                          T.C. Memo. 2008-251



                        UNITED STATES TAX COURT



                LESLIE B. BENNETT, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 22699-05L.               Filed November 6, 2008.



     Dean A. Hrbacek, for petitioner.

     Susan Greene and Marilyn Ames, for respondent.




                          MEMORANDUM OPINION


     HOLMES, Judge:     Leslie Bennett offered the Commissioner

nearly $15,000 to settle her tax debt of more than $110,000.      The

Commissioner admits that Bennett’s offer is more than ten times

what the Commissioner himself calculated to be the amount she

could reasonably pay.    But the Commissioner nevertheless refused
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her offer, because he wanted to place part of her debt in

“currently not collectible” status--letting him try to collect

more were her finances to improve.     The question is whether his

refusal to accept Bennett’s offer is an abuse of discretion.

                            Background

     Bennett failed to file her tax returns from 1997 through

2001.   She also failed to pay over the taxes for four quarters

between 2000 and 2001 that had been withheld from employees of a

company she helped run.   In 2003, the Commissioner began an audit

and asked Bennett to file the missing tax returns.    She did--

filing the missing returns in several batches.    She also filed

her 2002 return, months after it was due.    The return showed that

she owed nearly $8,000, but she failed to include any payment

with the return.   The Commissioner subsequently sent Bennett a

notice that he intended to levy upon her property to collect the

2002 tax debt.   He later put a lien on her property to secure the

payment of both the 2002 income-tax and other tax debts that she

owed.   Bennett asked for a collection due process (CDP) hearing.

     At the hearing, Bennett claimed that she had gotten right

with the tax system, promising that she was owed a refund on her

2003 taxes which she would apply to her 2004 taxes.    The

Commissioner set a deadline for Bennett to provide copies of both

her 2003 and 2004 returns, along with proof of payment.      Bennett

complied, but her 2003 return showed not only that she wasn’t
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putting in for a refund, but that she actually owed more than

$15,000.   As with her 2002 taxes, she did not pay.

     Bennett also sent the IRS a copy of a check for $5,619,

which she said was an estimated payment of her 2004 liability, as

well as an offer to compromise her 1996, 1999, 2002, and 2003

income-tax debts and the trust-fund-recovery penalties she still

owed for four quarters between 2000 and 2001.1    This first offer

was for $1,500, which the Commissioner promptly rejected as not

in the government’s best interest.     It was also based on a list

of income and expenses that the Commissioner concluded were

excessive or unverifiable.   Bennett responded by submitting more

documentation to support her position.    After review, the

Commissioner sent a counteroffer for $31,756.81.

     But then the Commissioner suspended negotiations, having

discovered that Bennett’s $5,619 estimated tax payment for 2004

never posted--it turned out that Bennett had sent in only a copy

of the check and not the check itself.    What had happened was

that Bennett’s mother, who had seemed to be willing to help get



     1
        Taxes that employers withhold from their employees’ wages
are known as “trust fund taxes” because they are deemed a special
fund in trust for the United States under section 7501(a).
Slodov v. United States, 436 U.S. 238, 243 (1978). The
Commissioner may collect unpaid employment taxes from a
“responsible person” within the company; i.e., someone who was
required to pay over the tax. The money that’s collected is
called a trust-fund-recovery-penalty tax. Sec. 6672. (Unless
otherwise indicated, all section references are to the Internal
Revenue Code.)
                               - 4 -

her daughter out of tax trouble, had changed her mind and now

would help only if the Commissioner would agree to a single lump-

sum payment to discharge all her daughter’s tax liability.    This

was news to the Commissioner; he told Bennett that she could try

another offer-in-compromise, but must prove that she had filed

her 2004 return and fully paid any tax due.

     Bennett accepted this suggestion and in late July 2005,

filed her 2004 Form 1040 and fully paid the amount due.   Bennett

also included proof of a $3,000 estimated tax payment for 2005.

And she submitted a second compromise offer of $14,908.81.

Following much computational give-and-take between the two

parties, the Commissioner tendered a second counteroffer of

$54,816.   Bennett then won a variety of favorable concessions on

various monthly living expenses, leading the Commissioner to

recalculate his offer a final time, lowering it to $33,484.81.

     The fluidity of these negotiations sprang from the

Commissioner’s finding that many of Bennett’s expenses, including

transportation expenses and tuition for her son, were

unverifiable or somehow improper.   Bennett’s leased 2002 Mercedes

(which was the largest part of her claimed $820 monthly

transportation expense), for instance, was in fact registered to

and paid for by her mother.   Bennett had agreed to reimburse her

mother for the monthly payments by check, but the Commissioner

discovered that Bennett’s mother had never cashed any of them.
                              - 5 -

Bennett’s claim for $1,000 in monthly tuition costs for her son

was likewise undermined when the Commissioner discovered that her

mother had paid most of those costs during late 2004 and early

2005.

     All of this haggling ultimately went nowhere.   Bennett

submitted another financial update in late September 2005 showing

that her income had dropped to an average of $4,093 in the last

seven months while her monthly expenses averaged $4,777.   With

Bennett now dependent on family loans for living expenses, the

Commissioner recommended rejection of her offer in compromise and

placement of her 2002 debt on “currently not collectible” status.

Based on this determination, the Commissioner sent her a notice

of determination stating that he would indefinitely suspend his

collection activities for all years pending an improvement in

Bennett’s finances.

     The Commissioner’s notice of determination cited Internal

Revenue Manual (IRM) Part 5.8.7.6(5) (Sept. 1, 2005), which

states that a “rejection may also be based on a determination

that acceptance of the [offer] is not in the ‘best interest of

the government’ per policy statement P-5-100.”   The Commissioner

also cited language from the IRM authorizing rejection when a

taxpayer has an egregious history of noncompliance and a probable

likelihood of noncompliance in the future.   He stated as well

that “rejection of the offer was also based on the time left on
                                - 6 -

the collection statutes, the taxpayer’s age, earning capability

over the next several years, and the fact that her business has

the ability to generate a large profit in the near future.”

     Bennett timely filed an appeal of the Commissioner’s

rejection and his decision to place her 2002 debt in currently-

not-collectible status.   She argues that because her offer of

$14,908.81 exceeds her $1,468.81 collection potential, it is in

the government’s best interest, according to the Commissioner’s

own policy statement, and so the Commissioner had no

justification to reject it.

                              Discussion

     Tax debts are typically settled in one of three ways:    The

Commissioner may allow a taxpayer to pay his tax debt over time

via an installment agreement; he may declare the debt “currently

not collectible” and take no collection action until and unless

the taxpayer’s finances improve; or, he may accept a taxpayer’s

offer to compromise for less than the full debt owed.   IRM pt.

5.14.1.1 (July 12, 2005), 5.16.1.1 (Sept. 19, 2005), and

5.8.1.1.3 (Sept. 1, 2005).

     The parties agree that the question in this case is whether

the Commissioner abused his discretion in rejecting Bennett’s

offer and instead classifying her tax debt as currently not

collectible.   We therefore look to see if the Commissioner’s

decision was grounded on an error of law or rested on a clearly
                               - 7 -

erroneous finding of fact, or whether he applied the correct law

to fact findings that weren’t clearly erroneous but ruled in an

irrational manner.   Indus. Investors v. Commissioner, T.C. Memo.

2007-93 (citing United States v. Sherburne, 249 F.3d 1121, 1125-

26 (9th Cir. 2001)); see also Cooter & Gell v. Hartmarx Corp.,

496 U.S. 384, 402-03 (1990).

     The Commissioner is guided in his consideration of offers in

compromise by regulations and policies aimed at balancing the

values of treating taxpayers in similar situations similarly and

considering the special facts and circumstances of each case.

Section 301.7122-1(f)(3), Proced. & Admin. Regs., states: “No

offer to compromise may be rejected solely on the basis of the

amount of the offer without evaluating that offer under the

provisions of this section and the Secretary’s policies and

procedures regarding the compromise of cases.”    These policies

and procedures are laid out in the IRM.   IRM pt. 5.8.1.1.   The

regulations also instruct, “The determination whether to accept

or reject an offer to compromise will be based upon consideration

of all the facts and circumstances.”   Sec. 301.7122-1(c)(1),

Proced. & Admin. Regs.

     The Commissioner accepts an offer in compromise on one of

three bases: doubt as to liability, doubt as to collectibility,

or promotion of effective tax administration.    Sec. 301.7122-

1(b), Proced. & Admin. Regs.   Bennett put her offer in the doubt-
                               - 8 -

as-to-collectibility pigeonhole, and we look to the rules on

those kinds of offers.

     IRM part 5.8.7.6(5) states that offers in compromise are to

be evaluated in terms of what is “in the ‘best interest of the

government’ per policy statement P-5-100.”    That policy, in turn,

states the Commissioner will accept offers when “it is unlikely

that the tax liability can be collected in full and the amount

offered reasonably reflects collection potential.”

     Bennett believes that this language from policy statement P-

5-100, (Jan. 30, 1992), conclusively defines the government’s

“best interest.”   And she argues that she meets both of policy

statement P-5-100’s requirements.   First, as the Commissioner

admits, her full debt is not collectible.    Second, her offer of

$14,908.81 not only meets, but greatly exceeds, her collection

potential of $1,468.81.   Bennett believes these two facts mean

her offer is in the government’s best interest--and that the

Commissioner’s refusal to accept it is an abuse of discretion.

     Policy statement P-5-100 is not a stand-alone statement,

however, but only part of another section of the Internal Revenue

Manual:   IRM part 5.8.1.1.3(1).   IRM part 5.8.1.1.3(3) states: “A

Doubt as to Collectibility (DATC) offer amount must equal or

exceed a taxpayers (sic) reasonable collection potential (RCP) in

order to be considered for acceptance.”     (Emphasis added.)   This

language, contrary to Bennett’s contention, doesn’t require that
                                 - 9 -

the Commissioner accept an offer in compromise whenever the

amount exceeds the collection potential.    Rather, it only

establishes grounds for winning consideration.

     Even policy statement P-5-100 does not draw a bright line--

stating not that the IRS will accept any offer exceeding

reasonable collection potential, but only that it will do so when

“the amount offered reasonably reflects collection potential.”

It goes on to state that “taxpayers are expected to provide

reasonable documentation to verify their ability to pay.”     And

IRM part 5.8.7.6 lists, as one example of an offer in compromise

that the Commissioner might reject as not in the best interest of

the government, an offer from a taxpayer who “has an egregious

history of past noncompliance and our analysis of his current

finances reveals that it will be highly unlikely the taxpayer

will be able to remain in compliance during the offer period.”

     The record here also shows that the Commissioner based his

determination in part on his finding that there was a possibility

that Bennett’s circumstances might change in the near future

(i.e., before the statute of limitations for collecting her taxes

runs out).   Because Bennett had so delayed filing her returns, we

find no error in the Commissioner’s conclusion that there were

eight years or more remaining before the statute would run on

most of the years in question.    We also find no clear error in

the Commissioner’s conclusion that Bennett had several more years
                              - 10 -

of earning capability.   The Commissioner recognized that her

business (a public relations firm) had not been enormously

successful, but we note that she had quite low overhead (she ran

it out of her home), so we don’t find the Commissioner to be

clearly erroneous in deciding it had potential to be more

successful in the future.

     We thus find no abuse of discretion in the Commissioner’s

determination.   Bennett argues, however, that our decision in

Oman v. Commissioner, T.C. Memo. 2006-231, supports her argument

as a matter of law.   In Oman, we also confronted the interplay

between IRM part 5.8.7.6(5) and policy statement P-5-100.    Oman,

with a debt of more than $170,000 and irregular and often poor

earnings since a personal financial catastrophe, offered $1,000

to compromise his tax debt.   The Commissioner refused the offer

as not being in the government’s best interest, citing as his

reasons Oman’s past noncompliance and doubt as to Oman’s

likelihood of remaining compliant in the future.   As in Bennett’s

case, the Commissioner in Oman cited IRM part 5.8.7.6(5) and its

emphasis on past and future compliance as the definition of “best

interest.”   Oman riposted by citing policy statement P-5-100 and

arguing that he met its two-part requirement: the debt be

currently not collectible, and the offer be greater than the

taxpayer’s current collection potential.
                                - 11 -

     Bennett claims that in Oman, the Court “analyzed policy

statement P-5-100 and IRM pt. 5.8.7.6(5) and concluded, as

applied in this case, they appear to be inconsistent regarding

the ‘best interest of the government.’      The same inconsistency

holds true in the current case.”    Unfortunately, this is the most

favorable contention Bennett can extract from Oman.

     Oman in fact led only to a remand for a further hearing, not

a decision for the taxpayer.    It offered no firm conclusions

resolving the possible conflict between IRM part 5.8.7.6(5) and

policy statement P-5-100.    Furthermore, a close reading of our

conclusion shows that our main concern with the record to that

point was the “unclear” reasoning for the “best interest”-based

rejection.     Oman, T.C. Memo. 2006-231.

     The Commissioner, on the other hand, compares our facts to

those of Oman and points out a crucial difference.      Unlike the

“absent” record there, this case boasts a full record that makes

the Commissioner’s reasoning quite clear.      Because IRM part

5.8.7.6(5) and policy statement P-5-100 are both contained in the

Commissioner’s manual of policies and procedures, they would seem

to hold equal weight.    But both guidelines are in the end just

that--language guiding the Commissioner’s consideration of all

the facts and circumstances, as mandated by the regulation that

is unquestionably binding, section 301.7122-1(f)(3), Proced. &

Admin. Regs.    That regulation does not compel him to accept any
                              - 12 -

particular offer, but to consider the facts and circumstances of

the case before him.   That is what he did here.

     The Commissioner has diligently presented an exhaustive

narrative to justify his conclusion that accepting Bennett’s

offer would be in neither his best interest nor hers.   Given the

Commissioner’s adherence to statutory prescription, we cannot say

that his rejection represents an abuse of discretion.



                                    Decision will be entered for

                               respondent.
