Originally published on Forbes.com.
It is really amazing how long you can stretch out paying anything on a tax deficiency if you have the right sort of constitution. I wrote about a Tax Court decision in the case of Bruce Hauptman not quite two years ago . At issue were income taxes from the years 1992 through 1996. There is no dispute as to the amount of the taxes. In 2007, when the IRS started getting more serious about actually collecting, the tab was around $13 million.
What Is Reasonable?
The October 2014 Tax Court decision was about whether the IRS could levy on Mr. Hauptman’s property. He was arguing that the IRS was being unreasonable in rejecting his offer in compromise. In July 2005 he had made his third offer in compromise based on doubt as to collectibility. He had offered $500,000. An IRS collection specialist had pegged Mr. Hauptman’s “reasonable collection potential” at over $3 million and asserted that he was not in current compliance with income taxes for more recent years.
In 2007, the IRS issued a notice of intent to levy. Mr. Hauptman responded with Form 12153 – Request for a Collection Due Process or Equivalent Hearing. If you played Magic the Gathering, you would think of Form 12153 as a powerful counter-spell, but I may be the only reader of tax blogs who has played Magic. Regardless, IRS Appeals made quick work of determining that the levy was justified. Mr. Hauptman appealed to Tax Court. That was December 19, 2007. If his deficiencies were kids, the oldest would have been starting high school.
Time Marches On
Nearly seven years late, the Tax Court ruled that the IRS was justified in rejecting the offer in compromise. Mr. Hauptman appealed. The Eighth Circuit agreed with the Tax Court in a decision released this week two decades give or take after the taxes were originally due.
One part of the appeal was procedural. Mr. Hauptman argued that the Tax Court had lost jurisdiction when the case was kicked back to appeals. That argument went nowhere. He also tried to argue that the IRS had been unreasonable in rejecting his $500,000 offer.
Hauptman advances several arguments to the contrary. He argues that the Office of Appeals could not reject his offer on the basis that he had not complied with his tax obligations because that reasoning would “apply to every ever made” by a delinquent taxpayer. Stated another way, if the purpose of offers-in-compromise is to allow delinquent taxpayers to settle their tax liabilities, then a taxpayer’s delinquency alone cannot provide a basis to reject his offer. But the Office of Appeals did not base its rejection on the fact that Hauptman had failed to pay income tax during the years giving rise to the proposed levy. Instead, it concluded that Hauptman had continued to violate his tax obligations by continuing to fail to report all of his income in later years and by failing to pay his liability when he had the means to do so. Hauptman’s noncompliance with his obligations provides an adequate basis to reject his offer-in-compromise.
Hauptman next challenges the Office of Appeals’s calculation of the amount of his liability that the IRS reasonably could collect from him. He claims that “all relevant assets have been liquidated at values substantially less than assigned by the IRS.” However, Hauptman does not point to any evidence in the record to support his contention. He thus fails to show that the values used by the Office of Appeals are “contrary to the evidence.” In any event, even if some of his assets were overvalued, Hauptman does not contend that his actual collection potential was only $500,000. He therefore cannot show that the Office of Appeals abused its discretion when it rejected his offer.
Remember that offer that was rejected was from nine years ago.
Is It A Good Idea?
A couple of thoughts on this. One is that you really don’t want to try this with a tax liability that you could pay without breaking yourself because you will get it to grow to that level. On the other hand, the IRS does agree that Mr. Hauptman will not be able to pay the whole tab. Once that threshold is clearly crossed, the amount of the tax liability and accumulated interest and penalties is no longer important. (See Reilly’s Tenth Law of Tax Planning). So what’s the hurry?
I reached out to Russell Haynes, an attorney who practices in the collection area, for his thoughts on this case. He wrote me.
I’m not surprised Hauptman lost, either on appeal or in the Tax Court. The Service will always reject an Offer when presented with conflicting evidence of asset valuation or other indications that there are omissions or inaccuracies on the financial statement used to evaluate the Offer. If they cannot establish what the taxpayer’s actual ability to pay is, then there is no way they can reliably decide whether the taxpayer is able to pay the offered amount, more, or less. The decision to reject an Offer under such circumstances is appropriate, will probably be sustained by Appeals, and will be nearly impossible to overturn on the “abuse of discretion” standard applied in the Tax Court. But to your original point, a taxpayer can delay collection action in such cases by continuing to appeal, although it usually does more harm than good in the end – the statute of limitations on collection is tolled during the time the Offer and any subsequent appeals are pending. Hauptman has been fighting this case for so long the statute would have run twice if he hadn’t filed at least four OICs, a Tax Court case, and appealed the Tax Court’s decision.
I’m not sure what the moral is to this story. If you keep appealing you can go a long time before you have to pay anything. Whether that is a good idea or not, you be the judge.