Procedure & Administration
The Tax Court held that a taxpayer’s losses from a period of day-trading activity constituted a dissipation of assets that the IRS could take into account in determining whether to accept the taxpayer’s offer in compromise (OIC).
Larry Tucker filed income tax returns for 2000, 2001, and 2002 that reported tax due. However, he filed the returns late and did not pay the tax due. In early 2003, when his tax liabilities totaled at least $14,945, Tucker deposited $44,700 in an E-trade account and began a misguided attempt to make enough money through day trading to pay off his tax and other debts. Two months later he had lost $22,645.
The IRS subsequently assessed the tax Tucker owed and notified him of the filing of a notice of federal tax lien (NFTL). After an initial hearing and an adverse determination, Tucker appealed the determination with the Tax Court, contending that the IRS Office of Appeals improperly rejected an OIC that he had proposed. The Tax Court remanded the case to the Office of Appeals for further consideration of Tucker’s OIC.
At a supplemental collection due process hearing, the Office of Appeals stated its preference for a partial payment installment agreement, but Tucker proposed only an OIC. In calculating Tucker’s reasonable collection potential for purposes of evaluating his OIC, Appeals considered his day trading to constitute asset dissipation. The Office of Appeals issued a supplemental notice of determination denying Tucker’s proposed OIC and upholding the filing of the NFTL. Back in Tax Court, Tucker again challenged the IRS’s determination, claiming in part that the IRS had incorrectly considered his day-trading losses as a dissipation of assets. (Tucker also challenged the constitutionality of his collection due process hearing because it was not conducted by an officer of the United States appointed by the president or the secretary of the Treasury as required (he argued) by the Appointments Clause of the U.S. Constitution (Art. II, §2). The Tax Court rejected this argument in a separate opinion. Tucker, 135 T.C. No. 6 (2010).)
The Tax Court’s Decision
The Tax Court held that the IRS Appeals officer had not erred in including the day-trading losses in her analysis of Tucker’s reasonable collection potential and in rejecting Tucker’s OIC. The court focused on the known risk involved in the day trading, stating:
The losses that Mr. Tucker sustained were not due to an unforeseeable event but rather were commonplace (especially for a neophyte) in such a highly volatile activity. Mr. Tucker knew he owed outstanding taxes; and he had the cash in hand that would have paid in full the taxes and accruals he owed as of early 2003 (i.e., for tax years 1999, 2000 and 2001); and yet he chose instead to devote that money to a risky investment. Mr. Tucker’s foray into day trading was purely speculative, and his already slim chances of success were undermined by his inexperience. In short, Mr. Tucker’s circumstances were of his own making. [Slip op. at 29]
Adding Tucker’s day-trading losses to his other disposable income as determined under the IRS’s guidelines, his reasonable collection potential was in excess of his outstanding tax liabilities. Therefore, the Tax Court held that the Appeals officer’s rejection of Tucker’s OIC was not an abuse of discretion. Furthermore, it found that even if the IRS had not taken Tucker’s day-trading losses into account, the Appeals officer had provided a reasonable basis for rejecting Tucker’s OIC in favor of a partial payment installment agreement.
This case treats day trading by an inexperienced investor as essentially the same as gambling. While this is arguably a reasonable position, many taxpayers would not consider this to be the case. Practitioners should inform clients with tax debts who are contemplating making an OIC that the IRS, in reviewing an OIC, may consider many uses of assets—not just lavish living expenses or outright gambling—as a dissipation of assets in the analysis of reasonable collection potential.
Tucker, T.C. Memo. 2011-67