First Circuit Court of Appeals finds no abuse
of discretion in the I.R.S.'s rejection of O.I.C.
The
Court of Appeal for the First Circuit, in reversing the Tax Court,
determined that the Internal Revenue Service did not abuse its
discretion in rejecting a taxpayers'
offer-in-compromise (OIC). The 1st Circuit based its ruling on the fact
that the taxpayers had
failed to include in their asset disclosure trust property in which they
retained a
beneficial interest. Applying a more deferential standard in reviewing
IRS's determinations, the 1st Circuit held that IRS acted reasonably in
determining that the taxpayers were the owners of the property.
Background:
An OIC is an agreement between the IRS and a taxpayer that settles the
taxpayer's tax debt for less than the full amount owed. Pursuant to
Treasury Regulations, OIC's will only be rejected by the IRS when the
IRS
determines that no basis for compromise is present or that the offer is
unacceptable under IRS's policies and procedures. (Code Sec.
7122(d)(3)(A), Treas. Reg. § 301.7122-1(f)(3))
Facts in Dalton: The IRS sought to collect trust fund recovery penalties from the Daltons but after a collection due process (CDP)
hearing, the IRS rejected the Daltons' OIC because it failed to include in
their asset disclosures a nominee interest in trust property. The IRS determined that the
Daltons retained a beneficial interest in the trust property under a
nominee ownership theory and rejected their OIC.
In Court, the
Daltons contended that IRS's determination was an abuse of its discretion
because the Daltons did not retain a nominee interest in the trust
property after the trust was created, and thus didn't need to include
the trust property in their assets for purposes of the OIC.
Tax Court Decision: The United States Tax Court determined that the trust wasn't a nominee of the
taxpayers under Maine law so the Tax Court found that
IRS had abused its discretion in rejecting the taxpayers' offer because
it had premised that rejection on an erroneous view of the law. Dalton v. Comm., 135 TC 393 (2010).
1st Circuit decision.
The First Circuit, reversing the Tax Court's ruling, found that IRS's nominee determination was
reasonable and shouldn't be disturbed.
Preliminarily, the First Circuit concluded that the Tax Court had applied the wrong standard of review. The First Circuit held
that it was not a court's job to review IRS's CDP determinations
afresh. Rather, its job was to decide whether: (1) IRS's factual and
legal determinations were reasonable; and (2) the ultimate outcome of
the CDP proceeding constituted an abuse of IRS's wide discretion.
The
Court reasoned that the judicial review must be tailored to the purpose
of the CDP process—that is, ensuring that IRS's determinations, whether
of fact or of law, were not arbitrary. A court should set aside
determinations reached by IRS during the CDP process only if they were
unreasonable in light of the record compiled before the agency. Any more
intrusive standard of review would result in the courts inevitably
becoming involved on a daily basis with tax enforcement details that
judges were neither qualified, nor had the time, to administer. The
Court concluded that its analysis was applicable whether an IRS
determination reached during the CDP process was based on a purely
factual question, a purely legal question, or (as here) a mixed question
of fact and law.
The 1st Circuit therefore held that the IRS acted
within its discretion in refusing to accept the OIC because the evidence
before the IRS was ample to justify its conclusion that the Daltons'
valuable ownership interest in the property had to be considered
when evaluating their OIC.
Import of decision:
The 1st Circuit teaches us two things: First, failure to disclose
assets in an asset disclosure can cause the IRS to reject an OIC.
Second, the determination by the IRS will rarely be disturbed by the
Courts (at least those within the 1st Circuit.)
