The Tax Court held that an IRS settlement officer had not abused her discretion by rejecting actor Wesley Snipes's offer in compromise (OIC) because he failed to provide bona fide documentation to prove his assets and financial condition.
Background
Snipes, best known for his role as a vampire-hunting dhampir in the Blade trilogy, earned a great deal of money in the 1990s and 2000s. Unfortunately, Snipes fell in with a financial adviser who convinced him, based on certain tax protester arguments, that he did not have to pay income tax. He did not file income tax returns or pay any income tax from 2001 to 2006.
The government, not surprisingly, thought that Snipes did have to pay income tax on his earnings and file tax returns for those years, and eventually it brought criminal tax charges against him. He was acquitted of the most serious charges, but was convicted of three misdemeanor counts of failing to file federal income tax returns and sentenced to three years in prison. Adding insult to injury, the IRS assessed Snipes over $20 million in tax liabilities for 2001 through 2006.
In August 2013, not long after Snipes was released from prison, the IRS filed a Notice of Federal Tax Lien (NFTL) of $23.5 million against his property. In September 2013, he responded by requesting a Collection Due Process (CDP) hearing. In the CDP request, he asked for an installment agreement or an OIC as collection alternatives. In April 2014, he submitted a cash OIC of $842,061, based on doubt as to collectibility.
The settlement officer assigned to Snipes spent considerable time and effort attempting to verify his income and assets to determine his reasonable collection potential (RCP). These efforts included issuing an investigatory request to the IRS Compliance Division. However, the settlement officer was unable to definitively determine that Snipes no longer owned certain properties he claimed to have lost or transferred, and he could not provide bona fide documentation of the properties' dissipation. The settlement officer determined that Snipes' RCP was $17.5 million, but Snipes did not increase his OIC. Consequently, the settlement officer rejected his OIC and sustained the NFTL.
Snipes appealed the IRS's determination in Tax Court, which remanded the case to IRS Appeals to supplement the record and to consider Snipes's RCP in light of his current circumstances. The settlement officer made more inquiries about Snipes's assets and income, but the only new information she received was affidavits from his financial adviser that backed up the actor's claims that the adviser had misused his assets and income. Snipes also requested that the IRS conduct a transferee investigation of the financial adviser, but the IRS refused this request.
Nonetheless, following her review, the settlement officer reduced Snipes RCP to $9.6 million to encourage a settlement. Snipes, however, did not increase his original offer of $842,061. The settlement officer again rejected the OIC and sustained the NFTL, and the case headed back to the Tax Court. In Tax Court, Snipes contended that the settlement officer had abused her discretion in refusing his OIC by failing to (1) calculate his exact RCP; (2) exclude dissipated assets from the RCP calculation; (3) conduct an expedited transferee investigation into his financial adviser; and (4) consider whether the NFTL would cause him economic hardship.
The Tax Court's decision
The Tax Court held that the settlement officer did not abuse her discretion in rejecting Snipes's OIC and sustaining the filing of the NFTL. The court largely based its opinion on Snipes's failure to provide bona fide documentation to prove his assets and financial condition and the disparity in his OIC versus his RCP as determined by the settlement officer.
Calculation of the RCP: The Tax Court found that the Internal Revenue Manual (IRM) does not require the calculation of a taxpayer's exact RCP. The court further found that an exact RCP was not warranted because of the large difference between Snipes's OIC offer amount and the RCP, as well as Snipes's "inability to credibly document his assets."
Inclusion of dissipated assets in RCP: The court explained that the IRM directs settlement officers to include potentially dissipated assets in RCP in cases involving transferee liability issues unless the taxpayer includes the transferee amount in his offer, which Snipes had not done. Thus, the settlement officer did not abuse her discretion in including potentially dissipated assets in Snipes's RCP, particularly because Snipes had failed to provide bona fide or definitive documentation proving that he no longer owned the assets or to what extent he had benefited from their dissipation.
Transferee liability investigation: The Tax Court found that Snipes had not provided any support for his contention that a taxpayer in a CDP hearing can compel the IRS to conduct a transferee liability investigation of a third party. Moreover, the court stated that the Appeals Office is not designed for settlement officers to conduct such investigations and does not authorize a settlement officer to direct taxpayer examinations.
Economic hardship: The Tax Court, citing case law, the IRM, and other IRS guidance, found that economic hardship is a special circumstance that allows a settlement officer to accept an OIC that is significantly below a taxpayer's RCP. Regs. Sec. 301.7122-1(c)(3)(i) provides that 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 the 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. Snipes argued that the third factor applied to him.
The Tax Court stated, citing Vinatieri, 133 T.C. 392 (2009), that the taxpayer must submit complete and current financial information to the IRS to prove economic hardship. The court determined that Snipes had not submitted complete and current financial information because he did not provide bona fide or definitive documentation of his assets. Thus, he had not shown economic hardship that was a special circumstance.
According to the court, absent a showing of special circumstances, settlement officers are instructed to reject an OIC substantially below the taxpayer's RCP where the OIC is based on doubt as to collectibility. Since Snipes had not shown he was subject to special circumstances and his OIC was based on doubt as to collectibility, the court found that the settlement officer had properly rejected his OIC.
Reflections
Snipes's problems were originally caused by his belief that obviously too-good-to-be-true tax protester arguments excused him from paying tax. While Snipes has claimed that that he was unfairly targeted by the government for criminal tax prosecution because he was a high-profile celebrity, and to some extent this may be true, his story nonetheless provides a very good lesson for all taxpayers of the extremely bad consequences that can result from espousing tax protester arguments.
Snipes, T.C. Memo. 2018-184
