing a lien on a taxpayer's property until the taxpayer has been given notice and an opportunity for administrative review. See 26 U.S.C. § 6320. Section 6330 provides the right to a collection due process hearing. Id. at § 6330(c)(2). At the hearing, the taxpayer may raise "any relevant issue relating to the unpaid tax or the proposed levy," including challenges to the appropriateness of the collection actions, and offers of collection alternatives." Id. Collection alternatives may include offers in compromise. Id. The taxpayer may challenge the "existence or amount of the underlying tax liability" only if the taxpayer "did not otherwise have an opportunity to dispute such tax liability." Id. An issue may not be raised at the hearing if: 1) it was raised and considered at a previous hearing or other previous administrative or judicial proceeding; and 2) the person seeking to raise the issue participated meaningfully in such hearing or proceeding. Id. at § 6330(c)(4).
After the hearing, the I.R.S. Appeals Officer's determination must take into consideration the following factors: 1) the verification that the requirements of any applicable law or administrative procedure have been met; 2) the issues raised by the taxpayer; and 3) whether any proposed collection action balances the need for efficient tax collection with the legitimate concern of the person that any collection action be no more intrusive than necessary. Id. at § 6330(c)(3).
Section 6330(d) permits the taxpayer to appeal the determination by the Appeals Officer to the Tax Court, or to the United States District Court (in the event the Tax Court does not have jurisdiction of the underlying tax liability). See id. at § 6330(d); see also 26 C.F.R. § 301.6330-1(f). Because the Tax Court does not have jurisdiction with respect to employment tax liability, the district court is the proper court in which to file a complaint to contest the assessment of employment taxes. Abu-Awad v. United States, 294 F.Supp.2d 879, 886-87 (S.D. Tex. 2003); see also Cavanaugh v. United States, No. 03-250, 2004 WL 880442 at *4 (D.N.J. Mar. 23, 2004) (tax court without jurisdiction to determine taxpayer's liability for penalty imposed under § 6672); Borges v. United States, 317 F.Supp.2d 1276, 1281 (D. N.Mex. 2004). Judicial review under § 6330(d) is limited to issues properly raised and considered during the C.D.P. hearing. Borges, 317 F.Supp.2d at 1281; Clouse v. Commissioner of Internal Revenue, No. 3:03 CV 7087, 2003 WL 23223842 at *2 (N.D. Ohio Dec. 8, 2003); 26 C.F.R. § 301.6330-1(f).
Section 6330(d) does not specify the standard of review a district court should apply when reviewing Notices of Determination by the I.R.S. Appeals Office. Legislative history, however, indicates, that where the validity of the underlying tax liability is part of the appeal, courts review the determination on a de novo basis. Where the validity of the tax liability is not part of the appeal, a district court may review Notices of Determination for abuse of discretion. See Abu-Awad, 294 F.Supp.2d at 887; see also H.R. Conf. Rep. No. 105-599, at 266 (1998). When a taxpayer's appeal challenges the validity of the underlying tax liability as well as other administrative determinations, the validity of the underlying tax liability is reviewed de novo, while the other administrative decisions are reviewed under the abuse of discretion standard. See Jones v. Commissioner, 338 F.3d 463, 466 (5th Cir. 2003).
The Fifth Circuit equates the phrase "abuse of discretion" with "arbitrary and capricious," and states that an abuse necessarily occurs where an act can only be described as "clearly improper." See Abu-Awad, 294 F.Supp.2d at 892. Under the abuse of discretion standard, a determination will be affirmed unless the court determines with a "definite and firm conviction" that a clear error of judgment has been committed. Cincinnati Ins. Co. v. Byers, 151 F.3d 574, 578 (6th Cir. 1998). An abuse of discretion has also been described as "a plain error, discretion exercised to an end not justified by the evidence, a judgment that is clearly against the logic and effect of the facts as are found." Wing v. Asarco, Inc., 114 F.3d 986 (9th Cir. 1997).
Under the abuse of discretion standard, the court cannot substitute its judgment for that of the appeals officer. See Stop 26-Riverbend, Inc. v. United States, No. C2-02-0285, 2003 WL 1908747 at *1 (S.D. Ohio Mar. 12, 2003). Thus, the appeals officer's determination will be upheld if it has an adequate basis in law or fact. Id. The burden is on the taxpayer when challenging an I.R.S. collection action. Richter v. United States, No. 01CV5240, 2002 WL 31031777, *2 (C.D. Cal. Apr. 2, 2002), citing Redmond v. United States, 507 F.2d 1007, 1011-12 (5th Cir. 1975) (stating that an agency action stands unless the plaintiff can prove it should be set aside).
Actions brought pursuant to § 6330(d) have been interpreted as actions for administrative review, such that the reviewing district court is limited to the administrative record, and the parties are not entitled to discovery or a jury trial. Hart v. United States, 291 F.Supp.2d 635, 640 (N.D. Ohio 2003). Thus, this Court's review is confined to the administration record, without further discovery permitted. See id; Carroll v. United States, 217 F.Supp.2d 852, 858 (W.D. Tenn. 2002) (citing United States v. Carlo Bianchi and Co., Inc., 373 U.S. 709, 714-15, 83 S.Ct. 1409, 1413 (1963).
In reviewing the rejection of Plaintiff's offers in compromise, the court does not conduct an independent review of what would be an acceptable offer in compromise. Rather, the court only reviews whether Defendant's rejection of the OIC was arbitrary, capricious, or without sound basis in law or fact. See Woodral v. Commissioner, 112 T.C. 19, 23 (1999). Further, the Court reviews Defendant's action for abuse of discretion on the basis of the arguments and information available to the Appeals officer when the discretion was exercised. See Oyer v. Commissioner, T.C. Memo. 2003-178, citing Sego v. Commissioner, 114 T.C. 604, 610 (2000).
Section 7122(a) authorizes a compromise of a taxpayer's federal tax liability where there is doubt as to liability or collectibility, or where it would promote effective tax administration. 26 C.F.R. § 301.7122-1(b). One of the factors considered in determining whether to accept or reject an offer is whether the collection of the full liability would result in economic hardship to the taxpayer. Id. at § 301.7122-1(b)(3)(i). Economic hardship is the inability of the taxpayer to meet reasonable basic living expenses. Id. at § 301.6343-1(b)(4).
Here, both parties agree that the proper standard of review is for abuse of discretion, since the underlying tax liability is not at issue. Rather, Plaintiff asserts that the Appeals Officer abused his discretion in not accepting her offers in compromise, based on doubt as to liability and based on economic hardship. [Rec. No. 8, pp. 4, 7] Defendant posits, however, that Plaintiff did not present any evidence or argument in support of her doubt as to liability offer at the hearing. Thus, according to Defendant, the only offer at issue is that made based on economic hardship and resubmitted as a collection alternative after the CDP hearing. [Rec. No. 6, p. 3] Assuming, without deciding, that both offers in compromise are subject to review, the Court will address the rejection of each in turn, because neither presents an abuse of discretion.
1. Offer in Compromise Based on Doubt as to Liability
Under federal law, employers are required to withhold from their employees' paychecks their shares of federal social security taxes and income taxes. See 26 U.S.C. §§ 3102, 3402; Barnett v. Internal Revenue Service, 988 F.2d 1449, 1453 (5th Cir.), cert. denied, 510 U.S. 990, 114 S.Ct. 546 (1993); Sutton v. United States, 194 F.Supp.2d 559, 562 (E.D. Tex. 2001). The employer holds the withheld taxes "in trust" for the United States and must pay them over to the government. Barnett, 988 F.2d at 1453; Sutton, 194 F.Supp.2d at 562. If the employer withholds the taxes but fails to remit them, the government must credit the employees for having paid the taxes and seek the unpaid funds from the employer. Sutton, 194 F.Supp.2d at 562-63. Section 6672 (a) imposes liability for the unremitted funds on any person who is required to collect, truthfully account for, and pay over the tax, who willfully fails to do so. See 26 U.S.C. § 6672(a).
Any person facing liability under § 6672 is generally referred to as a "responsible person." See Sutton, 194 F.Supp.2d at 563 n. 2. The Fifth Circuit has taken a broad view as to who qualifies as a responsible person under § 6672. Logal v. United States, 195 F.3d 229, 232 (5th Cir. 1999); Barnett, 988 F.2d at 1454. Whether someone is a responsible person depends on the person's status, duty, and authority. Sutton, 194 F.Supp.2d at 563. Section 6672 applies to any responsible person, not just the most responsible. Id.
In the present case, Plaintiff submitted an offer to compromise her tax liability of $40,511 for $4,000, based on doubt as to her liability and now contends that Defendant abused its discretion in rejecting her offer. Defendant contends that the issue was not properly raised at the CDP hearing, and therefore, may not be raised here.
Assuming arguendo that Plaintiff did properly raise the issue, Defendant nonetheless did not abuse its discretion in rejecting her offer to compromise. Her offer based on doubt as to liability is not synonymous with a challenge to the underlying liability. Upon receiving notice of the proposed penalty assessment, she never challenged the underlying tax liability. She even states in her response to Defendant's motion for summary judgment that she never challenged the lien filing. Rather, she made an offer to compromise the liability, based on her doubt as to her own liability.
Based on the facts and information available to the Appeals Officer, Defendant did not abuse its discretion in rejecting Plaintiff's offer. In her Collection Information Statement, Plaintiff stated that she was an office manager for the corporation. [Id., Exh. 1] However, Defendant's information showed that Plaintiff was listed as a corporate Director, corporate Secretary, registered agent and incorporator with the Secretary of the State of Texas. [Rec. No. 6, Govt Exh. 7] She was present at meetings regarding taxes, giving I.R.S. notices to other officers, and working with the I.R.S. regarding payment of tax liabilities. [Id.] Defendant determined that she was responsible based on checks she had signed, working with the Revenue Officer, making "FTD's" and payments to the I.R.S., signing checks to other creditors, and being a corporate director and officer. [Id.]
In correspondence to the I.R.S., Plaintiff asserted that she was not a responsible person and did not act willfully. [Rec. No. 9, Exh. 4, 6, 7] She asserted that Eduardo Chavez, another corporate officer who was assessed liability, stated that Plaintiff had no independent responsibility in the corporation. [Id., Exh. 6] When the corporation was formed, Mr. Loya, the owner, had her placed as secretary of the corporation's records so that she could prepare and sign checks and other paperwork for him. [Id.] Plaintiff further contends that she was not a shareholder or director in the corporation. [Id.] When contacted by the I.R.S., Loya instructed Plaintiff to pay $20,000 and to request an installment agreement, which she did. [Id.] While Loya hired employees and supervised the work, he instructed Plaintiff each week to prepare charges for the employees for the hours worked and the amount he decided to pay them. [Id.] Plaintiff further asserted that she was not present at the meeting when the formation documents were created, and was not an investor or incorporator of the corporation. [Id., Exh. 7]
Factors to consider as indicia of responsible person status include whether the person:
1. is an officer or member of the board of directors;
2. owns a substantial amount of stock in the company;
3. manages the day-to-day operations of the business;
4. has the authority to hire or fire employees;
5. makes decisions as to the disbursement of funds and payment of creditors; and
6. possesses the authority to sign company checks.
Barnett, 988 F.2d at 1455. No single factor is dispositive. Id.
Plaintiff meets several of these factors, sufficient to be considered a responsible person. See Moore v. United States, 465 F.2d 517 (5th Cir. 1972) (finding that corporate officers who merely followed their supervisor's instructions in issuing checks to creditors were nevertheless responsible persons). Because Plaintiff is a responsible person for tax liability under § 6672, the Appeals Officer did not abuse his discretion in rejecting her offer based on doubt as to liability.
Having found that the rejection of Plaintiff's offer in compromise for $4000, based on doubt as to liability was not an abuse of discretion, the Court will proceed to review Plaintiff's offer in compromise for $100, based on economic hardship. It appears somewhat incongruous, even disingenuous, to complain of the rejection of a hardship offer for $100, while offering to compromise for $4000.
2. Offer in Compromise Based on Economic Hardship
In reviewing an offer based on economic hardship, and determining basic reasonable living expenses, the Regulations direct the I.R.S. to consider relevant information such as the taxpayer's age, employment status and history, ability to earn, number of dependents, and any "unique circumstances" of the individual taxpayer.26 C.F.R. § 301.6343-1(b)(4). Factors supporting a determination that collection of the tax liability would cause an economic hardship include: the taxpayer is incapable of earning a living because of a medical condition or disability, and it is reasonably foreseeable that the taxpayer's resources will be exhausted providing care during the course of the condition; the taxpayer is unable to borrow against the equity in certain assets, and liquidation of those assets to pay the tax liability would render the taxpayer unable to meet basic living expenses. Id. at § 301.7122-1(c)(3). For offer purposes, assets are valued at Net Realizable Equity, which is defined as the quick sale value less amounts owed to secured lien holders with priority over the federal tax lien. Internal Revenue Manual § 5.8.5.3.1. Finally, an offer to compromise may not be rejected solely on the basis of the amount of the offer without evaluating that offer under I.R.S. policies and procedures. 26 U.S.C. § 7122(c)(3); 26 C.F.R. § 301.7122-1(f)(3).
Plaintiff submitted an offer in compromise for $100, based on economic hardship on May 20, 2002. [Rec. No. 9, Plaintiff's Exh. 8] The I.R.S. rejected that offer on October 11, 2002, stating that the amount offered was less than her reasonable collection potential, but that an offer of $12,269.70 would be considered if submitted. [Id., Plaintiff's Exh. 9] In reaching this decision, the I.R.S. stated that Plaintiff had not explained the hardship that would ensue. Further, based on the information available, the I.R.S. determined that Plaintiff's life insurance proceeds of $5651 and her individual retirement account of $5050 were eligible for tax application. However, her assets of $60,785.41 were classified as hardship producing, and thus protected.
The Asset/Equity Table worksheet used by the I.R.S. indicates that the counter-offer was derived from adding the net equity values of the life insurance proceeds, the I.R.A., and the present value of Plaintiff's future income. Further, assets including her home, vehicle, and bank accounts, valued at $60,785.41, were classified as protected. The Income and Expense Statement worksheet shows that the present value of her future income was derived from the difference between the allowed total income and expenses, projected for 48 months.
Life insurance proceeds ($3955.70) + I.R.A. ($5050.00) + Present Value Future Income ($3264) = $12,269.70.
[Total allowed income ($2847) — Total expenses allowed for taxpayer ($2779)] * 48 = $3,264.
Plaintiff did not accept the counter-offer and appealed the rejection of her offer to the Appeals Office. [Rec. No. 9, Plaintiff's Exh. 9] In November 2002, Settlement Officer Richard Wempe advised Plaintiff that he needed further financial information in order to review Plaintiff's appeal of the rejection of her offer. [Id., Plaintiff's Exh. 10] In January 2003, Wempe advised Plaintiff that he could not recommend her "ETA" offer for acceptance, as it was for less than her reasonable collection potential. [Id.] He stated, however, that he would favorably consider for acceptance an offer of $13,814.47. This figure was generated by calculating the quick sale value of her home, then the present value of that figure, and allowing for 50% doubt of collecting over the next ten years. Further, he would recommend that the account be deemed uncollectible, so that she would be unaffected by the lien, unless she attempted to sell her home or borrow against it before the collection action expires.
The Quick Sale Value is normally calculated at 80% of Fair Market Value. I.R.M. 5.8.5.3.1.
Current market value ($65,222) reduced by 20% = Quick sale value ($52,177.60). Adding 2% annual appreciation for ten years, increases the quick sale value to ($63,602.20). The present value of that amount, at 8% average annual interest rate, over ten years, is ($27,628.93). The present value reduced by 50% for doubt of collecting during the next ten years equals ($13,814.47).
The 2001 El Paso Consolidated Tax Bill indicates that Plaintiff's home was appraised at $69,669. [Rec. No. 6, Gov't Exh. 2] On the Collection Information Statement Form 433-A, signed by Plaintiff, the value of her home is reported to be $56,292. [Id., Gov't Exh. 1] This statement also reports her monthly income as $2994, and monthly expenses as $2656. [Id.]
In her ETA Offer, re-submitted in September 2003, Plaintiff described the special circumstances affecting her ability to pay the amount due. [Id., Gov't Exh. 4] She stated that she is elderly, in moderate health, living alone, and with limited assets. If her employer fails to remain in business after filing bankruptcy, she will be reliant upon her social security income. She further stated that her prospects of securing other employment are unlikely, especially given her age. (She is now 67 years old.) Additionally, she stated that she would need all of her savings and retirement "to survive." [Id.]
In the notes attached to her Collection Information Statement, Plaintiff stated that she was being treated for chronic hepatitis, diabetes, high blood pressure, and glaucoma, and that she was on a list for a liver transplant. [Rec. No. 6, Govt. Exh. 1] Also, she had extensive dental treatment required as a result of her diabetes. She has considerable medical expenses that are not covered by Medicare. Further, she stated that her ability to work may be affected if any of her conditions worsened, and that her current job was tenuous given that the company was in the process of declaring bankruptcy. [Id.] However, there are no medical records or findings of disability included in the administrative record indicating an inability to work.
In a letter dated September 2003, to the I.R.S. Appeals Division, Plaintiff further described her circumstances, stating that she was 67 years old, insolvent, and in very poor health. [Rec. No. 9, Plaintiff's Exh. 6] She had recently been diagnosed with breast cancer and undergone surgery and radiation treatments. [Id.] Other than her monthly social security income of $850, she received approximately $300 to $350 weekly from her employer. She had no medical insurance other than Medicare. Also, her primary assets are an I.R.A. of $5000 and "a small home with little QSV equity." [Id.]
Under the facts and circumstances as presented to the Appeals Officer, the decision to reject Plaintiff's offer to compromise her $40,511 tax liability for $100 was not an abuse of discretion. Her de minimus offer effectively asked forgiveness of her entire liability. See Razo v. Commissioner, T.C. Memo. 2004-101 (rejection of plaintiffs' offer to compromise $7,832 tax liability for $100 was not abuse of discretion). Defendant did allow a substantial reduction for hardship in considering Plaintiff's offer. Regardless of which counter-offer of $12,269 or $13,814 is considered appropriate, it was not unreasonable for Defendant to reject Plaintiff's offer to compromise for $100. Defendant is entitled to preserve its priority regarding Plaintiff's assets, given their value and the uncertainty of their disposition. See id. Further, Defendant's willingness to forgo collection until Plaintiff's financial situation changed or until the collection action expires was reasonable and not arbitrary or capricious. See id. Accordingly, the administrative determination should be affirmed.
CONCLUSION
Based on the foregoing, it is RECOMMENDED that Defendant's motion for summary judgment be GRANTED.
It is further RECOMMENDED that Plaintiff's motion for summary judgment be DENIED.