I’m a tax nerd. I read Tax Court decisions. Today, one caught my eye: W.T. Snipes v. Commissioner. This name looks vaguely familiar.
Yes, it’s the Wesley Snipes. Mr. Snipes, for those who don’t remember, visited ClubFed for failing to file tax returns in the early 2000s. Today’s decision begins,
P[etitioner] has Federal income tax liabilities of approximately $23.5 million for tax years 2001-06. These liabilities are largely a result of P’s failure to file Federal income tax returns. R[espondent] assessed these deficiencies, filed a notice of Federal tax lien (NFTL), and issued notice and demand for payment of the liabilities, and, when P did not pay, issued to P a notice of the filing. P timely requested a collection due process hearing under I.R.C. sec. 6330(d) and stated that he wanted a collection alternative–i.e., an offer-in-compromise (OIC) or currently not collectible status–and wanted the NFTL withdrawn. P did not challenge his underlying tax liabilities. P made a cash OIC of $842,061, less than 4% of his total underlying liability.
The tax liability is now about $23.5 million. Interestingly, back in 2008 (when Mr. Snipes was tried for failing to file) he and his then-attorney, Robert Bernhoft, said he would pay his taxes. That apparently didn’t happen.
The Tax Court dispute is over Mr. Snipes’ having a Federal tax lien being put on him. Mr. Snipes submitted an Offer In Compromise (OIC) stating there was doubt as to whether the $23.5 million could be collected. When an OIC is submitted, the taxpayer must provide a complete listing of all of his assets and liabilities. In many cases an OIC is justified. Mr. Snipes alleged that a former financial advisor of his took out loans and disposed of assets and income on his behalf without his knowledge or benefit. Indeed, the advisor signed affidavits. The Tax Court had an issue, though: “However, petitioner did not provide any definitive or otherwise bona fide documentation showing the dissipation or diversion of his assets or income.”
Something I’ve said before in discussing the Tax Court, you need to provide absolute proof and documentation. It appears that didn’t happen in this case. But I digress….
Following review of petitioner’s case the settlement officer reduced petitioner’s [reasonable collection potential (RCP)] to $9,581,027 in an effort to compromise for settlement purposes. Petitioner maintained his original OIC of $842,061. The settlement officer ultimately concluded that it was not in the best interest of the Government to accept petitioner’s OIC. The settlement officer’s manager reviewed the settlement officer’s actions regarding petitioner’s case and her rejection of petitioner’s OIC.
Mr. Snipes didn’t accept the ruling, so the case went to Tax Court.
Petitioner contends that the settlement officer abused her discretion in refusing his OIC by failing to (1) calculate petitioner’s exact RCP, (2) exclude dissipated assets, (3) conduct an expedited transferee investigation into Mr. Johnson, (4) consider whether the NFTL would cause petitioner economic hardship, and (5) satisfy the review obligations of section 7122(e)(1).
The Court did not give Mr. Snipes good news. The exact RCP isn’t required. The petitioner asked for $842,061; the settlement officer calculated $9,581,027; that’s a big difference. Without, in the view of the Tax Court, credible documentation of his assets, Mr. Snipes lost his first argument.
The argument regarding dissipated assets is more interesting. Here’s what the Court said:
Even though the settlement officer included potentially dissipated assets in petitioner’s RCP, she did not abuse her discretion. She was properly following published guidance that directs settlement officers to reject an OIC where issues of transferee liability are present unless the taxpayer includes the transferee amount in his offer. Petitioner had multiple entities in which his multiple assets, particularly his real estate properties, were held. The settlement officer could not determine petitioner’s assets clearly. Moreover, petitioner did not provide bona fide or definitive documentation showing that he no longer owned the assets in question or to what extent, if any, he had benefited from their dissipation. He provided only affidavits by [his financial advisor]. The settlement officer was justified in her calculation of petitioner’s RCP. [internal citation omitted]
I can see some basis for an appeal here. Given that the financial advisor was willing to sign affidavits saying he disposed of assets, there’s likely proof that those assets were disposed. On the other hand, you shouldn’t assume with the Tax Court. Consider that if Mr. Snipes had included proof of disposition he might have won this argument (and he might have won at Appeals, too).
The argument on transferee issues was a loser. The Internal Revenue Manual pt. 5.8.5.6(7) states,
It is not necessary to actually seek or obtain any specific legal remedy in order to address * * * [transferee/nominee/alter ego] issues in an offer. However, the offer file must be clearly documented with the basis for including the value of a transferred asset in the RCP. Care should be taken so that the determination to include assets held by others is reasonable.
This was a losing argument.
The next argument was economic hardship.
Economic hardship is considered a “special circumstance” under which a settlement officer can accept an OIC that is considered significantly below a taxpayer’s RCP…Factors indicating “economic hardship” include: (1) a long-term illness, medical condition, or disability that renders the taxpayer incapable of earning a living, where it is “reasonably foreseeable that taxpayer’s financial resources will be exhausted providing for care and support during the course of the condition”; (2) a situation where the taxpayer’s monthly income is exhausted by providing for care of dependents without other means of support; and (3) a situation where, although the taxpayer has certain assets, the taxpayer is unable to borrow against the equity in those assets and the liquidation of the assets would render the taxpayer unable to meet basic living expenses…Petitioner contends that payment of his RCP as calculated by the IRS would render him unable to meet basic living expenses. [internal citations omitted]
If you can prove that paying the RCP would cause you to be unable to pay your living expenses, you normally do qualify for an OIC based on economic hardship. There’s just one problem here:
The taxpayer must submit complete and current financial documentation to the Commissioner to prove economic hardship. Petitioner has not submitted complete and current financial data to respondent, as he did not provide definitive or bona fide documentation of his assets. Accordingly, petitioner’s settlement officer could not determine that he could not borrow against the equity of his real property interests or other assets, or that the liquidation of these interests would render him unable to meet basic living expenses. Petitioner did not make a showing of economic hardship necessary to qualify for special circumstances.
The final argument was that the review obligations of Section 7122(e)(1) were not met. Petitioner stated that the Appeals Office manager was not an ‘independent’ reviewer. The Court rejected that argument, noting that this is exactly how the proposed rejection of an offer is reviewed.
While I do expect this case to be appealed, for now the tax lien stands. As I said years ago, it would have been far, far easier (and far, far less expensive) for Mr. Snipes to have simply paid his taxes in the first place. Of course, I would have missed out on years of great blog materials but it would have saved Mr. Snipes millions of dollars.
Case:
