                               T.C. Memo. 2016-84



                         UNITED STATES TAX COURT



                   JOHN N. ALPHSON, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 16424-13L.                         Filed May 2, 2016.


      Robert Conrad Eroen, for petitioner.

      Michael K. Park and Najah J. Shariff, for respondent.



                           MEMORANDUM OPINION


      HOLMES, Judge: John Alphson ran up a tax bill of more than $200,000

from 2008 to 2010. He didn’t pay, and in 2012 the Commissioner decided to place

a lien on his property to try to collect. Alphson claimed he couldn’t pay the full

amount because of financial problems dating back to the real-estate market

collapse of 2008 and offered to settle for $2,400. The Commissioner rejected the
                                        -2-

[*2] offer because he thought Alphson had wasted more than $1 million that he

should have used to pay his taxes.

                                     Background

      For much of his professional career, up until 2008, Alphson worked in the

commercial real-estate industry, owning and operating buildings as well as

developing real property. In 2008 he settled an ongoing legal dispute between

businesses in which he and family members were involved--the precise nature of

the dispute and all its consequences aren’t clear from the record, but Alphson did

cut formal ties with at least some family entities and was to receive a $1.2 million

settlement, paid out over three years--and he eventually received $600,000 in

2008; $460,000 in 2009; and $135,000 in 2010. Alphson also claims that the

settlement left him unemployed.

      Alphson nevertheless filed tax returns for 2008-2010 that showed

significant adjusted gross income:

           Year               Adjusted gross income                  Tax
           2008                       $237,797                     $87,704
           2009                       373,553                      104,952
           2010                       123,220                       13,111
                                        -3-

[*3] The Commissioner accepted the returns and assessed the tax shown. See sec.

6201(a)(1).1

      Alphson, however, never paid. And in March 2010 he filed for bankruptcy.

He won a discharge in February 2011, but his tax debt wasn’t dischargeable.2 He

tried to settle it with an offer in compromise (OIC) in April 2011. His reason for

seeking an OIC was doubt as to collectibility, tax-speak for not being able to pay

the tax because his liabilities and living expenses exceeded the value of his assets

and future income. He offered to pay $2,400 to settle his tax debt, which at that

time (before he filed his 2010 tax return and the Commissioner assessed that debt

too) would have been just under $200,000. As part of the OIC process, there was

a back-and-forth exchange of requests and financial information, but the gist of

Alphson’s argument was that he was unemployed and unable to find any work

after three years, had practically no assets, and needed to pay thousands of dollars




      1
        All section references are to the Internal Revenue Code in effect for the
years at issue and all rule references are to the Tax Court Rules of Practice and
Procedure, unless we say otherwise.
      2
         11 U.S.C. section 523(a)(1)(A) (2012) exempts from discharge federal
income taxes that have a return filing due date (including extensions) within the
three years before the bankruptcy filing date. It also exempts from discharge taxes
that are assessable after the start of the bankruptcy case. Id. sec. 507(a)(8)(A)(i),
(iii). These provisions govern the three tax years.
                                         -4-

[*4] in monthly expenses. An OIC specialist ultimately rejected Alphson’s offer

in June 2012 because she determined he could pay more than $2,400.

      While one part of the IRS mulled over Alphson’s OIC, another part was

moving ahead with collection and in March 2012 notified Alphson that it had filed

a notice of federal tax lien (NFTL) against his property. The Commissioner’s

notice of NFTL filing and rejection of Alphson’s OIC then converged. Alphson

asked for a collection due process (CDP) hearing in April to challenge the lien.

He claimed that he couldn’t pay the tax and that the IRS should not have rejected

his OIC. The settlement officer who conducted the CDP hearing met Alphson and

his lawyer for a face-to-face meeting in October 2012. He also conducted his own

review of the information which Alphson had submitted to support his OIC, but he

ultimately rejected the offer and sustained the NFTL filing. Alphson then

appealed to this Court. He argues that the settlement officer abused his discretion

by ignoring relevant facts and incorrectly calculating his assets and future income.

      At calendar call in Los Angeles we granted the parties’ motion to submit

this case without trial pursuant to Rule 122. We must decide whether the

settlement officer abused his discretion by rejecting Alphson’s offer of $2,400 to

settle his tax liability of more than $200,000.
                                          -5-

[*5] When the case was submitted Alphson was 54 years old. He was also still a

California resident, as he was when he filed his petition. He was married when he

made his initial OIC in 2011, but he now claims he is not.

                                      Discussion

       Section 7122(d)(1) gives the Commissioner wide discretion to accept

compromise offers and to prescribe guidelines “to determine whether an offer-in-

compromise is adequate and should be accepted.” Offers in compromise come in

three flavors: (1) doubt as to liability (when there’s a genuine dispute about the

existence or amount of a tax debt), (2) doubt as to collectibility (when a taxpayer’s

assets and income are insufficient to pay the full debt), and (3) the promotion of

effective tax administration (when collection would cause economic hardship to

the taxpayer or compelling public policy or equitable considerations favor

compromise). Sec. 301.7122-1(b), Proced. & Admin. Regs. The Code leaves the

decision to accept or reject an OIC to the Commissioner’s discretion, but his

decision should be based on all the facts and circumstances relevant to the offer.

Id. para. (c)(1).

       Alphson’s offer was based on doubt as to collectibility. The Commissioner

has said that he’ll accept an OIC based on doubt as to collectibility when it’s

unlikely that he can collect the unpaid tax liability in full and the offer reflects the
                                         -6-

[*6] taxpayer’s reasonable collection potential (RCP). See Internal Revenue

Manual (IRM) pt. 5.8.4.3 (June 1, 2010). The RCP is a key concept in this corner

of tax law, but it’s easy to understand: A taxpayer’s RCP is the amount that the

IRS thinks it can get from his assets and income. The IRM explains in exhaustive

detail how to calculate a taxpayer’s RCP, and while the process is complicated, its

guiding principle and purpose are simple: The Commissioner estimates how much

he can collect by selling a taxpayer’s property and garnishing his income while

allowing for certain necessary expenses. We can even come up with a Hand

formula: RCP > OIC = NO. See United States v. Carroll Towing Co., 159 F.2d

169, 173 (2d Cir. 1947). Though as always in tax law, there are some exceptions,

and under some circumstances that “no” can become a “yes”. See IRM pt. 5.8.4.3.

      Alphson challenges the settlement officer’s rejection of his OIC. Our

standard of review in such a case depends on whether his underlying tax liability

was at issue. Alphson wants to challenge his underlying tax liability--in his

petition he states he “is challenging the underlying tax liability assessed by the

IRS.” The problem, however, is that he didn’t raise the issue any time before or

during his CDP hearing. Nowhere in his request for a hearing did he indicate that

he wanted to challenge his liability; he raised only his claimed inability to pay.

And when Alphson and his attorney met in person with the CDP settlement
                                         -7-

[*7] officer, they stated that Alphson didn’t challenge his underlying tax liability.

That’s enough to knock that issue out of this case: Since Alphson never raised the

issue of liability during his hearing, he can’t do so now. See Giamelli v.

Commissioner, 129 T.C. 107, 113 (2007).

      That means that the only issue left is whether the settlement officer should

have accepted Alphson’s OIC. Our standard of review for this issue is abuse of

discretion. See Sego v. Commissioner, 114 T.C. 604, 610 (2000); Goza v.

Commissioner, 114 T.C. 176, 182 (2000). We don’t decide whether in our

opinion the settlement officer should have accepted Alphson’s OIC, but whether

the settlement officer abused his discretion when he rejected it. See Woodral v.

Commissioner, 112 T.C. 19, 23 (1999). A settlement officer abuses his discretion

if his decision was grounded on an error of law or rested on a clearly erroneous

finding of fact, or if he ruled irrationally. See Fargo v. Commissioner, 447 F.3d

706, 709 (9th Cir. 2006), aff’g T.C. Memo. 2004-13; United States v. Sherburne,

249 F.3d 1121, 1125-26 (9th Cir. 2001).

      To make a proper determination a settlement officer at a CDP hearing must

verify that the requirements of applicable law and administrative procedure were

met, consider issues properly raised by the taxpayer, and decide whether the

collection action balances the need for efficient tax collection with the taxpayer’s
                                          -8-

[*8] legitimate concerns. Sec. 6330(c)(3). At his CDP hearing, Alphson raised

the issue of his OIC based on doubt as to collectibility. In his petition to this

Court, he argues that the settlement officer erred in calculating his RCP and

therefore erred in rejecting his offer.

      We turn, then, to the calculation of Alphson’s RCP.

      The main components of a taxpayer’s RCP are his realizable net equity in

his assets and his net future income. See Johnson v. Commissioner, 136 T.C. 475,

485 (2011), aff’d, 502 F. App’x 1 (D.C. Cir. 2013); IRM pt. 5.8.11.2 (Sept. 23,

2008). The settlement officer calculated Alphson’s RCP to be over $3 million, far

more than the $2,400 offer. Alphson argues that the settlement officer erred

greatly in his calculation of both components, and we’ll look at each.

      We note at the start that the IRS tells taxpayers that it will give full

consideration to their overall situation, including such factors as age, health,

education, and occupational training, IRM pt. 5.8.4.3(2) (June 1, 2010), all as of

the time the taxpayer submitted his OIC, id. pt. 5.8.5.3(1) (Oct. 22, 2010). The

process necessarily requires some estimation. We’re certainly aware of the

longstanding rule that the IRM doesn’t have the force of law, but because section

7122 gives such wide discretion to the Commissioner to establish guidelines for

evaluating OICs, we’ve generally upheld a settlement officer’s determination
                                         -9-

[*9] rejecting an OIC as reasonable when he follows the IRM. Atchison v.

Commissioner, T.C. Memo. 2009-8. And even if the officer makes some errors in

calculating the RCP, we have upheld a determination when the taxpayer’s OIC

was far less than the correct RCP. See Carter v. Commissioner, T.C. Memo. 2007-

25, aff’d in part, vacated in part sub nom. Keller v. Commissioner, 568 F.3d 710

(9th Cir. 2009).

I.    Net Equity

      The settlement officer determined that Alphson had net realizable equity in

assets of more than $1.5 million, even though Alphson said on his Form 433-A,

Collection Information Statement for Wage Earners and Self-Employed

Individuals, that he had only $501 in total available assets. (He also said in his

appeal from the IRS’s initial rejection of his OIC that he really had a negative net

worth of $500,000.) The settlement officer’s calculation of Alphson’s assets

includes a number of bank accounts and cash deposits that Alphson didn’t include,

but by far the largest asset is the $1,195,000 Alphson collected as a result of his

settlement. We focus on this amount--if it’s includible in Alphson’s RCP, it alone

is so much greater than $2,400 that it justifies rejection of the OIC.

      No one disputes the basic facts about this settlement. Both parties agree

that Alphson received three payments--one in 2008, one in 2009, and one in 2010.
                                        - 10 -

[*10] Both also agree that Alphson doesn’t have any of this money because he

spent it. The parties don’t agree, however, about whether all or some of it should

still be included in Alphson’s RCP. This is a dispute, in other words, about

whether or not the settlement proceeds are a dissipated asset.

      A dissipated asset is any asset (liquid or illiquid) that has been “sold,

transferred, or spent on non-priority items or debts and that is no longer available

to pay the tax liability.” Johnson, 136 T.C. at 487. If a taxpayer can substantiate

claims that he used dissipated assets for necessary living expenses, the

Commissioner shouldn’t include them in the taxpayer’s RCP. Id. Ascribing

dissipated assets to someone results in a legal fiction that may seem harsh: It

treats a taxpayer as having money that he actually doesn’t. But 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. Including dissipated assets in RCP

solves this chutzpah problem. See Alex Kozinski & Eugene Volokh, “Lawsuit,

Shmawsuit,” 103 Yale L.J. 463, 467 (1993) (defining “chutzpah”).

      The IRM provides specific guidance on how to calculate and when to

include dissipated assets in a taxpayer’s RCP, but the parties disagree about what

version of the IRM to apply. Alphson cites the IRM for the principle that
                                        - 11 -

[*11] “inclusion of dissipated assets in * * * RCP is no longer applicable, except

in situations where it can be shown the taxpayer has sold, transferred, encumbered,

or otherwise disposed of assets in an attempt to avoid the payment of the tax

liability.” IRM pt. 5.8.5.18(1) (Sept. 30, 2013). He argues that the Commissioner

hasn’t shown he spent the settlement proceeds with the intent of avoiding payment

of his taxes. This is true, and he accurately quotes part of the current IRM, but his

overall argument is misguided.

      First, he cites an IRM provision that was added in September 2013.

Alphson renewed his initial OIC when he sent his CDP hearing request to the IRS

in April 2012. The settlement officer rejected the OIC and issued his notice of

determination in June 2013. The relevant IRM provisions on dissipated assets

remained the same throughout the process, which ended before the IRM was

changed in September 2013. So at all relevant times, the settlement officer

would’ve been applying a different version of the IRM.

      That version provides in relevant part that while dissipated assets shouldn’t

automatically be included in calculating RCP, if a taxpayer used assets on

nonpriority items the officer should determine what portion of the value of the

asset is appropriate to include in the taxpayer’s RCP. IRM pt. 5.8.5.16 (Oct. 22,

2010). The inclusion of dissipated assets must clearly be justified in the case file,
                                         - 12 -

[*12] and the determination should analyze facts such as when the assets were

dissipated in relation to the tax liability and the OIC, with a general rule of

considering only assets dissipated within five years of the offer. Id. In the earlier

version of the IRM, as with the current one, the officer shouldn’t include assets

that were used to fund necessary living expenses. Notably absent from this

version of the IRM is a presumption against including dissipated assets unless the

officer shows an attempt to avoid paying the tax.

      When we consider the 2010 requirements, we find that the settlement officer

followed the IRM.3 The settlement officer independently considered Alphson’s

settlement proceeds as documented by the OIC specialist. He looked at when

Alphson received the settlement proceeds and when he incurred his tax liabilities.

After he tentatively concluded that Alphson had dissipated assets that could have

paid his tax bill, he gave Alphson another chance to respond. And here we get to

Alphson’s main argument. He says that he didn’t dissipate any assets because he

used them for necessary expenses. He gave the settlement officer a table of those

expenses and pages of photocopied checks to substantiate his claim. The list:

      3
        Alphson’s OIC was first rejected by an OIC specialist. We review for
abuse of discretion during the CDP hearing, so the initial rejection has no bearing
on our review. What’s important is the settlement officer’s determination. See,
e.g., Taylor v. Commissioner, T.C. Memo. 2009-27; Lloyd v. Commissioner, T.C.
Memo. 2008-15.
                                          - 13 -

                               Schedule C                         Living
  [*13] Year     Legal fees     expenses           Credit card   expenses     Total
     2008         $109,871       $40,053           $184,968      $244,935   $579,827
     2009            -0-          35,354            246,224      265,063    546,641
     2010
  (3 months)         -0-            -0-              41,104       94,351    135,455
     Total        109,871         75,407            472,296      604,349    1,261,923

      Alphson argues that these expenses were necessary, and because he used the

$1,195,000 to cover part of them, the settlement proceeds aren’t a “dissipated

asset.” His argument fails for a few reasons. First, the table alone isn’t adequate

substantiation--it doesn’t prove he actually spent these amounts or spent them on

what he claims. He did provide pages and pages of photocopies of checks, but he

didn’t sort or organize them by type of expense or purpose. Some seem to be for

clearly unnecessary expenses--there are many to various country clubs while

others, such as some made out to a lawyer or banks or credit cards, might be for

necessary expenses, but the checks alone don’t show that--the check doesn’t say if

that lawyer was the one who helped him obtain his settlement (thus earning

money) or what the credit cards were used for. Electronic withdrawal records

similarly show payments to businesses such as American Express, Chase, or Bank

of America, but not what the underlying charges were for. Missing from these
                                       - 14 -

[*14] charts, checks, and bank records are receipts that show what he actually

bought. Without such information, we can’t verify that Alphson was spending

money on necessary living or business expenses, and he hasn’t substantiated such

claims. We can see no error, much less clear error, by a settlement officer who

thought likewise.

      Even some expenses that are “living expenses” aren’t reasonable. In 2008,

for at least part of the year, there are checks showing rent payments of $9,700 a

month. The settlement officer noticed this and considered it “exorbitant.”

Alphson, however, gave him no information about what the rent was for and didn’t

produce his lease agreement. We see no error, much less clear error, in the

settlement officer’s conclusion that such expenses are exorbitant and far in excess

of what a person claiming only one dependent on his 2008 and 2009 tax returns,

and none on his 2010 return, would need.4 The officer who holds the CDP

hearing is supposed to follow the IRM as well, and must exercise independent


      4
         The record is also unclear on how many children Alphson had and whether
he was taking care of them. He claimed only one dependent on each of his returns
for the years at issue, but in other documents he claimed to have four children
living in his household, and his bankruptcy documents list seven children. Three
of them are stepchildren, but his wife claimed only one dependent on her return for
the same years. Alphson has provided no strong proof one way or the other,
besides various documents listing different numbers of children. We can hardly
fault the settlement officer for relying on those returns.
                                        - 15 -

[*15] judgment when he determines an RCP. See IRM pts. 8.23.3.1 (Oct. 14,

2011), and 8.23.3.3 (Aug. 28, 2009). The settlement officer did this. The case

activity record shows that he did consider the issue of dissipated assets and

decided to include the settlement proceeds in the RCP. He reasoned that Alphson

had failed to show that he spent the money on necessary expenses--which in

context means that he concluded both that Alphson hadn’t adequately showed

what he spent the money on and that he hadn’t showed that what he said he spent

the money on was necessary or even reasonable. As a result, the officer rejected

the offer.

      We can’t find any significant errors made by the settlement officer in his

determination. The IRM for the years at issue provided that the officer should

clearly justify the inclusion of information about dissipated assets in the case file

and should analyze facts such as when the assets were dissipated in relation to

when the tax liability arose. The officer also shouldn’t include assets dissipated

more than five years before the offer or assets used to pay for necessary living

expenses. IRM pt. 5.8.5.16. On the record before us, the settlement officer

followed these requirements at all stages of the process.

      Of course, Alphson must have spent some money during the years at issue

for necessary living expenses. But he didn’t give the settlement officer much
                                       - 16 -

[*16] proof. The $9,700 a month for rent in 2008 doesn’t count. His records do

show expenditures on items such as gas ($196 in March 2008) and phone service

($162.80 to Verizon in July 2010), but these are trivial when compared to the more

than $1.2 million that he claims to have spent in 2008-2010. The settlement

officer could’ve reduced the net equity part of the RCP a bit to account for these

tiny expenses, but given that Alphson provided so little helpful information, and

because he appeared to have other unexplained money coming in during these

years that could’ve covered his living expenses, we can’t find that the settlement

officer abused his discretion by making a decision grounded on clearly erroneous

facts or by ruling irrationally. See Indus. Investors v. Commissioner, T.C. Memo.

2007-93.

      Even if the settlement officer allowed Alphson’s Schedule C expenses of

$75,000, and allowed living expenses of a few thousand dollars a month, there

would still be around $1 million of the settlement proceeds that could be

includible in Alphson’s RCP as a dissipated asset. This would still make the RCP

far greater than the offer of $2,400. Even if the settlement officer makes some

errors calculating the RCP, we uphold determinations when the taxpayer’s OIC

was far less than the correct RCP. See, e.g., Carter v. Commissioner, T.C. Memo.

2007-25 (immaterial to use $380,000 instead of $304,000 as future income in
                                         - 17 -

[*17] calculating the RCP when OIC was only $100,000). At the CDP hearing,

Alphson said he’d be willing to raise his offer to $24,000, but even that is still far

below his RCP once one adds to it any reasonable portion of the dissipated assets.5

      We therefore find that the settlement officer didn’t abuse his discretion by

determining the settlement proceeds were a dissipated asset. And we could

determine that the settlement officer didn’t abuse his discretion by rejecting the

OIC based on dissipated assets alone. But, as an alternative ground, we turn to the

future-income component of Alphson’s RCP.

      Future Income

      Future income is a calculation of a taxpayer’s gross monthly income less

necessary expenses for a specific number of months into the future. IRM pt.

      5
        Alphson’s RCP was far below his OIC under many different scenarios, but
we will consider just one more. Alphson, as explained above, argues that under
the current version of the IRM, dissipated assets should be included only if he
spent them with the intent of avoiding tax payments. He quotes the IRM
selectively, however. The rest of the provision says to include dissipated assets
used for unnecessary items after the tax has been assessed or within six months
before assessment. IRM pt. 5.8.5.18(1) (Sept. 30, 2013). The Commissioner
assessed Alphson’s 2008 tax liability on November 23, 2009 and his 2009 liability
on May 31, 2010. Under these facts, even if we assume Alphson received all of
his 2009 settlement proceeds at the beginning of the year, and therefore before his
2008 or 2009 taxes were assessed, he still received $135,000 in 2010 after his first
tax assessment, and that would therefore qualify as a dissipated asset. Simply
adding $135,000 to Alphson’s RCP makes it far in excess of $2,400, or $24,000.
We would find that the settlement officer did not abuse his discretion in rejecting
the OIC even under this scenario.
                                        - 18 -

[*18] 5.8.5.18(1) (Oct. 22, 2010). The analysis usually begins with the taxpayer’s

current income at the time of the offer, and the number of months depends on

factors like the kind of offer he made and how much time was left for the

Commissioner to collect the tax. Id. pt. 5.8.5.23. No one rule controls all

circumstances, and the officer should consider any fact about the taxpayer’s

situation that affects his ability to earn income, such as his age, health, education,

and past work experience. Fairlamb v. Commissioner, T.C. Memo. 2010-22; IRM

pt. 5.8.5.18(3).

      The settlement officer calculated Alphson’s future income to be nearly $2.9

million: a gross monthly income of $26,759, minus monthly expenses of $2,690,

multiplied by 120 months. Alphson, who claims to have been unemployed and

without any income since 2008, says this calculation was grossly incorrect and an

abuse of discretion: It’s not clear whether some of his arguments are against the

calculation of his future income or the inclusion of dissipated assets in his equity,

but he does claim to be unable to find work, and he alleges that the settlement

officer erred by looking back too far and incorrectly averaging amounts to

calculate his future income.

      We do find that the settlement officer made some clear errors in calculating

Alphson’s future income. First, Alphson claims to be unemployed despite his
                                        - 19 -

[*19] “herculean efforts to obtain suitable employment,” and he blames this on his

age, his low credit rating, and the fact that the real-estate-market was severely

depressed after the Great Recession began. Alphson claimed to have a household

income of only $1,750, all of which came from his wife. His briefs repeatedly

attack the settlement officer’s calculation of his future income, but they don’t offer

an alternative number. Presumably, he thinks it should be zero.

      But nowhere in the record is there evidence of Alphson’s ever receiving any

sort of unemployment benefit, nor of any specific efforts he made to find new

work. On his Form 433-A, he showed actual monthly expenses of $5,538, but he

never explained how he supported himself. He later claimed to be getting

assistance from family, but provided no proof. There is a difference between

“unemployed” and “permanently unemployable,” and in the past we’ve found the

Commissioner didn’t abuse his discretion when deciding that on the basis of a

taxpayer’s health, education, skills, prior earnings, and professional background

that the taxpayer could earn future income despite being unemployed at the

moment. See Johnson, 136 T.C. at 494. This all shows that the settlement officer

didn’t abuse his discretion by finding that Alphson would earn some future

income.
                                       - 20 -

[*20] The settlement officer was, however, much more specific. He calculated

Alphson’s future income by averaging AGI for 2008 to 2010: $237,797 +

$373,553 + $123,220 = $734,570/(3*12) = $20,404. The settlement officer also

averaged bank deposits for the three months leading up to the offer, and found an

additional $6,355 a month of unexplained deposits, which he added to the

previous average to get a gross income of $26,759. He also adjusted Alphson’s

claimed monthly expenses:6

  Expense type            Claimed               Allowed            Difference
 Food & clothing             $1,500                 $534                $966
 Housing &                      550                  550                   -0-
 utilities
 Vehicle loan/lease             730                  496                   234
 Vehicle operating              792                  295                   497
 cost
 Public                           15                 -0-                    15
 transportation
 Health Insurance               755                  755                   -0-
 Other Health Care              350                   60                   290
 Child care                     400                  -0-                   400
  Total                       5,092                2,690                2,402


      6
         The expenses Alphson included with his initial offer don’t match the
expenses that he claimed he spent the settlement proceeds on. This also supports
the settlement officer’s finding that Alphson’s numbers couldn’t be trusted.
                                          - 21 -

[*21] The settlement officer subtracted the $2,690 in allowed expenses from the

$26,759 in gross monthly income to arrive at a net monthly income of $24,069.

And he multiplied this by 120 months because he concluded that there were still

about 10 years left to collect the tax.

      Alphson points us to a number of IRM provisions that he argues the

settlement officer misapplied. He repeatedly cites the wrong version of the IRM,

however, so we will review the settlement officer’s work under the relevant IRM

provisions.

      For the years at issue, part 5.8.5.18 provided most of the guidance for

calculating future income. It says that when a taxpayer has been unemployed for a

long time, his current income should be used and the officer shouldn’t average

income, and shouldn’t use anticipated future income if the taxpayer’s future

employment is uncertain. Id. pt. 5.8.5.18(4). If a taxpayer has irregular earnings,

then the officer should use average income. Id. But, in all cases the officer should

exercise his judgment on a case-by-case basis when determining when to average

income. There are two additional provisions relevant to Alphson’s situation. The

IRM says that if the taxpayer “has been unemployed for over one year and

provided proof that Social Security Disability is the sole source of income * * *

[d]o not apply income averaging.” Id. pt. 5.8.5.18(5), Example (2) (emphasis
                                       - 22 -

[*22] added). And in situations where the taxpayer’s income doesn’t meet his

stated living expenses, the difference shouldn’t automatically be included as

additional income, but the officer should ask about the source of unexplained

deposits.

      Much of the parties’ disagreement concerns whether Alphson is really

unemployed, and whether he’s receiving any additional income. It’s clear that the

officer didn’t simply add as income the difference between Alphson’s claimed

income and expenses, which would’ve violated the IRM, but he did note that

Alphson somehow made bank deposits of $18,500 each month from entities

controlled by family members, plus thousands more from unknown sources. And

he also observed that Alphson never substantiated his claims of unemployment,

by, for example, showing Social Security checks.

      The problem is that since this case was submitted under Rule 122, all we

have are exhibits listing dollar amounts with little explanation. The number of

these deposits--combined with Alphson’s apparent ability to fund an expensive

lifestyle without any obvious source of income--might lead one to conclude he

wasn’t really unemployed or was that receiving income from some other source.

But in reviewing a notice of determination, we limit our review to the

Commissioner’s own explanation. See LG Kendrick, LLC v. Commissioner, 146
                                         - 23 -

[*23] T.C. __, __ (slip op. at 31) (Jan. 21, 2016); Salahuddin v. Commissioner,

T.C. Memo. 2012-141. That explanation isn’t always clear. The settlement

officer stated that she averaged Alphson’s income over three years because he was

unemployed. This would seem to violate the IRM’s direction not to average when

the taxpayer is unemployed. Moreover, Alphson’s AGI from 2008-2010, when he

claimed to be unemployed, might not be a good indicator of what he would make

when employed in the future. For example, in 2010 most of his reported AGI

came from a capital gain related to an entity he appeared to be selling an interest

in. In 2009 he reported $172,977 on his Schedule C, but $212,599 of income was

a capital gain from selling off his interest in the entity. There is nothing to

indicate that Alphson could continue to have such high capital gains in the future--

in fact, his 2011 return showed no income, and while we don’t accept this as

necessarily accurate, it does call into question whether the hundreds of thousands

of dollars in capital gains would continue past 2010. We think then that ascribing

$20,404 in monthly income to Alphson to compute his RCP is clear error.

      The IRS is on much firmer ground in the settlement officer’s analysis of

Alphson’s $6,355 a month in unexplained deposits. Alphson never explained its

source, it was much more recent, and we can’t easily ascribe it to a possibly

irregular capital gain as with the other amount. We don’t think the settlement
                                        - 24 -

[*24] officer abused his discretion when he included this amount in Alphson’s

future income. As we’ve already stated, we don’t think it was error for the

settlement officer to think that at some point Alphson would again find a job

(assuming he actually was unemployed), since he was only 51 years old when he

made his first offer, had a good education and job experience, and the real-estate

market had started to pick up.

      The settlement officer made one more error: multiplying Alphson’s net

monthly income by 120 months to calculate his future income. An older version

of the IRM instructs a settlement officer to multiply monthly income by the

number of months remaining in the statutory collection period. IRM pt. 5.8.5.6.6

(Sept. 23, 2008). However, this changed in 2010, and the IRM then told

settlement officers to multiply monthly income by 60 months or the remaining

statutory period, whichever is less, for OICs payable between more than 5 months

and 24 months. Id. pt. 5.8.5.23.

      Alphson’s original offer was for $2,400 to be paid in more than five months,

but he didn’t specify how long it would take him to pay. He later sent a protest

letter about his initial rejection. In this letter Alphson said he’d pay $10,000

(instead of $2,400) and he said he’d pay it over 24 months. Between the two,

Alphson expressed his intent to pay the offer in 24 months. That means the
                                        - 25 -

[*25] settlement officer should’ve multiplied his monthly income by 60 months or

the remaining number of months in the collection period, whichever was less. The

Commissioner assessed Alphson’s 2008 tax on November 23, 2009, and he

generally has 10 years from the date of assessment to collect the tax. Sec. 6502.

Therefore, even if one ignores any tolling, the Commissioner could’ve collected

the tax until 2019 at the earliest. At the time of the offer in 2011, there was more

than 60 months left in the collection period, so the settlement officer should’ve

multiplied the monthly income by 60 months.

      This error, though, is completely harmless. For example, if we assigned to

Alphson a monthly income of $6,000 (which seems conservative under the

circumstances) and allowed $3,000 a month in expenses (rounded up a bit from

what the Commissioner allowed), Alphson would have a net monthly income of

$3,000. If we multiply that by 60 months, his future income would have been

$180,000. Now this is obviously much less than what the settlement officer

calculated, but it’s also still much, much more than Alphson’s offer, and that isn’t

even considering the $1,195,000 in dissipated assets. As we noted before, even if

the settlement officer made errors in calculating Alphson’s RCP, we will uphold

his decision when the taxpayer’s offer is far less than the correct RCP. See Carter

v. Commissioner, T.C. Memo. 2007-25.
                                        - 26 -

[*26] Alphson has one more argument. He notes that, while the Commissioner

may reject an offer that is significantly less than a taxpayer’s OIC, he may accept

such an offer when “special circumstances” apply. See id. One of these special

circumstances is when a taxpayer would suffer economic hardship if the IRS were

to collect from him an amount equal to the RCP. Regulations provide some

examples: a taxpayer who provides full-time care to a dependent child with a

serious long-term illness, or a taxpayer who is retired or disabled and living on a

fixed income. See sec. 301.7122-1(c)(3)(iii), Proced. & Admin. Regs. Alphson

claimed that he would suffer “economic hardship” if he had to pay, but he

presented no specific evidence of any such hardship. There’s no abuse of

discretion in making a determination against a taxpayer on an issue where he

produces no evidence. See, e.g., Giamelli v. Commissioner, 129 T.C. at 112.7




      7
        An officer conducting a CDP hearing must always verify that the IRS met
the requirements of applicable law and administrative procedures and consider if
the collection action balances the need for efficient tax collection with the
taxpayer’s legitimate concerns. Sec. 6330(c)(3). The settlement officer met both
of these requirements.
                                       - 27 -

[*27] Because the settlement officer didn’t abuse his discretion in determining to

proceed with collection,


                                                Decision will be entered for

                                      respondent.
