Background
Andrew Filipowski reported $110 million in income after selling his software company in 1999 but claimed offsetting losses through New Millennium Trading, LLC, a partnership later found to be a sham created solely for tax avoidance. The IRS assessed $32.5 million in tax, $13 million in accuracy-related penalties, and $65.6 million in statutory interest. Filipowski did not challenge the deficiency or make material payments toward it.
After the liability grew to approximately $140 million, Filipowski offered to settle it for $1.5 million. The IRS calculated his reasonable collection potential at approximately $5.9 million but rejected the offer on public-policy grounds, concluding that acceptance could undermine voluntary tax compliance. The Tax Court granted summary judgment to the Commissioner and sustained the proposed levy.
The Court’s Holding
The Eleventh Circuit affirmed. Because Filipowski did not dispute the underlying tax liability, the controlling question was whether the IRS abused its discretion by acting arbitrarily, capriciously, or without a sound basis in fact or law. The court held that the IRS permissibly rejected the offer based on undisputed facts: Filipowski had used a sham partnership to avoid tax on $110 million in income, his liability had reached $140 million, his offer was only $1.5 million, and he filed returns for 2015 through 2018 late and only after IRS prompting.
Filipowski challenged other factual findings concerning his status as a high-income nonfiler, alleged cryptocurrency and foreign assets, the DePasquale Trust, and the effect of his Parkinson’s diagnosis. The court concluded that those disputes related principally to collectability and the calculation of his reasonable collection potential. They were not material to the independent public-policy basis for rejecting the offer, so they did not preclude summary judgment.
Key Takeaways
- The IRS may reject an offer in compromise when accepting it could undermine voluntary compliance by the public, even if the taxpayer cannot pay the full liability.
- A vast disparity between the tax debt and the proposed settlement, coupled with tax-shelter use and repeated late filings, supported the IRS’s public-policy determination.
- Factual disputes affecting collectability do not defeat summary judgment when undisputed facts independently support rejection on public-policy grounds.
Why It Matters
The decision underscores the breadth of the IRS’s discretion over offers in compromise and confirms that reasonable collection potential is not necessarily dispositive. Even where full collection appears unlikely, the agency may consider the message that accepting a deeply discounted settlement would send to other taxpayers.
For practitioners, the opinion also highlights the importance of materiality in Collection Due Process litigation. Challenges to asset valuations, financial disclosures, or collection potential may not justify a trial when the administrative decision rests on a separately sufficient public-policy rationale supported by undisputed facts.