Tax Court upholds rejection of taxpayer’s proposed OIC and installment agreement

The Tax Court granted the IRS summary judgment in a CDP matter, sustaining the rejection of the taxpayer’s proposed collection alternatives and upholding both a notice of federal tax lien and a proposed levy.

Facts: Charlton C. Tooke III, executive chairman and a minority partner of Welvie LLC, a surgery decision support company, self-assessed but did not pay his federal individual income taxes for 2012 through 2017, accumulating assessed liabilities that ultimately approached $1.8 million. After the IRS filed a notice of federal tax lien for 2013 through 2017 and issued a final notice of intent to levy for those years, Tooke timely requested CDP hearings and proposed two collection alternatives: an OIC and, in the alternative, an installment agreement. His OIC, premised on doubt as to collectibility and effective tax administration, initially offered $175,000, which he later increased to $375,000.

Tooke’s submission rested on three claimed special circumstances. First, he traced his financial difficulties to actions by his former spouse, Terry Schue, who, amid a worsening drug addiction, allegedly demanded that roughly $440,000 in proceeds from the sale of their jointly owned Florida condominium be deposited into Schue’s own account. He then departed with the funds and much of Tooke’s property, precipitating litigation Tooke said cost him more than $2 million. Second, Tooke cited his 2010 Parkinson’s disease diagnosis and its progressive symptoms. Third, he and his then-wife, Loretta Tooke, had assumed custody of a 12-year-old special-needs child, generating substantial medical, therapy, and schooling expenses.

The IRS Collections function and, in turn, two Appeals officers worked through successive revisions of Tooke’s reasonable collection potential (RCP), the agency’s estimate of what it could realize by seizing and liquidating his assets and garnishing his future income while allowing for necessary expenses. After allowing numerous above-standard expenses, including for private schooling, speech therapy, and increased medical costs for the child, the Appeals officer fixed Tooke’s RCP at $499,109, comprising $363,137 in net realizable equity and $135,972 of projected future income. He declined to allow approximately $1,000 per month for in-home tutoring and roughly $550 per month to transport the child to private school, and he rejected Tooke’s request to retain $85,000 in emergency reserves against possible future medical events. Appeals issued a notice of determination sustaining collection on Jan. 5, 2021.

Issues: The Tax Court first considered whether Tooke’s 2012 tax year should be dismissed as moot. The court found that the record showed that, following a series of payments and credits, Tooke’s 2012 account was paid in full and subsequently overpaid. In addition, the record showed that Tooke had received a $40,271 abatement. Under Zuch, 145 S. Ct. 1707 (2025), the Tax Court lacks jurisdiction under Sec. 6330 to resolve a dispute once the IRS is no longer pursuing a levy. Based on the record, there could no longer be a proposed levy for 2012, since that year fell outside the court’s jurisdiction.

The Tax Court then considered whether Appeals abused its discretion by rejecting Tooke’s collection alternatives for the other years at issue. According to the court, an abuse of discretion occurs if the Appeals officer exercises discretion “arbitrarily, capriciously, or without sound basis in fact or law” (Woodral, 112 T.C. 19, 23 (1999)). Under Sec. 6330(c)(3), the court considered whether the Appeals officer (1) properly verified that the requirements of any applicable law or administrative procedure were met; (2) considered any relevant issues raised by Tooke; and (3) considered whether the proposed collection action balanced the need for the efficient collection of taxes with Tooke’s legitimate concern that any collection action be no more intrusive than necessary.

With regard to the verification requirement, Tooke had conceded that he was not challenging the satisfaction of the verification procedure under Sec. 6330(c). Accordingly, the Tax Court, although it could have reviewed whether the verification requirement had been satisfied, found that the issue was conceded.

The Tax Court then looked at whether the Appeals officer had considered all the issues raised by Tooke with respect to his OIC and his installment agreement collection alternatives. As the court noted, the IRS enjoys wide discretion to compromise liabilities under Sec. 7122, and an Appeals officer is generally directed to reject a doubt-as-to-collectibility offer that falls substantially below the taxpayer’s RCP unless special circumstances justify a lower amount. Special circumstances may exist where the collection of the full RCP would cause economic hardship or where public policy or equity considerations counsel acceptance. According to Regs. Sec. 301.6343-1(b)(4)(i), economic hardship arises only when a taxpayer is “unable to pay his or her reasonable basic living expenses,” and it expressly does not extend to maintaining an affluent standard of living.

The Tax Court’s central move was to assume the contested expenses away. Even crediting the disputed $1,550 per month for the child’s tutoring and school transportation, Tooke’s RCP would fall only to about $480,509, still well above his $375,000 offer. Because a taxpayer who offers less than his RCP ordinarily cannot show an abuse of discretion in the rejection, the expenses in dispute were not outcome-determinative, and the court had no need to decide whether Tooke satisfied the “necessary expense test.”

On economic hardship, the Tax Court agreed with Appeals that Tooke’s request to preserve $85,000 against hypothetical future medical events did not establish that collection would leave him unable to meet his reasonable basic living expenses. With monthly income near $42,000 and expenses already allowed well beyond the national and local standards, in the court’s view, Tooke faced no current hardship. The record did not establish the likelihood of the anticipated medical events or the need for an $85,000 reserve, including for costs not covered by insurance or expenses already allowed. The court invoked Fargo, 447 F.3d 706 (9th Cir. 2006), for the proposition that Appeals may disregard speculative medical expenses.

On the public policy and equity (non-economic-hardship) grounds, the Tax Court upheld Appeals’ determination that Tooke’s losses were not the product of a third party’s criminal or fraudulent act directly causing the liability that otherwise could have supported a non-economic-hardship finding. The court determined that the 2012 deficiency stemmed from Tooke’s failure to make quarterly estimated payments. Furthermore, the court found that, knowing of Schue’s addiction, Tooke had not exercised prudent business care in permitting the sale proceeds to flow into Schue’s account. In addition, because Schue co-owned the property, according to the court, the deposit did not evince fraud or theft of the kind the Internal Revenue Manual (IRM) contemplates as permitting relief (IRM §5.8.11.2.2.1(4) (Aug. 5, 2025)).

Tooke argued that rejection of his alternative Sec. 6159(a) partial-pay installment agreement was an abuse of discretion, contending that the Appeals officer’s ability-to-pay calculation was flawed because he denied the $1,550 of tutoring and transportation expenses for the special-needs child. According to Tooke, these were necessary expenses. The Tax Court disagreed, finding, consistent with Appeals’ determination, that rejecting those expenses was not an abuse of discretion.

Finally, the Tax Court found that Appeals had satisfied the third balancing requirement of Sec. 6330(c)(3) by offering two collection alternatives that Tooke declined.

Holding: The Tax Court granted the IRS’s motion to dismiss Tooke’s claim with respect to the proposed levy for tax year 2012 for lack of jurisdiction because the liability for the year had been paid in full and overpaid before review, so there could no longer be a proposed levy. As to the remaining years, the court found no genuine dispute of material fact and no abuse of discretion in any respect. It accordingly granted the IRS’s motion for summary judgment, denied Tooke’s cross-motion, and sustained both the notice of federal tax lien and the proposed levy.

• Tooke, T.C. Memo. 2026-54

— Thomas Godwin, CPA, CGMA, Ph.D., and John McKinley, CPA, CGMA, J.D., LL.M., are both professors of the practice in accounting and taxation in the SC Johnson College of Business at Cornell University in Ithaca, N.Y. To comment on this column, contact Paul Bonner, the JofA’s tax editor.