Tax Court holds that the IRS May Reject a Taxpayer's Offer in Compromise Where He Dissipates Assets Through Day Trading Losses

The Tax Court just held in Tucker,TC Memo 2011-67 (Tax Court Memo 2011) , that a taxpayer's day-trading losses while owing taxes constituted the dissipation of assets.  Thus, the lost assets were included in his reasonable collection potential ("RCP") analysis.

The procedure of the case went as follows: Tucker owed taxes, the amounts were not in dispute, but he claimed an inability to pay. In connection with the offer, Tucker submitted a Form 656, "Offer in Compromise" (OIC).  The OIC was evaluated and IRS notified Tucker that it had determined he could pay the liability in full. Tucker requested a collection due process (CDP) hearing after a lien was filed.
The Appeals Office upheld the filing of the lien, and Tucker appealed to the Tax Court. Tucker sought review in the Tax Court, claiming Appeals abused its discretion in rejecting Tucker's OIC. The Tax court held that the Service properly included the dissipated assets in its calculation of the taxpayer's RCP.  The tax court determined that Tucker's losses from engaging in "the highly speculative and volatile activity of day trading" were not unforeseeable. He had had the cash in hand that would have paid in full the taxes, interest, and penalties that were owing, but chose rather to devote that money to a risky investment.  The tax court therefore opined that Tucker's situation was therefore of his own making.