Opinion
17358-22L
02-09-2023
FRANK KLEINERMAN & SUSAN KLEINERMAN, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER AND DECISION
Ronald L. Buch, Judge
In response to a notice of tax lien filing, the Kleinermans asked the Commissioner to consider an offer in compromise. They offered a mere fraction of their reasonable collection potential as calculated using the applicable standards. The Commissioner issued a notice of determination sustaining the proposed collection action. He now asks for summary judgment. The Commissioner did not abuse his discretion in denying an offer in compromise because the Kleinermans offered far less than their reasonable collection potential. We will grant the Commissioner's motion.
Background
The Commissioner commenced collection action for the Kleinermans' unpaid 2014 and 2016 federal income tax liabilities and they sought a collection hearing. The Commissioner mailed them Letter 3172, Notice of Federal Tax Lien Filing and Your Right to a Hearing under IRC 6320 for those liabilities on December 3, 2019. In response to that notice, the Kleinermans timely requested a collection hearing using Form 12153, Request for a Collection Due Process or Equivalent Hearing. In their request, they checked boxes indicating that they could not pay the balance and that they were interested in an offer in compromise. Their request was assigned to a settlement officer in the IRS Office of Appeals, who scheduled a collection hearing for February 11, 2021. The hearing was rescheduled for March 23, 2021.
The Kleinermans separately sought an offer in compromise. In March 2021, they submitted an offer in compromise to the IRS's Centralized Offer in Compromise Unit (OIC Unit) and informed the settlement officer. The settlement officer agreed to give the Kleinermans' case more time so that the OIC Unit could complete an investigation of their offer and return their case file to Appeals. The Kleinermans offered to pay $24,000 for their outstanding 2014, 2016, and 2019 liabilities, which totaled $78,606. They submitted Form 656, Offer in Compromise, on which they checked a box indicating that the reason for their offer was doubt as to collectability ("I do not have enough in assets and income to pay the full amount."). They did not check the box indicating that they had special circumstances such that paying the liability would cause hardship. They also submitted Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, on which they reported their income, assets, and living expenses. They reported monthly income of $19,000, monthly expenses totaling $17,000, and equity in assets totaling $25,100. Their disposable monthly income came out to $2,000, and they calculated a minimum offer of $24,000 based on 12 months of future income. They did not add their equity in assets to the offer amount, even though the form instructed them to do so. If they had followed the instructions, their offer would have more than doubled.
An OIC Unit offer specialist recommended that Appeals reject the offer. The specialist calculated gross monthly income of $14,358 based on a two-year average and reduced their monthly expenses to $8,946 based on the maximum amounts allowable for various expenses under 2021 IRS guidelines. The specialist's calculations indicated that the Kleinermans' disposable monthly income was $5,412. The specialist also calculated net equity in assets of $56,434 based on information from Accurint (an online database), Cook County Assessor records, lender documents, and Kelly Blue Book. The specialist determined the Kleinermans future income over the remaining collection period would total $606,144. Thus, the OIC Unit calculated that their reasonable collection potential, i.e., their future income plus their equity in assets, was $662,578. The OIC Unit preliminarily rejected the offer because the Kleinermans' reasonable collection potential exceeded their liability; the specialist determined that they could fully pay the liability in 15 months on an installment agreement using future income alone.
The settlement officer held a hearing with the Kleinermans' representative, and they discussed the offer again. The settlement officer verified the financial information in a manner similar to the OIC Unit specialist. She determined average monthly income of $14,321 based on 2021 returns and agreed to increase the amount of allowable expenses based on 2022 guidelines, which were published after the OIC Unit considered the offer. This resulted in disposable monthly income of $4,928 and a lower RCP of $608,370, but the difference was not meaningful because the Kleinermans could still fully pay the liability. The representative indicated he would follow up with the settlement officer after these communications, but never did.
The settlement officer decided to sustain the lien filing. She verified that the Commissioner satisfied all legal and procedural requirements and confirmed that the lien filing was appropriate under the circumstances. She considered the Kleinermans' proposed collection alternative but determined that it could not be accepted because they could fully pay the liability with equity in assets and future income. Finally, she determined that the lien filing was no more intrusive than necessary because the Kleinermans failed to demonstrate that the lien notice was overly intrusive or that better alternatives were available. The Commissioner mailed them a notice of determination sustaining the lien notice on June 29, 2022.
While residing in Illinois, the Kleinermans filed a petition disputing the notice of determination. In their petition, they contend that the Commissioner abused his discretion in rejecting their offer in compromise. As grounds for this contention, they allege that the OIC Unit specialist and settlement officer erroneously overvalued their equity in assets, disallowed certain expenses, failed to use current IRS guidelines to determine allowable expenses, and failed to provide calculations of gross monthly income. They do not allege special circumstances or financial hardship.
The Commissioner filed a motion for summary judgment on January 4, 2023, arguing that he did not abuse his discretion in rejecting the offer in compromise and sustaining the lien filing. The Kleinermans did not file a response.
Discussion
I. Summary Judgment Standard
The purpose of summary judgment is to expedite litigation and avoid unnecessary trials. Fla. Peach Corp. v. Commissioner, 90 T.C. 678, 681 (1988). Under Rule 121(a), either party may move for summary judgment regarding any part of the legal issues in controversy. We may grant summary judgment only if there is no genuine dispute as to any material fact. Rule 121(b); Naftel v. Commissioner, 85 T.C. 527, 528-29 (1985). The moving party bears the burden of demonstrating that there is no genuine dispute as to any material fact. Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), aff 'd, 17 F.3d 965 (7th Cir. 1994). In deciding whether to grant summary judgment, we draw factual inferences in the light most favorable to the nonmoving party. FPL Grp., Inc. & Subs. v. Commissioner, 115 T.C. 554, 559 (2000). When a motion for summary judgment is made and properly supported, the nonmoving party may not rest on mere allegations or denials, but instead must set forth specific facts showing that there is a genuine dispute for trial. Rule 121(d).
Because Mr. and Mrs. Kleinerman failed to respond to the Commissioner's motion, they did not set forth specific facts showing there is a genuine dispute for trial. However, as the nonmoving party, we draw factual inferences in their favor.
II. Standard of Review
Where the underlying liability is properly at issue in a collection case, we review the issue of underlying liability de novo. Sego v. Commissioner, 114 T.C. 604, 609-10 (2000). Where the underlying liability is not properly at issue, we review the notice of determination for an abuse of discretion. Id.at 610. The Kleinermans have not challenged their underlying liability. Accordingly, we review the Commissioner's determination for an abuse of discretion. See Giamelli v. Commissioner, 129 T.C. 107, 113-14 (2007); Magana v. Commissioner, 118 T.C. 488, 493 (2002); Goza v. Commissioner, 114 T.C. 176, 182-83 (2000).
An abuse of discretion occurs if the Commissioner exercises his discretion "arbitrarily, capriciously, or without sound basis in fact or law." Woodral v. Commissioner, 112 T.C. 19, 23 (1999). To determine whether the Commissioner abused his discretion in issuing a notice of determination, we consider whether the Commissioner: (1) properly verified that all requirements of applicable law and administrative procedure were satisfied, (2) considered any relevant issues petitioner raised, and (3) considered whether the proposed collection action is no more intrusive than necessary. See I.R.C. § 6330(c)(3). Because the Kleinermans contend in their petition that the Commissioner abused his discretion in rejecting their offer in compromise, our review will focus on the second requirement.
III. The Kleinermans' Collectability
The Commissioner may compromise a taxpayer's liability on grounds including doubt as to collectability, which the Kleinermans' assert. Murphy v. Commissioner, 125 T.C. 301, 308-09 (2005), aff 'd 469 F.3d 27 (1st Cir. 2006). Doubt as to collectability exists where a taxpayer's income and assets are less than the liability such that collection in full is unlikely. Id. at 309. Generally, IRS procedures direct the Commissioner to reject an offer that is less than the taxpayer's reasonable collection potential (the amount the Commissioner can expect to collect through "means such as administrative and judicial collection remedies") unless special circumstances justify accepting the offer. Id.; Abraham v. Commissioner, T.C. Memo. 2021-97, at *13. In the absence of special circumstances, and where the Commissioner has followed Internal Revenue Manual (IRM) guidelines to ascertain a taxpayer's reasonable collection potential, it is not an abuse of discretion to reject an offer than is less than that amount. Murphy, 125 T.C. at 321; Abraham, T.C. Memo 2021-97, at *13-14. The Commissioner did not abuse his discretion because: (1) the Kleinermans' offer was far less than their reasonable collection potential; and (2) the Commissioner followed relevant IRM guidelines for, among others: (a) verifying financial information, including gross income, see IRM pts. 5.8.5.3.1, 5.8.5.3.1.1, 5.8.5.3.1.4, and 5.8.5.7; (b) calculating future income, see IRM pts. 5.8.5.20 and 5.8.5.25; (c) determining the allowable amounts for expenses and applying the national standard expense schedules, see IRM pts. 5.8.5.22, 5.8.5.22.1, 5.8.5.22.4, and 5.8.5.26; see also Dean v. Commissioner, T.C. Memo. 2009-269, 98 T.C.M. (CCH) 488, 491-92; and (d) valuing bank accounts, motor vehicles, and real estate, see IRM pts. 5.8.5.7, 5.8.5.12, and 5.8.5.13. Further, even if we were to accept the Kleinermans' numbers (i.e., disposable monthly income of $2,000 and equity of $25,100), the result would be the same. Their offer shows that they could pay the balance in full using future disposable income within roughly 40 months, which is well within the collection period for any of the liabilities. See Murphy, 125 T.C. at 320. The Commissioner did not abuse his discretion in rejecting the Kleinermans' offer and sustaining the lien. Accordingly, it is
ORDERED that Commissioner's motion for summary judgment filed January 4, 2023, is granted. It is further
ORDERED AND DECIDED that the determination set forth in the Notice of Determination Concerning Collection Action(s) under Section 6320 and/or 6330 issued to the Kleinermans on June 29, 2022, and upon which this case is based, is sustained.