Snipes’s collection alternative refused

The Tax Court sustained the IRS’s rejection of an offer in compromise (OIC) by the actor Wesley Snipes to settle his approximately $23.5 million tax liabilities with a single payment of $842,061.

Facts: In 2013, the IRS assessed the tax liabilities for tax years 2001 through 2006 and issued a Notice of Federal Tax Lien (NFTL) against property owned by Snipes. Snipes filed a request for a Collection Due Process (CDP) hearing, in which he requested an installment agreement or OIC as collection alternatives. Later, he made a cash OIC of $842,061, based on doubt as to collectibility.

The CDP hearing was held in June 2014. The settlement officer assigned to Snipes spent considerable time and effort attempting to verify the actor’s income and assets to determine his reasonable collection potential (RCP), including 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 Snipes could not provide bona fide documentation of these properties’ dissipation. The settlement officer determined that Snipes’s RCP was $17.5 million, but Snipes did not increase his OIC. Consequently, the IRS rejected his OIC and sustained the NFTL.

Snipes petitioned the Tax Court, which in 2016 remanded the case to the IRS Appeals Office for supplemental CDP proceedings to investigate Snipes’s claims of dissipation of real estate holdings. In these and in the earlier CDP proceedings, Snipes said his financial adviser had diverted and disposed of property and income without his knowledge or benefit. He presented affidavits from the financial adviser to that effect, but he provided no definitive or bona fide documentation, the court found. The settlement officer reduced Snipes’s RCP to $9,581,027 to aid a compromise settlement, but Snipes still did not increase his OIC. The IRS again rejected the OIC and sustained the NFTL.

Issues: The parties did not dispute the underlying tax liability, and so the Tax Court reviewed the IRS’s determination for an abuse of discretion, i.e., whether the Appeals Office’s determination was “arbitrary, capricious, or without sound basis in fact or law” (Murphy, 125 T.C. 301, 320 (2005), aff’d, 469 F.3d 27 (1st Cir. 2006)).

Snipes argued that the settlement officer abused her discretion by not calculating his exact RCP, by including in the calculation assets he no longer owned, and by not considering the economic hardship the NFTL would cause him. He further argued that she abused her discretion by not conducting an expedited investigation of his former financial adviser as a transferee of the assets.

Holding: The Tax Court determined that the settlement officer did not abuse her discretion in rejecting Snipes’s OIC and thus sustained her determination. The court rejected Snipes’s first three arguments primarily because the settlement officer was unable to definitively determine which properties Snipes no longer owned and he had not provided bona fide documentation that he no longer owned the assets. Moreover, given the disparity between the amounts of his OIC and the RCP, the settlement officer had “ample justification” to reject the OIC, the court stated.

As for the financial adviser as a transferee, the court noted that Snipes provided no support for his contention that a taxpayer can compel the IRS to conduct an expedited investigation of transferee liability of a third party. The Appeals Office is not designed or authorized to conduct such investigations itself, which are done by the IRS’s field division.

• Snipes, T.C. Memo. 2018-184

— By Paul Bonner, a JofA senior editor.