Day-trading losses are dissipation of assets.

• Author: Beavers, James A.

The Tax Court held that a taxpayer's losses from a period of day-trading activity constituted a dissipation of assets that the IRS could take into account in determining whether to accept the taxpayer's offer in compromise (OIC).

Background

Larry Tucker filed income tax returns for 2000, 2001, and 2002 that reported tax due. However, he filed the returns late and did not pay the tax due. In early 2003, when his tax liabilities totaled at least $14,945, Tucker deposited $44,700 in an E-trade account and began a misguided attempt to make enough money through day trading to pay off his tax and other debts. Two months later he had lost $22,645.

The IRS subsequently assessed the tax Tucker owed and notified him of the filing of a notice of federal tax lien (NFTL). After an initial hearing and an adverse determination, Tucker appealed the determination with the Tax Court, contending that the IRS Office of Appeals improperly rejected an OIC that he had proposed. The Tax Court remanded the case to the Office of Appeals for further consideration of Tucker's OIC.

At a supplemental collection due process hearing, the Office of Appeals stated its preference for a partial payment installment agreement, but Tucker proposed only an OIC. In calculating Tucker's reasonable collection potential for purposes of evaluating his OIC, Appeals considered his day trading to constitute asset dissipation. The Office of Appeals issued a supplemental notice of determination denying Tucker's proposed OIC and upholding the filing of the NFTL. Back in Tax Court, Tucker again challenged the IRS's determination, claiming in part that the IRS had incorrectly considered his day-trading losses as a dissipation of assets. (Tucker also challenged the constitutionality of his collection due process hearing because it was not conducted by an officer of the United States appointed by the president or the secretary of the Treasury as required (he argued) by the Appointments Clause of the U.S. Constitution (Art. II, [section]2). The Tax Court rejected this argument in a separate opinion. Tucker, 135 T.C. No. 6(2010).)

The Tax Court's Decision

The Tax Court held that the IRS Appeals officer had not erred in including the day-trading losses in her analysis of Tucker's reasonable collection potential and in rejecting Tucker's OIC. The court focused on the known risk involved in the day trading, stating:

The losses that Mr. Tucker sustained were not due to...