                               T.C. Memo. 2018-215



                         UNITED STATES TAX COURT



  WILLIAM E. GUSTASHAW AND NANCY D. GUSTASHAW, Petitioners v.
        COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 23873-14L.                        Filed December 27, 2018.



      Harris L. Bonnette, Jr., for petitioners.

      Nathan M. Swingley and Timothy A. Lohrstorfer, for respondent.



            MEMORANDUM FINDINGS OF FACT AND OPINION


      BUCH, Judge: The Gustashaws filed this collection case pursuant to

section 6330(d) to challenge the Commissioner’s notice of determination

sustaining a notice of intent to levy for 2000 and 2003 Federal income tax
                                         -2-

[*2] liabilities.1 They argue that the settlement officer abused his discretion in

denying their offer-in-compromise. Additionally the Gustashaws contend that the

settlement officer erred in calculating their reasonable collection potential by

overvaluing an investment partnership, including the cash value of a life insurance

policy, and failing to properly account for the Gustashaws’ out-of-pocket health

care and vehicle expenses.

      The settlement officer did not abuse his discretion in denying the

Gustashaws’ offer-in-compromise because the Gustashaws’ reasonable collection

potential far exceeded their final offer amount. He also did not err in calculating

the values of the investment partnership and allowance for health care and vehicle

expenses. Although the settlement officer erred by including the cash value of the

life insurance policy, we find his error harmless, because after omission of the

value of the life insurance policy, the Gustashaws’ reasonable collection potential

still exceeded their final offer.




      1
       Unless otherwise indicated, all section references are to the Internal
Revenue Code at all relevant times. All monetary amounts are rounded to the
nearest dollar.
                                         -3-

[*3]                           FINDINGS OF FACT

       For a large portion of Mr. Gustashaw’s career he worked for various

companies in food and beverage operations management. Near retirement he

changed fields and became the vice president of a company in the pharmaceutical

industry. In this role Mr. Gustashaw was given stock options as part of his

compensation.

       In the late 1990s, around the time Mr. Gustashaw was retiring, the

Gustashaws’ financial adviser encouraged them to create an estate plan. As part of

this plan the Gustashaws created the Gustashaw Family Declaration of Trust, an

irrevocable trust that owns a life insurance policy insuring the lives of Mr. and

Mrs. Gustashaw. The trustees of the irrevocable trust are the Gustashaws’ sons,

and the beneficiaries are the Gustashaws’ three children. Between 1997 and 2009

the Gustashaws made $15,000 annual gifts to the irrevocable trust to fund the life

insurance premiums. Their final payments occurred in 2010 and 2011 when they

made smaller payments of $7,500.

       After retiring in 2000 Mr. Gustashaw exercised stock options and generated

$8,007,376 of income. To help minimize taxes the Gustashaws’ financial planner

suggested that they engage in a custom adjustable rate debt structure, commonly

referred to as a CARDS transaction, which they did. The Gustashaws’ returns
                                        -4-

[*4] were audited in 2003, and a notice of deficiency was issued in 2006. In the

Gustashaws’ prior proceeding in this Court, Gustashaw v. Commissioner, T.C.

Memo. 2011-195, aff’d, 696 F.3d 1124 (11th Cir. 2012), the Gustashaws conceded

deficiencies in tax and were found liable for penalties relating to their CARDS

transaction. The Gustashaws appealed, and our decision was affirmed by the U.S.

Court of Appeals for the Eleventh Circuit. The Commissioner assessed the tax

and penalties for the years in issue, and the Gustashaws made a partial payment of

$4,500,000.

      On September 11, 2012, the Commissioner issued a notice of intent to levy

for 2000 and 2003 to collect unpaid portions of the Gustashaws’ liabilities. The

Gustashaws timely requested a hearing and stated that they wanted to pursue an

installment agreement or an offer-in-compromise.

I.    Collection Hearing

      The settlement officer assigned to the Gustashaws’ hearing scheduled a

telephone conference and requested that the Gustashaws provide a completed

Form 433-A, Collection Information Statement for Wage Earners and Self-

Employed Individuals, a completed tax return for 2011, and proof of estimated tax

payments for 2012.
                                         -5-

[*5] At the collection hearing the settlement officer reviewed the Gustashaws’

Form 433-A and supporting financial information. The financial information

listed a real estate limited partnership with CHI Investments Corp. (investment

partnership) valued at $199,347 and an insurance policy owned by the irrevocable

trust valued at $169,425. They also listed vehicle ownership and operating

expenses of $985 and $785, respectively, and out-of-pocket health care expenses

of $640. The Gustashaws’ counsel informed the settlement officer that they were

in the process of submitting an offer-in-compromise.

      A.     First Offer-in-Compromise

      A few weeks later the settlement officer received the Gustashaws’ first

offer-in-compromise for $750,000 to compromise 1998 through 2003 Federal

income tax liabilities. The offer included Form 656, Offer in Compromise, Form

433-A (OIC), Collection Information Statement for Wage Earners and Self-

Employed Individuals, a supplemental statement requesting acceptance of the

offer under effective tax administration, life expectancy calculations, a copy of the

irrevocable trust instrument, and the required payment.

      They also included with their offer a letter from the investment partnership’s

president, which they used to substantiate the value of their interest. The letter

included a list of the Gustashaws’ investments “valued for custodial holding
                                          -6-

[*6] purposes at the amount of principal left in the Fund”, totaling over $400,000.

The president stated in her letter that the funds are illiquid and “[t]here is no

market for regular sale of these funds.” Despite their illiquidity the president

stated that “there is a possible secondary market to which a FINRA Broker/Dealer

may have access, however I am unaware of how to access that myself. About

three years ago one of our investors did sell their Fund holdings on this secondary

market, but I believed they received less [than] $.50 on the dollar valuation.” The

Gustashaws provided a handwritten document and supporting Schedules K-1,

Partner’s Share of Income, Deductions, Credits, etc., showing $9,767 of

distributions from the investment partnership in 2011 but provided no other

documentation substantiating its value.

      Their supplemental statement requested that the offer be considered under

effective tax administration, specifically economic hardship. They argue, among

other things, that liquidating their assets would leave them without adequate

retirement funds and “they would not have the resources to pay their necessary

living expenses”, including out-of-pocket health care expenses and vehicle

expenses.

      Finally, a copy of the irrevocable life insurance trust instrument indicated

that it was established by the Gustashaws for the benefit of their three children.
                                         -7-

[*7] The Gustashaws’ sons were appointed as trustees and pursuant to article III of

the trust instrument, it is “irrevocable and unamendable.”

      The settlement officer informed the Gustashaws that, because their

liabilities exceeded their assets and income and because of their involvement in a

tax shelter, an effective tax administration offer-in-compromise was inappropriate

and their offer would be processed as a doubt as to collectibility offer.2

      B.     Revised Offer-in-Compromise

      The Gustashaws submitted a revised offer-in-compromise in June 2014

under doubt as to collectibility with special circumstances. They argue that

because of their age and lack of employment, the Commissioner’s collection of the

full liability would leave them unable to cover basic living expenses and such a

situation constitutes an economic hardship.

      As part of their revised offer the Gustashaws included an updated financial

statement on Form 433-A (OIC) and Form 433-A. Their revised Form 433-A

(OIC) included, among other items, the investment partnership with a value of

$162,197, discounted to $129,758, vehicle operating expenses of $1,330, and out-

of-pocket health care expenses of $757. They did not include the value of the

      2
      See sec. 301.7122-1(b)(3), Proced. & Admin. Regs. (an effective tax
administration offer is appropriate only when the taxpayer’s assets and income
exceed the liability and the taxpayer is able to cover the liability in full).
                                         -8-

[*8] irrevocable life insurance trust or vehicle ownership expenses. Their revised

Form 433-A listed the value of the investment partnership as $162,197 and the

cash value of the life insurance policy in the irrevocable trust as $211,795.

Additionally they listed vehicle ownership expenses of $918 despite having zero

loan balances and no monthly payments on their vehicles, vehicle operating

expenses of $412, and out-of-pocket health care expenses of $757.

      After reviewing the Gustashaws’ documents the settlement officer inquired

about a $7,588 out-of-pocket health care expense included in the Gustashaws’

calculation. The Gustashaws informed the settlement officer that the expense

occurred as a result of Mrs. Gustashaw’s procedure to remove a benign tumor and

that she would undergo further screening in the future. The Gustashaws included

with their response Schedules A for 2012 and 2013 indicating significant medical

expenses.

      The following week the settlement officer informed the Gustashaws of his

calculations. He valued the investment partnership at $405,493, discounted at

60% for a quick sale value of $162,197, and he valued the irrevocable life

insurance trust as a dissipated asset at $230,435, discounted 20% for a quick sale

at $184,348. Additionally the settlement officer excluded vehicle ownership

expenses, allowed $644 in operating expenses, and accepted all but one of the
                                         -9-

[*9] Gustashaws’ out-of-pocket health care expenses. The settlement officer

determined that the $7,583 expense for Mrs. Gustashaw’s procedure was a one-

time expense and excluded it from his calculation. He allowed $283 for health

care expenses, which is more than the national standard.

      The Gustashaws’ counsel and the settlement officer continued their

correspondence over the summer, but during this time Mr. Gustashaw suffered a

serious leg injury that required hospitalization. This delayed negotiations, and by

August several issues in the offer calculation remained unsettled.

      Around the middle of August the Gustashaws’ counsel sent the settlement

officer a letter disputing the values assigned to the investment partnership and the

irrevocable life insurance trust and asked the settlement officer to take into

account Mr. Gustashaw’s recent leg injury. The Gustashaws argued that the

investment partnership was worthless and unmarketable. They included a

followup letter from the president of the investment partnership stating that “it is

unlikely that you could find a secondary market for sale of the funds and the

structure of the private placement memorandum does not allow for liquidation of

fund investments.” Her letter further stated that two holdings had sold on the

secondary market, but that “they sold at less than 50 cents on the dollar of

remaining principal at that time.” Finally she informed the Gustashaws that she
                                        -10-

[*10] was “not a FINRA broker or rep” and “cannot say with complete and total

certainty that [they] might not be able to find some secondary market”.

      The Gustashaws also argue that the settlement officer improperly included

the full cash value of the life insurance policy owned by the irrevocable trust.

They point out that the irrevocable trust, created in 1997, is the owner of the

policy, and although an older life insurance policy was converted into a new

policy within the trust on August 5, 2005, the life insurance policy cannot be a

dissipated asset because the notice of deficiency was not issued until almost a year

and a half later. They contend that the value of the policy should not be included

as a dissipated asset because the Gustashaws are not the owners of the policy and

the planning occurred long before their trouble with the Internal Revenue Service.

To support this position they submitted two additional documents to the settlement

officer. One of those documents was a statement from American United Life

Insurance Co. that lists “TR Gustashaw Fam Declar of TR” as the owner of the life

insurance policy, a contract date of July 22, 2005, and a cash value of $230,435.

      Finally the Gustashaws disputed the out-of-pocket heath care and vehicle

expenses that the settlement officer allowed. They argue that considering Mrs.

Gustashaw’s operation and Mr. Gustashaw’s leg injury, the settlement officer

should allow the full amount of the Gustashaws’ claimed out-of-pocket health care
                                        -11-

[*11] expenses. They further argue that, although the Gustashaws are not making

payments on their current vehicles, they will need to replace those vehicles in the

future.

      The settlement officer informed the Gustashaws that he was not able to

accept their position on the investment partnership, life insurance trust, and out-of-

pocket health care and vehicle expenses. But agreeing to an adjustment for Mr.

Gustashaw’s leg injury and for other undisputed items, the settlement officer

adjusted their reasonable collection potential to $2,300,683. Despite this

reduction the settlement officer informed the Gustashaws that he was unable to

recommend acceptance of their $1,507,413 offer. He suggested that if the

Gustashaws amended their offer to the amount he had determined to be their

reasonable collection potential, he would recommend acceptance. The following

day the Gustashaws submitted an amended offer for $1,650,000.

      The settlement officer issued a notice of determination sustaining the levy

notice on September 2, 2014. In his report the settlement officer detailed his

calculation of the Gustashaws’ reasonable collection potential and their request for

a doubt as to collectibility offer-in-compromise with special circumstances.

      The Gustashaws filed a timely petition with the Court on October 7, 2014,

while residing in Indiana. In their petition they challenge the determination as to
                                            -12-

[*12] tax years 1998 through 2003, arguing that the settlement officer “erred and

abused his discretion in not approving the petitioners’ offer in compromise made

as an alternative to enforced collection”. The Court dismissed as to all years

except 2000 and 2003 because the notice of determination was only for those

years.

II.      Trial

         The Gustashaws and the Commissioner set forth many of the same

arguments at trial that they had raised in the collection hearing. But the

Commissioner also raised one new argument at trial and on brief. He argues that

even if the Gustashaws’ reasonable collection potential is adjusted for potential

errors, the settlement officer’s rejection of the offer will still be within his

discretion because the corrected reasonable collection potential still exceeds the

Gustashaws’ final offer. He further contends that any potential miscalculations

would be harmless error because the Gustashaws’ offer and their reasonable

collection potential are too far apart.

                                          OPINION

         The question before the Court is whether the settlement officer abused his

discretion in rejecting the Gustashaws’ offer-in-compromise and sustaining the

Commissioner’s levy notice for their 2000 and 2003 Federal tax liabilities.
                                         -13-

[*13] Specifically the Gustashaws argue that the settlement officer erred in

overvaluing a partnership investment and an irrevocable life insurance trust, and

understating out-of-pocket health care and vehicle expenses.

I.     Offer-in-Compromise

       “The Secretary may compromise any civil or criminal case arising under the

internal revenue laws prior to reference to the Department of Justice”.3 The

regulations provide guidance for the acceptance of such compromises under

section 7122 and include three grounds for the compromise of a liability: (1)

doubt as to liability, (2) doubt as to collectibility, and (3) promotion of effective

tax administration.4 When a taxpayer’s liability exceeds assets and income, as is

the case here, the Secretary is authorized to accept an offer based on doubt as to

collectibility.

       When, as here, the underlying liability is not at issue, we review the

settlement officer’s determination for abuse of discretion.5 In reviewing for abuse

of discretion we do not conduct an independent review of the collection



       3
           Sec. 7122(a).
       4
           Sec. 301.7122-1(b), Proced. & Admin. Regs.
       5
     See Sego v. Commissioner, 114 T.C. 604, 610 (2000); Goza v.
Commissioner, 114 T.C. 176, 181-182 (2000).
                                         -14-

[*14] alternatives, and we do not substitute our judgment for that of the settlement

officer; we review only to determine whether the settlement officer’s decision was

arbitrary, capricious, or without sound basis in fact or law.6

      A.       Doubt as to Collectibility With Special Circumstances

      In determining a doubt as to collectibility offer the settlement officer must

determine the taxpayer’s ability to pay.7 A settlement based on a taxpayer’s ability

to pay allows the taxpayer to retain sufficient funds to cover reasonable basic

living expenses, with such expenses determined by evaluating the individual facts

and circumstances.8 These facts and circumstances include the taxpayer’s “age,

health, marital status, number and age of dependents, education or occupational

training, work experience and present and future employment status.”9 Generally

the Commissioner will reject a doubt as to collectibility offer-in-compromise if the

taxpayer’s reasonable collection potential exceeds the offer.10 A taxpayer’s

      6
       See Klein v. Commissioner, 149 T.C. __, __ (slip op. at 12) (Oct. 3, 2017);
Murphy v. Commissioner, 125 T.C. 301, 320 (2005), aff’d, 469 F.3d 27 (1st Cir.
2006).
      7
          Sec. 301.7122-1(c)(2), Proced. & Admin. Regs.
      8
          Sec. 301.7122-1(c)(2)(i), Proced. & Admin. Regs.
      9
          Internal Revenue Manual (IRM) pt. 5.8.4.3(2) (May 10, 2013).
      10
           See, e.g., Johnson v. Commissioner, 136 T.C. 475, 486 (2011), aff’d, 502
                                                                      (continued...)
                                          -15-

[*15] reasonable collection potential is the amount the Commissioner “could

collect through other means, including administrative and judicial collection

remedies.”11 A settlement officer’s rejection of an offer below the taxpayer’s

reasonable collection potential generally is not an abuse of discretion.12

      In certain cases the Commissioner “may accept an offer of less than the

total reasonable collection potential of a case if there are special circumstances.”13

Special circumstances include, as argued by the Gustashaws, “circumstances

demonstrating that the taxpayer would suffer economic hardship if the IRS were to

collect from him an amount equal to the reasonable collection potential”.14

Generally an economic hardship occurs when collection of the taxpayers’ full

collection potential leaves them unable to cover reasonable basic living




      10
        (...continued)
F. App’x 1 (D.C. Cir. 2013); Brombach v. Commissioner, T.C. Memo. 2012-265,
at *21; see also Rev. Proc. 2003-71, sec. 4.02(2), 2003-2 C.B. 517, 517.
      11
           Rev. Proc. 2003-71, sec. 4.02(2); see Murphy v. Commissioner, 125 T.C.
at 309.
      12
     See, e.g., Murphy v. Commissioner, 125 T.C. 301; McClanahan v.
Commissioner, T.C. Memo. 2008-161, 95 T.C.M. (CCH) 1625 (2008); Lemann v.
Commissioner, T.C. Memo. 2006-37.
      13
           Rev. Proc. 2003-71, sec. 4.02(2); IRM pt. 5.8.4.3(3).
      14
           Murphy v. Commissioner, 125 T.C. at 309.
                                        -16-

[*16] expenses.15 Factors indicating economic hardship include the taxpayers’

advanced age, poor health, medical catastrophe, disability, dependents with special

needs, and inability to meet basic living expenses when borrowing against equity

in the their assets.16

       When considering an offer-in-compromise based on doubt as to

collectibility with special circumstances, the settlement officer must consider

section 301.7122-1(b)(3)(iii), Proced. & Admin. Regs., which requires that he

reject an offer-in-compromise if acceptance “would undermine compliance by

taxpayers with the tax laws.”17

       The Gustashaws argue that their doubt as to collectibility offer should be

considered under special circumstances. They contend that they would suffer


       15
       Sec. 301.7122-1(b)(3)(i), Proced. & Admin. Regs.; IRM pt. 5.8.4.2 (May
10, 2013).
       16
       Sec. 301.7122-1(c)(3), Proced. & Admin. Regs.; IRM pt. 5.8.11.2.1 (Sept.
23, 2008); see McClanahan v. Commissioner, 95 T.C.M. (CCH) at 1627; Lemann
v. Commissioner, T.C. Memo. 2006-37.
       17
        Sec. 301.7122-1(b)(3)(iii), Proced. & Admin. Regs.; Rev. Proc. 2003-71,
sec. 4.02(3)(a); IRM pt. 5.8.11.2.1(8), pt. 5.8.4.2; see, e.g., Johnson v.
Commissioner, T.C. Memo. 2007-29, 93 T.C.M. (CCH) 885, 889-890 (2007),
aff’d sub nom. Keller v. Commissioner, 568 F.3d 710 (9th Cir. 2009); Lindley v.
Commissioner, T.C. Memo. 2006-229, 92 T.C.M. (CCH) 363, 366-367 (2006),
aff’d sub nom. Keller v. Commissioner, 568 F.3d 710 (9th Cir. 2009); Barnes v.
Commissioner, T.C. Memo. 2006-150, 92 T.C.M. (CCH) 31, 36-37 (2006), aff’d
sub nom. Keller v. Commissioner, 568 F.3d 710 (9th Cir. 2009).
                                         -17-

[*17] economic hardship if the Commissioner collected an amount equal to their

reasonable collection potential, leaving them unable to cover reasonable basic

living expenses because of their age and health. The Gustashaws point to Mr.

Gustashaw’s recent leg injury and Mrs. Gustashaw’s removal of a benign tumor as

factors indicating economic hardship. The Gustashaws argue that because of their

age and lack of employment and Mr. Gustashaw’s having been retired for roughly

16 years, an offer equal to their reasonable collection potential would leave them

unable to cover basic living expenses and result in economic hardship.

      The settlement officer did not abuse his discretion in failing to accept the

Gustashaws’ economic hardship argument. Contrary to cases cited by the

Gustashaws, the record is clear that the settlement officer considered the

Gustashaws’ economic hardship arguments but ultimately found them lacking.

Even if we accept the Gustashaws’ argument that they would suffer economic

hardship, we would not find that the settlement officer abused his discretion. The

Gustashaws’ liabilities are the result of participation in a tax shelter; acceptance of

the offer “would place the Government in the unenviable role of an insurer against

poor business decisions by taxpayers” and “[i]t would be particularly inappropriate
                                         -18-

[*18] for the Government to play that role here”.18 Reducing the risks associated

with tax shelters would undermine compliance with the tax laws; therefore the

settlement officer’s rejection of the offer was appropriate.19

      Because we do not substitute our judgment for that of the settlement

officer,20 and because the settlement officer’s decision was not arbitrary,

capricious, or without sound basis in fact or law,21 we find that the settlement

officer did not abuse his discretion in denying the Gustashaws’ claim for an offer-

in-compromise based on economic hardship.

      B.       The Gustashaws’ Assets

      The Gustashaws further argue that the settlement officer erred in calculating

their reasonable collection potential by overvaluing an investment partnership and

including the full cash value of a life insurance policy as a dissipated asset. They




      18
           Lindley v. Commissioner, 92 T.C.M. (CCH) at 367.
      19
     See, e.g., Johnson v. Commissioner, 93 T.C.M. (CCH) at 890; Barnes v.
Commissioner, 92 T.C.M. (CCH) at 36.
      20
     See Murphy v. Commissioner, 125 T.C. at 320; McClanahan v.
Commissioner, 95 T.C.M. (CCH) at 1628.
      21
        See Klein v. Commissioner, 149 T.C. __, __ (slip op. at 12) (Oct. 3, 2017)
(citing Murphy v. Commissioner, 125 T.C. at 320).
                                          -19-

[*19] contend that the settlement officer’s erroneous valuation was an abuse of

discretion.

               1.     Investment Partnership Value

      In considering an offer-in-compromise the Commissioner values a

taxpayer’s assets at their net realizable equity.22 Net realizable equity is the “quick

sale value (QSV) less amounts owed to secured lien holders with priority over the

federal tax lien”.23 The Commissioner generally calculates the quick sale value at

80% of the fair market value of the asset.24

      The Gustashaws’ initial Form 433-A assigned a value in the investment

partnership of $199,347, while later Forms 433-A assigned a value of $162,197

and finally $129,758 after a 20% discount. They submitted letters from the

president of the investment partnership indicating that the value of the partnership

was difficult to determine and “[t]here is no market for regular sale of these

funds.” The letters referenced sales where, to the president’s knowledge, sellers

received “$.50 on the dollar” for their interest. The Gustashaws did not provide




      22
           IRM pt. 5.8.5.4.1(1) (Sept. 30, 2013).
      23
           IRM pt. 5.8.5.4.1(1).
      24
           IRM pt. 5.8.5.4.1(3).
                                         -20-

[*20] any other evidence relating to the investment partnership’s value and argue

that it is worthless with an appropriate value of zero.

      The settlement officer did not abuse his discretion in using a 60%

discounted quick sale value for the partnership investment. The record shows that

the settlement officer used the values reported by the Gustashaws and reviewed

the accompanying documents indicating sales generating less than 50 cents on the

dollar. These documents do not conclude that the investment partnership is

worthless, only that it would be difficult to sell on the secondary market.

Additionally the president’s letter indicates that she is not a broker of these types

of deals, simply stating that any discount a buyer “would want would probably

erase a majority of the remaining value”. Finally the letters indicate a possibility

of selling the investment partnership interest on the secondary market through a

Financial Industry Regulatory Authority (FINRA) broker or dealer. Despite this

information the Gustashaws did not contact a FINRA broker and failed to produce

further documentation regarding the value of the investment partnership.

      Without any further evidence as to the investment partnership’s value the

settlement officer assigned a discount value of 60%, a discount far greater than

advised in the Internal Revenue Manual. The settlement officer’s determination of
                                         -21-

[*21] the investment partnership’s value is reasonably based on the information

provided by the Gustashaws and is not an abuse of discretion.

               2.     Life Insurance Policy

      The settlement officer included in his calculation of the Gustashaws’

reasonable collection potential a discounted cash value of the life insurance policy

held by the irrevocable life insurance trust. He included the discounted cash value

as a dissipated asset. A dissipated asset is “any asset (liquid or non-liquid) that

has been sold, transferred, or spent on non-priority items or debts and that is no

longer available to pay the tax liability.”25 But if the taxpayer can show that the

dissipated asset was “necessary for the production of income or the health and

welfare of the taxpayer or their family”, then the asset will not be included in their

reasonable collection potential.26

      The reason to include dissipated assets in a taxpayer’s reasonable collection

potential “is to deter delinquent taxpayers from wasting money that they owe and

should pay as tax.”27 While this may seem harsh because “[i]t treats a taxpayer as


      25
           Johnson v. Commissioner, 136 T.C. at 487; I.R.M. 5.8.5.18(1) (Sept. 30,
2013).
      26
           IRM pt. 5.8.5.18(1).
      27
           McAvey v. Commissioner, T.C. Memo. 2018-142, at *12 (citing Johnson
                                                                    (continued...)
                                        -22-

[*22] having money that he actually doesn’t[,] * * * not including dissipated

assets in RCP would create a perverse incentive to be profligate: A taxpayer with

a large tax debt could waste his money on nonessential goods and then plead

poverty when the taxman came.”28 Generally dissipated assets are excluded from a

taxpayer’s reasonable collection potential, but a settlement officer can look back

three years from the taxpayer’s offer date and include any dissipated assets.29

Additionally the settlement officer can include assets as dissipated assets

      where it can be shown the taxpayer sold, transferred, encumbered or
      otherwise disposed of assets in an attempt to avoid the payment of the
      tax liability or used the assets or proceeds (other than wages, salary,
      or other income) for other than the payment of items necessary for the
      production of income or the health and welfare of the taxpayer or
      their family, after the tax has been assessed or within six months prior
      to the tax assessment.[30]

The settlement officer can also include assets, because of their specific timing, that

occurred “after notification of an examination”.31




      27
      (...continued)
v. Commissioner, 136 T.C. at 486-487).
      28
           Alphson v. Commissioner, T.C. Memo. 2016-84, at *10.
      29
           IRM pt. 5.8.5.18(2).
      30
           IRM pt. 5.8.5.18(1).
      31
           IRM pt. 5.8.5.18(6).
                                        -23-

[*23] The Gustashaws made $15,000 premium payments to the life insurance

policy owned by the irrevocable trust from 1997 to 2009 and made $7,500

premium payments in 2010 and 2011. These payments were not “necessary for the

production of income or the health and welfare of the * * * [Gustashaws] or their

family”.32

       Because the Gustashaws’ returns were examined in 2003, some of the

premium payments to the irrevocable trust are dissipated assets. But the premium

payments made before the Gustashaws’ examination are not dissipated assets;

therefore the amount the settlement officer determined as a dissipated asset, the

cash surrender value of the life insurance policy, incorrectly includes the premium

payments made before the Gustashaws’ examination. While this timing

potentially affects the Gustashaws’ reasonable collection potential, a

“[d]etermination of their exact RCP would be a meaningless exercise” because the

Gustashaws’ reasonable collection potential far exceeds their final offer when any

error is corrected.33




       32
            See IRM pt. 5.8.5.18(1).
       33
        Estate of Duncan v. Commissioner, T.C. Memo. 2016-204, at *22 n.5,
aff’d, 890 F.3d 192 (5th Cir. 2018).
                                        -24-

[*24] The settlement officer erred by including the discounted value of the life

insurance policy as a dissipated asset. It is undisputed that the Gustashaws did not

have an ownership interest in the policy; it was owned by an irrevocable trust.

And we need not decide the precise extent to which some of the premium

payments may have been dissipated assets because it would be a meaningless

exercise. The exact amount of premium payments that might be includible in the

Gustashaws’ assets is immaterial because “we uphold determinations when the

taxpayer’s OIC was far less than the correct RCP.”34

      C.     The Gustashaws’ Expenses

      The Gustashaws argue that the settlement officer erred in disallowing their

out-of-pocket health care expenses and vehicle ownership and operation expenses.

They contend that the settlement officer’s failure to grant these allowances is an

abuse of discretion.




      34
       Alphson v. Commissioner, at *16-*17 (citing Carter v. Commissioner,
T.C. Memo. 2007-25, 93 T.C.M. (CCH) 861 (2007), aff’d in part, vacated in part
sub nom. Keller v. Commissioner, 568 F.3d 710 (9th Cir. 2009)).
                                             -25-

[*25]             1.    Out-of-Pocket Health Care Expenses

        A settlement officer must give full consideration to the taxpayer’s age and

health when determining allowable out-of-pocket health care expenses.35

Taxpayers claiming “more than the total allowed by the out-of-pocket health care

standard, may be allowed more than the standard if they provide documentation to

substantiate and justify the additional expenses.”36 Additionally when confronted

with special circumstances, the settlement officer must take into account any long-

term illnesses, medical conditions, disabilities, and care for dependents with

special health needs.37

        The settlement officer did not abuse his discretion in determining the

Gustashaws’ out-of-pocket health care expenses. He accepted all but one of them,

allowed their expenses to exceed the national standard, took into consideration

Mr. Gustashaw’s leg injury, and properly excluded the nonrecurring expenses of

$7,588.




        35
             IRM pt. 5.8.4.3(2), pt. 5.15.1.7(3)(b) (Oct. 2, 2012).
        36
             IRM pt. 5.15.1.8(8) (Oct. 2, 2012).
        37
        Sec. 301.7122-1(c)(3), Proced. & Admin. Regs.; see IRM pt. 5.8.4.2(4)
(“Factors establishing special circumstances under DATCSC are the same as those
considered under ETA.”).
                                           -26-

[*26] The Gustashaws argue that the one-time expense of $7,588 is representative

of the future health care expenses the Gustashaws might incur, but they provide no

support for their claim that this expense or any other health care expense will

occur in the future. Instead they rely on the argument that medical expenses

increase as people age. It is not an abuse of discretion for a settlement officer to

set aside speculative future expenses if the record does not support their

inclusion.38 The settlement officer reviewed the Gustashaws’ out-of-pocket health

care expenses and allowed all but one, an expense that the parties agree is

nonrecurring, and such action is not arbitrary or capricious.

                2.    Motor Vehicle Expenses

      A settlement officer is required to factor in taxpayers’ necessary

transportation expenses in computing their reasonable collection potential.39

Transportation expenses are necessary if “they are used by taxpayers and their

families to provide for their health and welfare and/or the production of income.”40

Transportation expenses include ownership expenses for the purchase or lease of a




      38
           Brombach v. Commissioner, at *24-*25.
      39
           IRM pt. 5.8.5.22.3 (Sept. 30, 2013), pt. 5.15.1.7(4).
      40
           IRM pt. 5.8.5.22.3(1).
                                         -27-

[*27] vehicle and operating expenses to keep the vehicle on the road.41 For

ownership expenses a taxpayer is “allowed the local standard or the amount

actually paid, whichever is less, unless the taxpayer provides documentation to

verify and substantiate that the higher expenses are necessary.”42 If a taxpayer

owns and uses a vehicle, but there is no loan or lease payment, the taxpayer is

entitled only to operating expenses.43

      The Gustashaws’ live in a community without adequate public

transportation and need their vehicles to provide for their health and welfare. This

much is clear. But because they own each of their vehicles outright, making no

payments, the settlement officer disallowed ownership expenses. The Gustashaws

argue that the settlement officer abused his discretion by not allowing the local

standard for ownership expenses. They contend that their vehicles will need

replacing in the future and that the settlement officer should adjust the allowance

to allow for their life expectancies and monthly shortfall.

      Internal Revenue Manual pt. 5.15.1.7(4)(b) is clear. Because the

Gustashaws own their vehicles outright and do not make payments, they are


      41
           IRM pt. 5.8.5.22.3(2).
      42
           IRM pt. 5.8.5.22.3(3).
      43
           IRM pt. 5.15.1.7(4)(b).
                                         -28-

[*28] entitled only to the local standard for operating expenses. The settlement

officer followed the Internal Revenue Manual and did not abuse his discretion in

disallowing the Gustashaws’ request for ownership expenses.44

II.   The Gustashaws’ Request for Remand

      The Gustashaws argue that the settlement officer’s abuse of discretion

requires a remand. They also contend that any correction of the settlement

officer’s errors requires a remand so the parties can continue negotiations. The

Commissioner disagrees, arguing that even if we disagree with one of the

settlement officer’s conclusions, remand is not appropriate for harmless error. He

cites Lindley v. Commissioner, T.C. Memo. 2006-229, 92 T.C.M. (CCH) 363

(2006), aff’d sub nom. Keller v. Commissioner, 568 F.3d 710 (9th Cir. 2009), for

the proposition that even if the settlement officer erred in his calculations, the

Gustashaws’ reasonable collection potential would still exceed their last offer, and

rejection under these circumstances would not be an abuse of discretion.

      We agree. The Court on numerous occasion has found that although a

settlement officer erred in his calculations, the error did not change the result of

      44
        See Levin v. Commissioner, T.C. Memo. 2018-172, at *32 (“This Court
has generally held that there is no abuse of discretion when an Appeals officer
relies on guidelines published in the Internal Revenue Manual”.); see also
Thompson v. Commissioner, 140 T.C. 173 (2013); Aldridge v. Commissioner,
T.C. Memo. 2009-276; Etkin v. Commissioner, T.C. Memo. 2005-245.
                                         -29-

[*29] the hearing because the taxpayer’s reasonable collection potential still

exceeded the taxpayer’s final offer when the error was corrected.45

       After correction of the settlement officer’s inclusion of the full cash value of

the irrevocable life insurance trust, the Gustashaws’ corrected reasonable

collection potential still exceeds their final offer by over $500,000. Because the

Gustashaws did not establish economic hardship and because it is within the

settlement officer’s discretion to deny an offer below a taxpayer’s reasonable

collection potential, we find that the settlement officer did not abuse his discretion

and remand would be improper.

III.   Conclusion

       The Gustashaws have not shown that the settlement officer’s actions were

arbitrary, capricious, or without sound basis in fact or law. Although the

settlement officer did err in his inclusion of the life insurance policy’s cash value,

the error was harmless and the settlement officer did not abuse his discretion in

rejecting the Gustashaws’ offer.




       45
     See, e.g., Carter v. Commissioner, 93 T.C.M. (CCH) at 866; Lindley v.
Commissioner, 92 T.C.M. (CCH) at 367.
                                   -30-

[*30] To reflect the foregoing,


                                          Decision will be entered for

                                  respondent.
