                           T.C. Memo. 2009-8



                      UNITED STATES TAX COURT



         JOHN T. AND SHERRI S. ATCHISON, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 249-07L.                   Filed January 14, 2009.



     Robert Doran Grossman, Jr., for petitioners.

     Wesley J. Wong, for respondent.



                        MEMORANDUM OPINION


     HOLMES, Judge:   John and Sherri Atchison didn’t file their

tax returns between 1999 through 2003, and eventually found

themselves owing $328,717.    When the Commissioner came to

collect, they offered to compromise this rather large liability

for a little less than three cents on the dollar.    The

Commissioner rejected their offer because he concluded that they
                               - 2 -

could pay much more or, in IRS jargon, that their account had a

higher “reasonable collection potential” of $91,187.    In reaching

that conclusion, he disallowed expenses that the Atchisons say

were perfectly reasonable.   The Commissioner says he was just

following guidelines.   We must decide whether he abused his

discretion by doing so.

                             Background

     Both Atchisons are business owners.   John owns Atchison

Welding, a construction and welding company.    Sherri is a

manicurist with her own company called Atchison Services.

They’ve managed to do well together--in 2005 he made a gross

profit of around $117,000 and she took home $1,251.

     But they neglected to file tax returns from 1999 through

2003.   The Commissioner caught up with them and filed substitutes

for returns (SFRs) computing their tax liability.    This prompted

the Atchisons into discussions with the IRS, and in December 2004

the Atchisons signed a Form 4549, Income Tax Examination Changes,

agreeing that the Commissioner could collect unpaid tax for all

five years.   They then timely filed their 2004 tax return, but

failed to withhold enough, leaving themselves with another tax

bill that they didn’t pay.   In October 2005, the Commissioner

notified them that he intended to levy on their property to

collect all their unpaid taxes for 1999-2004.    The Atchisons

hired a lawyer and asked for a collection due process (CDP)
                                - 3 -

hearing.

     The Atchisons can’t challenge the amount of their tax

liability (at least from 1999-2003) because they agreed to its

assessment, but section 63301 does give them the right to ask for

a hearing where they can offer alternatives to having the IRS

seize their property, such as an offer-in-compromise (OIC) or an

installment agreement.   The Atchisons wanted a fresh start, and

to get one they offered to compromise their tax debt.   For the

IRS to even consider such an offer, though, taxpayers have to be

current in their filings and on track to pay their future taxes

as they come due.    The Appeals officer conducting the hearing was

skeptical; he noted that although the Atchisons’ 2005 tax return

wasn’t yet due, the couple had not made any estimated tax

payments at all, and he warned them that they had better do so

for 2005 and 2006.   The Atchisons responded by submitting another

compromise offer that swept in their 2005 tax debt, too.    But

they did also include their estimated tax payments for 2006.      The

Appeals officer concluded that this put them into compliance and

filed their OIC for processing as an OIC based on doubt as to

collectibility.   The Atchisons were claiming that they didn’t

have enough assets to fully pay their tax debt, and their OIC

proposed to settle what was by then a debt of $328,717 for only


     1
       Unless otherwise noted all section references are to the
Internal Revenue Code, and Rule references are to our Rules of
Practice and Procedure.
                               - 4 -

$9,216.

     In preparing their OIC, the Atchisons filled out Forms 433-

B, Collection Information Statement for Businesses, for both the

welding and manicure businesses.    The expenses that they listed

on these forms are central to this case.   The key is the

Atchisons’ claim for a depreciation expense of $20,876 for

equipment used in the welding business.    Of this amount, $20,000

was a section 1792 expense for a pickup truck and a welder that

John bought in 2005.   The remaining $876 was a depreciation

expense for a welding truck.   The Atchisons also claimed a $750

transportation expense, and a monthly $200 “other expense.”

     The Appeals officer reviewed the OIC and wrote the

Atchisons’ lawyer that he was unable to accept it because it was

so much lower than what he calculated the Atchisons’ reasonable

collection potential (RCP) to be.   Calculation of the RCP is

complicated, but its result is easy to understand--it’s the IRS’s

estimate of how much a taxpayer can pay from a combination of his

income and the immediately realizable value of his property.    The

Appeals officer handling the Atchisons’ case computed their

future income by using their actual income in 2005:




     2
       Section 179 allows a taxpayer in some circumstances to
deduct the entire cost of a capital asset in the year in which he
puts it into service, rather than depreciating the cost over
time.
                                - 5 -

               Mr. Atchison’s income

               2005 Schedule C income         $60,685
               Disallowed depreciation
                 and sec. 179 deduction        20,876
                                               ______
                                               81,561
               Mrs. Atchison’s Income           1,251

               Total Annual Income             82,812

               Monthly Income                   6,901

     The Appeals officer then subtracted expenses from income.

He allowed all the expenses that they had listed on their Forms

433-B, except for a part of their transportation expense (which

is no longer at issue) and the depreciation expense.      The Appeals

officer even allowed higher housing and tax expenses than the

Atchisons had claimed on the Form 433-A, Collection Information

Statement for Wage Earners and Self-Employed Individuals.

Subtracting expenses from gross income, the Appeals officer

computed their monthly net income to be $1,615.      Following the

guidance of the Internal Revenue Manual (IRM), he multiplied this

monthly income by 48 to compute the Atchisons’ future income that

would be available to pay their tax debt.      See IRM pt.

5.8.5.5(1)(A)(Sept. 1, 2005).

     The Appeals officer computed the second component of the

Atchisons’ RCP, their equity in property that could be sold, by

using those assets’ quick sale value (QSV), which the IRM

generally defines as 80 percent of fair market value (FMV).

Id. pt. 5.8.5.3.1 (Sept. 1, 2005).      The Atchisons’ equity:
                               - 6 -

    Assets         FMV          QSV           Encumbrance    Net Equity
House              $551,356     $441,085          $495,000      ---
2001 Chevrolet       10,000           8,000      ---              $8,000
US Bank                  367           367       ---                   367

checking
1997 GMC              6,000           4,800      ---                  4,800
Community Bank           500           500       ---                   500

checking

    Total           568,223      454,752           495,000        13,667

The Appeals officer then added the Atchisons’ future income to

their net equity and computed an RCP of $91,187.

     The Appeals officer didn’t include the value of the couple’s

house in determining RCP since the remaining mortgage debt was

more than the house’s quick sale value.       See id. pt. 5.8.5.3.1(1)

(Sept. 1, 2005).   He also either overlooked, or generously

excluded from his calculation, a $6,200 account receivable.3             He

also didn’t consider the value of the welder as an asset.         This

isn’t surprising--the Atchisons hadn’t listed it as an asset on

their collection information forms.      (The Atchisons gave the

Appeals officer only a Schedule C, Profit or Loss From Business,

showing their total depreciation expense, not a list of any



     3
       Although IRM pt. 5.8.5.3.12 (Sept. 1, 2005) considers
accounts receivable as assets, it does allow a discounted value
to be used for accounts receivable that may be difficult to
collect. Id. pt. 5.8.5.3.12(2)(A) (Sept. 1, 2005). But the
Appeals officer didn’t consider the value of the account
receivable at all--at least it’s not listed in his table
calculating the Atchisons’ RCP.
                                 - 7 -

specific depreciable assets.4)    The Commissioner learned the

specifics only from the Atchisons’ papers in this case.    No

matter--even without knowing what the Atchisons were taking a

section 179 deduction for, the Appeals officer would have

disallowed it because the IRM tells him to disallow depreciation

(or any item listed on Form 4562 Depreciation and Amortization,

which includes section 179 deductions) in calculating an RCP.

IRM pt. 5.15.1.13(9) (May 1, 2004).

     The Appeals officer gave the Atchisons more time to submit

an amended OIC.   When they didn’t, he rejected their OIC and

issued a notice of determination sustaining the levy.    The

Atchisons appealed and trial was set to begin in Las Vegas, where

they resided when they filed their petition.    The parties then

submitted the case for decision on cross-motions for summary

judgment.

                            Discussion

     Summary judgment is appropriate where it is shown that

“there is no genuine issue as to any material fact and that a

decision may be rendered as a matter of law.”    Rule 121(b); Fla.



     4
       Including the other depreciable assets--the welding and
pickup trucks--in the RCP calculation may have been contrary to
IRM part 5.8.5.3.3(1) (Sept. 1, 2005), which exhorts Appeals
officers to make adjustments to taxpayers’ RCP when those assets
are “essential for the production of income.” The Atchisons
didn’t raise this issue, though, so we deem it conceded. See
Rule 331(b)(4); Goza v. Commissioner, 114 T.C. 176, 183 (2000).
                               - 8 -

Peach Corp. v. Commissioner, 90 T.C. 678, 681 (1988).     The

parties don’t dispute the facts.   The Commissioner contends (and

the Atchisons agree) that he was just applying the IRM in

disallowing the Atchisons’ depreciation expenses.

     The crux of this case is the Appeals officer’s disallowance

of the Atchisons’ $20,876 depreciation expense.    He added this

expense back to the Atchisons’ income, increasing their monthly

income and thus their RCP.   The Atchisons argue that the IRM

guideline telling him to do so is inconsistent with the Code,

because the Code itself recognizes depreciation as an expense.

See secs. 167, 168, 179.   By not allowing depreciation expenses

in computing an RCP, the Atchisons argue, the Commissioner based

his determination sustaining the levy on an illegal guideline;

and relying on an illegal guideline is necessarily an abuse of

discretion because it would be an error of law.

      This is a difficult argument.    Section 7122 gives the

Commissioner a very wide discretion, providing that he “may”

compromise tax liabilities and authorizing him to establish

guidelines for the IRS to “determine whether an offer-in-

compromise is adequate and should be accepted.”    Sec.

7122(a),(d)(1). Section 7122 was amended by the Tax Increase

Prevention and Reconciliation Act of 2005, Pub L. 109-222, sec.

509 (a), (b), (d), 120 Stat. 362, 363, 364 (2006).    By telling

the Commissioner, and not the courts, to develop guidelines,
                                   - 9 -

Congress is telling us to give him a very wide range of

discretion.       We have already recognized in other cases that it’s

within the Commissioner’s power to exclude some expenses for the

RCP computation.       For example, we’ve upheld the Commissioner’s

discretion to disallow housing expenses that are higher than

those allowable under the IRM’s standards.         Schulman v.

Commissioner, T.C. Memo. 2002-129.         We’ve also affirmed the

Commissioner’s disallowance of “conditional expenses” under the

IRM.5       Etkin v. Commissioner, T.C. Memo. 2005-245.    We’ve also

noted many times that, though the IRM doesn’t have the force of

law, it is persuasive authority.       Ginsburg v. Commmissioner, 127

T.C. 75, 87 (2006).       And the result is that we’ve generally

upheld Appeals officers’ determinations of whether to accept an

OIC as reasonable when they’ve followed the IRM.          We seem to have

overturned the Commissioner’s OIC rejections--where he followed

the IRM--only twice:       Harris v. Commissioner, T.C. Memo. 2006-

186, where there were two OICs submitted and an Appeals officer

failed to conduct an independent review of the taxpayer’s

financial information and prepare a financial analysis, as the

Code requires; and Blosser v. Commissioner, T.C. Memo. 2007-323,



        5
       Conditional expenses are expenses the Commissioner takes
into account in calculating payments under an installment
agreement. They’re called “conditional” because the Commissioner
allows them only if doing so wouldn’t interfere with a taxpayer’s
ability to pay his entire tax debt in less than five years. IRM
pt. 5.8.5.5.3 (Sept. 1, 2005).
                               - 10 -

where we rejected the Commissioner’s decision not to accept an

OIC because he failed to properly conduct the analysis required

by section 6330(c)(3)(B).    We’ve even affirmed the Commissioner

when his rejection of an OIC foreseeably resulted in substantial

hardship to taxpayers.   See Speltz v. Commissioner, 124 T.C. 165,

176-78 (2005), affd. 454 F.3d 782 (8th Cir. 2006).     And we will

uphold the Commissioner again here.     Our most important reason is

that the Atchisons offered less than 3 cents on the dollar to

compromise their tax liability, which is far less than the RCP.

We routinely uphold rejections of OICs when the amount offered is

so much lower than the RCP.    Lemann v. Commissioner, T.C. Memo.

2006-37.   We’ve also held that the Commissioner doesn’t abuse his

discretion by rejecting an OIC that “bore no relationship” to the

taxpayer’s own calculations of his ability to pay.      McDonough v.

Commissioner, T.C. Memo. 2006-234.      That’s what was going on

here--even subtracting the disallowed depreciation expense from

the Atchisons income leads to an RCP of $70,311, still far more

than the Atchisons’ offer.

     We do recognize that reasonable minds can differ on some of

the numbers that go into calculating an RCP.     For example, in

Lloyd v. Commissioner, T.C. Memo. 2008-15, two IRS employees

(reviewing slightly different OICs) made different determinations

on what Lloyd’s RCP was.    We held that the Appeals officer didn’t

abuse his discretion in basing his determination on the second
                                - 11 -

RCP calculation, rather than the first, since the second was

based on the IRM’s guidelines.    We noted there that, even if the

Appeals officer had been wrong in relying on the second RCP

calculation, he wouldn’t have abused his discretion, because the

taxpayer was offering less than either RCP.    We likewise held, in

Carter v. Commissioner, T.C. Memo. 2007-25, that even when the

Commissioner goofed in calculating the RCP–-looking at income for

the next 86 months instead of the next 48--he did not abuse his

discretion because the taxpayer’s offer was far less than even

the correctly calculated RCP.

       But the Commissioner’s reasonableness is not grounded only

in the harmlessness of any error he might have made.      We think he

was completely reasonable in excluding the Atchisons’

depreciation (and section 179) expenses from his calculation of

their RCP:    Though he excluded these expenses in his

calculations, it’s not as if he ignored the reality that old used

property is worth less than when it was new--he bases a

taxpayer’s net equity on a depreciable asset’s FMV.      And FMV

includes a discount reflecting economic depreciation, if not tax-

accounting depreciation.    This use of FMV, instead of, for

example, replacement value, in calculating net equity lowers the

RCP.    So we conclude the Commissioner’s general exclusion of

depreciation is reasonable.

       The Commissioner is also correct that the Atchisons did not
                               - 12 -

identify the depreciated property as business property on their

Forms 433-B: The $7,500 welder makes no appearance on any form,

and the two trucks allegedly used for welding are listed on the

Form 433-A as personal property.     Depreciation is not allowed for

personal property even in calculating taxes, much less for

purposes of an OIC.   Sec. 167(a).   And failure to include the

welder on any form effectively precluded the Appeals officer from

investigating whether the Atchisons equity in the welder would

increase their RCP.   The Atchisons say that expensing the welder

in 2005 meant they were right to leave it off the Form 433-B;

this is patently wrong.   If a taxpayer still owns an item that

could be sold to raise money to pay a tax liability, it could

possibly increase his RCP.   We can’t fault the Appeals officer

for refusing to consider depreciation in the RCP when the

Atchisons didn’t tell him what it was they were depreciating.

     Finally, we note that the Appeals officer told the Atchisons

that they needed to increase their offer and kept an open mind to

another offer.   The record shows that he even kept an open mind

to the possibility that they could persuade him to change his

calculation of their RCP.    See Samuel v. Commissioner, T.C. Memo.

2007-312.   As we’ve already noted, he also allowed some expenses

that were higher than the Atchisons even requested.    He coupled

this openmindedness with a deadline to respond.    And even though

the Atchisons let that deadline expire without increasing their
                              - 13 -

offer, the Appeals officer still waited another week to close the

case.   So the Atchisons had ample opportunity to submit a new OIC

or to provide more documentation to change the Appeals officer’s

mind, but chose not to.   They also proposed no other collection

alternatives, so the Commissioner had no less intrusive means to

consider.   Having exercised his discretion reasonably,



                                 An appropriate order and decision

                           for respondent will be entered.
