Wesley Snipes Makes Offer the IRS can Refuse
Wesley Snipes and the IRS have been at odds for many years. From 1999 to 2001, Snipes simply didn’t file returns and failed to pay millions of dollars in taxes. For his part, Snipes has denied being a tax protestor; rather, he claims to have relied on professional advice from individuals who probably were tax protestors themselves. Although Snipes was acquitted of felony tax fraud and conspiracy charges, Snipes was still convicted of three misdemeanor counts of willfully failing to file tax returns, for which he served jail time. He was released in April of 2013, but Snipes and the IRS wasted no time in picking up where they left off.
In November of 2018, in Snipes v. Commissioner,1 Snipes was handed his latest IRS defeat when the Tax Court reviewed the circumstances around his most recent attempt to resolve his tax balance via an offer-in-compromise (OIC), finding no problem with the IRS’s rejection of that offer. Perhaps the most relevant take-away from this ongoing saga is that high net worth clients must avail themselves of high-quality financial professionals.
In August of 2013, the IRS filed a Notice of Federal Tax Lien (NFTL) against Snipes’ property for tax years 2001-2006. Liabilities then totaled approximately $23.5 million. Snipes timely responded and filed a Form 12153, Request for a Collection Due Process or Equivalent Hearing (CDP request), asking for either an installment arrangement or an OIC as collection alternatives. In April of 2014, on the basis of doubt as to collectability, Snipes made a cash OIC in the amount of $842,061 (less than 4% of the total liability).
The CDP hearing was held in June of 2014. The IRS settlement officer was charged with determining the “reasonable collection potential” (RCP) – i.e. whether Snipe’s offered amount was in fact all that he could actually afford to pay. So, the officer issued an investigatory request in order to verify Snipes’ income and assets.
The investigation revealed that multiple entities were involved, which owned numerous assets and real estate holdings. Snipes claimed that, unbeknownst to him, his financial adviser had independently disposed of Snipes’ assets and income. As proof, Snipes provided signed affidavits from Mr. Johnson regarding this misconduct. However, Snipes was unable to provide anything considered as bona fide substantiation for these transfers. Ultimately, the officer decided that without such substantiation, the amount that client could actually offer the IRS in compromise of the total amount of liabilities was $17,482,152. Snipes made no adjustment to his original amount offered; thus, the IRS issued a notice of determination rejecting the OIC and sustaining the NFTL.
Subsequently, Snipes and the IRS filed motions for summary judgment. In October of 2016, the court rejected both parties’ motions and remanded the case to the IRS Appeals Office. The court directed the Appeals Office to conduct supplemental CDP proceedings and to consider the RCP in light of Snipes’ current circumstances.
During the supplemental CDP proceedings, the officer issued additional investigatory requests targeted at real estate holdings. Meanwhile, Snipes reiterated that his financial adviser disposed of property and requested: (1) that the IRS conduct an expedited transferee investigation of the financial adviser, and (2) acceptance of the OIC, conditional on the investigation finding fault with the financial adviser, or “currently not collectible” status during the investigation. The settlement officer requested her manager’s permission to conduct a transferee investigation, but the manager denied the request and clarified that conditional OICs are unacceptable.
This supplemental review ended with the officer reducing the initial IRS determination of RCP to $9,581,027 for settlement purposes. Snipes maintained his original offer amount of $842,061. The officer rejected Snipes’ OIC. The officer’s manager reviewed the proceedings and rejection. In December of 2017, the IRS issued a notice sustaining the NFTL and rejecting the OIC. The notice was signed by the officer’s manager. Snipes filed a petition in the Tax Court.
II. The Court’s Holding and Analysis
The Tax Court agreed with the IRS, holding that since Snipes failed to provide bona fide documentation to verify his assets, overall financial status, and the difference between Snipes’ offered amount and the IRS’s RCP determination, the IRS officer did not abuse her discretion throughout the matter’s duration.
Specifically, the court considered whether or not the settlement officer abused her discretion by:
(1) failing to determine an exact RCP;
(2) considering potentially dissipated assets;
(3) failing to conduct the expedited transferee investigation of the financial advisor; and
(4) determining that the collection of the RCP amount of $9,581,027 would not cause Snipes to suffer an economic hardship.
Additionally, the court considered whether the IRS complied with the review obligations of IRC §7122(e)(1).
A. RCP Determination
In holding that the officer did not abuse her discretion by failing to determine Snipes’ exact RCP, the court emphasized her investment of time and considerable efforts to determine income and assets. The court concluded that the officer was simply unable to make a definitive determination, and Snipes could not provide bona fide documentation of property dissipation.
B. Including Dissipated Assets
Next, the court was careful to note that the officer did not err in considering potentially dissipated assets. Even though the Internal Revenue Manual (I.R.M.) 126.96.36.199(1) (Sept. 30, 2013), provides a general rule that dissipated assets should not be used to calculate RCP—there are exceptions, stated the court. Citing IRM 188.8.131.52 (Sept. 27, 2011), the court found that the officer was appropriately following guidance requiring an officer “to reject an OIC where issues of transferee liability are present unless the taxpayer includes the transferee amount in his offer.”2
C.Denial of Expedited Transferee Investigation
The court then clarified that the officer did not abuse her discretion by rejecting Snipes’ expedited transferee investigation request. The court indicated that Snipes offered no support for his position that a taxpayer may compel such investigation during CDP proceedings. Furthermore, the court stated that “the structure of the Appeals Office is not designed for a settlement officer to conduct in-depth investigations, nor does it authorize the settlement officer or the Appeals Office to direct taxpayer examinations.”3
D. Economic Hardship
Furthermore, the court considered that, although Snipes argued that the IRS’s RCP would make it impossible for him to meet basic living expenses, Snipes was unable to prove this contention with complete and current financial substantiation. Since Snipes failed to show any other factors indicating economic hardship (i.e. medical condition, dependent care, etc.),4the officer was fully able to reject his OIC as being substantially below his RCP.
E. IRC §7122(e)(1) Obligations
Finally, the court stated that IRC §7122(e)(1) and corresponding regulations provide IRS authority to establish procedures for independent administrative review of OIC rejections. However, the court clarified that in the CDP setting, this review is typically made by the Appeals Officer manager. In this case, since the settlement officer’s manager reviewed the OIC rejection, the court concluded that the independent review requirement was met.
III. What’s Next?
Interestingly, Snipes will have the opportunity to continue debating his RCP with the IRS by filing another offer. Snipes may find himself in appeals and Tax Court once again as thisdecision revolved around a NFTL and not a notice of levy. Although, the IRS often issues a notice of lien and levy close in time, if he has not received such notice, once issued, the notice of levy may provide an independent path to appeals and Tax Court.
If you have any questions or concerns about tax matters, contact Frost Law today at 410-497-5947.
T.C. Memo 2018-184 (Nov. 1, 2018).
Id. at 12.
Id. at 13, citingDaltonv. Commissioner,
Reg. §301.7122-1(c)(3)(i); I.R.M. 184.108.40.206.1(6) (Aug. 5, 2015).