                                            STEPHEN J. JOHNSON, PETITIONER v. COMMISSIONER                                       OF
                                                     INTERNAL REVENUE, RESPONDENT
                                                        Docket No. 11556–09L.                      Filed May 31, 2011.

                                                  P had taxable income of $1.7 million in 1999 and $1.8 mil-
                                               lion in 2000. P filed income tax returns for those years in
                                               2002 but paid no income tax. The Internal Revenue Service
                                               (IRS) assessed tax of $514,164 for 1999 and $565,268 for 2000
                                               and then served on P notice of the filing of a notice of Federal
                                               tax lien (NFTL) and a notice of proposed levy to collect P’s
                                               liabilities that (with interest and penalties) totaled
                                               $1,586,952.45. P requested a collection due process (CDP)
                                               hearing, during which he proposed an offer-in-compromise
                                               (OIC), which he amended several times during 2008 and 2009
                                               while the CDP hearing was in process. During the pendency
                                               of the CDP proceeding, P received, from sales of investments,
                                               proceeds that he did not pay to the IRS. In December 2008
                                               P amended his OIC to propose payments totaling $400,000,
                                               but in April 2009 P advised that he could not afford to make
                                               the payments and that he would amend his offer downward
                                               to $140,000. R rejected the OIC and issued a notice of deter-

                                                                                                                                       475




VerDate 0ct 09 2002   09:55 May 31, 2013   Jkt 372897    PO 20009   Frm 00001   Fmt 2847   Sfmt 2847   V:\FILES\JOHNSON.136   SHEILA
                                      476                136 UNITED STATES TAX COURT REPORTS                                      (475)


                                               mination sustaining the notices of lien and proposed levy. P
                                               filed a petition for review of the determination under I.R.C.
                                               sec. 6330(d). During a remand, R’s settlement officer deter-
                                               mined that P’s reasonable collection potential (RCP) was more
                                               than three times the amount he had informally proposed,
                                               which was based solely on the value of one asset he owned.
                                               In calculating RCP, R also took into account, as dissipated
                                               assets, certain of the proceeds of P’s investment assets that he
                                               did not pay to the IRS. After remand R issued a supplemental
                                               notice of determination to proceed with collection by lien and/
                                               or levy of assessed income tax liabilities, plus interest and
                                               penalties, for taxable years 1999 and 2000. Held: Where P
                                               amended or withdrew an OIC, R’s Office of Appeals did not
                                               abuse its discretion in declining the terms previously offered
                                               in that OIC. Held, further, in declining P’s informal proposal
                                               on the grounds that it offered less than his RCP, R’s Office
                                               of Appeals did not abuse its discretion by including, in its cal-
                                               culation of P’s RCP, certain dissipated assets and the settle-
                                               ment officer’s final projection of P’s future earnings.

                                           Babcock Maclean and Marshall J. Gluck, for petitioner.
                                           Justin L. Campolieta, for respondent.

                                                                                  OPINION

                                        GUSTAFSON, Judge: This is an appeal, pursuant to section
                                      6330(d)(1), 1 by which petitioner Stephen Johnson seeks this
                                      Court’s review of a determination by the Office of Appeals of
                                      the Internal Revenue Service (IRS) to reject Mr. Johnson’s
                                      proposed offer-in-compromise (OIC) and to sustain the filing
                                      of a notice of Federal tax lien (NFTL) and notice of intent to
                                      levy, in order to collect Mr. Johnson’s unpaid Federal income
                                      taxes for tax years 1999 and 2000. That determination was
                                      made after the Office of Appeals had conducted a collection
                                      due process (CDP) hearing pursuant to section 6330(c) and a
                                      supplemental CDP hearing pursuant to a remand by this
                                      Court. This matter is currently before the Court pursuant to
                                      the parties’ joint motion to submit this case on a stipulated
                                      record under Rule 122.
                                        The issue for decision is whether the Office of Appeals’
                                      rejection of Mr. Johnson’s OIC was an abuse of discretion. We
                                      hold that the Office of Appeals did not abuse its discretion
                                        1 Unless otherwise indicated, all section references are to the Internal Revenue Code (26

                                      U.S.C.) as amended, and all Rule references are to the Tax Court Rules of Practice and Proce-
                                      dure.




VerDate 0ct 09 2002   09:55 May 31, 2013   Jkt 372897   PO 20009   Frm 00002   Fmt 2847   Sfmt 2847   V:\FILES\JOHNSON.136   SHEILA
                                      (475)                        JOHNSON v. COMMISSIONER                                            477


                                      by rejecting Mr. Johnson’s                    OIC     and sustaining the proposed
                                      collection action.

                                                                               Background
                                         This case was submitted fully stipulated pursuant to Rule
                                      122, and the facts are so found. The stipulations of the par-
                                      ties, with accompanying exhibits, are incorporated herein by
                                      this reference. At the time he filed the petition, Mr. Johnson
                                      resided in the Republic of Singapore.
                                      Mr. Johnson’s background
                                        Stephen Johnson earned a degree in business from the
                                      University of Pennsylvania School of Business and worked as
                                      an investment banker with UBS AG. Mr. Johnson left UBS AG
                                      and in 1999 established Asiawerks Global Investment Group,
                                      Pte., Ltd. (Asiawerks), in Singapore. Asiawerks is an invest-
                                      ment firm in which Mr. Johnson held a 50-percent ownership
                                      interest. In 1999 and 2000, Mr. Johnson’s primary sources of
                                      regular income were his Asiawerks salary and certain tribal
                                      income he received annually as a member of the Saginaw
                                      Chippewa Indian Tribe.
                                      Mr. Johnson’s 1999 and 2000 liabilities
                                        During 1999 and 2000, Mr. Johnson liquidated a number
                                      of investments. 2 The gain realized from the liquidation of
                                      these investments, combined with his other earnings,
                                      resulted in AGI of $1,740,936 in 1999 and $1,809,767 in 2000
                                      and in Federal income tax liabilities of $514,164 for 1999 and
                                      $565,268 for 2000. Mr. Johnson filed returns for the years
                                      1999 and 2000 in December 2002, but he did not make any
                                      payments towards his outstanding liabilities for those
                                      years. 3
                                        2 In his briefs Mr. Johnson stresses the stipulated fact that he liquidated the investments in

                                      order to fund a divorce settlement. However, as respondent points out, Mr. Johnson paid $1.25
                                      million to his former wife, whereas his combined adjusted gross income (AGI) for the two years
                                      totaled over $3.5 million. In general, when calculating a taxpayer’s RCP, a settlement officer
                                      may allow an expense for court-ordered payments (e.g., alimony, child support) where the pay-
                                      ments are reasonable. Internal Revenue Manual (IRM) pt. 5.15.1.10(3) (Oct. 2, 2009). However,
                                      Mr. Johnson’s payment of the $1.25 million divorce settlement has no bearing on his RCP here
                                      because there are no ongoing payments towards this liability which need to be considered in
                                      determining his ability to pay his taxes.
                                        3 The IRS did, however, apply to those liabilities various overpayment credits from subsequent

                                      years and the downpayments Mr. Johnson submitted in connection with various OICs.




VerDate 0ct 09 2002   09:55 May 31, 2013   Jkt 372897   PO 20009   Frm 00003   Fmt 2847   Sfmt 2847   V:\FILES\JOHNSON.136   SHEILA
                                      478                136 UNITED STATES TAX COURT REPORTS                                      (475)


                                      The IRS’s notices of lien and proposed levy
                                         On October 30, 2007, the Internal Revenue Service (IRS)
                                      issued Mr. Johnson a ‘‘Notice of Federal Tax Lien Filing and
                                      Your Right to a Hearing under IRC 6320’’ (lien notice), noti-
                                      fying him that a Federal tax lien had been filed with respect
                                      to his outstanding income tax liabilities for taxable years
                                      1999 and 2000, and notifying him of his right to request a
                                      CDP hearing. Two days later, on November 1, 2007, the IRS
                                      issued Mr. Johnson a ‘‘Final Notice—Notice of Intent to Levy
                                      and Notice of Your Right to a Hearing’’ (levy notice) for those
                                      same years, pursuant to sections 6330(a)(1) and 6331(d)(1),
                                      advising him of the IRS’s intent to levy upon his property. As
                                      of that time, his liabilities for 1999 and 2000—including
                                      interest and penalties—totaled $1,586,952.45. On November
                                      19, 2007, the IRS received from Mr. Johnson’s representatives
                                      a Form 12153, ‘‘Request for a Collection Due Process
                                      Hearing’’.
                                         The resulting CDP process took nearly four years. Since
                                      November 2007 multiple settlement officers have been
                                      involved in the CDP process, and through his representatives
                                      Mr. Johnson submitted three formal OICs on Forms 656,
                                      ‘‘Offer in Compromise’’, and a number of proposed amend-
                                      ments, and he informally proposed an amendment to an OIC.
                                      While only the most recent determination (made by the
                                      Office of Appeals in April 2010) is now subject to our review,
                                      see Kelby v. Commissioner, 130 T.C. 79 (2008), an under-
                                      standing of the CDP hearing history is helpful.
                                      Hearing before Settlement Officer Hunt
                                        On November 30, 2007, Mr. Johnson submitted his first
                                      formal OIC on a Form 656 dated October 21, 2007 (October
                                      2007 OIC). Under the October 2007 OIC Mr. Johnson proposed
                                      to pay, in settlement of his outstanding tax liabilities, a total
                                      of $225,000 in 23 monthly installments of $9,375 plus a
                                      deposit in the same amount. Mr. Johnson’s CDP hearing was
                                      initially assigned to Settlement Officer Mark Hunt (SO
                                      Hunt), who calculated Mr. Johnson’s total tax liability with
                                      accruals to be $2,324,895.40.
                                        On March 27, 2008, SO Hunt issued a preliminary deter-
                                      mination in which he calculated Mr. Johnson’s reasonable




VerDate 0ct 09 2002   09:55 May 31, 2013   Jkt 372897   PO 20009   Frm 00004   Fmt 2847   Sfmt 2847   V:\FILES\JOHNSON.136   SHEILA
                                      (475)                        JOHNSON v. COMMISSIONER                                            479


                                      collection potential (RCP) to be $707,386 4 and recommended
                                      rejection of the October 2007 OIC. Mr. Johnson’s representa-
                                      tives subsequently submitted an informal proposal to amend
                                      the October 2007 OIC upward to $456,064, which Mr. John-
                                      son would fund with distributions from his investment in
                                      DCM II Doll Technology Investment Fund II LP (DCM) and his
                                      interest in Claremont LLC (Claremont). However, in June
                                      2008 the October 2007 OIC was informally amended down-
                                      ward to $350,000 to account for Mr. Johnson’s plan to sell his
                                      interest in DCM to an unrelated investor for 75 percent of the
                                      value.
                                         During an October 28, 2008, telephone conference, Mr.
                                      Johnson’s representatives informed SO Hunt and his man-
                                      ager that Asiawerks was having financial difficulty and that
                                      a portion of Mr. Johnson’s 2008 DCM distribution, 5 which had
                                      been earmarked to fund the October 2007 OIC and subse-
                                      quent OICs, was reinvested in Asiawerks to pay his salary.
                                      The parties also discussed the inclusion of certain dissipated
                                      assets in Mr. Johnson’s RCP, the value of Mr. Johnson’s
                                      interest in Asiawerks, and the disallowance of a monthly
                                      loan payment. 6
                                         On December 17, 2008, after a series of further discus-
                                      sions, Mr. Johnson’s representatives faxed to SO Hunt an
                                      amended offer-in-compromise proposing a $400,000 cash offer
                                      payable within eight months. This offer was formally
                                      amended a week later on December 24, 2008, when Mr.
                                         4 SO Hunt calculated Mr. Johnson’s RCP to be $707,386 on the basis of a future income poten-

                                      tial of $215,653 (monthly income of $9,777 less allowable monthly expenses of $5,284.22 pro-
                                      jected over 48 months) and a total equity in assets of $491,733. In calculating Mr. Johnson’s
                                      RCP for the purpose of this preliminary determination, SO Hunt did not place any value on
                                      Mr. Johnson’s 50-percent interest in Asiawerks, and he did not treat the distribution from cer-
                                      tain investments or the proceeds from the sale of real property as dissipated assets. In ulti-
                                      mately recommending rejection of the October 2007 OIC, SO Hunt rejected Mr. Johnson’s asser-
                                      tion that the forced sale of securities giving rise to his tax liabilities for years 1999 and 2000
                                      presented a unique circumstance that would permit the acceptance of an OIC for less than his
                                      RCP.
                                         5 Mr. Johnson received an earlier DCM distribution, apparently in 2006, which is not at issue

                                      in the supplemental notice of determination issued by Settlement Officer Covey (SO Covey). For
                                      clarity, we will refer to the distribution at issue in the present case as the ‘‘2008 DCM distribu-
                                      tion.’’
                                         6 The parties have continuously disagreed about the disallowance (in computing RCP) of a

                                      $3,000 monthly loan payment attributable to a home equity loan that Mr. Johnson’s mother took
                                      out on behalf of her son. Mr. Johnson claims that the loan was taken out so that he could fund
                                      the repayment of his outstanding tax liabilities; however, he failed to substantiate that the loan
                                      proceeds were ever used for this purpose. SO Hunt initially proposed to allow this expense in
                                      his draft determination, but the Appeals Office ultimately disallowed the expense in the supple-
                                      mental notice of determination, because Mr. Johnson was not legally obligated to repay the loan
                                      and the payments were not a necessary living expense.




VerDate 0ct 09 2002   09:55 May 31, 2013   Jkt 372897   PO 20009   Frm 00005   Fmt 2847   Sfmt 2847   V:\FILES\JOHNSON.136   SHEILA
                                      480                136 UNITED STATES TAX COURT REPORTS                                      (475)


                                      Johnson’s representatives submitted a revised amended offer-
                                      in-compromise (December 24, 2008, OIC), in which Mr. John-
                                      son proposed to pay $400,000 in five bimonthly installments
                                      of $80,000. 7
                                         In his January 2009 draft Appeals case memorandum
                                      (ACM), SO Hunt recommended acceptance of Mr. Johnson’s
                                      December 24, 2008, OIC after calculating Mr. Johnson’s RCP
                                      to be $364,392. 8 SO Hunt’s manager, however, rejected this
                                      recommendation. Shortly thereafter, SO Hunt was internally
                                      reassigned to an acting position in management.
                                      Hearing before Settlement Officer DeVincentz
                                         Settlement Officer D.W. DeVincentz was assigned to com-
                                      plete Mr. Johnson’s CDP hearing upon SO Hunt’s reassign-
                                      ment. After reviewing all the prior correspondence and
                                      records, SO DeVincentz recalculated Mr. Johnson’s RCP to be
                                      $513,872 9 and advised Mr. Johnson’s representatives that a
                                      short-term cash offer of $500,000, with an additional $20,000
                                      downpayment, would be an acceptable collection alternative.
                                         On April 10, 2009, Mr. Johnson’s representatives informed
                                      SO DeVincentz that Asiawerks was in the process of winding
                                      up, and thus Mr. Johnson could no longer afford the payment
                                      schedule proposed in his December 24, 2008, OIC. Mr. John-
                                      son’s representatives also informed SO DeVincentz that Mr.
                                      Johnson had used the remainder of his DCM distributions to
                                      fund the business operations of Asiawerks and for living
                                      expenses, and that his only remaining asset was his post-dis-
                                      tribution interest in DCM, valued at $60,000. For that reason,
                                         7 The first installment of $80,000 consisted of $42,500 (which Mr. Johnson would pay upon

                                      acceptance of the December 24, 2008, OIC) plus the $37,500 previously paid in connection with
                                      the October 2008 OIC.
                                         8 SO Hunt’s January 2009 draft ACM was not a final product and contained a number of er-

                                      rors, including a misstatement of Mr. Johnson’s RCP. Mr. Johnson’s RCP was determined to
                                      be $364,392 by combining future income potential of $7,800 and equity in assets of $356,592.
                                      This figure did not include the combined $80,000 in cash already remitted to the IRS in connec-
                                      tion with Mr. Johnson’s October 2007 OIC and December 24, 2008, OIC.
                                         9 SO DeVincentz recalculated Mr. Johnson’s RCP to be $513,872 by combining $77,280 in fu-

                                      ture income potential with $436,592 in asset equity. In recalculating Mr. Johnson’s future in-
                                      come potential, SO DeVincentz determined that only $1,842 of the $3,000 monthly loan payment
                                      was allowable as a necessary living expense, representing the difference between the $3,000 Mr.
                                      Johnson was currently paying and the $1,158 his mother had been paying towards her mortgage
                                      before the monthly loan payment arrangement. This effectively increased Mr. Johnson’s dispos-
                                      able income by $1,158 per month. SO DeVincentz added the $1,158 to the $130 in net monthly
                                      income determined by SO Hunt, which he then multiplied by 60 months to arrive at a future
                                      income potential of $77,280. Moreover, SO DeVincentz increased Mr. Johnson’s asset equity fig-
                                      ure from $356,592 (as calculated by SO Hunt) to $436,592 by adding the value of Mr. Johnson’s
                                      discounted interest in a coal mine owned by Asiawerks.




VerDate 0ct 09 2002   09:55 May 31, 2013   Jkt 372897   PO 20009   Frm 00006   Fmt 2847   Sfmt 2847   V:\FILES\JOHNSON.136   SHEILA
                                      (475)                        JOHNSON v. COMMISSIONER                                            481


                                      Mr. Johnson directed his representatives to amend the
                                      December 24, 2008, OIC downward to $140,000, which would
                                      consist of the $80,000 he had previously remitted in connec-
                                      tion with his prior OICs and his remaining $60,000 interest
                                      in DCM. SO DeVincentz declined this informal offer of
                                      $140,000 and informed Mr. Johnson that a notice of deter-
                                      mination sustaining the proposed collection action would be
                                      issued.
                                      Determination, Tax Court petition, and remand
                                         The Office of Appeals issued its notice of determination on
                                      April 17, 2009. Mr. Johnson filed a petition with the Court
                                      challenging the IRS’s rejection of his OIC and arguing that an
                                      offer of $140,000 was acceptable given his financial situation.
                                      Respondent subsequently moved for remand because the
                                      notice of determination did not explain how SO DeVincentz
                                      had calculated Mr. Johnson’s RCP. This Court remanded the
                                      case to the Office of Appeals on December 17, 2009, granting
                                      Mr. Johnson a supplemental administrative hearing pursu-
                                      ant to section 6330.
                                      Supplemental hearing and determination
                                         Upon remand, Settlement Officer Covey was assigned to
                                      Mr. Johnson’s hearing and reviewed the administrative
                                      record. At that time, Mr. Johnson’s unpaid balance (including
                                      interest and penalties) was $2,468,936.29; and SO Covey ten-
                                      tatively calculated Mr. Johnson’s RCP to be only about one-
                                      fourth of that—i.e., $568,408 10—on the basis of her under-
                                      standing of Mr. Johnson’s financial situation.
                                         A face-to-face conference was held on March 2, 2010, in
                                      which SO Covey and Mr. Johnson’s representatives discussed
                                      the issues relating to Mr. Johnson’s unpaid tax liabilities,
                                      including the dissipation of Mr. Johnson’s 2008 DCM distribu-
                                      tion. Mr. Johnson’s representatives claimed that the
                                      $277,000 2008 DCM distribution was used to pay Mr. John-
                                      son’s representatives in connection with the ongoing Tax
                                        10 SO Covey initially calculated Mr. Johnson’s RCP to be $568,408 on the basis of a future

                                      income potential of $212,784 over a period of 48 months and a total equity in assets of $355,625.
                                      SO Covey noted, however, that before a final calculation could be determined she needed more
                                      information regarding an appraisal of Asiawerks and other companies Mr. Johnson held inter-
                                      ests in, as well as documentation substantiating that the liquidation proceeds of certain invest-
                                      ments were used for necessary living expenses.




VerDate 0ct 09 2002   09:55 May 31, 2013   Jkt 372897   PO 20009   Frm 00007   Fmt 2847   Sfmt 2847   V:\FILES\JOHNSON.136   SHEILA
                                      482                136 UNITED STATES TAX COURT REPORTS                                      (475)


                                      Court proceeding and to fund the downpayment of the
                                      December 24, 2008, OIC, and that any remaining funds were
                                      either reinvested into the failing Asiawerks or used for per-
                                      sonal living expenses. SO Covey requested that Mr. Johnson
                                      provide by March 16, 2010, a number of documents substan-
                                      tiating his current financial affairs, including: proof of
                                      disbursements from the 2008 DCM distribution and the liq-
                                      uidation of Mr. Johnson’s investment in Claremont; closing
                                      statements; settlement sheets; bank statements verifying Mr.
                                      Johnson’s claim that the money he reinvested in Asiawerks
                                      to pay his salary had been used for necessary living
                                      expenses; Mr. Johnson’s current Form W–2, Wage and Tax
                                      Statement, to corroborate a supposed reduction in his tribal
                                      income; current statements establishing Mr. Johnson’s
                                      remaining interests in DCM and Claremont; and Forms 433–
                                      B, ‘‘Collection Information Statement for Businesses’’, for all
                                      companies in which Mr. Johnson held an interest. In
                                      response, Mr. Johnson’s representatives faxed SO Covey a
                                      letter on March 12, 2010, advising SO Covey that the Clare-
                                      mont investment had paid out $11,317 and was now finished,
                                      and advocating that SO Covey apply a flexible standard in
                                      calculating Mr. Johnson’s RCP, given that Asiawerks was now
                                      defunct. (As is explained below, most of the requested docu-
                                      ments were never provided to SO Covey.)
                                         In a letter dated March 12, 2010, Mr. Johnson’s represent-
                                      atives reiterated that his current offer was $140,000, con-
                                      sisting of $80,000 already remitted in connection with his
                                      prior OICs plus $60,000 that he believed he could obtain by
                                      liquidating his remaining $60,000 interest in DCM. That is,
                                      Mr. Johnson’s $140,000 proposal presumed that, beyond the
                                      $80,000 he had already remitted, the IRS could reasonably
                                      expect to collect from him in the future no more than
                                      $60,000. At this time, Mr. Johnson’s unpaid income tax
                                      liabilities (with accruals) totaled approximately $2.5 million.
                                         On the basis of her review of the entire administrative
                                      record, SO Covey ultimately concluded that neither of Mr.
                                      Johnson’s proposed offers—i.e., neither the informal proposal
                                      of $140,000, nor the December 24, 2008, OIC of $400,000 that
                                      he had withdrawn—would be an acceptable offer, given her
                                      calculation of his RCP. In evaluating Mr. Johnson’s proposals,
                                      SO Covey calculated his RCP to be $445,181 (i.e., about 18
                                      percent of his total liability of about $2.5 million), on the




VerDate 0ct 09 2002   09:55 May 31, 2013   Jkt 372897   PO 20009   Frm 00008   Fmt 2847   Sfmt 2847   V:\FILES\JOHNSON.136   SHEILA
                                      (475)                           JOHNSON v. COMMISSIONER                                                  483


                                      basis of total equity in assets of $288,317 and future income
                                      potential of $156,864. Her asset computation was as follows:
                                                Personal bank accounts ......................................                   $7,500
                                                Value of remaining DCM interest ......................                          60,000
                                                Dissipated assets:
                                                  Claremont interest sold 4/2009 .......................                        11,317
                                                  DCM interest sold 6/2009 ................................                    209,500

                                                   Total ..................................................................    288,317

                                      SO Covey’s determination of Mr. Johnson’s future income
                                      potential first computed his monthly disposable income
                                      (income over allowable expenses) and then multiplied that
                                      amount by 48 months, to yield four years’ worth of disposable
                                      income. For his monthly income, SO Covey took the figures
                                      from Mr. Johnson’s own financial statement—i.e., wages of
                                      $3,267 per month and tribal income of $6,510 per month,
                                      totaling $9,777 per month. SO Covey’s monthly expense fig-
                                      ures differed somewhat from Mr. Johnson’s (in some respects
                                      to his advantage, but overall to his disadvantage), and both
                                      are set out here:

                                                                                            Mr. Johnson                        SO Covey

                                           Monthly income                                                $9,777                       $9,777
                                           Monthly expenses:
                                            National Standard                                 $600                            $760
                                            Housing and utilities                            3,117                            3,117
                                            Health care                                          0                               60
                                            Taxes                                            1,500                            1,500
                                            Transportation—
                                              operating cost                                    385                            385
                                            Transportation—owner-
                                              ship cost                                        915                             489
                                            Child care                                         300                             198
                                            Loan payment                                     3,000                               0

                                               Total expenses                                              9,817                       6,509

                                           Monthly disposable income                                          –40                      3,268

                                      Thus, SO Covey disagreed with Mr. Johnson both about the
                                      amount of his assets (i.e., she included his personal bank
                                      accounts and about $220,000 of dissipated assets) and about
                                      the expenses that should be taken into account in figuring




VerDate 0ct 09 2002   09:55 May 31, 2013   Jkt 372897   PO 20009     Frm 00009     Fmt 2847     Sfmt 2847     V:\FILES\JOHNSON.136    SHEILA
                                      484                    136 UNITED STATES TAX COURT REPORTS                                     (475)


                                      his disposable income (chiefly, she made no allowance for his
                                      $3,000 loan payment). 11
                                        Mr. Johnson did not thereafter provide, in response to SO
                                      Covey’s requests, any documentation substantiating that the
                                      funds reinvested in Asiawerks were used for necessary living
                                      expenses, nor Forms 433–B for interests he owned in various
                                      businesses. SO Covey therefore recommended, and the Office
                                      of Appeals issued, a ‘‘Supplemental Notice of Determination
                                      Concerning Collection Action(s) Under Section 6320 and/or
                                      6330’’ on April 20, 2010, fully sustaining the proposed lien
                                      and levy actions of the Collection Division. In response to
                                      this supplemental notice of determination, Mr. Johnson filed
                                      an initial brief with this Court, arguing that the Office of
                                      Appeals failed to properly apply the IRM provisions on dis-
                                      sipated assets and thus abused its discretion in rejecting Mr.
                                      Johnson’s OICs.

                                                                                   Discussion
                                      I. Legal principles for ‘‘collection due process’’
                                            A. Right to agency-level hearing
                                        Section 6330 provides that, before a levy may be made on
                                      any property or right to property pursuant to section 6331,
                                      a taxpayer is entitled to notice of the Commissioner’s intent
                                      to levy and of the taxpayer’s right to a fair hearing before an
                                      impartial officer of the IRS Office of Appeals. Sec. 6330(a) and
                                      (b). Similarly, section 6320 provides that after the filing of an
                                      NFTL under section 6323, the Secretary shall furnish written
                                      notice of the filing and of the taxpayer’s right to a hearing,
                                      which is generally conducted consistent with the procedures
                                      set forth in section 6330(c), (d), and (e). Sec. 6320(c).
                                        At the agency-level CDP hearing, taxpayers may raise chal-
                                      lenges to ‘‘the appropriateness of collection actions’’ and may
                                      make ‘‘offers of collection alternatives, which may include the
                                      posting of a bond, the substitution of other assets, an install-
                                      ment agreement, or an offer-in-compromise.’’ Sec.
                                      6330(c)(2)(A). The appeals officer must consider those issues,
                                      verify the requirements of applicable law and administrative
                                      procedure have been met, and consider ‘‘whether any pro-
                                      posed collection action balances the need for the efficient
                                           11 See   supra notes 6 and 9.




VerDate 0ct 09 2002   09:55 May 31, 2013    Jkt 372897     PO 20009   Frm 00010   Fmt 2847   Sfmt 2847   V:\FILES\JOHNSON.136   SHEILA
                                      (475)                        JOHNSON v. COMMISSIONER                                            485


                                      collection of taxes with the legitimate concern of the person
                                      [involved] that any collection action be no more intrusive
                                      than necessary.’’ Sec. 6330(c)(3)(C). As his collection alter-
                                      native, Mr. Johnson chose to submit OICs. In the case before
                                      us, Mr. Johnson disputes the IRS’s failure to accept his latest
                                      OIC.

                                           B. Offers-in-compromise
                                         Section 7122(a) authorizes the Secretary to compromise
                                      any civil or criminal case arising under the internal revenue
                                      laws. Section 7122(c) provides that the Secretary shall pre-
                                      scribe guidelines for evaluation of whether an OIC should be
                                      accepted, and thus the decision whether to accept or reject an
                                      OIC is left to the Secretary’s discretion. Fargo v. Commis-
                                      sioner, 447 F.3d 706, 712 (9th Cir. 2006), affg. T.C. Memo.
                                      2004–13; 26 C.F.R. sec. 301.7122–1(c)(1), Proced. & Admin.
                                      Regs.
                                         The regulations promulgated under section 7122 set forth
                                      three grounds for compromise of a taxpayer’s liability. These
                                      grounds are doubt as to liability, doubt as to collectibility,
                                      and the promotion of effective tax administration. 26 C.F.R.
                                      sec. 301.7122–1(b). In his CDP hearing Mr. Johnson sought a
                                      compromise based on doubt as to collectibility.
                                         The Secretary may compromise a tax liability based on
                                      doubt as to collectibility where the taxpayer’s assets and
                                      income are less than the full amount of the liability. 26
                                      C.F.R. sec. 301.7122–1(b)(2). Under the Commissioner’s
                                      administrative procedures, an OIC based on doubt as to
                                      collectibility will be acceptable only if it reflects the tax-
                                      payer’s ‘‘reasonable collection potential’’ (RCP). Rev. Proc.
                                      2003–71, sec. 4.02(2), 2003–2 C.B. 517, 517. RCP is generally
                                      calculated by multiplying a taxpayer’s monthly income avail-
                                      able to pay taxes by the number of months remaining in the
                                      statutory period for collection, see sec. 6502, and adding to
                                      that product the realizable net equity in the taxpayer’s
                                      assets. Both parties appear to agree that Mr. Johnson’s RCP
                                      is substantially less than his tax liability, which stood at
                                      approximately $2.5 million as of January 28, 2010. The par-
                                      ties obviously disagree, however, as to the amount of Mr.
                                      Johnson’s RCP.




VerDate 0ct 09 2002   09:55 May 31, 2013   Jkt 372897   PO 20009   Frm 00011   Fmt 2847   Sfmt 2847   V:\FILES\JOHNSON.136   SHEILA
                                      486                136 UNITED STATES TAX COURT REPORTS                                      (475)


                                        The IRS may reject an OIC because the taxpayer’s ability to
                                      pay is greater than the amount he proposes to pay under the
                                      compromise proposal. See Fargo v. Commissioner, 447 F.3d
                                      at 709–710. Under IRS procedures, the IRS will not accept a
                                      compromise that is less than the reasonable collection value
                                      of the case, absent a showing of special circumstances. See
                                      Rev. Proc. 2003–71, sec. 4.02(2). Mr. Johnson has not argued
                                      that he presents special circumstances, so we determine here
                                      whether the settlement officer’s calculation of RCP was
                                      reasonable. See Murphy v. Commissioner, 125 T.C. 301, 302
                                      (2005), affd. 469 F.3d 27 (1st Cir. 2006).
                                           C. Dissipated assets
                                        Where the settlement officer determines that a taxpayer
                                      has dissipated assets in disregard of the taxpayer’s out-
                                      standing Federal income tax liability, the IRM 12 provides
                                      that the dissipated assets may be included in the calculation
                                      of the minimum amount that is to be paid under an accept-
                                      able OIC:
                                      (1) During an offer investigation it may be discovered that assets (liquid
                                      or non liquid) have been sold, gifted, transferred, or spent on non-priority
                                      items or debts and are no longer available to pay the tax liability. This sec-
                                      tion discusses treatment of the value of these assets when considering an
                                      OIC.

                                                               *   *    *   *   *   *    *
                                      (2) Once it is determined that a specific asset has been dissipated, the
                                      investigation should address whether the value of the asset, or a portion
                                      of the value, should be included in an acceptable offer amount.
                                      (3) Inclusion of the value of dissipated assets must clearly be justified in
                                      the case file and documented on the ICS or AOIC history, as appropriate.
                                      A determination that assets were dissipated should include an analysis of
                                      the following facts:
                                           •   When the asset(s) were dissipated in relation to the offer submission.
                                           •   When the asset(s) were dissipated in relation to the liability.
                                           •   How the asset was transferred.
                                           •   If the taxpayer realized any funds from the transfer of assets.
                                        12 The IRM provisions on dissipated assets were revised in October 2010 and since then ap-

                                      pear in part 5.8.5.16, but we quote the provisions as in effect when the Office of Appeals made
                                      the determination under review here. Mr. Johnson asserts in his brief that the IRM instructs
                                      settlement officers to take dissipated assets into account ‘‘only in unusual circumstances.’’ The
                                      IRM, however, does not require ‘‘unusual circumstances’’ but requires only that the inclusion
                                      of dissipated assets ‘‘must clearly be justified.’’ IRM pt. 5.8.5.5(3) (Sept. 23, 2008). The IRM,
                                      quoted below, goes on to list a number of factors for consideration in deciding whether to include
                                      the value of dissipated assets in a taxpayer’s RCP as quoted above.




VerDate 0ct 09 2002   09:55 May 31, 2013   Jkt 372897   PO 20009   Frm 00012   Fmt 2847   Sfmt 2847   V:\FILES\JOHNSON.136   SHEILA
                                      (475)                        JOHNSON v. COMMISSIONER                                            487


                                           • How any funds realized from the disposition of assets were used.
                                           • The value of the assets and the taxpayer’s interest in those assets.

                                                               *    *  *    *   *   *   *
                                      (5) If the investigation clearly reveals that assets have been dissipated
                                      with a disregard of the outstanding tax liability, consider including the
                                      value in the RCP calculation.
                                        [IRM pt. 5.8.5.5 (Sept. 23, 2008).]

                                      A dissipated asset is thus defined as any asset (liquid or non-
                                      liquid) that has been sold, transferred, or spent on non-pri-
                                      ority items or debts and that is no longer available to pay the
                                      tax liability. IRM pt. 5.8.5.5(1); see also Samuel v. Commis-
                                      sioner, T.C. Memo. 2007–312. If the taxpayer establishes that
                                      he used the dissipated assets for necessary living expenses,
                                      the IRM instructs the settlement officer not to include them
                                      in the RCP calculation. IRM pt. 5.8.5.5(4). If the taxpayer fails
                                      to provide information substantiating the disposition of the
                                      funds from such assets, the settlement officer may consider
                                      including the full value of the dissipated assets as part of the
                                      taxpayer’s RCP, for purposes of determining an acceptable
                                      offer amount. IRM pt. 5.8.5.5(8).
                                         A consequence of including dissipated assets in RCP is that
                                      the taxpayer is fictitiously assumed to have, as funds avail-
                                      able to pay his tax liability, money that he manifestly does
                                      not have anymore—an assumption that may be discouraging
                                      to the delinquent taxpayer who is trying to get right with the
                                      IRS. However, the evident reason for this rule is to deter
                                      delinquent taxpayers from wasting money that they owe and
                                      should pay as taxes. Conscientious taxpayers would object—
                                      and the system would suffer—if a taxpayer with overdue
                                      taxes and with money in hand could spend his money on
                                      ‘‘non-priority items’’ and nonetheless effectively obtain
                                      forgiveness of his liability simply by proving in the collection
                                      context that he really did reduce his collection potential by
                                      wasting the assets. Removing dissipated assets from RCP
                                      could create perverse incentives, and the tax collector must
                                      have discretion to avoid that problem. It is therefore reason-
                                      able for the Office of Appeals to consider including dissipated
                                      assets in a taxpayer’s RCP.




VerDate 0ct 09 2002   09:55 May 31, 2013   Jkt 372897   PO 20009   Frm 00013   Fmt 2847   Sfmt 2847   V:\FILES\JOHNSON.136   SHEILA
                                      488                136 UNITED STATES TAX COURT REPORTS                                      (475)


                                           D. Judicial review
                                        If the taxpayer is dissatisfied with the determination made
                                      by the Office of Appeals in his CDP hearing, he may appeal
                                      that determination by filing a petition in this Court. Sec.
                                      6330(d). Where, as here, the underlying tax liability is not at
                                      issue, our review of the notice of determination under section
                                      6330 is for abuse of discretion. See Sego v. Commissioner,
                                      114 T.C. 604, 610, (2000); Goza v. Commissioner, 114 T.C.
                                      176, 182, (2000). We do not make an independent decision as
                                      to what would be an acceptable OIC or substitute our judg-
                                      ment for that of the settlement officer. Rather, we do not dis-
                                      turb the IRS’s decision to reject an OIC unless it is arbitrary,
                                      capricious, or without sound basis in fact or law. Murphy v.
                                      Commissioner, 125 T.C. at 320. 13
                                      II. Non-acceptance of the December 24, 2008, OIC
                                         For two reasons, we hold that when in January 2009 the
                                      Office of Appeals declined to accept Mr. Johnson’s December
                                      24, 2008, OIC offering $400,000, it did not abuse its discre-
                                      tion:
                                           A. Mr. Johnson amended or withdrew the December 24,
                                              2008, OIC in April 2009.
                                        The regulations require that OICs be submitted ‘‘in the
                                      form and manner * * * prescribed by the Secretary’’. 26
                                      C.F.R. sec. 301.7122–1(d)(1). The prescribed form for an OIC
                                      is Form 656. See 26 C.F.R. sec. 601.203(b), Statement of
                                      Procedural Rules; Rev. Proc. 2003–71, sec. 4.01, 2003–2 C.B.
                                      at 517. Mr. Johnson’s latest Form 656 was submitted in
                                      December 2008 and contained his offer to pay $400,000.
                                      When respondent moved the Court (with Mr. Johnson’s con-
                                      sent) to remand this case to the Office of Appeals, respondent
                                      apparently assumed that Mr. Johnson’s December 24, 2008,
                                      OIC had still been pending at the time of the original April
                                      17, 2009, determination. 14 However, it is clear that the
                                        13 Mr. Johnson requests that this Court ‘‘order that petitioner’s pending offer in compromise

                                      be accepted by respondent’’; however, this Court has jurisdiction to review respondent’s rejection
                                      of an OIC for abuse of discretion. We cannot order the IRS to accept an OIC. Rather, if we find
                                      that the IRS abused its discretion in rejecting an OIC, the remedy available to this Court is
                                      to determine that the collection action itself—the filing of the NFTL or the proposed levy—is
                                      not sustained.
                                        14 Respondent’s motion for remand filed December 14, 2009, stated: ‘‘The primary issue in this




VerDate 0ct 09 2002   09:55 May 31, 2013   Jkt 372897   PO 20009   Frm 00014   Fmt 2847   Sfmt 2847   V:\FILES\JOHNSON.136   SHEILA
                                      (475)                        JOHNSON v. COMMISSIONER                                            489


                                      December 24, 2008, OIC was either amended or withdrawn by
                                      the time the Office of Appeals made its original determina-
                                      tion and could not have been accepted by the IRS at that
                                      time.
                                         1. The December 24, 2008, OIC was amended in
                                             April 2009.
                                         In a letter dated April 10, 2009, Mr. Johnson’s representa-
                                      tives stated:
                                      Mr. Johnson * * * is no longer able to make the payments required under
                                      the $400,000 offer. * * * Mr. Johnson has instructed us to amend the
                                      pending $400,000 offer downward to $140,000, consisting of the $80,000 he
                                      has already paid to the IRS and the estimated $60,000 sale value of his
                                      remaining interest in Doll [DCM].

                                                              *   *  *   *   *  *   *
                                      * * * We respectfully request * * * that Mr. Johnson’s offer as revised
                                      herein be accepted by the IRS.

                                      In a letter dated March 12, 2010, Mr. Johnson’s representa-
                                      tives confirmed to SO Covey that Mr. Johnson’s ‘‘current
                                      offer in compromise * * * totals $140,000’’.
                                         We find no provision in the pertinent regulations or Rev-
                                      enue Procedure that precludes an amendment to an OIC or
                                      requires that such an amendment take any particular form.
                                      Consequently, we conclude that on April 10, 2009, Mr. John-
                                      son’s latest OIC was amended downward by $260,000 15 to an
                                      amount of $140,000. As a result of that amendment, there
                                      was no longer pending thereafter any offer to pay $400,000.
                                      Therefore, the Office of Appeals did not abuse its discretion
                                      by failing to accept payment of $400,000.



                                      case is whether respondent’s Office of Appeals abused its discretion in rejecting, as a collection
                                      alternative, a proposed offer-in-compromise. * * * The Notice of Determination, however, does
                                      not provide an explanation as to how the Office of Appeals calculated petitioner’s reasonable
                                      collection potential’’. This suggests that respondent believed Mr. Johnson’s December 24, 2008,
                                      OIC was still pending and had not been withdrawn. Otherwise respondent need only have
                                      issued a notice of determination stating that the December 24, 2008, offer had been withdrawn,
                                      rather than asking for a remand to clarify the calculation of Mr. Johnson’s RCP for an offer
                                      that respondent knew was no longer pending.
                                        15 The attachment to the supplemental notice of determination misstates Mr. Johnson’s pro-

                                      posal at one point by stating, ‘‘your proposal was decreased from $400,000 to $260,000’’. (Empha-
                                      sis added.) But in fact the offered amount was decreased by $260,000 to $140,000, as the attach-
                                      ment elsewhere acknowledges.




VerDate 0ct 09 2002   09:55 May 31, 2013   Jkt 372897   PO 20009   Frm 00015   Fmt 2847   Sfmt 2847   V:\FILES\JOHNSON.136   SHEILA
                                      490                136 UNITED STATES TAX COURT REPORTS                                      (475)


                                           2. If the December 24, 2008, OIC was not amended, then it
                                              was withdrawn.
                                         Mr. Johnson’s representatives’ April 2009 letter made it
                                      clear that his payment of $400,000 was no longer possible
                                      and was not offered. If the letter did not effectively amend
                                      the offer down to $120,000, then it must have withdrawn the
                                      offer of $400,000. An offer will be considered withdrawn on
                                      the IRS’s receipt of written notification of the withdrawal of
                                      the offer either by personal delivery or certified mail, or on
                                      issuance of a letter by the IRS confirming the taxpayer’s
                                      intent to withdraw the offer. 26 C.F.R. sec. 301.7122–1(d)(3);
                                      Rev. Proc. 2003–71, sec. 7.02, 2003–2 C.B. at 519. While Mr.
                                      Johnson’s representatives’ letter did not use the term ‘‘with-
                                      draw’’, it stated that ‘‘the $400,000 offer is no longer work-
                                      able’’ because Mr. Johnson ‘‘is no longer able to make the
                                      payments’’. If the letter withdrew the OIC, then the Office of
                                      Appeals did not abuse its discretion in failing to accept the
                                      then-obsolete December 24, 2008, OIC.
                                           B. An OIC offering $400,000 would have been defective.
                                         Even if Mr. Johnson’s offer to pay $400,000 had still been
                                      pending, the Office of Appeals would not have abused its
                                      discretion by failing to accept that offer when it issued its
                                      supplemental determination in April 2010. This is so for one
                                      of two alternative reasons: First, Mr. Johnson had stated
                                      that he could not afford to make the payments that the
                                      $400,000 OIC called for. If that were true, then he would
                                      default on his obligations under the OIC and, under the
                                      standard term in paragraph l of Form 656, would again
                                      become liable for the entire liability. The execution of the OIC
                                      would have been a pointless act. Or, second, for the reasons
                                      stated below in part III.B.2, SO Covey reasonably concluded
                                      that Mr. Johnson’s RCP exceeded $400,000. That being the
                                      case, it would not have been in the Government’s interest to
                                      accept the OIC, and the Office of Appeals would not have
                                      abused its discretion by declining to accept it.
                                         However, the only collection alternative pending during the
                                      supplemental hearing was the amended offer of $140,000
                                      (i.e., Mr. Johnson’s offer to pay $60,000, in addition to the
                                      $80,000 already remitted to the IRS). We now analyze that
                                      proposal.




VerDate 0ct 09 2002   09:55 May 31, 2013   Jkt 372897   PO 20009   Frm 00016   Fmt 2847   Sfmt 2847   V:\FILES\JOHNSON.136   SHEILA
                                      (475)                        JOHNSON v. COMMISSIONER                                            491


                                      III. Non-acceptance of the informal proposal
                                           A. Mr. Johnson’s informal proposal was pending.
                                         As we have noted, IRS regulations require that an OIC be
                                      submitted on a Form 656, whereas Mr. Johnson’s latest and
                                      only pending proposal was the $140,000 proposal commu-
                                      nicated by letter of April 10, 2009 (and confirmed by letter
                                      of March 12, 2010). However, for the reasons stated above in
                                      part II.A.1, the April 2009 letter amended the December 24,
                                      2008, OIC, so that the $140,000 proposal was pending in the
                                      form of the amended OIC. But even if the $140,000 proposal
                                      was not embodied in a formal OIC, it was nonetheless a
                                      ‘‘collection   alternative’’  for    purposes    of    section
                                      6330(c)(2)(A)(iii) and was properly considered during the CDP
                                      hearing. See Sullivan v. Commissioner, T.C. Memo. 2009–4,
                                      97 TCM (CCH) 1010, 1016 (2009).
                                           B. Mr. Johnson’s informal proposal was inadequate.
                                           1. The issue: Did Mr. Johnson’s RCP exceed $60,000?
                                         We hold that the Office of Appeals did not abuse its discre-
                                      tion in declining Mr. Johnson’s proposal to compromise his
                                      unpaid Federal income tax liabilities for $140,000. That pro-
                                      posed amount consisted of $80,000 that Mr. Johnson had
                                      already deposited in connection with prior offers and an addi-
                                      tional $60,000. Thus, Mr. Johnson essentially offered an
                                      additional $60,000 in settlement of a Federal income tax
                                      liability of approximately $2.5 million. This offer assumed
                                      that Mr. Johnson’s entire collection potential consisted of the
                                      value of a single asset that Mr. Johnson owned—his
                                      remaining interest in DCM after the second distribution.
                                         To be considered for acceptance, an offer based on doubt as
                                      to collectibility must equal or exceed a taxpayer’s reasonable
                                      collection potential. IRM pt. 5.8.1.1.3(3) (Sept. 23, 2008).
                                      Pursuant to Rev. Proc. 2003–71, sec. 4.02(2), an OIC based on
                                      doubt as to collectibility will be acceptable only if the offer
                                      reflects the taxpayer’s RCP, i.e., that amount, less than the
                                      full liability, which the IRS could collect through means such
                                      as administrative and judicial remedies. Murphy v. Commis-
                                      sioner, 125 T.C. at 309.
                                         For SO Covey to properly conclude that Mr. Johnson’s pro-
                                      posal should be rejected, she needed only to find that Mr.




VerDate 0ct 09 2002   09:55 May 31, 2013   Jkt 372897   PO 20009   Frm 00017   Fmt 2847   Sfmt 2847   V:\FILES\JOHNSON.136   SHEILA
                                      492                136 UNITED STATES TAX COURT REPORTS                                      (475)


                                      Johnson’s RCP exceeded $60,000 (i.e., the amount he proposed
                                      to pay under his offer). The precise amount by which Mr.
                                      Johnson’s RCP exceeded $60,000 need not be resolved,
                                      because it was sufficient for SO Covey to find that Mr. John-
                                      son had available for collection an amount that was substan-
                                      tially greater than his $60,000 offer.
                                           2. SO Covey’s analysis: Mr. Johnson’s RCP exceeded
                                              $60,000.
                                         SO Covey concluded (and we hold that she reasonably con-
                                      cluded) that Mr. Johnson had other assets and disposable
                                      income, not admitted by him, that could have funded addi-
                                      tional collection. In fact, SO Covey calculated Mr. Johnson’s
                                      RCP to be not $60,000, but $445,181. However, if Mr. John-
                                      son’s RCP did substantially exceed $60,000, then the rejection
                                      of his proposal was justified even if his RCP was not as great
                                      as $445,181. We therefore consider three principal items, any
                                      one of which by itself would support the supplemental deter-
                                      mination of the Office of Appeals.
                                           a. Dissipated assets
                                         SO Covey concluded that Mr. Johnson had a total equity
                                      in assets of $288,317, which included amounts he had pre-
                                      viously received from his Claremont investment and his 2008
                                      DCM distribution, which she considered dissipated assets.
                                      Specifically, SO Covey included (a) the $11,317 that Mr.
                                      Johnson received from the liquidation of his interest in
                                      Claremont and (b) $209,500 from Mr. Johnson’s 2008 DCM
                                      distribution of $277,000. (The portions of that distribution
                                      that she did not treat as dissipation were the $42,500 that
                                      was remitted to the IRS as a downpayment with the
                                      December 24, 2008, OIC, and $25,000 that was used to pay
                                      Mr. Johnson’s representatives in connection with the
                                      prosecution of his Tax Court proceeding.)
                                         Pursuant to IRM part 5.8.5.5(1), any assets that have been
                                      ‘‘sold, gifted, transferred, or spent on non-priority items or
                                      debts and are no longer available to pay the tax liability’’ are
                                      treated as dissipated assets. The IRM instructs a settlement
                                      officer to consider inclusion of dissipated assets, unless the
                                      taxpayer can substantiate that such assets were used to fund
                                      necessary living expenses. The burden rests on the taxpayer,




VerDate 0ct 09 2002   09:55 May 31, 2013   Jkt 372897   PO 20009   Frm 00018   Fmt 2847   Sfmt 2847   V:\FILES\JOHNSON.136   SHEILA
                                      (475)                        JOHNSON v. COMMISSIONER                                            493


                                      however, to provide complete and current financial informa-
                                      tion and to corroborate any such claims. See Kerr v. Commis-
                                      sioner, T.C. Memo. 2007–43; 26 C.F.R sec. 301.7122–1(d)(2).
                                         Mr. Johnson disputes the inclusion of any of his liquidated
                                      investments as dissipated assets for purposes of calculating
                                      his RCP, because (he says) these funds were reinvested in his
                                      failing business, in order to pay him a salary, which he
                                      argues was needed for necessary living expenses. If Mr.
                                      Johnson could show that he invested these distributions into
                                      Asiawerks to pay himself a salary, and if he could substan-
                                      tiate that he used the resulting salary for necessary living
                                      expenses, then he could credibly argue that these assets
                                      should not be included in his RCP calculation as dissipated
                                      assets. However, despite pointed requests from SO Covey,
                                      Mr. Johnson failed to substantiate either (a) how much of the
                                      2008 DCM distribution or the Claremont distribution that he
                                      invested into Asiawerks was actually used to pay his salary,
                                      or (b) how much of this salary, if any, was used for necessary
                                      living expenses. 16 Thus SO Covey did not abuse her discre-
                                      tion by including the full $220,817 as dissipated assets in
                                      calculating Mr. Johnson’s RCP.
                                           b. Personal bank accounts
                                         SO Covey determined from Mr. Johnson’s own financial
                                      statements that he held $7,500 in bank accounts (an amount
                                      equal to more than 10 percent of the $60,000 he offered). Mr.
                                      Johnson did not dispute this determination. He was therefore
                                      in a position to pay substantially more than the $60,000 he
                                      offered (which would come from his liquidation of DCM). This
                                      fact in itself was enough to justify the rejection of his
                                      $140,000 proposal.
                                           c. Future disposable income
                                        According to the IRM, the amount to be collected from
                                      future income, for purposes of calculating a taxpayer’s RCP,
                                      consists of projected gross monthly income, less allowable
                                      expenses, forecast over a specified monthly period. IRM pt.
                                      5.8.5.6. In calculating future income, settlement officers are
                                        16 According to his 2008 Form W–2, Mr. Johnson received $79,500 as tribal income. Since he

                                      had at least this tribal income from which to pay living expenses, we cannot assume that
                                      Asiawerks salary was spent on necessary living expenses, which the IRS determined to be
                                      $6,509 per month.




VerDate 0ct 09 2002   09:55 May 31, 2013   Jkt 372897   PO 20009   Frm 00019   Fmt 2847   Sfmt 2847   V:\FILES\JOHNSON.136   SHEILA
                                      494                136 UNITED STATES TAX COURT REPORTS                                      (475)


                                      directed to consider the taxpayer’s ‘‘overall general situation
                                      including such facts as age, health, marital status, number
                                      and age of dependents, level of education or occupational
                                      training, and work experience’’. Id. pt. 5.8.5.6(2). If a tax-
                                      payer is temporarily unemployed or underemployed, the IRM
                                      suggests using ‘‘the level of income expected if the taxpayer
                                      were fully employed and if the potential for employment is
                                      apparent.’’ Id. pt. 5.8.5.6(5).
                                         In this case, SO Covey calculated Mr. Johnson’s future
                                      disposable income to be $9,777 in projected gross monthly
                                      income, less $6,509 in allowable monthly expenses, arriving
                                      at $3,268 in disposable income per month, which she pro-
                                      jected over a period of 48 months. 17 Mr. Johnson makes two
                                      principal arguments against SO Covey’s determination of
                                      disposable income—first, that income should be reduced and,
                                      second, that his allowable expense should be increased.
                                         First, Mr. Johnson argues that he should essentially be
                                      treated as having no future income potential at all and that
                                      the Office of Appeals should apply a ‘‘flexible’’ standard in
                                      projecting his monthly income, given that Mr. Johnson’s
                                      business, Asiawerks, is now defunct. In their letter dated
                                      March 12, 2010, Mr. Johnson’s representatives essentially
                                      argue that he has no prospect of future income, other than
                                      his tribal income, because Asiawerks was in the process of
                                      winding up. This argument, however, overlooks the signifi-
                                      cant difference between being temporarily unemployed or
                                      underemployed and being permanently unemployable. In
                                      considering the factors outlined in the IRM, including Mr.
                                      Johnson’s health, education, skills, prior earnings, and
                                      professional background, SO Covey did not abuse her discre-
                                      tion in finding that Mr. Johnson was very employable and
                                      could, at a minimum, earn a projected $39,000 a year, in
                                      addition to his tribal income.
                                         Second, Mr. Johnson argues that his disposable income
                                      should be reduced by loan payments of $3,000 per month.
                                      This purported expense stems from a home equity loan that
                                      his mother took out on her home, the proceeds of which he
                                      claims were used by him for living expenses, the payment of
                                      taxes, and legal fees incurred in connection with this pro-
                                        17 In an exercise of discretion, SO Covey projected Mr. Johnson’s gross monthly income over

                                      a period of only 48 months, even though, according to IRM part 5.8.5.6(1)(A), she could have
                                      projected his income over 60 months.




VerDate 0ct 09 2002   09:55 May 31, 2013   Jkt 372897   PO 20009   Frm 00020   Fmt 2847   Sfmt 2847   V:\FILES\JOHNSON.136   SHEILA
                                      (475)                        JOHNSON v. COMMISSIONER                                            495


                                      ceeding. While SO Hunt proposed to allow the monthly loan
                                      payments as an expense in the calculation of Mr. Johnson’s
                                      RCP, and while SO DeVincentz would have allowed a portion
                                      of these loan payments, the administrative record reflects
                                      that the Office of Appeals was justified in ultimately dis-
                                      allowing the $3,000 monthly loan payments on SO Covey’s
                                      recommendation, because Mr. Johnson failed to establish
                                      that the payment of this debt was ‘‘necessary for the produc-
                                      tion of income or for the health and welfare of the taxpayer’s
                                      family,’’ as required by the IRM. See IRM pt. 5.8.5.6.2(1). A
                                      more difficult issue might have been presented had Mr.
                                      Johnson corroborated his claim that the loan proceeds were
                                      applied toward his outstanding tax liabilities; however, we
                                      need not address that hypothetical issue. In the absence of
                                      any evidence to substantiate his claims that the loan pro-
                                      ceeds were used for necessary living expenses or the payment
                                      of taxes and expenses, we cannot say that SO Covey abused
                                      her discretion by disallowing the $3,000 monthly loan pay-
                                      ments in calculating Mr. Johnson’s RCP.
                                         Thus, while Mr. Johnson proposed to pay the IRS the pro-
                                      ceeds from the anticipated sale of one asset and nothing
                                      more, SO Covey reasonably determined, in view of his profes-
                                      sional qualifications and personal earning history, that his
                                      reasonable collection potential included some amount of
                                      future disposable income. That being the case, rejection of his
                                      proposal was not an abuse of discretion.
                                           C. Mr. Johnson’s other arguments have no merit.
                                           1. The Office of Appeals did not renege on any deal with
                                              Mr. Johnson.
                                         Mr. Johnson claims in his answering brief that his OICs
                                      were accepted by the IRS four times over the last seven years,
                                      but each time the IRS subsequently reneged on the deals. Mr.
                                      Johnson argues that the administrative course of conduct
                                      was therefore more intrusive than necessary and denied him
                                      the fundamental fairness that Congress sought to protect in
                                      CDP hearings. Mr. Johnson’s claim fails, however, as a matter
                                      of both fact and law.




VerDate 0ct 09 2002   09:55 May 31, 2013   Jkt 372897   PO 20009   Frm 00021   Fmt 2847   Sfmt 2847   V:\FILES\JOHNSON.136   SHEILA
                                      496                136 UNITED STATES TAX COURT REPORTS                                      (475)


                                           a. As a matter of fact, no settlement officer purported to
                                              accept any offer made by Mr. Johnson.
                                         The record is altogether void of any instance in which a
                                      settlement officer or Appeals officer purported to actually
                                      accept any of Mr. Johnson’s OICs. While SO Hunt rec-
                                      ommended acceptance of Mr. Johnson’s December 24, 2008,
                                      OIC in the draft January 2009 ACM, this recommendation was
                                      considered by SO Hunt’s manager, Ms. Craca, and ultimately
                                      rejected. A recommendation of acceptance by a settlement
                                      officer, however, is not an acceptance of a taxpayer’s OIC.
                                           b. As a matter of law, no settlement officer had any
                                              authority to accept any offer made by Mr. Johnson.
                                         An OIC is a contract, and general principles of contract law
                                      therefore determine whether a binding settlement has been
                                      reached. Becker Holding Corp. v. Commissioner, T.C. Memo.
                                      2004–58. One such principle is that a settlement agreement
                                      may be reached only by authorized agents or officials rep-
                                      resenting the parties. Dorchester Indus. Inc. v. Commis-
                                      sioner, 108 T.C. 320, 331 (1997), affd. without published
                                      opinion 208 F.3d 205 (3d Cir. 2000). ‘‘[P]ersons dealing with
                                      an agent of the government must take notice of the limita-
                                      tions of his authority.’’ Bornstein v. United States, 345 F.2d
                                      558, 562 (Ct. Cl. 1956); Graff v. Commissioner, 74 T.C. 743
                                      (1980), affd. per curiam 673 F.2d 784 (5th Cir. 1982); Mid-
                                      west Motor Express, Inc. v. Commissioner, 27 T.C. 167, 182
                                      (1956), affd. 251 F.2d 405 (8th Cir. 1958). Within the Office
                                      of Appeals, final authority over administrative settlements
                                      involving Federal tax matters has been delegated to Regional
                                      Directors of Appeals, Chiefs, Assistant Chiefs and Associate
                                      Chiefs of the Appeals Offices, Appeals Team Chiefs, Team
                                      Managers, Directors of an Appeals Operating Unit, Appeals
                                      Area Directors, Deputy Appeals Area Directors, and Appeals
                                      Team Case Leaders. 26 C.F.R. sec. 601.106(a)(1)(i) and (ii),
                                      Statement of Procedural Rules; IRS Deleg. Order No. 66 (Rev.
                                      15 Jan. 23, 1992). IRS Deleg. Order No. App. 8–a (Mar. 17,
                                      2003) further authorizes: (1) Appeals officers and settlement
                                      officers to conduct hearings and make determinations under
                                      secs. 6320 and 6330; and (2) Appeals Team Managers to
                                      review and approve such determinations. Thus, a settlement
                                      officer lacks authority to accept an OIC. Consequently,




VerDate 0ct 09 2002   09:55 May 31, 2013   Jkt 372897   PO 20009   Frm 00022   Fmt 2847   Sfmt 2847   V:\FILES\JOHNSON.136   SHEILA
                                      (475)                        JOHNSON v. COMMISSIONER                                            497


                                      regardless of any action that SO Hunt might have purported
                                      to take, the Government had not accepted any OIC that could
                                      have been breached by the adverse determinations of the
                                      Office of Appeals.
                                        The outcome is the same if Mr. Johnson contends not that
                                      an OIC was explicitly accepted by SO Hunt but that in some
                                      other, less formal fashion SO Hunt made a deal with him on
                                      behalf of the IRS. Such a contention alleges a quasi-contract,
                                      or a contract implied in fact, which is ‘‘ ‘founded upon a
                                      meeting of minds, which, although not embodied in an
                                      express contract, is inferred, as a fact, from conduct of the
                                      parties showing, in the light of the surrounding cir-
                                      cumstances, their tacit understanding.’ ’’ Lewis v. United
                                      States, 70 F.3d 597, 600 (Fed. Cir. 1995) (quoting Baltimore
                                      & Ohio R.R. Co. v. United States, 261 U.S. 592, 597 (1923)).
                                      However, as the Court of Federal Claims has explained,
                                      [W]hen the United States is a party to an alleged contract implied-in-fact,
                                      the government representative ‘‘whose conduct is relied upon must have
                                      actual authority to bind the government in contract.’’ [Minehan v. United
                                      States, 75 Fed. Cl. 249, 260 (2007); citations omitted.]

                                      The Commissioner is thus not bound by an apparent settle-
                                      ment where an agent is without authority to compromise a
                                      taxpayer’s tax liability. Becker Holding Corp. v. Commis-
                                      sioner, T.C. Memo. 2004–58, 87 TCM (CCH) 1069, 1071 (2004)
                                      (citing Botany Worsted Mills v. United States, 278 U.S. 282,
                                      288–289 (1929)). Here, SO Hunt was without authority to
                                      bind respondent to a settlement, and thus Mr. Johnson could
                                      not have had any deal based on the actions of SO Hunt.
                                           2. The Office of Appeals did not abuse its discretion by
                                              delay in the handling of Mr. Johnson’s case.
                                        Mr. Johnson also asserts in his briefs that the CDP pro-
                                      ceedings were ‘‘more intrusive than necessary’’, in violation of
                                      section 6330(c)(3)(C), because of the length of the proceedings
                                      and the number of settlement officers assigned to his
                                      hearings. While the four-year duration of this proceeding was
                                      unfortunate, we do not perceive that the Office of Appeals
                                      abused its discretion in conducting the CDP hearings.
                                        First, section 6330(c)(3)(C) does not provide that the CDP
                                      process must not be ‘‘more intrusive than necessary’’, but
                                      rather that the proposed ‘‘collection action [e.g., lien or levy]




VerDate 0ct 09 2002   09:55 May 31, 2013   Jkt 372897   PO 20009   Frm 00023   Fmt 2847   Sfmt 2847   V:\FILES\JOHNSON.136   SHEILA
                                      498                136 UNITED STATES TAX COURT REPORTS                                      (475)


                                      be no more intrusive than necessary.’’ Mr. Johnson has made
                                      no showing that the collection actions that the Office of
                                      Appeals sustained were unduly intrusive.
                                         Second, the long duration of Mr. Johnson’s CDP hearing
                                      was largely attributable to Mr. Johnson. His case presented
                                      a moving target, as his financial affairs drastically fluc-
                                      tuated, with the liquidation of his investments and the
                                      failing of Asiawerks. In addition, Mr. Johnson delayed pro-
                                      viding the necessary financial records that were requested of
                                      him by various settlement officers (many of which records he
                                      never provided).
                                         Personnel in the Office of Appeals cannot be chained to
                                      their cases. The work of that office, like the work in any
                                      office, will have to be reassigned as time passes, when
                                      employees take leave, receive promotions, or retire. And
                                      when reassignments do occur, new personnel will necessarily
                                      take time to get up to speed. We do not find that the Office
                                      of Appeals protracted Mr. Johnson’s proceedings in a manner
                                      that could constitute an abuse of discretion.

                                                                                Conclusion
                                        The determination of the IRS’s Office of Appeals—i.e., not
                                      to accept Mr. Johnson’s proposed collection alternative, but
                                      instead to sustain the filing of the notice of lien and the pro-
                                      posed collection by levy of his outstanding tax liabilities—
                                      was not an abuse of discretion. Respondent may proceed with
                                      collection.
                                        To reflect the foregoing,
                                                                           Decision will be entered for respondent.

                                                                               f




VerDate 0ct 09 2002   09:55 May 31, 2013   Jkt 372897   PO 20009   Frm 00024   Fmt 2847   Sfmt 2847   V:\FILES\JOHNSON.136   SHEILA
