IRS can proceed with levy after rejecting inspection agency’s $250,000 settlement offer

Middle Dep't Inspection Agency, Inc. v. Commissioner, T.C. Memo. 2025-99, No. 20018-23L., 2025 BL 351926, Court Opinion

On October 1, 2025, the U.S. Tax Court upheld the IRS’s decision to reject Middle Department Inspection Agency, Inc.’s (MDIA) $250,000 offer to settle over $9 million in excise tax liabilities.

The court ruled that the IRS Independent Office of Appeals did not abuse its discretion when it denied MDIA’s offer and sustained a proposed levy to collect unpaid pension-related taxes from 2000 through 2018.

Why It Matters

The ruling confirms that taxpayers seeking collection relief through offers-in-compromise (OICs) must provide substantial evidence and meet statutory criteria. It also reinforces that the IRS may reject reduced settlement offers when accepting them would undermine compliance or fairness among taxpayers.

Key Facts

• Parties: Middle Department Inspection Agency, Inc. (MDIA) v. Commissioner of Internal Revenue

• Issue: Whether the IRS abused its discretion by rejecting MDIA’s offer-in-compromise and sustaining a levy.

• Statutes Involved: Internal Revenue Code §§ 430, 4971, 6320, 6330, 7122

• Tax Years at Issue: 2000–2018

• Liabilities: Over $9 million in excise taxes for underfunding a defined benefit pension plan

• Offer Amount: $250,000 over five months

• IRS Finding: MDIA had a reasonable collection potential (RCP) of about $2.56 million—ten times the offer amount

• Outcome: Court granted summary judgment for the IRS

Timeline

• 1972: MDIA established a defined benefit pension plan.

• 1990: Company entered bankruptcy but continued the plan voluntarily.

• 1998: Plan frozen; no new participants allowed.

• 2000–2018: MDIA failed to meet minimum funding standards; excise taxes accrued.

• 2014: Tax Court stipulated MDIA owed $2.73 million for 2000–2011.

• 2021: IRS issued levy notices totaling $9.7 million.

• 2021–2023: MDIA sought collection relief through an OIC.

• Nov. 8, 2023: IRS Appeals denied the offer and sustained the levy.

• Oct. 1, 2025: Tax Court upheld the IRS decision.

Court Findings

• Jurisdiction: Court reviewed under abuse-of-discretion standard since underlying liabilities were previously determined.

• Administrative Review: Appeals properly verified procedural compliance.

• OIC Analysis:

  • MDIA offered $250,000 despite reporting assets exceeding $2.1 million and monthly income around $700,000.

  • The IRS calculated RCP at $2.56 million—well above the offer.

  • IRS policy allows acceptance below RCP only if “special circumstances” exist (economic hardship or public policy grounds).

• Special Circumstances Claim:

  • MDIA argued public policy justified compromise because it fully paid pensioners and served a vital public role.

  • Appeals found no evidence of community harm or special hardship.

  • IRS determined acceptance would undermine compliance by rewarding noncompliance over 18 years.

• Procedural Fairness:

  • The court found any errors in IRS explanations harmless since the decision relied on sound grounds.

  • IRS properly referred MDIA’s offer to the specialized group handling public policy-based OICs.

Judgment Details

• Court: U.S. Tax Court

• Judge: Jones, J.

• Decision: Respondent’s motion for summary judgment granted; petitioner’s denied.

• Result: IRS authorized to proceed with levy to collect excise taxes.

• Liabilities: Over $9 million total, covering excise taxes and interest under §4971(a).

Outcome

The Tax Court found no abuse of discretion by the IRS and sustained the levy action. MDIA’s $250,000 offer was rejected as insufficient relative to its financial capacity and lack of qualifying special circumstances.

The Takeaway

The decision reinforces the IRS’s broad discretion in evaluating settlement offers and underscores that claims based on fairness or public benefit alone rarely justify compromise. Businesses with significant resources cannot expect leniency for long-term noncompliance merely by arguing equitable treatment.

Middle Dep’t Inspection Agency, Inc. v. Commissioner, T.C. Memo. 2025-99, No. 20018-23L., 2025 BL 351926, Court Opinion

Source: Tax Notes

Citations

• Statutes:

  • 26 U.S.C. §§ 430, 4971(a) – Minimum funding and excise tax rules

  • 26 U.S.C. §§ 6320, 6330 – Collection due process hearings

  • 26 U.S.C. § 7122 – Compromises

• Key Precedents:

  • Sundstrand Corp. v. Commissioner, 98 T.C. 518 (1992), aff’d, 17 F.3d 965 (7th Cir. 1994) – Summary judgment standards

  • Murphy v. Commissioner, 125 T.C. 301 (2005), aff’d, 469 F.3d 27 (1st Cir. 2006) – Effective tax administration OICs

  • Thompson v. Commissioner, 140 T.C. 173 (2013) – Review of OIC rejection for abuse of discretion

  • Woodral v. Commissioner, 112 T.C. 19 (1999) – Abuse-of-discretion framework

  • Fargo v. Commissioner, 447 F.3d 706 (9th Cir. 2006) – IRM not binding law

  • W. Zintl Construction, Inc. v. Commissioner, T.C. Memo. 2017-119 – RCP computation guidance

  • Serna v. Commissioner, T.C. Memo. 2022-66 – Public policy OIC review

Each citation illustrates the Tax Court’s reliance on established abuse-of-discretion standards and the narrow application of public policy compromises under §7122.