Or, You Have to Be Current If You Want An Alternative

 So Judge Halpern reminds us in Simone’s Butterfly, 2011 T.C. Mem. 187, filed 8/8/11. Simone’s Butterfly, a D.C. corporation, ran up $50K in liabilities, interest and penalties for the years at issue, and didn’t make its 2010 estimated tax payments. Butterfly filed its returns showing tax due for those years, but paid nothing. So IRS assessed tax, and sent Butterfly the Notice of Intent to Levy.

Butterfly missed an initial phone appointment with Appeals, but later submitted an incomplete Form 433-B in support of an OIC.

Issue presented: Was Appeals’ denial “arbitrary or capricious, lacks sound basis in law, or is not justifiable in light of the facts and circumstances”? 2011 T.C. Mem. 187, at p. 9, specifically in denying Butterfly an OIC because Butterfly wasn’t current with its 2010 estimated payments?

The statute is Section 6330(c)(3)(c), which propounds this test: is the method of collection chosen by IRS (in this case, lien and levy) “no more intrusive than necessary” to collect the taxes, interest and penalties concededly due?

Yes, says Judge Halpern: “…petitioner [Butterfly] had over $50,000 of unpaid taxes for years beginning in 2003. It appears to have provided her [the Appeals officer] an incomplete Form 433-B, and it did provide her with inconsistent financial information. [Butterfly’s attorney] suggested an installment agreement, but she provided no terms. Moreover, [the Appeals officer’s] decision to preclude petitioner from entering into an installment agreement because of its failure to pay estimated taxes was based on applicable procedures contained in the Commissioner’s Internal Revenue Manual (IRM).[Footnote Omitted.] According to those procedures, in determining whether a taxpayer is eligible for an installment agreement an IRS employee must:

‘Analyze the current year’s anticipated tax liability. If it appears a taxpayer   will have a balance due at the end of the current year, the accrued liability may be included in an agreement. Compliance with filing, paying estimated taxes, and federal tax deposits must be current from the date the installment agreement begins. * * *’

“IRM pt. 5.14.1.4.1(19) (Sept. 26, 2008) (emphasis added). Respondent avers, and petitioner does not deny, that petitioner made no estimated tax payments for 2010.” 2011 T.C. Mem. 187, at p. 13.

It’s not just the Manual, says Judge Halpern. Installment agreements, OIC and other alternatives to levy run the risk of pyramiding delinquencies if the taxpayer can’t come current when the alternative begins. “Estimated tax payments, intended to ensure that current taxes are paid, are a significant component of the Federal tax system, and [the Appeals officer] was entitled to rely on their absence in reaching her conclusions. See Cox v. Commissioner, 126 T.C. 237, 258 (2006), revd. on other grounds 514 F.3d 1119 (10th Cir. 2008); Schwartz v. Commissioner, T.C. Memo. 2007-155. In fact, petitioner’s circumstances illustrate one of the reasons for requiring current compliance before granting collection alternatives such as an offer-in-compromise or an installment agreement; namely, the risk of pyramiding tax liability (i.e., that failure to pay current tax liabilities might result in an increasing total tax liability notwithstanding some payment of past tax liabilities). See Orum v. Commissioner, 412 F.3d 819, 821 (7th Cir. 2005), affg. 123 T.C. 1 (2004).” 2011 T.C. Mem. 187, at p. 14.

So summary judgment for IRS.