124 T.C. 165 (T.C. 2005), 15382-03L, Speltz v. Commissioner of Internal Revenue

Docket Nº:15382-03L
Citation:124 T.C. 165, 124 T.C. No. 9
Opinion Judge:COHEN, Judge:
Attorney:Timothy J. Carlson, for petitioners. Albert B. Kerkhove and Stuart D. Murray, for respondent.
Judge Panel:Cohen, Mary Ann
Case Date:March 23, 2005
Court:United States Tax Court

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124 T.C. 165 (T.C. 2005)

124 T.C. No. 9




No. 15382-03L

United States Tax Court

March 23, 2005

Judgment entered for respondent.


Ps incurred AMT liability as a result of their exercise of incentive stock options in 2000. The stock declined precipitously in value after the date of exercise. Ps partially paid the tax liability and submitted an offer in compromise with respect to the unpaid balance. The IRS rejected the offer in compromise and filed a lien on Ps' property. Held: It was not an abuse of discretion to reject Ps' offer in compromise and to continue the lien.

Timothy J. Carlson, for petitioners.

Albert B. Kerkhove and Stuart D. Murray, for respondent.

Cohen, Mary Ann


COHEN, Judge:

This case is before the Court on respondent's motion for summary judgment, seeking a determination sustaining an Appeals officer's rejection of petitioners' offer in compromise. Petitioners seek a summary determination that it was an abuse of discretion to refuse their offer in compromise because of the unfair application of the alternative minimum tax (AMT) based on their exercise of incentive stock options (ISOs) where the stock acquired by exercise of the ISOs has lost substantially all of its value subsequent to the acquisition of the stock. Unless otherwise indicated, all section references are to the Internal Revenue Code as amended, and all Rule references are to the Tax Court Rules of Practice and Procedure.


In ruling on respondent's motion for summary judgment, factual inferences are viewed in the light most favorable to petitioners. Preece v. Commissioner, 95 T.C. 594, 597 (1990). Thus, the background facts set forth herein are based primarily on petitioners' declaration in opposition to the motion

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for summary judgment and on other materials submitted by petitioners.

Petitioners resided in Ely, Iowa, at the time that they filed their petition. For some years prior to 2000, petitioner Ronald J. Speltz (petitioner) was employed by McLeodUSA (McLeod). By 2000, petitioner was a senior manager at McLeod earning wages in excess of $ 75,000. By 2004, petitioner's wages were approximately $ 90,000 per year. As part of his compensation at McLeod, petitioner received ISOs for acquisition of McLeod stock.

During the year 2000, petitioner exercised certain of the ISOs that he previously had received. On petitioners' Form 1040, U.S. Individual Income Tax Return, for 2000, petitioners reported, for purposes of the AMT, those ISOs as resulting in " excess of AMT income over regular tax income" of $ 711,118. On their Form 1040, petitioners reported that their " regular" adjusted gross income was $ 142,070. Their taxable income was $ 105,461, and their " regular" tax was $ 18,678. Petitioners reported AMT of $ 206,191 for a total tax liability of $ 224,869. After application of Federal income tax withheld, the balance owed on petitioners' tax liability for 2000 was $ 210,065. Petitioners also filed a 2000 Iowa Individual Income Tax Long Form, IA 1040, on which they reported Iowa minimum tax of $ 46,792 and a total tax liability of $ 56,769.

The value of petitioners' McLeod stock dropped precipitously. On their tax return for 2000, petitioners reported that they sold 200 shares of McLeod stock on January 14 for a total of $ 14,011 and 500 shares of McLeod stock on March 10 for a total of $ 52,282. On their tax return for 2002, petitioners reported that they sold 2,070 shares of McLeod stock on December 30 for a total of $ 1,647.

Petitioners partially paid the liability reported on their 2000 Form 1040 at the time that it was filed and paid an additional $ 75,000 in installments prior to November 2, 2001. Petitioners borrowed $ 134,000 from a bank to pay State and Federal taxes reported on their 2000 returns.

On or about November 2, 2001, petitioners submitted to the Internal Revenue Service (IRS) a Form 656, Offer in Compromise. Petitioners offered a cash payment of $ 4,457, the cash value of petitioner's life insurance policy, against the liability that then exceeded $ 125,000. On the Form 656,

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petitioners checked the box for " Doubt as to Collectibility -- 'I have insufficient assets and income to pay the full amount.'" Petitioners also attached to Form 656 a statement in which they explained that an offer in compromise was necessary because of the impact the AMT in 2000 had on their finances and their lifestyle. Specifically, petitioner's income in 2000 was at a comfortable level for a family of five including three young daughters; the McLeod stock they held was nearly worthless and declining and had been used to secure a $ 134,000 loan with a bank to pay part of the 2000 Federal and State taxes; and, in the event of a sale of the stock (forced or otherwise), petitioners would be unable to carry back the capital loss to offset their 2000 gain. They began building a new home in 2000 and sold their prior home in 2001, using the proceeds of sale to repay the bank. Lifestyle changes were necessary, including: Petitioner June M. Speltz had to get a job instead of staying home with the children; the oldest daughter had to switch schools; petitioners were unable to contribute to their retirement and to their children's education fund; and they had to reduce their charitable donations. Finally, they could not afford to have a fourth child, which they had wanted. Petitioners offered in compromise $ 4,457, the cash surrender value on petitioner's life insurance. In the statement, petitioners expressed their mental anguish and frustration with the unfairness of their situation.

Petitioners' offer in compromise was reviewed by Revenue Officer Robert G. Dallas (Dallas), an offer in compromise specialist. Dallas indicated to petitioners that he was rejecting the offer in compromise because petitioners had the ability to pay the outstanding tax liability in full. On October 6, 2002, petitioners wrote to Dallas disputing amounts that Dallas had used in his calculation. On October 9, 2002, Dallas indicated that certain adjustments that were requested by petitioners had been made. He wrote, however:

The adjustments to the Income/Expense table you requested have not been granted because the allowed amount * * * is the allowable housing and utility standard for families of your number in Linn County, Iowa. The excess expenses you have claimed * * * cannot be moved * * * solely to circumvent the allowable standard amount.

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Based upon your current financial condition, we have determined that you have the ability to pay your liability in full within the time provided by law. We have made this determination based on the following computations:

Total net equity in assets: $ 77,948.00
Total future ability to pay and retire debt: $ 113,568.00
Total ability to pay: $ 191,516.00
Total balance due: $ 148,744.64
Amount you offered: $ 4,457.00

Copies of our worksheets are enclosed for your review. Your options at this time are to pay your liability in full, enter into an installment agreement, withdraw your offer using the withdrawal letter previously provided or withhold your response and appeal your offer's failure to gain acceptance through the appeal procedure that you will be offered. Please advise of your preferred course of action. Please respond within 14 days of the date of this letter. If you fail to respond or if your response is egregiously inadequate, a Federal Tax Lien will be filed if one is not already a matter of record and the case will be forwarded to an independent reviewer without a recommendation for approval. If the reviewer concurs with the conclusion of my investigation, you will be notified by mail and advised of your appeal rights. If there is a need for additional information you will be notified.

On December 17, 2002, respondent sent to petitioners a Letter 3172, Notice of Federal Tax Lien Filing and Your Right to a Hearing Under IRC 6320, with respect to their unpaid income tax liability for 2000, advising that petitioners could request a hearing with respondent's Office of Appeals. On January 13, 2003, petitioners submitted a Form 12153, Request for a Collection Due Process Hearing. Petitioners stated that they were disagreeing with the Notice of Federal Tax Lien because:

Forms 433-A and 656 have been prepared and filed with the IRS as an Offer in Compromise. The only real estate owned by the taxpayers is their personal residence * * *. Such residence constitutes exempt property, and therefore, the IRS' attempted lien is unenforceable.

Petitioners' Request for a Collection Due Process Hearing was signed by their then...

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