John F. Campbell v. Commissioner
2019 T.C. Memo. 4 (2019)
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Rule of Law:
The Internal Revenue Service (IRS) abuses its discretion when it rejects a taxpayer's Offer-in-Compromise by including assets in the taxpayer's reasonable collection potential (RCP) calculation that were transferred years before a tax liability was assessed for legitimate purposes, or by asserting a nominee theory to reach trust assets without a basis in established state law.
Facts:
- In 2001, John F. Campbell invested in a custom adjustable rate debt structure (CARDS) transaction.
- On April 26, 2004, when his net worth was approximately $25 million, Campbell established the First Aeolian Islands Trust, an irrevocable grantor trust in Nevis, West Indies, funding it with a single $5 million contribution.
- Campbell and his family are beneficiaries of the Trust, but he retains no control over the trustee's investment or distribution decisions.
- On May 10, 2004, the IRS notified Campbell that his 2001 tax return was under examination; he was not aware of a potential audit or increased tax liability before this notice.
- In 2006, Campbell invested $27 million in the Gulf Opportunity Zone (GO-Zone), a legitimate business venture which subsequently suffered significant losses due to unforeseen circumstances, including defective Chinese drywall and the 2008 financial crisis.
- After his GO-Zone investment, Campbell still retained approximately $6.5 million in liquid assets.
- The Trust, through a wholly-owned corporation and at the sole discretion of the trustee, later invested in one of Campbell's business ventures after he fully disclosed his conflicts of interest.
Procedural Posture:
- The IRS issued a statutory notice of deficiency to John F. Campbell for his 2001 tax year.
- Campbell filed a petition in the U.S. Tax Court, which resulted in a settlement and a decision entered on March 11, 2010, determining a deficiency and penalty.
- The IRS assessed the liability on April 19, 2010, and later issued a final notice of intent to levy and filed a notice of Federal tax lien.
- Campbell timely requested a Collection Due Process (CDP) hearing and proposed collection alternatives.
- On January 31, 2012, the IRS Appeals Office issued a notice of determination upholding the proposed levy.
- Campbell petitioned the U.S. Tax Court for review of the determination.
- The Tax Court remanded the case to the IRS Appeals Office for further consideration.
- On remand, Campbell submitted an Offer-in-Compromise (OIC), which the IRS rejected in a supplemental notice of determination issued January 14, 2016.
- The Tax Court again granted Campbell's motion to remand the case to the IRS Appeals Office for further consideration of state law issues.
- On June 11, 2018, the IRS issued a second supplemental notice of determination, again rejecting the OIC and sustaining the proposed levy.
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Issue:
Did the IRS Appeals officer abuse her discretion by rejecting a taxpayer's Offer-in-Compromise and sustaining a proposed levy after calculating the taxpayer's reasonable collection potential to include assets transferred to an irrevocable trust and funds used for legitimate, albeit unsuccessful, business investments?
Opinions:
Majority - Judge Kerrigan
Yes, the IRS Appeals officer abused her discretion. The officer's determination to sustain the levy was arbitrary, capricious, and without a sound basis in fact or law because the calculation of Campbell's reasonable collection potential (RCP) was fundamentally flawed. The IRS erred by including the $5 million trust contribution as a 'dissipated asset,' as the transfer occurred six years before the tax assessment and ten years before the OIC, at a time when Campbell was unaware of the liability and had ample assets to cover it. The IRS also wrongly classified his legitimate GO-Zone business investments as dissipated assets, ignoring that they were for the production of income and failed due to unforeseen market events, not an attempt to avoid taxes. Finally, the IRS's determination that the Trust was a 'nominee' of Campbell was improper because it failed to establish that Campbell held property rights in the Trust under applicable state law (Connecticut), which has not adopted the federal nominee theory.
Analysis:
This decision significantly constrains the IRS's discretion in collection due process hearings, particularly in calculating a taxpayer's reasonable collection potential. It establishes that the IRS cannot use the 'dissipated asset' doctrine to penalize taxpayers for legitimate, pre-liability financial planning or for business investments that fail due to external factors. The ruling also reinforces the principle from Drye v. United States that the IRS must ground its nominee or alter ego theories in established state property law, preventing it from speculating on how a state court might rule. This provides a stronger shield for taxpayers against administrative overreach when negotiating collection alternatives like an Offer-in-Compromise.
