T.C. Memo. 2020-110
UNITED STATES TAX COURT
ROBERT ELKINS, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 12315-17L. Filed July 16, 2020.
Frank Agostino and Andrew D. Lendrum, for petitioner.
Frederick C. Mutter, Michael S. Rapiejko, and Mimi M. Wong, for
respondent.
MEMORANDUM OPINION
URDA, Judge: In this collection due process (CDP) case Robert Elkins
seeks review pursuant to sections 6320(c) and 6330(d)(1)1 of the determination of
1 Unless otherwise indicated, all section references are to the Internal (continued...) -2-
[*2] the Internal Revenue Service (IRS) Office of Appeals2 to uphold the filing of
a notice of Federal tax lien (NFTL) with respect to his unpaid Federal income tax
liabilities for 1998, 2000, and 2001, as well as associated interest and penalties.
Dr. Elkins’ underlying liabilities stemmed from computational adjustments3 made
by the IRS after this Court’s decision readjusting the tax reporting of Delta
Trading Partners IV, LP (Delta Trading), a partnership in which Dr. Elkins had
participated.
Respondent has filed a motion for summary judgment, while Dr. Elkins has
moved for a remand to the Office of Appeals. The main issue before us is whether
the Office of Appeals abused its discretion when it sustained the rejection of Dr.
Elkins’ offer-in-compromise (OIC) on the ground that it was not in the best
1 (...continued) Revenue Code (Code) in effect at all relevant times, and all Rule references are to the Tax Court Rules of Practice and Procedure. We round all monetary amounts to the nearest dollar. 2 On July 1, 2019, the Office of Appeals was renamed the Independent Office of Appeals. See Taxpayer First Act, Pub. L. No. 116-25, sec. 1001, 133 Stat. at 983 (2019). As the events in this case predate that change, we will use the name in effect at the times relevant to this case, i.e., the Office of Appeals. 3 The term “computational adjustment” means “the change in the tax liability of a partner which properly reflects the treatment under this subchapter of a partnership item.” Sec. 6231(a)(6). -3-
[*3] interest of the Government. Seeing no abuse of discretion, we will grant
respondent’s motion and deny that of Dr. Elkins.
Background
The following facts are based on the parties’ pleadings and motion papers,
including the attached declarations and exhibits. See Rule 121(b). Dr. Elkins
lived in Florida when he timely filed his petition.
A. Dr. Elkins’ Background
Dr. Elkins rose to prominence as the founder and chief executive officer of
Integrated Health Services, Inc. (IHS), one of the nation’s largest nursing home
chains during the late 1990s. Although he left IHS, Dr. Elkins stayed in the
healthcare field, founding, advising, and, at times, investing in various healthcare
businesses, including companies owned by Shirlene Elkins, his wife until their
divorce in January 2014.
B. Delta Trading Proceedings
1. Examination
Dr. Elkins was one of two partners in Delta Trading, a partnership formed in
1998 that engaged in transactions involving notional principal contracts during -4-
[*4] 1998 and 1999 before ceasing operations in 2000.4 Dr. Elkins owned 99% of
Delta Trading and was the sole limited partner. Quellos Capital Management, LP
(Quellos), then doing business as Quadra Capital Management, LP, held a 1%
interest as a general partner and acted as the tax matters partner.
The Commissioner opened an examination into Delta Trading’s income tax
returns for 1998 and 1999. At several points during the examination the
Commissioner and Quellos extended the period for assessment against Delta
Trading’s partners of any Federal income tax attributable to partnership items of
Delta Trading. These extensions were embodied in a series of Forms 872-P,
Consent to Extend the Time to Assess Tax Attributable to Partnership Items, and
later a Form 872-O, Special Consent to Extend the Time to Assess Tax
Attributable to Partnership Items, which suspended the assessment period until
one year after any determination of the partnership items following the
Commissioner’s issuance of a notice of final partnership administrative adjustment
(FPAA) to Delta Trading became final. In November 2008 the Commissioner
issued an FPAA to Delta Trading determining that its notional principal contract
4 “A notional principal contract is a contract that provides for the payment of amounts by one party to another at specified intervals calculated by reference to a specified index upon a notional principal amount in exchange for specified consideration or a promise to pay similar amounts.” Highwood Partners v. Commissioner, 133 T.C. 1, 13-14 (2009). -5-
[*5] transactions “lacked economic substance” and that Delta Trading was a sham
that should be disregarded for tax purposes.
2. Tax Court Case
Quellos, as Delta Trading’s tax matters partner, brought a timely petition in
this Court under the unified audit and litigation partnership procedures of the Tax
Equity and Fiscal Responsibility Act of 1982 (TEFRA) challenging the FPAA.
See secs. 6221-6234 (as in effect for years before 2018). Dr. Elkins later moved
for leave to participate in the TEFRA proceeding on the ground that Quellos had
entered into a settlement agreement with the Commissioner, leaving him as the
sole nonsettling partner.5 The Court granted Dr. Elkins’ motion. He subsequently
filed a notice of election to participate, explaining that he satisfied the
requirements for participation as set forth in section 6226(d) in that he “was a
partner during the applicable period(s) for which readjustment of partnership items
is sought and, if such readjustment is made, the tax attributable to such partnership
items may be assessed against him.”
Dr. Elkins and the Commissioner engaged in settlement negotiations, which
bore fruit in the form of a joint stipulation of settled issues that “resolve[d] all of
5 The Commissioner thereafter filed a notice formally apprising the Court that he had finalized a settlement with Quellos in 2010. -6-
[*6] the issues in this case.” The stipulation, which was signed by counsel for Dr.
Elkins6 and for the Commissioner, specified the adjustments to certain amounts of
income and deductions reported on Delta Trading’s 1998 and 1999 Forms 1065,
U.S. Return of Partnership Income. The stipulation further reflected the parties’
agreement that any underpayment of tax attributable to partnership item
adjustments would be subject to a 5% accuracy-related penalty.
The Commissioner subsequently filed a motion for entry of decision, noting
that he had entered into a settlement with Quellos in 2010 and that Dr. Elkins did
not object to the granting of the motion. The Commissioner detailed that “[a]ll
partners of the partnership that meet the interest requirements of I.R.C. § 6226(d)
are treated as parties to this action”. He further explained that, “[o]nce a decision
is entered in this matter, Respondent intends to assess Participant Robert N. Elkins
by way of computational adjustment based on the decision.”
We granted the Commissioner’s motion and entered a decision consistent
with the stipulation of settled issues. See Delta Trading Partners IV, LP v.
6 In February and November 2011 certain lawyers entered appearances in this Court on behalf of the petitioner, Quellos, which was Delta Trading’s tax matters partner. As clarified in a later motion to withdraw granted by this Court, these lawyers, in fact, represented Dr. Elkins and acted exclusively on his behalf at all times. The incorrect designation on their entries of appearance appears to have been an inadvertent error stemming from the fact that Dr. Elkins was the sole active participant (on the petitioner’s side) at the time. -7-
[*7] Commissioner, T.C. Dkt. No. 8513-09 (Sept. 10, 2012) (stipulated decision).
That decision became final on December 10, 2012. See secs. 7481, 7483.
C. OIC Proceedings
In November and December 2013 the IRS made computational adjustments
to Dr. Elkins’ 1998, 2000, and 2001 Federal income tax returns consistent with
our decision with respect to Delta Trading. After providing notice of these
adjustments to Dr. Elkins, the IRS assessed against him more than $10 million in
income tax deficiencies, accuracy-related penalties, and interest.7
1. OIC Submission
On January 6, 2014, Dr. Elkins submitted a Form 656, Offer in
Compromise, to the IRS Centralized Offer in Compromise (COIC) unit proposing
to settle his tax debt for $17,500. In his Form 656 and a supporting statement Dr.
Elkins premised his OIC on doubt as to collectibility, noting that “I am 71 years
old. My wife has filed for divorce. I am unemployed and do not have substantial
7 Once the decision in a partnership-level proceeding is final, the Commissioner is permitted to assess computational adjustments that do not require partner-level determinations against a partner without first issuing a notice of deficiency. See secs. 6225, 6230(a)(1); see also Adkison v. Commissioner, 129 T.C. 97, 102 (2007), aff’d, 592 F.3d 1050 (9th Cir. 2010); sec. 301.6231(a)(6)- 1(a), Proced. & Admin. Regs. -8-
[*8] assets or income.” He asserted that his reasonable collection potential (RCP)8
was limited to $15,500, the purported value of an art collection and wine that he
owned. He enclosed $3,500 with his OIC and represented that, upon acceptance,
he would pay the remaining balance of $14,000 within five months.
Dr. Elkins submitted with his OIC a Form 433-A, Collection Information
Statement for Wage Earners and Self-Employed Individuals, accompanied by
three months of bank statements. He reported monthly household income of
$2,059 from Social Security and identified only a few personal assets: $581 held
in bank accounts, a leased 2014 Audi A6 (with a $630 monthly payment that
started on December 30, 2013), an art collection valued at $8,000, and wine
valued at $7,500. Dr. Elkins claimed total monthly household expenses of $3,827.
In an attachment to the Form 433-A Dr. Elkins further disclosed that in
2013 he transferred stock to his then wife which was later sold for $240,000 (after
8 The Commissioner has promulgated guidelines for the evaluation of offers. See, e.g., Churchill v. Commissioner, T.C. Memo. 2011-182, 102 T.C.M. (CCH) 116, 117 (2011). The calculation of a taxpayer’s RCP occupies a central place in those guidelines. See id.; see also Internal Revenue Manual (IRM) pt. 5.8.5.1 (Sept. 23, 2008). A settlement officer derives the RCP from her estimate of a taxpayer’s assets and likely future income. See IRM pt. 5.8.5.4 (Sept. 30, 2013), 5.8.5.20 (Sept. 30, 2013). Likely future income, in turn, is determined by multiplying a taxpayer’s monthly disposable income (gross income minus necessary living expenses) by a certain number of months. See id. pt. 5.8.5.22 (Oct. 22, 2010), 5.8.5.25 (Sept. 30, 2013). -9-
[*9] paying administrative expenses). Dr. Elkins explained that these funds “were
used to pay household living expenses” and that “some of the funds will be
returned to me in the form of equitable distribution from the divorce.”
2. Evaluation by Offer Specialist
Dr. Elkins’ OIC was assigned to an offer specialist from the COIC unit for
evaluation.
a. Correspondence With Dr. Elkins
Beginning in October 2014 the offer specialist corresponded with Dr. Elkins
(through his representatives) to obtain general information regarding his finances
and supporting documentation including tax returns, bank and credit card
statements, rental and mortgage agreements, a copy of his final divorce decree,
proof of his stock transfer to his then wife in 2013, and documentation of medical
expenses. One of the primary points of interest was the intertwined financial and
professional relationships between the recently divorced spouses. As part of their
divorce each spouse had agreed to keep his or her own assets and liabilities; the
offer specialist thus asked Dr. Elkins to clarify the provenance of various
expenditures and accounts.
In a related vein Dr. Elkins explained that he had an ongoing professional
relationship with Common Sense Holdings, a holding company owned by his ex- - 10 -
[*10] wife, which, in turn, owned Cameo Home Health, Home Advantage, and
other healthcare entities. Before the divorce Dr. Elkins worked as a part-time
financial officer for Cameo Home Health and Home Advantage. He informed the
offer specialist that he received no compensation for his work but that his then
wife “provided for all his needs”. A year after the divorce Dr. Elkins represented
that he was continuing to provide free financial consulting services to these
companies, although he planned to leave the position “soon”.
Dr. Elkins also addressed a promissory note, stating that he had transferred a
20% interest in certain corporations to his then wife in 2013 and that she sold the
interest later that year for $238,000 (after transaction fees were deducted). At the
time of their divorce (i.e., January 2014), Dr. Elkins’ ex-wife signed the
promissory note to repay him the proceeds from that sale. She agreed to pay him
at least $5,000 a month, although she offset $3,000 a month in rent as Dr. Elkins at
the time was subleasing an apartment from her. Dr. Elkins represented that his ex-
wife had repaid $219,148 as of December 31, 2014.
In January 2015 Dr. Elkins proposed increasing his OIC from $17,500 to
either (1) $33,000 over five months, or (2) $36,000 over 24 months. The revised
amount was attributable to the balance on the promissory note ($13,852) and
higher likely future income amounts ($3,096 over 12 months or $6,192 over 24 - 11 -
[*11] months).9 Dr. Elkins never submitted a revised Form 656 or a new
Form 433-A reflecting this proposal.
b. Other Sources of Information
The offer specialist also performed a public records search about Dr. Elkins,
which turned up several news articles. According to her case activity notes the
offer specialist reviewed a 2002 Wall Street Journal piece about IHS, which filed
for bankruptcy in 2000. The article recounted that IHS executives had received
loans of “nearly $60 million--most of it going to Dr. Elkins himself” that they
were never required to pay back. The article further stated that Dr. Elkins used
“company * * * [i.e., IHS] money contributed to a retirement plan set up for him”
to amass an art collection worth more than $8 million, with pieces being displayed
at Dr. Elkins’ home despite being booked as company assets. The offer specialist
also noted that other articles described Dr. Elkins and his then wife as “wealthy”
Naples residents and indicated that they were involved in a Texas health care
business.
9 Dr. Elkins calculated his likely future income by subtracting monthly living expenses of $6,706 from monthly income of $6,964, which equaled $258 in monthly disposable income. Dr. Elkins calculated his monthly income by averaging his adjusted gross income for 2011 through 2013. - 12 -
[*12] c. Rejection of Dr. Elkins’ OIC
In April 2015 the offer specialist sent a letter preliminarily rejecting Dr.
Elkins’ proposed settlement offer (which the letter took to be $32,444) as not in
the best interest of the Government. Computations attached to the letter
recalculated Dr. Elkins’ RCP as $71,192 based upon likely future income of
$55,692 over 12 months and assets worth $15,500.10 Dr. Elkins responded by
offering to increase his OIC to $71,500 and questioning the grounds for the
rejection.
The offer specialist laid out her reasoning in both a telephone call to Dr.
Elkins’ representatives and a rejection memorandum. Specifically the offer
specialist reported that she saw no evidence of financial hardship and concluded
that Dr. Elkins had structured his affairs to artificially qualify for currently-not-
collectible status. She noted that, even after submission of his OIC in 2014, Dr.
Elkins lived a comfortable lifestyle that afforded him surplus cash for living
expenses and allowed for him to drive a luxury car, eat out regularly, and travel
10 The offer specialist calculated Dr. Elkins’ likely future income by averaging his 2012 through 2014 income. She derived his 2014 income ($189,057) from deposits into his primary bank account and used the adjusted gross income reported on his 2012 and 2013 tax returns ($149,290 and $45,548, respectively). These income amounts averaged to $10,663 per month. The offer specialist allowed $6,022 in living expenses, resulting in a monthly disposable income of $4,641. - 13 -
[*13] frequently. She also observed that, despite Dr. Elkins’ strong employment
prospects in the healthcare industry, he reported no income while providing free
consulting services to companies owned by his ex-wife, who paid his living
expenses and made large postdivorce payments to him. And the offer specialist
explained that Dr. Elkins’ willingness to repeatedly increase his offer amount
indicated that he had access to funds beyond his RCP.
The COIC territory manager approved the rejection, and the IRS issued a
letter formally informing Dr. Elkins. Dr. Elkins timely appealed the rejection to
the Office of Appeals.11
D. Collection Activities and CDP Proceedings
During the pendency of Dr. Elkins’ appeal the IRS began collection
activities, issuing a Letter 3172, Notice of Federal Tax Lien Filing and Your Right
to a Hearing under IRC 6320, with respect to his 1998, 2000, and 2001 liabilities
on September 24, 2015. In response Dr. Elkins filed a timely Form 12153,
Request for a Collection Due Process or Equivalent Hearing, in which he
challenged the rejection of his OIC, his underlying tax liabilities, and the NFTL
11 At the time of his appeal Dr. Elkins reduced his OIC from $71,500 to $71,192 to match the RCP calculated by the offer specialist. - 14 -
[*14] filing and requested verification of the IRS’ compliance with multiple Code
requirements.12
Dr. Elkins’ CDP case was assigned to a settlement officer in the Office of
Appeals and, per his request, was consolidated with his previously filed appeal of
the OIC rejection. The settlement officer scheduled a telephone CDP hearing with
Dr. Elkins for April 14, 2016, which was to be followed by a face-to-face meeting
the next week. During the telephone hearing Dr. Elkins’ representatives urged
acceptance of his OIC on the grounds of his age and the unlikelihood that he
would be able to pay his liabilities. They also threatened that Dr. Elkins would
challenge his underlying liabilities if the OIC was not accepted. The face-to-face
meeting did not occur, although the settlement officer and Dr. Elkins exchanged
correspondence in which Dr. Elkins again pressed for acceptance of his OIC,
noting that he did not have an egregious history of past noncompliance. He
further claimed that the IRS’ rejection of his OIC lacked managerial approval.
The settlement officer thereafter prepared a Form 14559, Appeals Offer in
Compromise Memorandum (rejection memorandum). As an initial matter, the
settlement officer calculated an RCP of $99,560, which was higher than Dr.
12 Dr. Elkins did not indicate on Form 12153 that he was seeking a discharge or withdrawal of the lien. - 15 -
[*15] Elkins’ proposed OIC ($71,192). She did not recommend rejection on this
ground, however. Instead she recommended sustaining the offer specialist’s
rejection on the ground that the offer was not in the best interest of the
Government.
The settlement officer laid out several reasons for her conclusion. First, she
noted that Dr. Elkins’ annual income gave the appearance of having been
“structured to decrease on a yearly basis since the posting of the TEFRA
assessments”, dropping from approximately $149,000 in 2012 to $45,000 in 2013
to $8,000 in 2014 ending with $879 in 2015. In the light of Dr. Elkins’ ability to
increase his offer amount on multiple occasions the settlement officer concluded
that Dr. Elkins “has funds in excess of the income being reported” and that his
various OIC submissions did not represent a good-faith attempt to “resolv[e] the
outstanding income taxes”. She drew the further conclusion that there was an
arrangement between the former spouses, given that the income of Dr. Elkins’ ex-
wife had been unaffected by the divorce and his separation from the business,
while Dr. Elkins’ income suffered a precipitous decline.
Although the settlement officer acknowledged that Dr. Elkins did not have
an egregious history of noncompliance, she nonetheless determined that he had
not shown good faith. She noted that he had made no efforts to pay toward his tax - 16 -
[*16] liabilities in the nearly four years since assessment. And she pointed out Dr.
Elkins’ “negative history” of using company retirement funds to purchase works
of art and obtaining money from shareholders that he never repaid.
The settlement officer summarized that Dr. Elkins’ actions “are not wholly
credible, lack financial documentation, and the offer funds are not supported by
the Taxpayer’s current yearly income.” She concluded that “[i]t was apparent to
Collection and is equally evident to Appeals that the Taxpayer is not acting
truthfully and likely has the ability to pay a significant [sic] larger amount on his
tax debt than has been offered.” The settlement officer subsequently
communicated her conclusion to Dr. Elkins and closed the case.
On May 3, 2017, the Office of Appeals issued a notice of determination
sustaining both the filing of the NFTL for the years at issue and the rejection of
Dr. Elkins’ OIC. As an initial matter, the notice stated that Dr. Elkins was
precluded from challenging his underlying liabilities both because tax treatment of
a partnership item must be determined at the partnership level and because a
partnership-level proceeding counts as a prior opportunity under
section 6330(c)(2)(B). The notice also indicated that the settlement officer
verified that all requirements of applicable law and administrative procedure had
been met. - 17 -
[*17] The notice further explained that the Internal Revenue Manual (IRM)
permitted rejection of offers as not in the best interest of the Government, noting
that the IRS was permitted to consider public policy and tax administration
concerns in making such a determination. Sustaining the rejection of the OIC, the
notice repeated the top-line points from the settlement officer’s rejection
memorandum: (1) Dr. Elkins had made no voluntary payments during the years
the OIC had been pending; (2) Dr. Elkins had a negative history with respect to his
use of company retirement funds; and (3) Dr. Elkins’ repeated offers to increase
his OIC belied “a good faith offer.” The notice ended with a balancing analysis.
After noting that Dr. Elkins’ OIC was not a viable collection alternative, the notice
concluded that the filed NFTL balanced the need for efficient collection of tax
with Dr. Elkins’ concern that collection be no more intrusive than necessary.
E. Tax Court Proceedings
Dr. Elkins filed a timely petition with the Court seeking review of the notice
of determination. Respondent subsequently filed a motion for summary judgment.
For his part, Dr. Elkins objected and moved for a remand. - 18 -
[*18] Discussion
I. Governing Principles
A. Summary Judgment
The purpose of summary judgment is to expedite litigation and avoid costly,
time-consuming, and unnecessary trials. Fla. Peach Corp. v. Commissioner, 90
T.C. 678, 681 (1988). Under Rule 121(b) the Court may grant summary judgment
when there is no genuine dispute as to any material fact and a decision may be
rendered as a matter of law. Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520
(1992), aff’d, 17 F.3d 965 (7th Cir. 1994). In deciding whether to grant summary
judgment, we construe factual materials and inferences drawn from them in the
light most favorable to the nonmoving party. Id. However, the nonmoving party
may not rest upon the mere allegations or denials of its pleadings but instead must
set forth specific facts showing that there is a genuine dispute for trial.
Rule 121(d); see Celotex Corp. v. Catrett, 477 U.S. 317, 324 (1986).
B. Standard of Review
We have jurisdiction to review the Office of Appeals’ determination
pursuant to sections 6320(c) and 6330(d)(1). Where, as here, the underlying tax
liabilities are not at issue, we review the determination of the Office of Appeals - 19 -
[*19] for abuse of discretion.13 Sego v. Commissioner, 114 T.C. 604, 610 (2000);
Goza v. Commissioner, 114 T.C. 176, 182 (2000). In reviewing for abuse of
discretion, we must uphold the Office of Appeals’ determination unless it is
arbitrary, capricious, or without sound basis in fact or law. See, e.g., Murphy v.
Commissioner, 125 T.C. 301, 320 (2005), aff’d, 469 F.3d 27 (1st Cir. 2006);
Taylor v. Commissioner, T.C. Memo. 2009-27, 97 T.C.M. (CCH) 1109, 1116
(2009).
II. Analysis
Dr. Elkins contends that the Office of Appeals abused its discretion in
sustaining the NFTL filing. We consider whether the settlement officer:
(1) properly verified that the requirements of applicable law or administrative
procedure have been met; (2) considered any relevant issues Dr. Elkins raised; and
(3) considered whether “any proposed collection action balances the need for the
efficient collection of taxes with the legitimate concern of * * * [Dr. Elkins] that
any collection action be no more intrusive than necessary.” See sec. 6330(c)(3).
Our review of the record establishes that the settlement officer satisfied all of these
requirements.
13 In his petition and other pleadings Dr. Elkins expressly abandons and repeatedly disavows any challenge to the underlying tax liabilities. - 20 -
[*20] A. Verification
As an initial matter, this Court has authority to review satisfaction of the
verification requirement regardless of whether the taxpayer raised that issue at the
CDP hearing. See Hoyle v. Commissioner, 131 T.C. 197, 201-203 (2008),
supplemented by 136 T.C. 463 (2011). The undisputed facts before us show that
the settlement officer verified that timely assessments had been made against Dr.
Elkins with respect to his 1998, 2000, and 2001 tax liabilities in the wake of the
Delta Trading case.
Dr. Elkins faults the settlement officer for not digging deeper. He believes
that she was obligated to verify that all requirements of applicable law and
administrative procedure were followed during the partnership-level case and that
she did not do so. Specifically Dr. Elkins asserts that the settlement officer did not
verify that (1) the consents extending the limitations periods in the Delta Trading
case were valid, and (2) the assessments of penalties against him complied with
section 6751(b)(1).14
14 Sec. 6751(b)(1) provides: “No penalty under this title shall be assessed unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination or such higher level official as the Secretary may designate.” - 21 -
[*21] Dr. Elkins’ verification arguments fail to take into account the binding
effect of our decision in Delta Trading. Section 6230(c)(4) provides that for
purposes of any claim or suit challenging the Secretary’s computational
adjustments, “the treatment of partnership items * * * under the decision of the
court * * * shall be conclusive. In addition, the determination * * * under the
decision of the court * * * concerning the applicability of any penalty * * * shall
also be conclusive.” See also Tigers Eye Trading, LLC v. Commissioner, 138
T.C. 67, 89 (2012), aff’d in part, rev’d in part on other grounds, and remanded sub
nom. Logan Tr. v. Commissioner, 616 F. App’x 426 (D.C. Cir. 2015). This Court
entered a final decision resolving Delta Trading, and Dr. Elkins, as a partner, is
therefore bound by it. The Delta Trading decision set forth adjustments to
partnership items, upon which the computational adjustments made to Dr. Elkins’
1998, 2000, and 2001 tax liabilities were based. The decision also explicitly
determined that the underpayments of tax attributable to partnership item
adjustments were subject to 5% accuracy-related penalties. Dr. Elkins points to no
authority that would allow us to set aside that binding decision or the assessments
made in its wake.
Neither the Office of Appeals nor this Court can set aside our final decision
in the partnership-level proceeding, the genesis of the assessments at issue. For - 22 -
[*22] this reason, no bona fide interest would be served by remanding for
verification. Cf. McAvey v. Commissioner, T.C. Memo. 2018-142, at *23.15
B. Issues Raised
1. Legal Background
The crux of the controversy here is the settlement officer’s decision to
sustain the offer specialist’s rejection of Dr. Elkins’ amended OIC of $71,192 as
not in the best interest of the Government. Section 7122(a) authorizes the
Secretary to compromise an outstanding tax liability on grounds that include doubt
as to collectibility, the ground that Dr. Elkins urged. See sec. 301.7122-1(b)(2),
Proced. & Admin. Regs. The Secretary may compromise a tax liability on this
basis where the taxpayer’s assets and income render full collection unlikely. Id.
The decision to accept or reject an OIC, along with the terms of the
compromise, is in the Secretary’s discretion. See id. para. (c)(1). The
Commissioner has created guidelines for settlement officers to follow in
evaluating an OIC. See Rev. Proc. 2003-71, sec. 2.02, 2003-2 C.B. 517, 517.
Generally, an OIC based on doubt as to collectibility “will be considered
15 In his petition Dr. Elkins claims that the settlement officer failed to verify the IRS’ compliance with sec. 6404(g). He did not renew that argument in his subsequent motions and thus has abandoned it. See Pitts v. Commissioner, T.C. Memo. 2010-101, 2010 WL 1838282, at *7. - 23 -
[*23] acceptable if it is unlikely that the tax can be collected in full and the offer
reasonably reflects the amount the Service could collect through other means,
including administrative and judicial collection remedies” (i.e., the RCP). See
Rev. Proc. 2003-71, sec. 4.02(2), 2003-2 C.B. at 517; see also IRM pt. 8.23.3.1(4)
(Oct. 15, 2014).
The IRM advises, however, that in certain circumstances the Commissioner
may reject an OIC if acceptance would not be in the best interest of the
Government. See IRM pt. 5.8.7.7.1(1) (Oct. 7, 2016). It specifies that “the
Service may take into account public policy and tax administration concerns in
determining whether an offer to compromise is acceptable”. Id. (quoting Rev.
Proc. 2003-71, sec. 6.03, 2003-2 C.B. at 519).16 It further states that “[r]ejections
under this provision should not be routine and should be fully supported by the
facts outlined in the rejection narrative.” Id. The IRM gives a few nonexclusive
examples justifying rejection for this reason, including where a taxpayer has an
egregious history of noncompliance, as evidenced by his failure to pay the tax
when he had the means to do so. Id. pt. 5.8.7.7.1(3).
16 IRM pt. 5.8.7.7.2(1) (Oct. 7, 2016) states that “offers may be rejected on the basis of public policy if acceptance might in any way be detrimental to the interests of fair tax administration, even though it is shown conclusively that the amount offered is greater than could be collected by any other means”. - 24 -
[*24] In reviewing the settlement officer’s determination we do not make an
independent evaluation of what would be an acceptable collection alternative.
See Thompson v. Commissioner, 140 T.C. 173, 179 (2013); Murphy v.
Commissioner, 125 T.C. at 320; see also Randall v. Commissioner, T.C.
Memo. 2018-123, at *9. “If the settlement officer followed all statutory and
administrative guidelines and provided a reasoned, balanced decision, the Court
will not reweigh the equities.” Thompson v. Commissioner, 140 T.C. at 179; see
also Lipson v. Commissioner, T.C. Memo. 2012-252, at *9.
We are mindful that we judge the propriety of the determination to sustain
the rejection of Dr. Elkins’ OIC on the grounds invoked by the Office of Appeals.
See SEC v. Chenery Corp., 332 U.S. 194, 196 (1947); see also Antioco v.
Commissioner, T.C. Memo. 2013-35, at *25 (“Applying Chenery in the CDP
context means that we can’t uphold a notice of determination on grounds other
than those actually relied upon by the Appeals officer.”). We will uphold a notice
of determination of less than ideal clarity, however, if the basis for the
determination may reasonably be discerned. See Bowman Transp., Inc. v.
Ark.-Best Freight Sys., Inc., 419 U.S. 281, 285-286 (1974); see also Melasky v.
Commissioner, 151 T.C. 93, 106 (2018), aff’d, 803 F. App’x 732 (5th Cir. 2020);
cf. Kasper v. Commissioner, 150 T.C. 8, 24-25 (2018) (“Although we may not - 25 -
[*25] accept any post hoc rationalizations for agency action provided by the
Commissioner’s counsel, we may consider any ‘contemporaneous explanation of
the agency decision’ contained in the record.” (quoting Tourus Records, Inc. v.
Drug Enf’t Admin., 259 F.3d 731, 738 (D.C. Cir. 2001))).
2. Analysis of the OIC
The notice of determination identifies three reasons for sustaining the
rejection of Dr. Elkins’ OIC as not in the best interest of the Government: (1) the
lack of good faith shown by the increasing values of Dr. Elkins’ offers; (2) his
failure to make any payments towards his outstanding tax liabilities during the
pendency of the offer; and (3) his “negative history”. Dr. Elkins argues that none
of these reasons rises to the high level justifying a rejection of an OIC as not in the
best interest of the Government. Looking at the proffered reasons in the light of
the more detailed explanation provided in the settlement officer’s
contemporaneous rejection memorandum, we conclude that the determination to
sustain the rejection of the OIC was neither arbitrary nor capricious, but, to the
contrary, had a sound basis.
First, the notice of determination stated that Dr. Elkins’ increases to his OIC
did not show “good faith”. As the settlement officer explained in more detail in
the rejection memorandum, Dr. Elkins’ ability to increase his offer several-fold - 26 -
[*26] meant that he had “funds in excess of the income being reported” and that
the various OIC submissions did not represent a good-faith attempt to “resolv[e]
the outstanding income taxes”. In reaching this conclusion she contrasted Dr.
Elkins’ ability to significantly increase his OIC from $17,500 (in January 2014) to
$33,000 (in January 2015) to $71,500 (in April 2015) with the decreasing income
amounts reported on his income tax returns between 2012 and 2015, during which
time his reported income dropped from $149,000 to $879. She also noted that he
continued to live a comfortable lifestyle without any ostensible paying job.
The notice of determination further relied upon Dr. Elkins’ failure to make
voluntary payments toward his assessed liabilities. In his opposition to summary
judgment Dr. Elkins points out that he was under no obligation to do so. Context
again is key. The IRS assessed Dr. Elkins’ liabilities in 2013 after several years of
litigation in the Tax Court and the entry of a decision whose terms Dr. Elkins
expressly agreed to (in the stipulation of settled issues). In her rejection
memorandum the settlement officer observed that Dr. Elkins had made no
payments toward his assessed liabilities during the nearly 3-1/2 years since he had
submitted his OIC. The settlement officer detailed his steps, at the same time, to
structure his affairs to obscure his financial condition and ability to pay. - 27 -
[*27] Finally, the notice of determination referenced Dr. Elkins’ “negative
history” with respect to IHS. Dr. Elkins attacks the purported source of this
negative history--the Wall Street Journal article detailing his financial relationship
with IHS–as hearsay and irrelevant.17
To the extent that Dr. Elkins’ challenges the settlement officer’s
consideration of the Wall Street Journal article, the Federal Rules of Evidence do
not apply in a CDP hearing, which is informal. See Fed. R. Evid. 1101; see also
Opp Cotton Mills, Inc. v. Adm’r of Wage & Hour Div. of DOL, 312 U.S. 126, 155
(1941). Information is not “admitted” in the CDP hearing as “evidence”, and it is
not excluded from consideration by Appeals just because it could not be admitted
into evidence in a proceeding governed by the Federal Rules of Evidence.
Of course, our Rules provide that a declaration in support of summary
judgment “shall set forth such facts as would be admissible in evidence”.
Rule 121(d). But the Wall Street Journal article, which was attached as an exhibit
to the settlement officer’s declaration, does not constitute inadmissible hearsay.
17 Dr. Elkins also argues that the article did not show an egregious history of past noncompliance with his tax obligations. Although the IRM uses such history as an example that might justify rejection of an offer as not in the best interest of the Government, the IRM does not suggest that such a history is a sine qua non for rejection. And the settlement officer did not assert that Dr. Elkins’ tenure with IHS related to a history of tax noncompliance. - 28 -
[*28] Hearsay is a statement offered in evidence to prove the truth of the matter
asserted. Fed. R. Evid. 801(c). The article is part of the administrative record,
which was submitted to this Court not for the truth of the matters asserted but to
show the documents that the settlement officer relied upon in making her decision
to sustain the rejection of the OIC (and the NFTL filing). The article thus would
be admissible at trial or hearing for that purpose. See Fed. R. Evid. 105 (use of
evidence admitted for limited purpose must be restricted to that purpose); see also
Levin v. Commissioner, T.C. Memo. 2018-172, at *28-*29, aff’d, 804 F.
App’x 833 (9th Cir. 2020).
As to the relevance of the article, we note that the IRM permits a settlement
officer to take into account public policy concerns in determining whether to
accept an OIC. See IRM pt. 5.8.7.7.1(1). We would expect that the evaluation of
the public policy implications of an OIC would involve consideration of
taxpayer’s prior history, including his financial dealings. Cf. IRM pt. 5.8.7.7.2(2)
(Oct. 7, 2016) (“A decision to reject an offer for public policy reason(s) should be
based on the fact that public reaction to the acceptance of the offer could be so
negative as to diminish future voluntary compliance by the general public.”). We
see nothing wrong with the settlement officer’s considering the negative history - 29 -
[*29] stemming from Dr. Elkins’ tenure at IHS--in particular, the sizable benefits
he received--when determining whether to accept a highly discounted OIC.
The reasons set forth in the notice of determination as further explicated in
the contemporaneous rejection memorandum supply a sound basis for the
settlement officer’s determination. We thus conclude that she did not abuse her
discretion in sustaining the rejection of Dr. Elkins’ $71,192 OIC as not in the best
interest of the Government.18
C. Balancing
Dr. Elkins next argues that this case should be remanded to the Office of
Appeals because the settlement officer failed to balance the need for efficient
collection of taxes with his legitimate concern that the collection action be no
more intrusive than necessary. From our review, we are satisfied that the
settlement officer did not abuse her discretion. She explained in the notice of
determination that Dr. Elkins had not offered a viable collection alternative (given
her sustaining the rejection of his OIC) and thus the NFTL filing was the least
intrusive means of collecting the outstanding liability.
18 Dr. Elkins also alleges that there was no territory manager’s approval of the offer specialist’s OIC rejection. Assuming arguendo that such approval is required, the record contains a copy of such an approval. - 30 -
[*30] In his opposition to summary judgment Dr. Elkins protests that his OIC
would be a less intrusive means of collection. This argument ignores the fact that
the OIC was off the table, leaving no less restrictive means than the NFTL filing.
See Lindley v. Commissioner, T.C. Memo. 2006-229, 92 T.C.M. (CCH) 363, 368-
369 (2006), aff’d sub nom. Keller v. Commissioner, 568 F.3d 710 (9th Cir. 2009).
He also argues that the settlement officer failed to account for the economic
hardship to him attendant to the NFTL filing. The administrative record
demonstrates that the settlement officer well understood Dr. Elkins’ position but
nonetheless concluded that the NFTL filing was an appropriate way forward, a
conclusion altogether consistent with the reasons she gave for sustaining the
rejection of the OIC. We see no abuse of discretion in this regard.19
19 In general, we may remand a CDP case for materially changed circumstances if it would be helpful, necessary, or productive. See, e.g., Churchill v. Commissioner, 102 T.C.M. (CCH) at 117. In his motion for remand, Dr. Elkins argues that the case should be remanded for materially changed circumstances in the light of the recent amendment to sec. 7803 adding subsec. (e)(7), which gives a taxpayer the right to the nonpriviliged portions of the case file regarding disputed issues at least 10 days before a conference with the Office of Appeals. See Taxpayer First Act, sec. 1001, 133 Stat. at 983. Sec. 7803(e)(7), however, applies only to “conferences occurring after the date which is 1 year after the date of the enactment of this Act.” Taxpayer First Act sec. 1001(e)(2), 133 Stat. at 985. Dr. Elkins’ CDP hearing was held approximately three years before the enactment of subsec. (e)(7), and thus he cannot avail himself of its benefits. - 31 -
[*31] III. Conclusion
In sum, there is no genuine dispute as to any material fact and a remand
would be neither appropriate nor helpful. Finding no abuse of discretion in any
respect, we will grant summary judgment to respondent, deny Dr. Elkins’ motion
to remand, and sustain the notice of determination upholding the filing of the
NFTL for the years at issue.
To reflect the foregoing,
An appropriate order and
decision will be entered.