Tooke v. Commissioner, T.C. Memo. 2026-54, June 23, 2026

The United States Tax Court recently issued a memorandum opinion in Tooke v. Commissioner, T.C. Memo. 2026-54, providing critical guidance on the scope of an Appeals Officer's discretion during Collection Due Process (CDP) hearings, specifically regarding the rejection of Offers-in-Compromise (OIC) and Partial-Pay Installment Agreements (PPIA).

Case Background and Procedural History

The petitioner, Charlton C. Tooke III, faced unpaid federal individual income tax liabilities for taxable years 2012 through 2017. Following the issuance of a Notice of Federal Tax Lien (NFTL) and a Final Notice of Intent to Levy, the taxpayer requested CDP hearings under IRC §§ 6320 and 6330. The taxpayer proposed several collection alternatives, including an OIC based on doubt as to collectibility and Effective Tax Administration (ETA), as well as an installment agreement.

The IRS Independent Office of Appeals ultimately issued a Notice of Determination rejecting the proposed collection alternatives and sustaining both the NFTL and the proposed levy actions. The taxpayer subsequently petitioned the Tax Court, challenging the Appeals Officer's (AO) determinations.

Taxpayer Requests for Relief

The taxpayer sought to compromise his liabilities for a lump sum of $175,000 (later increased to $375,000), which was significantly lower than the IRS's calculated Reasonable Collection Potential (RCP). The taxpayer’s request for relief rested on three primary pillars:

First, the taxpayer argued that special circumstances warranted an ETA compromise due to non-economic hardship. He alleged that his financial distress resulted from a series of "extortion attempts" and theft of funds by a former spouse.
Second, the taxpayer claimed economic hardship based on a diagnosis of Parkinson’s disease and the subsequent need for emergency medical reserves of $85,000 to avoid future insolvency.
Third, the taxpayer requested the allowance of additional monthly expenses in his RCP and IA calculations, specifically for the private schooling, tutoring, and transportation of a special needs adopted child.

Legal Standard of Review

The Court reviewed the AO's determinations under the abuse of discretion standard. Under IRC § 6330(d)(1), the Court evaluates whether the AO exercised discretion "arbitrarily, capriciously, or without sound basis in fact or law." Woodral v. Commissioner, 112 T.C. 19, 23 (1999). The Court emphasized that it judges the propriety of the determination "on the grounds invoked by . . . Appeals." Serna v. Commissioner, T.C. Memo. 2022-66, at *8.

Analysis of the Offer-in-Compromise and RCP

The Court first addressed the rejection of the OIC based on doubt as to collectibility. The AO determined the taxpayer's RCP to be $499,109. Because the taxpayer's offer was substantially below this amount, the AO rejected it.

The Court noted that "the Commissioner does not abuse his discretion by rejecting an OIC that falls short of a taxpayer’s RCP." Brombach v. Commissioner, T.C. Memo. 2012-265, at *21. Even when the Court performed a "favorable recalculation" of the RCP by allowing disputed expenses, the taxpayer's offer remained significantly lower than the resulting figure. Consequently, the Court found that the rejection of the OIC was legally sound unless special circumstances justified a lower amount.

Application of Effective Tax Administration Principles

The Court then analyzed the taxpayer's claims for ETA relief under the categories of economic hardship and non-economic hardship.

Regarding economic hardship, the taxpayer argued that the denial of $85,000 in emergency reserves was an abuse of discretion. The Court rejected this, ruling that "the offer figures should not be adjusted based on what you believe may happen in the future." The Court held that "compromise to promote ETA on the ground of economic hardship is appropriate when the Secretary determines that, although collection could be achieved, collection would cause the taxpayer economic hardship." Treas. Reg. § 301.7122-1(b)(3)(i). Because the taxpayer maintained a significant monthly income and was not currently unable to pay basic living expenses, the Court found the request for reserves to be "speculative."

On the issue of non-economic hardship, the taxpayer argued that the fraudulent acts of a third party (his former spouse) caused the delinquency. The Court applied IRM 5.8.11.3.2.1(4), which requires that the third party's act be the "direct cause of the delinquency" and that the taxpayer have exercised "prudent and responsible business actions." The Court found that the taxpayer failed this test, stating that the "outstanding tax liabilities began to accrue in tax year 2012 when you were supposed to make estimated tax payments," and that the taxpayer "did not exercise prudent and responsible business actions by allowing the funds to be deposited into a bank account of someone with a claimed addiction and/or mental disorder."

Analysis of the Installment Agreement and Necessary Expenses

The taxpayer challenged the rejection of his PPIA, arguing that the AO abused his discretion by disallowing $1,000 per month for tutoring and $550 per month for transportation.

The Court applied the "necessary expense test" under IRM 5.8.5.22.1, which defines a necessary expense as one "necessary to provide for a taxpayer’s and his or her family’s health and welfare and/or production of income." While the AO had already allowed a deviation from national standards by permitting private school tuition, the Court found it reasonable to disallow the tutoring expense because "one of the arguments used to justify the [private school] expense was the fact that the child would receive more one-on-one learning than in a public school."

Similarly, the Court upheld the denial of the transportation expense, noting that the taxpayer "had already been allowed more than the standard for vehicle operating costs" and failed to provide reasonable substantiation of the actual expenses incurred.

The Balancing Analysis and Conclusion

Finally, the Court addressed the balancing test under IRC § 6330(c)(3)(C), which requires the AO to balance the need for efficient collection with the taxpayer's legitimate concern that collection be no more intrusive than necessary. The Court found no abuse of discretion, noting that the IRS "was willing to implement two different collection alternatives, such as an [OIC] or an [IA]. However, [Mr. Tooke] declined to accept either as a collection alternative."

The Court granted the respondent's Motion for Summary Judgment, sustaining the NFTL and the proposed levy actions for the taxable years at issue (excluding 2012, which was dismissed as moot).

Prepared with assistance from LM Studio google/gemma-4-31b-qat.