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.