CCA 1021049: IRS may consider a California domestic partner's assets in an offer in compromise

Plain-English summary

The Office of Chief Counsel advised that the IRS may consider the assets and income of a taxpayer's registered domestic partner in California when determining the taxpayer's reasonable collection potential for an offer in compromise under § 7122. The memorandum relied on California community-property rules, which give registered domestic partners equal interests and liabilities in community property. It also explained that reasonable collection potential includes realizable value from assets and anticipated future income, less certain basic living expenses. The advice concerned whether the partner's assets could be included in evaluating the offer, not whether a particular offer should be accepted.

Ruling snapshot

• Question: May the IRS include a California registered domestic partner's assets and income when evaluating the taxpayer's offer in compromise?
• Outcome: Advice given
• Key authorities: IRC § 7122; C.A. Fam. §§ 297.5(a), 760, and 910(a); United States v. Craft, 535 U.S. 274 (2002)

Full text (IRS public release)

       Office of Chief Counsel
       Internal Revenue Service
       Memorandum
       Number: 201021049
       Release Date: 5/28/2010
       CC:PA:05:JBremer                        Third Party Communication: None
       POSTS-135450-09                         Date of Communication: Not Applicable

UILC: 7122.18-00

date: May 06, 2010

 to:   Vladislav M. Rozenzhak
       Attorney (Laguna Niguel, Group 3)
       (Small Business/Self-Employed)

from: Glenn J. Melcher
Branch Chief
(Procedure & Administration)

subject: Considerations of the Assets of a Domestic Partner in the State of California Under
I.R.C. Section 7122

       This Chief Counsel Advice responds to your request for assistance. This advice may
       not be used or cited as precedent.

       ISSUE

       Can the Internal Revenue Service consider the assets of a taxpayer’s registered
       domestic partner in the State of California when determining the reasonable collection
       potential of a taxpayer’s Offer In Compromise (“OIC”) under I.R.C. section 7122?

       CONCLUSIONS

       Yes. The IRS can consider the assets of a taxpayer’s registered domestic partner in the
       State of California when determining the reasonable collection potential of a taxpayer’s
       OIC under IRC section 7122.

       FACTS

       California is a community property state. The taxpayer, a registered domestic partner in
       the State of California pursuant to California Family Code section 297-297.5, has
       submitted an OIC to the IRS pursuant to Code section 7122. The taxpayer’s registered

POSTS-135450-09 2

domestic partner possesses assets or income that would significantly increase the
reasonable collection potential of the OIC, and the IRS revenue officer would like to
include such assets/income in the computation of the reasonable collection potential.

LAW AND ANALYSIS

IRC section 7122 authorizes the Secretary to compromise a taxpayer's federal income
tax liability. An OIC is an agreement between a taxpayer and the IRS that settles the
taxpayer’s tax liabilities for less than the full amount owed. The IRS is vested with
discretion to accept or reject an OIC. Keller v. Commissioner, 568 F.3d 710, 718 (9th
Cir. 2009) (IRS did not abuse its discretion in rejecting OIC). Absent special
circumstances, the IRS will reject an OIC if it believes that the liability can be paid in full
as a lump sum or through a payment agreement. In addition, in most cases the IRS will
not accept an OIC unless the amount offered by the taxpayer is equal to or greater than
the reasonable collection potential. The reasonable collection potential is how the IRS
measures the taxpayer’s ability to pay and includes the value that can be realized from
the taxpayer’s assets, such as real property, automobiles, bank accounts, and other
property. The reasonable collection potential also includes anticipated future income,
less certain amounts allowed for basic living expenses.

The IRS has recognized that in community property states, the assets of both owners of
community property (the owner submitting the offer and the non-offering owner) should
be considered in the offer. I.R.M. 25.18.4.10 provides that if under applicable state law,
all or part of the non-offering owner’s share of community property and community
property income would be available to satisfy the tax liability at issue, these items
should be considered in the offer in compromise. Thus, we must look to applicable
California State law to determine the property rights of the domestic partners.

California registered domestic partners share an equal interest and liability in
community property in the State of California. Chapter 297 of the California Family
Code pertaining to domestic partnerships provides, in relevant part:

   Registered domestic partners shall have the same rights, protections, and
   benefits, and shall be subject to the same responsibilities, obligations, and
   duties under law, whether they derive from statutes, administrative
   regulations, court rules, government policies, common law, or any other
   provisions or sources of law, as are granted to and imposed upon
   spouses.

C.A. Fam. § 297.5(a). Accordingly, registered domestic partners in California are
afforded all the rights provided under C.A. Fam. § 760, which states that:
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  Except as otherwise provided by statute, all property, real or personal,
  wherever situated, acquired by a married person during the marriage while
  domiciled in this state is community property.

C.A. Fam. § 910(a) further provides:

  (a) Except as otherwise expressly provided by statute, the community
  estate is liable for a debt incurred by either spouse before or during
  marriage, regardless of which spouse has the management and control of
  the property and regardless of whether one or both spouses are parties to
  the debt or to a judgment for the debt.

Based on the California state law provisions noted above, we conclude that the IRS can
consider the assets of the taxpayer’s registered domestic partner in the State of
California when determining whether to accept the taxpayer’s OIC under section 7122.
State law determines whether there is a property interest, see United States v. Craft,
535 U.S. 274, 278 (2002) (“[w]e look initially to state law to determine what rights the
taxpayer has in the property the Government seeks to reach…”), and California state
law provides that both domestic partners have an equal interest and liability in the
community property.

Please call Glenn Melcher or Jason Bremer at (202) 622-3620 if you have any further
questions.