The Tax Court yesterday ruled against Carl R. Klein, who joined the Chicago law firm of Defrees & Fisk as a partner in March 2006. According to his firm bio, Mr. Klein (who got his J.D. from Indiana in 1970) "has over thirty years of experience, specializing in corporate and securities law along with merger and acquisition transactions."

During the 1997-2000 tax years at issue in Klein v. Commissioner, T.C. Memo. 2007-325 (10/30/07), Mr. Klein practiced law with various Chicago law firms and had AGI of between $103,000 – $214,000.  When he did not pay his entire tax liability for these years, the IRS began collection proceedings against him.  At his § 6330 hearing, Mr Kelin claimed:

1. He was entitled to abatement of the “penalties” assessed against him because he had reasonable cause for his failure to pay the taxes.
2. The IRS should have accepted his offer-in-compromise based on doubt as to collectibility because of the possibility of discharge of his taxes in the event he filed for bankruptcy.
3. Alternatively, in the event his offer-in-compromise was not accepted, the IRS should have allowed him to pay his tax liability in installments.

As to the second point, Mr. Klein argued that "respondent had not considered that his future earnings were uncertain because petitioner was aging and was at that time practicing law without associates and without a formal office or support staff. In addition, petitioner contested the settlement officer’s calculation of petitioner’s realizable collection potential, claiming that increased allowances should have been made for petitioner’s basic living expenses."  The settlement officer recommended rejection of Mr. Klein’s offer-in-compromise, and the Appeals Office issued notices of determination sustaining the levy actions for 1997-2000.

The Tax Court rejected Mr. Klein’s two arguments.  First, the Tax Court held that Mr. Klein’s failure to timely file and timely pay was not the result of reasonable cause:

Petitioner contends that his failure to file returns timely and timely pay taxes was due to personal circumstances during the years at issue and that these circumstances constituted reasonable cause for purposes of § 6651(a). Specifically, petitioner claims that his

marriage was ending, the firms he was associated with were collapsing around him, or not following through on promised remuneration, and he was in the midst of a significantly over-budget rehabilitation project on a dream home that almost immediately upon completion he was forced to sell due to the divorce. This occurred all while trying to assure his family’s needs were met.

In spite of the personal adversity he encountered, petitioner succeeded in generating substantial income for the years at issue and apparently chose to spend this income to maintain an elevated lifestyle and to “assure his family needs were met” as opposed to paying his taxes. Petitioner is an attorney and obviously knew he had an obligation to obey the tax laws, including the obligation to file timely returns and pay the taxes when due. The obstacles petitioner describes simply do not rise to a level amounting to reasonable cause. After reviewing the record and applying the de novo standard of review for all years at issue, we hold that petitioner is liable for the additions to tax under § 6651(a)(1) and (2) for all of the years at issue.

Second, the Tax Court rejected Mr. Klein’s argument that the IRS abused its discretion in rejecting his offer-in-compromise on the basis of doubt as to its collectibility:

Respondent, in applying the published guidelines, allowed petitioner $2,474 per month for basic living expenses, which petitioner agrees was substantially the same as the amount provided for under the published guidelines. When subtracted from the $22,000 gross monthly income that petitioner disclosed in his offer-in-compromise, and in the light of respondent’s records which showed that petitioner had $302,400 in wages and $13,400 in nonemployee compensation for tax year 2004, respondent concluded that petitioner would be able to pay his bythen $252,462 tax liability in full over 48 months.

We agree with respondent that petitioner had sufficient income to meet his basic living expenses as well as to pay his tax liability in full. Petitioner basically wants the Government to permit him to use his current and expected future earnings to maintain a lifestyle more lavish than the standard for the Chicago area (petitioner’s living expenses are more than twice those of the average national and local standards) plus $4,000 per month for “business expenses” without having to fully satisfy his past due tax obligations. The record does not disclose any special circumstances that warrant acceptance of petitioner’s offer-in-compromise ($70,000 to extinguish a tax liability over $200,000).