Tax Court Rejects $1.8 Million Offer-in-Compromise, Upholds IRS Collection Actions

Today's date is 6/23/2026.

The stakes in Charlton C. Tooke III v. Commissioner could not be higher: $1.8 million in unpaid federal taxes spanning tax years 2012 through 2017. At issue is whether the IRS abused its discretion in rejecting Tooke’s Offer-in-Compromise (OIC) and sustaining a Notice of Federal Tax Lien (NFTL) and proposed levy actions. The Tax Court’s decision, issued June 23, 2026, reaffirms the IRS’s broad authority under § 6330, which governs Collection Due Process (CDP) hearings, and § 7122, which authorizes OICs. In upholding the IRS’s rejection, the court deferred to the agency’s discretion, signaling that taxpayers challenging collection actions face a steep burden when contesting the IRS’s financial analysis. The ruling underscores the Tax Court’s role as a gatekeeper of administrative discretion, not an arbiter of taxpayer fairness.

Charlton Tooke III’s tax liabilities did not arise from financial negligence—they emerged from a decade of personal devastation that left him financially and emotionally shattered. The unpaid federal income taxes totaling approximately $1.6 million for tax years 2012 through 2017 were the result of a cascade of misfortune that began with the dissolution of his 25-year partnership with Terry Schue, a relationship that had weathered decades of shared struggles and triumphs.

The collapse of their union in 2014 was not merely an emotional rupture but a financial catastrophe. In 2010, the couple had sold their jointly owned Florida condominium, expecting proceeds of $440,000 to cover mounting medical bills and tax obligations. But Schue, whose history of opioid addiction had long plagued their lives, relapsed in the years leading up to the sale. Hours before the closing in early 2013, Schue demanded all proceeds be deposited into his account, assuring Tooke the funds would be used as planned. Tooke, desperate to salvage what remained of their relationship, complied. Instead of paying taxes or medical bills, Schue allegedly began a campaign of extortion, falsely accusing Tooke of domestic abuse—a claim that carried particular weight in Florida at the time, where same-sex marriage was not legally recognized, leaving Tooke with no recourse in family court.

The theft of the sale proceeds was only the beginning. Schue emptied the condominium of Tooke’s rare book collection and other personal belongings before disappearing. The following year, Tooke discovered Schue had entered their Minnesota cabin—another jointly owned property—and stolen Tooke’s laptop. When Tooke reported the theft to police, Schue returned the laptop but not before filing a mechanics lien against the Minnesota home, which ultimately led to foreclosure. The legal and emotional toll of the separation mounted as Tooke pursued divorce proceedings in Minnesota, where same-sex divorce was permitted. The divorce, finalized in October 2014, required Tooke to pay Schue $168,000 over three years pursuant to their cohabitation agreement. By Tooke’s account, the cumulative financial and emotional fallout from the separation cost him more than $2 million.

Amid this turmoil, Tooke’s health began to deteriorate. In 2010, he had been diagnosed with Parkinson’s disease, a progressive neurological condition that brought balance issues, tremors, depression, and memory problems. The disease, though managed through diet and exercise, imposed significant limitations on his ability to travel for work—he logged 145 flights and 100 hotel nights annually—and exacerbated the stress of his financial and personal crises. By 2017, the combination of medical expenses, litigation costs, and lost income from disrupted business ventures had left him unable to meet his federal tax obligations.

The IRS first intervened in 2017, filing a Notice of Federal Tax Lien (NFTL) for Tooke’s unpaid 2012 taxes. The lien filing triggered § 6320, which grants taxpayers the right to a Collection Due Process (CDP) hearing to challenge the lien’s appropriateness or propose collection alternatives. Tooke did not respond to that initial notice. Two years later, the IRS escalated its collection efforts, issuing a Final Notice of Intent to Levy (Letter 1058) under § 6330 for tax years 2013 through 2017. This time, Tooke acted swiftly, filing a Form 12153 on April 20, 2019, requesting a CDP hearing and simultaneously proposing two collection alternatives: an Offer in Compromise (OIC) and an Installment Agreement (IA).

In his request, Tooke’s representative detailed the extraordinary circumstances behind his tax debt, describing the theft of sale proceeds, the protracted litigation, and the financial strain of supporting a niece with mental health challenges. The letter also highlighted Tooke’s Parkinson’s diagnosis and the medical expenses that had consumed his savings. By April 26, 2019, Tooke submitted a Form 656, offering $175,000 to settle the $1.6 million liability—a compromise he argued was justified under § 7122, which authorizes the IRS to accept less than full payment for tax debts in cases of doubt as to collectibility or effective tax administration (ETA). The offer included a $35,000 payment, which fully covered his 2012 tax liability but left the remaining interest unpaid.

The IRS’s response was swift and unyielding. Collections officials calculated Tooke’s Reasonable Collection Potential (RCP)—the estimated amount he could pay based on his assets and future income—at $8.06 million, far exceeding his offer. The agency rejected the OIC, citing Tooke’s failure to exercise ordinary business care and prudence in entrusting the condominium sale proceeds to Schue, despite knowing of his addiction. Appeals officers later adjusted the RCP downward to $499,109 after accounting for Tooke’s medical and dependent care expenses, but the revised figure still dwarfed his offer. The IRS’s rejection letter arrived on October 4, 2019, setting the stage for a prolonged legal battle that would test not only Tooke’s financial resilience but the limits of the Tax Court’s deference to IRS discretion.

The IRS’s rejection of Charlton Tooke III’s Offer-in-Compromise (OIC) on October 4, 2019, crystallized a fundamental dispute over the Reasonable Collection Potential (RCP)—a calculation central to OIC evaluations under IRC § 7122 and IRM 5.8.4.3.1. RCP, as defined by the IRS, represents the agency’s estimate of a taxpayer’s ability to pay a tax liability in full, either through a lump-sum payment or installment agreement, over the 10-year collection statute expiration period (CSED). For Tooke, the IRS initially calculated his RCP at $8,065,913, a figure that dwarfed his proposed $175,000 offer. Even after Appeals Officer Nathan B. Herring adjusted the RCP downward to $499,109—a reduction reflecting medical and dependent care expenses—the IRS maintained that Tooke’s offer remained substantially below his RCP, leaving no room for compromise.

Tooke’s arguments hinged on doubt as to collectibility and Effective Tax Administration (ETA) under IRC § 7122(c)(3)(B), asserting that his liabilities arose from circumstances beyond his control. His initial OIC of $175,000—later increased to $375,000—was framed as a concession to his financial reality, including his Parkinson’s diagnosis and the expenses tied to his adopted special needs child. Tooke’s April 24, 2019, letter to the IRS detailed his medical condition, describing symptoms such as balance issues, tremors, insomnia, and memory problems that had progressively impaired his ability to work. He also highlighted the $2 million in losses stemming from his former spouse’s actions, including the $440,000 condominium sale proceeds that were diverted into his spouse’s account amid a relapse of opioid addiction. Tooke argued that these events were unforeseeable and uncontrollable, warranting an OIC under ETA principles.

The IRS, however, rejected Tooke’s narrative as insufficient to justify a compromise. Collections Officer Tamara Scruggs calculated Tooke’s RCP at $8,065,913, a figure that included net realizable equity in assets of $124,588 and future income of $7,941,325. Even after Appeals Officer Pollock and later Appeals Officer Herring adjusted the RCP to $499,109, the IRS maintained that Tooke’s offer remained substantially below his RCP. The IRS’s rejection letter cited IRM 5.8.11.2, which requires OICs to reflect the taxpayer’s true ability to pay, and argued that Tooke’s circumstances did not meet the ETA criteria for compromise.

The IRS’s position rested on two core objections. First, it contended that Tooke’s financial mismanagement—specifically, his decision to entrust the condominium sale proceeds to his former spouse despite knowing of his addiction—demonstrated a lack of prudent judgment that undermined his claim of economic hardship. The IRS’s memorandum dated September 10, 2019, explicitly stated that Tooke’s failure to exercise ordinary business care and prudence in financial matters disqualified him from ETA consideration. Second, the IRS argued that Tooke’s Parkinson’s diagnosis did not render him incapacitated, as he was still capable of earning income and managing his finances. The IRS’s determination that Tooke’s medical condition did not meet the IRM 5.15.1.8 necessary expense test further solidified its rejection of his OIC.

The IRS’s rejection also addressed Tooke’s claims of special needs expenses, including $41,000 in adoption-related costs and $4,800 in monthly expenses for his adopted child. Appeals Officer Herring permitted some deviations from national and local expense standards—such as $1,375 per month for private schooling and $400 per month for speech therapy—but ultimately concluded that Tooke’s monthly net income of $14,146 was sufficient to cover his living expenses without the need for additional allowances. The IRS’s refusal to reduce Tooke’s asset calculation by the $85,000 in emergency reserves he requested—arguing that the funds could be dissipated—further underscored its stance that Tooke’s financial situation did not warrant compromise.

The battle lines were thus drawn: Tooke’s argument centered on circumstances beyond his control, while the IRS’s rejection emphasized financial prudence and the RCP threshold. The stage was set for a legal confrontation that would test not only Tooke’s financial resilience but the limits of the Tax Court’s deference to IRS discretion in collection actions.

The Tax Court’s ruling in Tooke v. Commissioner delivers a decisive affirmation of the IRS’s broad discretion in rejecting collection alternatives, particularly Offer-in-Compromise (OIC) requests. The court’s analysis hinged on the abuse of discretion standard under § 6330(c)(3), which grants the IRS sweeping authority to evaluate OICs and collection actions—authority the Tax Court was loath to second-guess.

The court first addressed whether the IRS’s rejection of Tooke’s OIC constituted an abuse of discretion, a standard defined as an action that is arbitrary, capricious, or without sound basis in fact or law. The IRS’s decision was reviewed under Sego v. Commissioner, which established that the Tax Court must defer to the IRS unless its actions lack a rational connection to the facts or law. The court emphasized that § 6330(c)(3) requires Appeals to verify compliance with applicable law and administrative procedures, a threshold the IRS easily cleared. The record showed that Appeals Officer Herring had meticulously documented his review, including the calculation of Tooke’s Reasonable Collection Potential (RCP) and the rejection of Tooke’s claimed expenses.

The court then turned to Tooke’s RCP calculation, which the IRS determined to be $499,109—comprising $363,137 in net realizable equity and $135,972 in future income over 12 months. Tooke’s OIC of $375,000 fell $124,109 short of his RCP, a gap the court found fatal under Treas. Reg. § 301.7122-1(c). The regulation explicitly states that the IRS generally rejects OICs based on doubt as to collectibility if the offer is substantially below the taxpayer’s RCP, absent special circumstances. The court rejected Tooke’s argument that $1,550 per month in expenses (including tutoring and transportation for his special needs child) should reduce his RCP, noting that even if these expenses qualified under the necessary expense test of IRM 5.8.5.22.1, Tooke’s offer still fell $105,509 short of the adjusted RCP. The court cited Brombach v. Commissioner, which held that OICs below RCP are presumptively unreasonable unless special circumstances justify acceptance.

The court then addressed Tooke’s claims of economic hardship under Treas. Reg. § 301.7122-1(b)(3)(i), which allows compromise if collection would cause the taxpayer inability to pay basic living expenses. Tooke argued that $85,000 in emergency reserves was necessary to cover potential future medical emergencies for himself and his special needs child. The court, however, sided with the IRS, which found no documentation to substantiate the need for these reserves. The IRS’s determination that Tooke’s $42,000 monthly income and allowed expenses (including medical costs) demonstrated his ability to pay his basic living expenses was deemed reasonable. The court rejected Tooke’s reliance on Mason v. Commissioner, which required Appeals to predict hardship, noting that the IRS had already permitted generous expense allowances and that Tooke’s argument rested on speculative future events rather than current hardship.

Tooke’s argument that his former spouse’s actions justified compromise under Effective Tax Administration (ETA) principles also failed. The IRS had determined that the funds misappropriated by Tooke’s former spouse were not the direct cause of his tax liabilities, which stemmed from his failure to pay estimated taxes. The court upheld this finding, noting that Tooke had deposited funds into his spouse’s account despite knowing of his addiction issues, a decision the court deemed lacking in prudence. The IRS’s reliance on IRM 5.8.11.3.2.1(4)—which requires proof that a third party’s criminal or fraudulent act directly caused the tax liability—was found to be consistent with the law. The court concluded that Tooke’s circumstances did not meet the public policy or equity standards for ETA compromise, as his financial mismanagement undermined his claim.

Finally, the court addressed Tooke’s Partial-Pay Installment Agreement (PPIA) request, which the IRS rejected due to his ability to pay. The court noted that § 6159(a) grants the IRS unfettered discretion to accept or reject installment agreements, and Appeals had properly considered Tooke’s income, expenses, and asset equity. The IRS’s decision to deny the PPIA was not an abuse of discretion, as Tooke’s $42,000 monthly income and $363,137 in net realizable equity demonstrated his capacity to pay a larger portion of his liability.

The court’s ruling underscores the deference owed to the IRS in collection matters, particularly in OIC evaluations. The Tax Court’s analysis repeatedly emphasized that Appeals’ determinations are entitled to substantial deference unless they are arbitrary or unsupported by the record. The court’s refusal to disturb the IRS’s RCP calculation, economic hardship denial, or rejection of Tooke’s collection alternatives sends a clear message: Taxpayers bear a heavy burden to justify OICs below RCP, and the IRS’s discretion in collection actions is nearly absolute. For future taxpayers, this ruling highlights the critical importance of meticulous documentation, realistic expense claims, and proactive engagement with the IRS—lest their collection alternatives be rejected on grounds as unforgiving as Charlton Tooke’s.

The Tax Court’s rejection of Charlton Tooke III’s economic hardship claim hinged on a $1.5 million discrepancy between his Reasonable Collection Potential (RCP) and his Offer-in-Compromise (OIC)—a gap that exposed the limits of the IRS’s flexibility when taxpayers fail to meet the stringent standards for financial distress.

Tooke’s RCP stood at $499,109, yet his OIC proposed paying just $375,000—a figure the IRS deemed unrealistically low given his financial capacity. The court’s analysis centered on whether Tooke could demonstrate that paying his RCP would leave him unable to cover basic living expenses, as defined under Treas. Reg. § 301.6343-1(b)(4)(i). That regulation clarifies that economic hardship occurs when a taxpayer is "unable to pay his or her reasonable basic living expenses"—a threshold that requires more than speculative financial strain.

The IRS’s Appeals Officer (AO) Herring rejected Tooke’s claim after a thorough review of his finances, finding that his monthly income of $42,000 far exceeded his allowed living expenses, leaving ample room to satisfy his tax debt. The court emphasized that Tooke’s basic living expenses—including housing, food, healthcare, and support for his special needs child—had already been generously adjusted to account for his medical condition and dependent care. The IRS had permitted expenses well above standard allowances, including additional allocations for medical out-of-pocket costs and dependent care, yet Tooke still sought to shield an additional $85,000 in emergency reserves for potential future medical crises.

The court flatly rejected this request, noting that Treas. Reg. § 301.7122-1(b)(3)(i)—which governs Effective Tax Administration (ETA) offers based on economic hardship—requires documented proof of a guaranteed or highly likely financial crisis. Tooke’s argument relied on hypothetical future medical emergencies, but the court found no evidence that such events were imminent or inevitable. The Administrative Record contained medical records but no documentation showing a specific, foreseeable need for the reserves, nor did it establish that Tooke’s Parkinson’s diagnosis had currently impaired his ability to work. The court cited Fargo v. Commissioner, 447 F.3d 710 (9th Cir. 2006), in rejecting speculative medical expense claims, holding that the IRS was not obligated to reserve funds for contingencies that may never materialize.

The court’s reasoning underscored a broader principle: economic hardship under the Tax Code is not a future projection but a present reality. Tooke’s $42,000 monthly income—even after accounting for his medical and dependent care expenses—left him with sufficient disposable income to pay his RCP without falling into financial distress. The IRS’s Notice of Determination had explicitly stated that there was "no indication of a guaranteed hardship" and that Tooke’s OIC figures should not be adjusted based on "what you believe may happen in the future." The Tax Court agreed, reinforcing that the IRS’s discretion in collection actions is not a negotiation but a calculation—one where speculation has no place.

This ruling sends a clear warning to taxpayers: economic hardship claims must be backed by ironclad documentation, not hope. The court’s emphasis on verifiable financial strain over anticipated risks aligns with the IRS’s long-standing position that OICs below RCP require extraordinary justification. For Tooke, the $1.5 million gap was not a bridge over financial ruin but a chasm of unmet evidentiary burdens—one that the Tax Court refused to cross.

The Tax Court’s rejection of Charlton Tooke III’s Offer-in-Compromise (OIC) under Effective Tax Administration (ETA) hinged on a single, damning conclusion: Tooke’s financial decisions were not merely unfortunate—they were imprudent. The court’s analysis dissected Tooke’s handling of the sale proceeds from his jointly owned property, his failure to pay quarterly estimated taxes, and his attempt to shift blame to his former spouse. In doing so, it reinforced a long-standing IRS principle: taxpayers are responsible for their own financial management, even when third-party misconduct occurs.

The court’s scrutiny began with IRM 5.8.11.3.2.1(4), which governs ETA compromises based on third-party criminal or fraudulent acts. The provision requires that:

• The act must directly cause the tax liability;
• The taxpayer must demonstrate prudent business actions despite the act; and
• The taxpayer must show that funds required for taxes were segregated and available.

Tooke’s case collapsed under the first two requirements. The IRS’s Appeals Officer (AO) Herring concluded that the $1.5 million tax liability arose from Tooke’s failure to pay quarterly estimated taxes in 2012, not from his former spouse’s alleged theft of the property sale proceeds. The court agreed, noting that Tooke’s decision to deposit the proceeds into his former spouse’s account—despite knowing his history of addiction—was not a prudent business action. The IRS’s reasoning was unassailable: if Tooke had exercised reasonable judgment, he could have ensured the funds were used to satisfy his tax obligations.

Tooke’s argument that his former spouse’s actions were unforeseeable fell flat. The court pointed to Tooke’s own April 24, 2019, letter, where he admitted that his former spouse’s addiction had "spiraled out of control" over two years, requiring "considerable care"—yet he still allowed the proceeds to be deposited into her account. The court held that Tooke’s failure to act prudently negated any claim of third-party misconduct. As the IRS’s AO Herring stated in the Notice of Determination, Tooke’s actions reflected "a lack of prudence and responsible business actions"—a finding the court explicitly endorsed.

The court also rejected Tooke’s attempt to invoke IRM 5.8.11.3.2.1(8), which allows for other compelling public policy or equity considerations. Tooke argued that the protracted litigation and his former spouse’s alleged extortion justified compromise. But the court found that Appeals had thoroughly considered these factors and still determined that Tooke did not meet the criteria. The IRS’s position—that Tooke’s tax liabilities stemmed from his own financial mismanagement, not his former spouse’s actions—was unassailable under the record.

This ruling sends a stark message: the Tax Court will not reward financial negligence under the guise of hardship. The IRS’s discretion in rejecting OICs was squarely within its authority, and the court’s deference to that discretion was unambiguous. For taxpayers, the lesson is clear: economic hardship claims must be backed by documented prudence, not retrospective justification. The court’s emphasis on verifiable financial responsibility over anticipated risks aligns with the IRS’s long-standing position that OICs below Reasonable Collection Potential (RCP) require extraordinary justification. Tooke’s case was not a bridge over financial ruin—it was a chasm of unmet evidentiary burdens, one the Tax Court refused to cross.

The Tax Court’s decision in Tooke v. Commissioner does not merely close the door on one taxpayer’s $1.8 million tax dispute—it reaffirms a broader legal reality: the IRS’s discretion in collection actions is not just broad, but nearly impregnable unless a taxpayer can pierce it with ironclad evidence of financial ruin. For taxpayers and practitioners navigating the treacherous waters of Offer-in-Compromise (OIC) submissions and Collection Due Process (CDP) hearings, the ruling serves as both a warning and a roadmap—one that demands meticulous documentation, strategic foresight, and an unflinching acknowledgment of the IRS’s procedural dominance.

The court’s affirmation of the IRS’s authority under IRC § 6330—which governs CDP hearings—reinforces that Appeals Officers are not mere referees but gatekeepers of fiscal prudence. Their decisions are entitled to deference under the abuse-of-discretion standard, meaning courts will not second-guess their judgment unless it is arbitrary, capricious, or unsupported by evidence. This is not a minor procedural footnote; it is a structural feature of tax administration. Taxpayers seeking to challenge an OIC rejection or a proposed levy must now do more than present a compelling narrative—they must dismantle the IRS’s calculation with verifiable data, third-party corroboration, and a demonstration that the agency’s reasoning was not just wrong, but legally indefensible.

The high bar for economic hardship claims under Effective Tax Administration (ETA) principles—codified in IRC § 7122(c)(3)(B) and Treas. Reg. § 301.7122-1(b)(3)—has been raised yet again. The Tax Court’s refusal to accept Tooke’s retrospective justification for his financial decisions underscores a critical shift: hardship is not a post-hoc excuse but a preemptive reality. Taxpayers must prove that their financial distress was not a result of imprudent choices but an inevitable consequence of circumstances beyond their control. This means documenting medical expenses before they accrue, securing expert testimony on disability impacts, and substantiating special needs costs with contemporaneous records—not assembling a case after the fact. The IRS’s Collection Financial Standards (IRM 5.15.1) are not suggestions; they are the baseline, and deviations require extraordinary justification, not just emotional appeal.

The court’s emphasis on prudent financial decision-making—even in the face of personal turmoil—sends a chilling message to taxpayers with chronic illnesses, dependents with special needs, or those grappling with job loss. The IRS is not obligated to accommodate financial mismanagement, no matter how sympathetic the circumstances. For example, a taxpayer with a disabled child cannot assume that private school tuition or therapy costs will automatically qualify as necessary expenses under IRM 5.15.1.8 without pre-approval or overwhelming documentation. The Tax Court’s recent rulings, such as T.C. Memo. 2023-12 (Lee), suggest that while the IRS may bend on student loan payments or medical costs, it will not tolerate retrospective financial housekeeping. Practitioners advising clients in these situations must counsel them to engage with the IRS early, propose structured payment plans, and seek professional help before their financial situation deteriorates to the point of no return.

For tax practitioners, the ruling is a clarion call to rethink OIC strategies. The IRS’s Reasonable Collection Potential (RCP) calculation—a formula blending future income potential (FIP) and net realizable equity (NRE)—is now more scrutinized than ever. Taxpayers must ensure their asset valuations are accurate, their income projections are conservative, and their expense claims align with IRS standards. The court’s rejection of Tooke’s arguments highlights a dangerous misconception: the IRS does not care about potential hardship; it cares about proven hardship. This means that practitioners must challenge the IRS’s assumptions—whether in asset valuations, expense allowances, or income multipliers—before an OIC is rejected, not after.

The practical implications for taxpayers are stark. Those with chronic illnesses or dependents with special needs must now anticipate the IRS’s skepticism and prepare for battle on two fronts: first, in the OIC submission, and second, in the CDP hearing if the offer is rejected. The Tax Court’s willingness to overturn IRS decisions where abuse of discretion is found—such as in T.C. Memo. 2021-111 (Johnson)—offers a glimmer of hope, but it is a hope that must be met with ironclad evidence. Taxpayers should request CDP hearings immediately upon receiving a final notice of intent to levy, submit detailed financial statements, and propose collection alternatives in writing. Silence is not an option; the IRS’s discretion is not a void to be filled with hope, but a wall to be scaled with evidence.

The broader context of this ruling cannot be ignored. With the IRS’s expanded funding under the Inflation Reduction Act, collection actions are likely to increase, and OIC rejections may become more frequent. Taxpayers who once might have slipped through the cracks under relaxed enforcement could now find themselves facing harsher scrutiny. The lesson is clear: the IRS is not your adversary, but it is not your ally either. It is a bureaucracy bound by rules, and those rules are enforced with increasing rigor. To navigate this landscape, taxpayers must adopt a proactive stance, document everything, and consult professionals who understand the IRS’s evolving standards.

For practitioners, the ruling underscores the need for specialized expertise in OIC submissions and CDP hearings. Generic financial disclosures will not suffice; every expense, every asset, every income stream must be justified with IRS-compliant documentation. The days of relying on emotional appeals or retrospective justifications are over. The Tax Court’s decision in Tooke is not just about one man’s tax debt—it is about the future of tax administration, where discretion is king, and evidence is the only currency that matters.