OIC Cases - Economic Hardship

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OIC Cases - Economic Hardship

Kenneth Hawkins v. Commissioner, Dkt. No. 1468-03L , TC Memo. 2005-88, April 19, 2005.

Kenneth Hawkins, pro se; Vivian N. Rodriguez, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

GERBER, Chief Judge: On January 2, 2003 , respondent sent petitioner a Notice of Determination Concerning Collection Action(s) Under Section 6320¹ and/or 6330 (notice of determination), in which respondent sustained the filing of a Federal tax lien for petitioner's 1993, 1995, and 1996 tax liabilities. Petitioner had previously made two offers-incompromise regarding these tax liabilities. Respondent rejected the first offer and returned the second.

The issue for consideration is whether respondent abused his discretion by sustaining the filing of the Federal tax lien.

FINDINGS OF FACT ²

Petitioner resided in Pompano Beach , Florida , when the petition in this case was filed. He was self-employed for taxable years 1993, 1995, and 1996 (collectively, the subject years), operating a business known as "Professional Investigations and Consulting Inc.". Petitioner filed untimely tax returns for all subject years, with unpaid tax liabilities for 1995 and 1996 and a small refund for 1993. At all relevant times, petitioner had an unpaid Federal income tax liability outstanding for each of the subject years, much of which arose out of self-assessment.³ Petitioner was not married and did not file joint returns for the taxable years under consideration. Petitioner did not petition this Court to redetermine any of the tax liabilities, and the underlying tax liabilities are not in dispute.

Petitioner married during 1997, and on February 10, 1997, he and his wife purchased a residence as tenants by the entireties. Petitioner contributed $50,000, or one-half of the downpayment.

Between October 25, 1994, and December 2, 1997, respondent assessed tax and additions to tax against petitioner for 1993, 1995, and 1996, based on audit examinations and amounts shown as due on income tax returns. On December 3, 1997, petitioner sent respondent a Form 656, Offer-in-Compromise (first offer), based on doubt as to collectibility for the subject years, offering to settle the total outstanding tax liabilities for $16,209. At that time, petitioner's outstanding and unpaid tax liability was $26,266.06. Petitioner on Form 433-A, Collection Information Statement for Individuals, claimed that he had a 50-percent interest in his home and monthly net business income and living expenses of $1,400 and $1,648, respectively. On February 13, 2001, respondent sent petitioner a notice rejecting petitioner's first offer, stating that the amount owed was legally due and appeared to be collectible.

On September 5, 2001, petitioner submitted a second offerin-compromise (second offer) for the subject years, this time for $2,200. In the second offer, petitioner's only reference to his wife's physical condition was the statement: "my wife is unemployable. She is on Social Security Disability and earns no income." At that time, petitioner's total outstanding tax liability had increased to $38,165.32. Petitioner claimed on the Form 433-A that he had a 25-percent interest in his home and monthly net business income and living expenses of $2,550 and $3,384, respectively.⁴ On Form 433-A, petitioner explained his home ownership as follows: "As I borrowed my contribution toward the purchase of the home, and as a result of the fact that my wife's assets were the basis for the ability to obtain the mortgage in the first place, my interest in the house is 25% while hers is 75%." On June 17, 2002, respondent returned the offer, stating that petitioner did not have any changed circumstances and that the offer was not materially different from the prior offer.

For the first offer, respondent accepted petitioner's claimed amount of monthly business net income but determined petitioner's allowable living expenses to be $433 on the basis of the national standard expenses table amount. For the second offer, respondent determined petitioner's net monthly business income to be $3,108, on the basis of petitioner's claimed revenue and expenses after disallowing some expenses that were doublecounted as both business and personal expenses. To estimate petitioner's living expenses, respondent first computed petitioner's and his wife's shares of monthly income, on the basis of the recomputed $3,108 income and petitioner's wife's $1,638 of Social Security and interest income reported for her 2000 taxable year. On the basis of this information, respondent determined that petitioner generated 65 percent of the income and petitioner's wife generated 35 percent of the income.

Respondent then applied this percentage to recompute petitioner's expenses on the basis of petitioner's own calculations or amounts indicated for local or national standards. Respondent allowed the full amount of the claimed life insurance expense but prorated petitioner's claimed health insurance premium and taxes by 65 percent. Also, respondent allowed the full Broward County local standard amount for transportation but allowed only a 65-percent prorated amount of the local standard for housing and of the national standard expense.

Respondent also determined, for both offers, petitioner's equity in assets, on the basis of petitioner's submitted information, statements from third parties, and a review of public records. Respondent determined the value of petitioner's home to be $342,096 for the first offer, on the basis of a valuation by the Broward County Property Appraiser. For the second offer, respondent determined the value of petitioner's home had increased to at least $610,000, because a similar home with a tax assessment lower than petitioner's home had sold for that much in the same development. The combination of petitioner's equity and earnings multiple resulted in a determination that petitioner's reasonable collection potential (RCP) exceeded both the amount of the offer and the outstanding tax liability for both offers.⁵

On June 24, 2002, respondent filed a notice of Federal tax lien on petitioner's property. On June 28, 2002, respondent sent petitioner a Notice of Federal Tax Lien and Your Right to a Hearing. On July 3, 2002, petitioner filed a Form 12153, Request for a Collection Due Process Hearing. Petitioner attended the October 24, 2002, hearing but did not present any collection alternatives or make any additional offer and refused to consider any collection alternatives that did not entail removal of the tax lien. On January 2, 2003, respondent sent petitioner a notice of determination in which the filing of the Federal tax lien was sustained.

OPINION⁶

Petitioner made two offers in this case to settle his Federal income tax liability. Respondent accepted neither offer, then placed a Federal tax lien on petitioner's property. We decide whether respondent abused his discretion in filing the lien. That question depends on whether respondent's failure to accept petitioner's offers was an abuse of discretion. Nearly 4 years separated the first and second offer, and the second offer was substantially less than the first. Because the making of the second offer was so long after the first and the second offer preceded the filing of the lien, we need to consider only whether respondent abused his discretion in rejecting the second offer.⁷

Section 6320 provides that a taxpayer shall be notified in writing by the Secretary of the filing of a Federal tax lien and provided with an opportunity for an administrative hearing. Sec. 6320(b). Hearings under section 6320 are conducted in accordance with the procedural requirements set forth in section 6330. Sec. 6320(c).

When an Appeals officer issues a determination regarding a disputed collection action, a taxpayer may seek judicial review with the Tax Court or a District Court, as appropriate. Sec. 6330(d); see Davis v. Commissioner [Dec. 53,969], 115 T.C. 35, 37 (2000); Goza v. Commissioner [Dec. 53,803], 114 T.C. 176, 179 (2000). Where the validity of the underlying tax liability is properly at issue, the Court will review the matter de novo. Sego v. Commissioner [Dec. 53,938], 114 T.C. 604, 610 (2000). However, when the validity of the underlying tax is not at issue, the Court will review the Commissioner's administrative determination for an abuse of discretion. Id.; Goza v. Commissioner, supra at 181-182. Petitioner does not dispute the validity of the underlying tax. Accordingly, our review is for an abuse of discretion.

We do not conduct an independent review of what would be acceptable offers-in-compromise. We review only whether the Appeals officer's rejection of the offer-in-compromise was arbitrary, capricious, or without sound basis in fact or law. Woodral v. Commissioner [Dec. 53,206], 112 T.C. 19, 23 (1999). The Court considers whether the Commissioner abused his discretion in rejecting a taxpayer's position with respect to any relevant issues, including offers of collection alternatives, which include an offer-in-compromise. See sec. 6330(c)(2)(A).

Section 7122(a) authorizes the Secretary to compromise any civil case arising under the internal revenue laws. The three standards that the Secretary may use to compromise a liability are doubt as to liability, doubt as to collectibility, and the promotion of effective tax administration. Sec. 7122(c)(1); sec. 301.7122 -1T(b), Temporary Proced. & Admin. Regs., 64 Fed. Reg. 39024 (July 19, 1999).⁸ Petitioner bases both offers on doubt as to collectibility.

Section 7122(c) provides the standards for evaluation of such offers. Under section 7122(c)(2):

(A) *** the Secretary shall develop and publish schedules of national and local allowances designed to provide that taxpayers entering into a compromise have an adequate means to provide for basic living expenses.

(B) Use of schedules.-The guidelines shall provide that officers and employees of the Internal Revenue Service shall determine, on the basis of the facts and circumstances of each taxpayer, whether the use of the schedules published under subparagraph (A) is appropriate and shall not use the schedules to the extent such use would result in the taxpayer not having adequate means to provide for basic living expenses.

Under the regulations for doubt as to collectibility cases:

A determination of doubt as to collectibility will include a determination of ability to pay. * * * To guide this determination [of the amount of the taxpayer's basic living expenses], guidelines published by the Secretary on national and local living expense standards will be taken into account. [Sec. 301.7122 -1T(b)(3)(ii), Temporary Proced. & Admin. Regs., supra.]

Thus, use of the national and local average statistics published by the Internal Revenue Service is an appropriate method to determine a taxpayer's monthly expenses. By using national and local averages for some of petitioner's expenses rather than petitioner's submitted expenses, the Appeals officer characterized petitioner as able to provide for basic living expenses. Thus, the Appeals officer did not violate statutory limits by using the tables. See sec. 7122(c)(2)(B). In addition, petitioner has not shown that his submitted expenses were more appropriate than the national or local averages. Respondent's proration of some of petitioner's expenses was appropriate because even though petitioner claims to incur all of the household expenses because of his wife's disability and lack of income, information returns show that his wife still generates passive income. While that income should not be considered in determining petitioner's collection potential, it should be considered in determining petitioner's responsibility for shared living expenses. 1 Administration, Internal Revenue Manual ( CCH ), sec. 5.8.5.5.3, at 16,342. Accordingly, respondent's use of the national and local averages combined with a prorated expense allowance was a reasonable way to estimate petitioner's expenses.

The denial of petitioner's offers was based on objective computations of petitioner's disposable income and assets, computed separately for each offer. The revenue officer even considered the alleged decrease, to 25 percent, in petitioner's equity ownership in the home between the first and the second offer.⁹ Respondent refused the second offer after applying the national and local averages to estimate petitioner's expenses because the RCP exceeded the full amount of the tax liability and was certainly much more than petitioner's offer. In fact, petitioner's second offer falls short of a reasonable offer even if his own calculation of expenses is used. The equity in petitioner's home alone exceeds both the offer and the full amount of the tax liability, even at 25-percent ownership. Even if we recalculated petitioner's RCP in a manner most favorable to petitioner, using a negative multiple of petitioner's cashflows with which he could offset equity in his other assets,¹⁰ the RCP would far exceed petitioner's $2,200 offer and cover most of the outstanding $38,165.32 tax liability.¹¹ Thus, petitioner's second offer was inadequate.

Petitioner argues that respondent's haste in filing the notices of lien shows that respondent was predisposed to reject petitioner's second offer. Respondent, however, filed the Federal tax lien 1 week after petitioner's second offer was returned, and we are not persuaded that in doing so respondent failed to properly consider petitioner's second offer or abused his discretion in any other manner.

Amongst petitioner's numerous arguments only one has any potential for success --his allegation that he was suffering from economic hardship when he submitted the second offer. Petitioner relies on the internal revenue manual to support his position that even if he has the ability to pay the liability, an offer-in-compromise may be accepted if he suffers from economic hardship. See 1 Administration, Internal Revenue Manual ( CCH ), sec. 5.8.11.2.1, at 16,385-5. Factors related to economic hardship may include: (1) Long-term illness, medical condition, or disability may render the taxpayer incapable of earning a living, (2) the taxpayer may have a set monthly income and no other means of support, and the income is exhausted each month caring for dependents, and (3) the taxpayer may be unable to borrow against the equity in assets so that enforced collection is unlikely. Id. Petitioner alleges that the first and third factors are relevant to his situation.

Petitioner alleges that his wife's permanent disability makes the first factor relevant. The only evidence petitioner offered concerning his wife's disability was: (1) His statement in the second offer that his wife was unemployable, was on Social Security disability, and earned no income; and (2) his own general testimony that his wife became disabled in 1999. When he made his offer petitioner did not state the nature of her disability, present any evidence of its financial effect, or even allege that it caused economic hardship. The only monthly expense submitted in the second offer that could have related to his wife's disability was health insurance of $340, representing only 10 percent of the claimed expenses. The lack of any evidence or specificity to support petitioner's allegation left respondent without an adequate basis for making any findings concerning the financial impact of the alleged disability. There is no indication that the revenue officer summarily refused to consider any changed circumstances of petitioner. Rather, petitioner did not provide sufficient proof of the nature and extent of his alleged hardship.

Furthermore, when economic hardship is a factor in a doubtas-to-collectibility situation, the unique circumstances of the taxpayer to be considered in determining the taxpayer's reasonable basic living expenses do not include the maintenance of an affluent or luxurious standard of living. Sec. 301.7122 -1T(b)(4)(i), Temporary Proced. & Admin. Regs, 64 Fed. Reg. 39024 (July 21, 1999); sec. 301.6343 -1(b)(4)(i), Proced. & Admin. Regs. Substantial equity in a home worth at least $610,000 would weigh against a finding that petitioner was suffering economic hardship when he made the second offer.

Moreover, petitioner's allegations with regard to his home ownership show that petitioner's assertions are unreliable. Petitioner admitted on cross-examination that he made a 50-percent, $50,000 initial contribution to the downpayment. In addition, he stated in his first offer he had a 50-percent interest in his home before his wife's disability. He then alleged in his second offer that his home equity had dropped to 25 percent after the disability, even though he alleged that his wife's condition necessitated his making all the mortgage payments. Even though respondent accepts this decreased ownership for purposes of the second offer, petitioner's attempts to show a reduction in equity are superficial at best. Irrespective of petitioner's actual equity position, his inconsistent, self-serving explanations show that his allegations regarding his economic well-being and alleged hardship are unreliable.

Next, petitioner argues that the third factor of economic hardship, the inability-to-borrow factor, is relevant to his situation. See supra p. 14. Citing 1 Administration, Internal Revenue Manual ( CCH ), sec. 5.8.11.2.1, at 16,385-5, petitioner alleges that the existence of the Federal tax lien makes it impossible to borrow against his home because "in today's financial market credit scoring is everything." The only evidence that petitioner offers is Washington Mutual's general policy:

Federal tax liens do not subordinate to any other liens.

If the transaction is a refinance and the applicant has entered into a repayment agreement, the lien (which is also evidenced in the title report) must be paid in full at closing.

At the section 6320 hearing, the Appeals officer stated that respondent would be willing to sign a certificate of subordination to subordinate the lien to a new lender. Financing could be available in this situation. Most importantly, petitioner has not shown that the lien affected his ability to borrow, or that he has attempted to borrow only to be thwarted by the existence of the lien. Therefore, it appears that petitioner had sufficient equity in his home against which he could borrow.

In sum, without more specific evidence of petitioner's wife's condition, respondent could not make any findings as to his economic hardship. Moreover, even if respondent used all the expenses petitioner submitted with the claim, petitioner's second offer was still unreasonably low. Accordingly, respondent did not abuse his discretion by rejecting petitioner's second offer.

Under section 6320, the Appeals officer must consider collection alternatives as well as whether any proposed collection action balances the need for efficient collection of taxes with the legitimate concern that collection be no more intrusive than necessary. Secs. 6320(c), 6330(c)(2)(A)(iii), (3)(C). Even considering the circumstances in a light most favorable to petitioner, petitioner had the ability to pay over $36,000 yet offered only $2,200 to compromise the outstanding $38,165.32 tax liability. Petitioner suggested no reasonable collection alternatives and would not even entertain any collection alternative that did not involve the removal of the Federal tax lien. In light of petitioner's inflexible stance, respondent's collection activity was no more intrusive than necessary. The Appeals officer thus complied with the requirements of sections 6320(c) and 6330(c) when he conducted the hearing and made a determination to keep in place the lien on petitioner's assets.

Petitioner has the ability to pay his undisputed tax liability. Most of the liabilities that respondent is attempting to collect were due with the self-assessed returns petitioner filed nearly a decade ago.

We have considered all of the contentions and arguments of the parties that are not discussed herein, and we find them to be without merit, irrelevant, or moot. We hold that respondent did not abuse his discretion and correctly determined to proceed with collection.

To reflect the foregoing,

A decision will be entered for respondent.

¹ Unless otherwise indicated, all Rule references are to the Tax Court Rules of Practice and Procedure, and all section references are to the Internal Revenue Code in effect for the years at issue.

² The parties' stipulation of facts is incorporated by this reference.

³ All of the 1995 and 1996 liabilities arose from unpaid tax shown on petitioner's self-assessed tax returns, while an audit for the 1993 taxable year resulted in a deficiency determination for that taxable year.

⁴ The total living expenses for both offers were calculated by petitioner as follows:

  Expense                                             First     Second

                                                      Offer      Offer  

  National standard1                                     $448       -0-

  Housing/utilities                                     1,000    $2,042

  Transportation                                           --       800

  Health insurance premium                                200       340

  Taxes                                                    --       100

  Life insurance                                           --       102

                                                   ____________________

  Total                                                 1,648     3,384

1 Includes clothing and clothing services, food, housekeeping         

supplies, personal care products and services, and miscellaneous.     

⁵ The calculations can be summarized as follows:

                                  First Offer         Second Offer  

  Equity in home1                         $20,688             $41,746

  IRA                                       2,000               1,809

  Cash on hand                                                  5,738

                                       __________          __________

  Net value of assets                      22,688              49,293

  Monthly income                 $1,400              $3,108         

  Less: Expenses                  (433)             (2,423)         

                             __________          __________         

  Disposable income                 967                 685         

  Multiple                        48               48         

                             __________          __________         

  Value of income                          46,416              32,880

                                       __________          __________

  Reasonable collection                    69,104              82,173

  Tax liability                            26,266              38,165

  OIC                                      16,209               2,200

1 Value based on 50 percent ownership for first offer and 25 percent

ownership for second offer.                                         

⁶ Petitioner served untimely discovery requests upon respondent. In addition, petitioner attempted to offer documentary evidence with his posttrial brief. Petitioner argues that he has been prejudiced by not being able to gather or submit evidence necessary to adequately present his case. Petitioner did not timely move the Court to compel discovery. See Rule 104(b). More importantly, petitioner has provided no evidence that respondent failed to comply with petitioner's requests or misled petitioner in any way. Finally, we will not treat documents attached to briefs as evidence. Rule 143(b); Clifton-Bligh v. Commissioner [Dec. 55,050(M)], T.C. Memo. 2003-44. We note that, even if the documents offered by petitioner were admissible, they would not change the outcome of this case.

⁷ We consider the first offer only to the extent helpful to determine whether respondent abused his discretion in rejecting the second offer.

⁸ Sec. 7122(c) is effective only for offers-in-compromise submitted after July 22, 1998. Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L. 105-206, sec. 3462, 112 Stat. 764. Sec. 301.7122-1T(b), Temporary Proced. & Admin. Regs., 64 Fed. Reg. 39024 (July 19, 1999), is effective for offers submitted after July 19, 1999, but sec. 301.7122-1, Proced. & Admin. Regs., applies to offers pending on or submitted on or after July 18, 2002. We do not need to address the applicability of the statute and the regulations to the first offer because we focus on the second offer. The second offer was made on Sept. 5, 2001, and returned on June 17, 2002, after the effective date of the statutory change and the temporary regulation but before the effective date of the new regulation. The statute and the temporary regulation are therefore effective for the second offer. See Galvin v. Commissioner [Dec. 55,289(M)], T.C. Memo. 2003-263, for a discussion of the addition of sec. 7122(c).

⁹ Calculation of 50-percent or only 25-percent home ownership also shows that respondent in no way considered petitioner's wife's assets in determining petitioner's reasonable collection potential, despite petitioner's allegations to the contrary.

¹⁰ The regulations and the internal revenue manual are both silent on how to apply a negative future income. See sec. 301.7122-1T(c), Temporary Proced. & Admin. Regs., supra; 1 Administration, Internal Revenue Manual ( CCH ), sec. 5.8.5.5, at 16, 339.

¹¹ The collection potential based on negative income is shown in the following calculation:

                                                        Second Offer  

  Equity in home                                                $41,746

  IRA                                                             1,809

  Cash on hand                                                    5,738

                                                             __________

  Net value of assets                                            49,293

  Monthly income                                       $3,108         

  Less: Expenses                                      (3,384)         

                                                   __________         

  Disposable income                                     (276)         

  Multiple                                              48         

                                                   __________         

  Value of income                                              (13,248)

                                                             __________

  Reasonable collection                                          36,045

Alicia Siquieros, Plaintiff v. United States of America, Defendant, U.S. District Court, West. Dist. Tex., El Paso Div.; EP-03-CA-0478-FM, July 27, 2004 .


ORDER ADOPTING REPORT AND RECOMMENDATION

MONTALVO, District Judge: On this day, the Court considered Magistrate Judge Norbert J. Garncy's Report and Recommendation [Rec. No. 17], Plaintiff's Objection to Report and Recommendation of Magistrate Judge [Rec. No. 18], and United States of America's Response to Plaintiff's Objection to Report and Recommendation of Magistrate Judge [Rec. No. 19] filed in the above-captioned cause. The Report and Recommendation advises the Court to GRANT Defendant's Motion for Summary Judgment [Rec. No. 6] and to DENY Plaintiff's Motion for Summary Judgment. [Rec. No. 8]. After careful consideration, the Court finds that the Report and Recommendation should be adopted in its entirety.

Accordingly, IT IS ORDERED that the findings and conclusions of the Report and Recommendation are ADOPTED as the findings and conclusions of the Court.

IT IS FURTHER ORDERED that Defendant's Motion for Summary Judgment [Rec. No. 6] is GRANTED and that Plaintiff's Motion for Summary Judgment [Rec. No. 8] is DENIED for the reasons set forth in the Report and Recommendation.

REPORT AND RECOMMENDATION OF THE MAGISTRATE JUDGE

GARNEY, United States Magistrate Judge: On this day came to be considered Defendant's Motion for Summary Judgment [Rec. No. 6], Plaintiff's Motion for Summary Judgment [Rec. No. 8], ¹ Plaintiff's Response to Defendant's Motion for Summary Judgment [Rec. No. 9], and Defendant's Response to Plaintiff's Motion for Summary Judgment and Reply to Plaintiff's Response [Rec. No. 12]. The motions for summary judgment were referred to United States Magistrate Judge Norbert Garney on June 7, 2004 , for a Report and Recommendation. [Rec. No. 16] After due consideration, and for the reasons stated below, it is RECOMMENDED that Defendant's motion be GRANTED and that Plaintiff's motion be DENIED.

BACKGROUND

Plaintiff was employed by E.C. Trucking, Inc. for over twenty years, including the calendar years 1998-2001. [Rec. No. 1, p.2; Rec. No. 6, Govt. Exh. 1] The corporation, which has since declared Chapter 11 bankruptcy and is no longer in business, failed to pay payroll taxes. ² [Rec. No. 1, p.2; Rec. No. 6, Govt. Exh. 4] On October 12, 2001, the Internal Revenue Service proposed a Trust Fund Recovery Penalty of $40,511.31, pursuant to 26 U.S.C. §6672, against Plaintiff as a responsible party. ³ [Rec. No. 9, Plaintiff's Exh. 1; Rec. No. 12, attachment] In a statement made to the I.R.S., Plaintiff claimed to be an office manager for the corporation. [Rec. No. 6, Govt. Exh. 1] In her complaint, she alleges she was a clerk/secretary. ⁴ [Rec. No. 1, p.2] The trust fund penalty represents the portion of the employment taxes withheld from the employees of the corporation, but not paid over by the corporation to the I.R.S. [Rec. No. 6, p. 1-2]

On May 20, 2002, Plaintiff submitted an Offer in Compromise of $100 for the reason that full payment of the amount owed would cause an economic hardship. ⁵ [Rec. No. 9, Plaintiff's Exh. 8] The Compliance Division of the I.R.S. rejected her offer on October 11, 2002, stating that the offer was less than her "reasonable collection potential," and she did not explain why payment would create a hardship. The I.R.S. made a counter-offer of $12,269.70. [Rec. No. 9, Plaintiff's Exh. 9] Plaintiff rejected the counter-offer and requested an appeal. [Id., Plaintiff's Exh. 10] On November 13, 2002, the I.R.S. Appeals Office notified Plaintiff that it received her appeal, but that it needed additional financial information from her. [Id.] Further, the Settlement Officer proposed an alternative to the offer: to file a lien and report it as uncollectible for the remaining ten years of the collection statute. [Id.]

In a letter dated January 13, 2003, the Settlement Officer addressed Plaintiff's correspondence of December 12, 2002, concerning her " ETA " ⁶ offer to compromise of $100, and advised her that it could not recommend acceptance of her offer. [Id., Plaintiff's Exh. 11] The Settlement Officer further stated in the letter that he would consider an offer of $13,814.47, and that he would recommend that the account be reported as "currently not collectible." [Id.] Therefore, the lien would be filed, but no action would be taken until significant improvement in Plaintiff's financial situation occurred, or until the collection action expired. [Id.]

On May 14, 2003, the I.R.S. sent notice to Plaintiff of the Federal Tax Lien filing, and of her right to a collection due process ("CDP") hearing before the I.R.S. Appeals Office under 26 U.S.C. §6320. [Rec. No. 1, p.2; Rec. No. 6, Appendix #1 and Gov't Exh. 7] Plaintiff requested a "CDP" hearing. [Id.] On June 11, 2003, Plaintiff submitted an offer in compromise for $4,000 on the basis of "Doubt as to Liability." ⁷ [Rec. No. 6, Govt Exh. 3] On August 20, 2003, a CDP hearing was held telephonically. [Id.]

On September 15, 2003, Plaintiff requested the I.R.S. review the denial of her ETA offer, and provide a description of the evidence it had against her. [Rec. No. 9, Plaintiff's Exh. 4] In a letter dated September 18, 2003, she resubmitted her previously rejected ETA offer in compromise of $100 as a collection alternative. [Id., Plaintiff's Exh. 12] She wrote again on September 19, 2003, stating that she was resubmitting her previously rejected ETA offer, and requested the I.R.S. consider I.R.M. 5.5.5.1. et al. in determining whether to uphold the tax penalty assessment. ⁸ [Id., Plaintiff's Exh. 5] In further correspondence from Plaintiff on September 22 and September 25, she questioned liability on her part due to a lack of independent authority with respect to corporate matters. [Id., Plaintiff's Exh. 6, 7]

On October 23, 2003, the I.R.S. Appeals Division issued a Notice of Determination Concerning Collection Action(s) under Section 6320 and/or 6330, rejecting her offer based on doubt as to liability, and sustaining the tax lien filing. [Rec. No. 1, Plaintiff's Exh. 3] The notice advised Plaintiff of her right to file a complaint for judicial review within thirty days.

PROCEDURAL HISTORY

Plaintiff instituted this action on November 19, 2003 , seeking judicial review of the Notice of Determination. In her complaint, she challenges Defendant's determination not to accept her Offer in Compromise in settlement of her federal tax liabilities as an abuse of discretion. [Rec. No. 1] She requests the Defendant be directed to accept her offer in compromise, and further demands a jury trial. ⁹ [Id.]

On January 16, 2004 , Defendant filed an answer [Rec. No. 5] and a motion for summary judgment with supporting brief. [Rec. No. 6] On February 5, 2004 , Plaintiff filed a motion for summary judgment pursuant to Rule 56 of the Federal Rules of Civil Procedure. [Rec. No. 8] Plaintiff filed a response to Defendant's motion for summary judgment on February 9, 2004 . [Rec. No. 9] On February 25, 2004 , Defendant filed a response to Plaintiff's motion for summary judgment and a reply to Plaintiff's response. [Rec. No. 12] The motions for summary judgment were referred to this Court on June 7, 2004 , for a Report and Recommendation. [Rec. No. 16]

ISSUE

The issue for determination is whether the Internal Revenue Service abused its discretion in refusing to accept Plaintiff's offers to compromise her federal tax liability.

DISCUSSION

A. Summary Judgment Standard ¹⁰

Summary judgment should be granted only where "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." FED . R. CIV . P. 56(c).The party that moves for summary judgment bears the initial burden of informing the Court of the basis for its motion, and identifying those portions of the record, which it believes demonstrate the absence of a genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 2553 (1986). However, the movant need not negate the elements of the non-movant's case. Id.; Gunaca v. State of Texas, 65 F.3d 467, 469 (5 ^th Cir. 1995). If the moving party fails to meet this initial burden, the motion must be denied, regardless of the non-movant's response. Tubacex, Inc. v. M/V Risan, 45 F.3d 951, 954 (5 ^th Cir. 1995).

Once the movant has met its burden, the non-movant must go beyond the pleadings and designate specific facts showing that there is a genuine issue for trial. See, e.g., Celotex, 477 U.S. at 324, 106 S.Ct. at 2553. If the non-movant fails to meet this burden, then summary judgment is appropriate. Tubacex, 45 F.3d at 954. The party opposing a properly supported motion cannot discharge his burden by resting upon the mere allegations and denials in his pleadings. See Anderson v. Liberty Lobby, 477 U.S. 242, 248-49, 106 S.Ct. 2505, 2510 (1986). Instead, the party must present affirmative evidence in order to defeat a properly supported motion for summary judgment. See id.

The Court must view facts and inferences in the light most favorable to the party opposing the motion. White v. FCI USA, Inc., 319 F.3d 672, 674 (5 ^th Cir. 2003). A genuine factual dispute precludes a grant of summary judgment if the evidence would permit a reasonable jury to return a verdict for the non-moving party. See id. After adequate time for discovery, summary judgment is proper against a party who fails to make a showing sufficient to establish the existence of an element essential to his case and as to which he will bear the burden of proof at trial. Celotex, 477 U.S. at 322, 106 S.Ct. at 2552.



B. Collection Due Process Hearing & Judicial Review under 26 §§6320 and 6330

Section 6320 provides that the I.R.S. cannot proceed with the collection of taxes by imposing a lien on a taxpayer's property until the taxpayer has been given notice and an opportunity for administrative review. See 26 U.S.C. §6320. Section 6330 provides the right to a collection due process hearing. Id. at §6330(c)(2). At the hearing, the taxpayer may raise "any relevant issue relating to the unpaid tax or the proposed levy," including challenges to the appropriateness of the collection actions, and offers of collection alternatives." Id. Collection alternatives may include offers in compromise. Id. The taxpayer may challenge the "existence or amount of the underlying tax liability" only if the taxpayer "did not otherwise have an opportunity to dispute such tax liability." Id. An issue may not be raised at the hearing if: 1) it was raised and considered at a previous hearing or other previous administrative or judicial proceeding; and 2) the person seeking to raise the issue participated meaningfully in such hearing or proceeding. Id. at §6330(c)(4).

After the hearing, the I.R.S. Appeals Officer's determination must take into consideration the following factors: 1) the verification that the requirements of any applicable law or administrative procedure have been met; 2) the issues raised by the taxpayer; and 3) whether any proposed collection action balances the need for efficient tax collection with the legitimate concern of the person that any collection action be no more intrusive than necessary. Id. at §6330(c)(3).

Section 6330(d) permits the taxpayer to appeal the determination by the Appeals Officer to the Tax Court, or to the United States District Court (in the event the Tax Court does not have jurisdiction of the underlying tax liability). See id. at §6330(d); see also 26 C.F.R. §301.6330-1(f). Because the Tax Court does not have jurisdiction with respect to employment tax liability, the district court is the proper court in which to file a complaint to contest the assessment of employment taxes. Abu-Awad v. United States [ 2003-2 USTC ¶50,716], 294 F.Supp.2d 879, 886-87 (S.D. Tex. 2003); see also Cavanaugh v. United States, No. 03-250, 2004 WL 880442 at *4 (D.N.J. Mar. 23, 2004) (tax court without jurisdiction to determine taxpayer's liability for penalty imposed under §6672); Borges v. United States [ 2004-1 USTC ¶50,208], 317 F.Supp.2d 1276, 1281 (D. N.Mex. 2004). Judicial review under §6330(d) is limited to issues properly raised and considered during the C.D.P. hearing. Borges [ 2004-1 USTC ¶50,208], 317 F.Supp.2d at 1281; Clouse v. Commissioner of Internal Revenue, No. 3:03 CV 7087, 2003 WL 23223842 at *2 (N.D. Ohio Dec. 8, 2003); 26 C.F.R. §301.6330-1(f).

Section 6330(d) does not specify the standard of review a district court should apply when reviewing Notices of Determination by the I.R.S. Appeals Office. Legislative history, however, indicates, that where the validity of the underlying tax liability is part of the appeal, courts review the determination on a de novo basis. Where the validity of the tax liability is not part of the appeal, a district court may review Notices of Determination for abuse of discretion. See Abu-Awad [ 2003-2 USTC ¶50,716], 294 F.Supp.2d at 887; see also H.R. Conf. Rep. No. 105-599, at 266 (1998). When a taxpayer's appeal challenges the validity of the underlying tax liability as well as other administrative determinations, the validity of the underlying tax liability is reviewed de novo, while the other administrative decisions are reviewed under the abuse of discretion standard. See Jones v. Commissioner [ 2003-2 USTC ¶50,584], 338 F.3d 463, 466 (5 ^th Cir. 2003).

The Fifth Circuit equates the phrase "abuse of discretion" with "arbitrary and capricious," and states that an abuse necessarily occurs where an act can only be described as "clearly improper." See Abu-Awad [ 2003-2 USTC ¶50,716], 294 F.Supp.2d at 892. Under the abuse of discretion standard, a determination will be affirmed unless the court determines with a "definite and firm conviction" that a clear error of judgment has been committed. Cincinnati Ins. Co. v. Byers, 151 F.3d 574, 578 (6 ^th Cir. 1998). An abuse of discretion has also been described as "a plain error, discretion exercised to an end not justified by the evidence, a judgment that is clearly against the logic and effect of the facts as are found." Wing v. Asarco, Inc., 114 F.3d 986 (9 ^th Cir. 1997).

Under the abuse of discretion standard, the court cannot substitute its judgment for that of the appeals officer. See Stop 26-Riverbend, Inc. v. United States [ 2003-1 USTC ¶50,360], No. C2-02-0285, 2003 WL 1908747 at *1 (S.D. Ohio Mar. 12, 2003). Thus, the appeals officer's determination will be upheld if it has an adequate basis in law or fact. Id. The burden is on the taxpayer when challenging an I.R.S. collection action. Richter v. United States, No. 01CV5240, 2002 WL 31031777, *2 (C.D. Cal. Apr. 2, 2002), citing Redmond v. United States, 507 F.2d 1007, 1011-12 (5 ^th Cir. 1975) (stating that an agency action stands unless the plaintiff can prove it should be set aside).

Actions brought pursuant to §6330(d) have been interpreted as actions for administrative review, such that the reviewing district court is limited to the administrative record, and the parties are not entitled to discovery or a jury trial. Hart v. United States [ 2003-2 USTC ¶50,680], 291 F.Supp.2d 635, 640 (N.D. Ohio 2003). Thus, this Court's review is confined to the administration record, without further discovery permitted. See id; Carroll v. United States [ 2002-2 USTC ¶50,500], 217 F.Supp.2d 852, 858 (W.D. Tenn. 2002) (citing United States v. Carlo Bianchi and Co., Inc., 373 U.S. 709, 714-15, 83 S.Ct. 1409, 1413 (1963).

In reviewing the rejection of Plaintiff's offers in compromise, the court does not conduct an independent review of what would be an acceptable offer in compromise. Rather, the court only reviews whether Defendant's rejection of the OIC was arbitrary, capricious, or without sound basis in law or fact. See Woodral v. Commissioner [ CCH Dec. 53,206], 112 T.C. 19, 23 (1999). Further, the Court reviews Defendant's action for abuse of discretion on the basis of the arguments and information available to the Appeals officer when the discretion was exercised. See Oyer v. Commissioner [ CCH Dec. 55,193(M)], T.C. Memo. 2003-178, citing Sego v. Commissioner [ CCH Dec. 53,938], 114 T.C. 604, 610 (2000).

Section 7122(a) authorizes a compromise of a taxpayer's federal tax liability where there is doubt as to liability or collectibility, or where it would promote effective tax administration. 26 C.F.R. §301.7122-1(b). One of the factors considered in determining whether to accept or reject an offer is whether the collection of the full liability would result in economic hardship to the taxpayer. Id. at §301.7122-1(b)(3)(i). Economic hardship is the inability of the taxpayer to meet reasonable basic living expenses. Id. at §301.6343-1(b)(4).

Here, both parties agree that the proper standard of review is for abuse of discretion, since the underlying tax liability is not at issue. Rather, Plaintiff asserts that the Appeals Officer abused his discretion in not accepting her offers in compromise, based on doubt as to liability and based on economic hardship. [Rec. No. 8, pp. 4, 7] Defendant posits, however, that Plaintiff did not present any evidence or argument in support of her doubt as to liability offer at the hearing. Thus, according to Defendant, the only offer at issue is that made based on economic hardship and resubmitted as a collection alternative after the CDP hearing. [Rec. No. 6, p. 3] Assuming, without deciding, that both offers in compromise are subject to review, the Court will address the rejection of each in turn, because neither presents an abuse of discretion.



1. Offer in Compromise Based on Doubt as to Liability

Under federal law, employers are required to withhold from their employees' paychecks their shares of federal social security taxes and income taxes. See 26 U.S.C. §§3102, 3402; Barnett v. Internal Revenue Service [ 93-1 USTC ¶50,269], 988 F.2d 1449, 1453 (5 ^th Cir.), cert. denied, 510 U.S. 990, 114 S.Ct. 546 (1993); Sutton v. United States [ 2002-2 USTC ¶50,552], 194 F.Supp.2d 559, 562 (E.D. Tex. 2001). The employer holds the withheld taxes "in trust" for the United States and must pay them over to the government. Barnett [ 93-1 USTC ¶50,269], 988 F.2d at 1453; Sutton, 194 F.Supp.2d at 562. If the employer withholds the taxes but fails to remit them, the government must credit the employees for having paid the taxes and seek the unpaid funds from the employer. Sutton [ 2002-2 USTC ¶50,552], 194 F.Supp.2d at 562-63. Section 6672 (a) imposes liability for the unremitted funds on any person who is required to collect, truthfully account for, and pay over the tax, who willfully fails to do so. See 26 U.S.C. §6672(a).

Any person facing liability under §6672 is generally referred to as a "responsible person." See Sutton [ 2002-2 USTC ¶50,552], 194 F.Supp.2d at 563 n.2. The Fifth Circuit has taken a broad view as to who qualifies as a responsible person under §6672. Logal v. United States [ 99-2 USTC ¶50,988], 195 F.3d 229, 232 (5 ^th Cir. 1999); Barnett [ 93-1 USTC ¶50,269], 988 F.2d at 1454. Whether someone is a responsible person depends on the person's status, duty, and authority. Sutton [ 2002-2 USTC ¶50,552], 194 F.Supp.2d at 563. Section 6672 applies to any responsible person, not just the most responsible. Id.

In the present case, Plaintiff submitted an offer to compromise her tax liability of $40,511 for $4,000, based on doubt as to her liability and now contends that Defendant abused its discretion in rejecting her offer. Defendant contends that the issue was not properly raised at the CDP hearing, and therefore, may not be raised here.

Assuming arguendo that Plaintiff did properly raise the issue, Defendant nonetheless did not abuse its discretion in rejecting her offer to compromise. Her offer based on doubt as to liability is not synonymous with a challenge to the underlying liability. Upon receiving notice of the proposed penalty assessment, she never challenged the underlying tax liability. She even states in her response to Defendant's motion for summary judgment that she never challenged the lien filing. Rather, she made an offer to compromise the liability, based on her doubt as to her own liability.

Based on the facts and information available to the Appeals Officer, Defendant did not abuse its discretion in rejecting Plaintiff's offer. In her Collection Information Statement, Plaintiff stated that she was an office manager for the corporation. [Id., Exh. 1] However, Defendant's information showed that Plaintiff was listed as a corporate Director, corporate Secretary, registered agent and incorporator with the Secretary of the State of Texas. [Rec. No. 6, Govt Exh. 7] She was present at meetings regarding taxes, giving I.R.S. notices to other officers, and working with the I.R.S. regarding payment of tax liabilities. [Id.] Defendant determined that she was responsible based on checks she had signed, working with the Revenue Officer, making "FTD's" and payments to the I.R.S., signing checks to other creditors, and being a corporate director and officer. [Id.]

In correspondence to the I.R.S., Plaintiff asserted that she was not a responsible person and did not act willfully. [Rec. No. 9, Exh. 4, 6, 7] She asserted that Eduardo Chavez, another corporate officer who was assessed liability, stated that Plaintiff had no independent responsibility in the corporation. [Id., Exh. 6] When the corporation was formed, Mr. Loya, the owner, had her placed as secretary of the corporation's records so that she could prepare and sign checks and other paperwork for him. [Id.] Plaintiff further contends that she was not a shareholder or director in the corporation. [Id.] When contacted by the I.R.S., Loya instructed Plaintiff to pay $20,000 and to request an installment agreement, which she did. [Id.] While Loya hired employees and supervised the work, he instructed Plaintiff each week to prepare charges for the employees for the hours worked and the amount he decided to pay them. [Id.] Plaintiff further asserted that she was not present at the meeting when the formation documents were created, and was not an investor or incorporator of the corporation. [Id., Exh. 7]

Factors to consider as indicia of responsible person status include whether the person:

1. is an officer or member of the board of directors;

2. owns a substantial amount of stock in the company;

3. manages the day-to-day operations of the business;

4. has the authority to hire or fire employees;

5. makes decisions as to the disbursement of funds and payment of creditors; and

6. 6. possesses the authority to sign company checks.

Barnett [ 93-1 USTC ¶50,269], 988 F.2d at 1455. No single factor is dispositive. Id.

Plaintiff meets several of these factors, sufficient to be considered a responsible person. See Moore v. United States, 465 F.2d 517 (5 ^th Cir. 1972) (finding that corporate officers who merely followed their supervisor's instructions in issuing checks to creditors were nevertheless responsible persons). Because Plaintiff is a responsible person for tax liability under §6672, the Appeals Officer did not abuse his discretion in rejecting her offer based on doubt as to liability.

Having found that the rejection of Plaintiff's offer in compromise for $4000, based on doubt as to liability was not an abuse of discretion, the Court will proceed to review Plaintiff's offer in compromise for $100, based on economic hardship It appears somewhat incongruous, even disingenuous, to complain of the rejection of a hardship offer for $100, while offering to compromise for $4000.



2. Offer in Compromise Based on Econoic Hardship

In reviewing an offer based on economic hardship and determining basic reasonable living expenses, the Regulations direct the I.R.S. to consider relevant information such as the taxpayer's age, employment status and history, ability to earn, number of dependents, and any "unique circumstances" of the individual taxpayer 26 C.F.R. §301.6343-1(b)(4). Factors supporting a determination that collection of the tax liability would cause an economic hardship include: the taxpayer is incapable of earning a living because of a medical condition or disability, and it is reasonably foreseeable that the taxpayer's resources will be exhausted providing care during the course of the condition; the taxpayer is unable to borrow against the equity in certain assets, and liquidation of those assets to pay the tax liability would render the taxpayer unable to meet basic living expenses. Id. at §301.7122-1(c)(3). For offer purposes, assets are valued at Net Realizable Equity, which is defined as the quick sale value less amounts owed to secured lien holders with priority over the federal tax lien. Internal Revenue Manual §5.8.5.3.1. Finally, an offer to compromise may not be rejected solely on the basis of the amount of the offer without evaluating that offer under I.R.S. policies and procedures. 26 U.S.C. §7122(c)(3); 26 C.F.R. §301.7122-1(f)(3).

Plaintiff submitted an offer in compromise for $100, based on economic hardship on May 20, 2002. [Rec. No. 9, Plaintiff's Exh. 8] The I.R.S. rejected that offer on October 11, 2002, stating that the amount offered was less than her reasonable collection potential, but that an offer of $12,269.70 would be considered if submitted. [Id., Plaintiff's Exh. 9] In reaching this decision, the I.R.S. stated that Plaintiff had not explained the hardship that would ensue. Further, based on the information available, the I.R.S. determined that Plaintiff's life insurance proceeds of $5651 and her individual retirement account of $5050 were eligible for tax application. However, her assets of $60,785.41 were classified as hardship producing, and thus protected.

The Asset/Equity Table worksheet used by the I.R.S. indicates that the counter-offer was derived from adding the net equity values of the life insurance proceeds, the I.R.A., and the present value of Plaintiff's future income. ¹¹ Further, assets including her home, vehicle, and bank accounts, valued at $60,785.41, were classified as protected. The Income and Expense Statement worksheet shows that the present value of her future income was derived from the difference between the allowed total income and expenses, projected for 48 months. ¹²

Plaintiff did not accept the counter-offer and appealed the rejection of her offer to the Appeals Office. [Rec. No. 9, Plaintiff's Exh. 9] In November 2002, Settlement Officer Richard Wempe advised Plaintiff that he needed further financial information in order to review Plaintiff's appeal of the rejection of her offer. [Id., Plaintiff's Exh. 10] In January 2003, Wempe advised Plaintiff that he could not recommend her "ETA" offer for acceptance, as it was for less than her reasonable collection potential. [Id.] He stated, however, that he would favorably consider for acceptance an offer of $13,814.47. This figure was generated by calculating the quick sale value ¹³ of her home, then the present value of that figure, and allowing for 50% doubt of collecting over the next ten years. ¹⁴ Further, he would recommend that the account be deemed uncollectible, so that she would be unaffected by the lien, unless she attempted to sell her home or borrow against it before the collection action expires.

The 2001 El Paso Consolidated Tax Bill indicates that Plaintiff's home was appraised at $69,669. [Rec. No. 6, Gov't Exh. 2] On the Collection Information Statement Form 433-A, signed by Plaintiff, the value of her home is reported to be $56,292. [Id., Gov't Exh. 1] This statement also reports her monthly income as $2994, and monthly expenses as $2656. [Id.]

In her ETA Offer, re-submitted in September 2003, Plaintiff described the special circumstances affecting her ability to pay the amount due. [Id., Gov't Exh. 4] She stated that she is elderly, in moderate health, living alone, and with limited assets. If her employer fails to remain in business after filing bankruptcy, she will be reliant upon her social security income. She further stated that her prospects of securing other employment are unlikely, especially given her age. (She is now 67 years old.) Additionally, she stated that she would need all of her savings and retirement "to survive." [Id.]

In the notes attached to her Collection Information Statement, Plaintiff stated that she was being treated for chronic hepatitis, diabetes, high blood pressure, and glaucoma, and that she was on a list for a liver transplant. [Rec. No. 6, Govt. Exh. 1] Also, she had extensive dental treatment required as a result of her diabetes. She has considerable medical expenses that are not covered by Medicare. Further, she stated that her ability to work may be affected if any of her conditions worsened, and that her current job was tenuous given that the company was in the process of declaring bankruptcy. [Id.] However, there are no medical records or findings of disability included in the administrative record indicating an inability to work.

In a letter dated September 2003, to the I.R.S. Appeals Division, Plaintiff further described her circumstances, stating that she was 67 years old, insolvent, and in very poor health. [Rec. No. 9, Plaintiff's Exh. 6] She had recently been diagnosed with breast cancer and undergone surgery and radiation treatments. [Id.] Other than her monthly social security income of $850, she received approximately $300 to $350 weekly from her employer. She had no medical insurance other than Medicare. Also, her primary assets are an I.R.A. of $5000 and "a small home with little QSV equity." [Id.]

Under the facts and circumstances as presented to the Appeals Officer, the decision to reject Plaintiff's offer to compromise her $40,511 tax liability for $100 was not an abuse of discretion. Her de minimus offer effectively asked forgiveness of her entire liability. See Razo v. Commissioner [ CCH Dec. 55,616(M)], T.C. Memo.2004-101 (rejection of plaintiffs' offer to compromise $7,832 tax liability for $100 was not abuse of discretion). Defendant did allow a substantial reduction for hardship in considering Plaintiff's offer. Regardless of which counter-offer of $12,269 or $13,814 is considered appropriate, it was not unreasonable for Defendant to reject Plaintiff's offer to compromise for $100. Defendant is entitled to preserve its priority regarding Plaintiff's assets, given their value and the uncertainty of their disposition. See id. Further, Defendant's willingness to forgo collection until Plaintiff's financial situation changed or until the collection action expires was reasonable and not arbitrary or capricious. See id. Accordingly, the administrative determination should be affirmed.

CONCLUSION

Based on the foregoing, it is RECOMMENDED that Defendant's motion for summary judgment be GRANTED.

It is further RECOMMENDED that Plaintiff's motion for summary judgment be DENIED.

NOTICE

FAILURE TO FILE WRITTEN OBJECTIONS TO THE PROPOSED FINDINGS, CONCLUSIONS AND RECOMMENDATIONS CONTAINED IN THE FOREGOING REPORT, WITHIN TEN DAYS RECEIPT OF SAME, MAY BAR DE NOVO DETERMINATION BY THE DISTRICT JUDGE OF AN ISSUE COVERED HEREIN AND SHALL BAR APPELLATE REVIEW, EXCEPT UPON GROUNDS OF PLAIN ERROR, OF ANY UNOBJECTED-TO PROPOSED FACTUAL FINDINGS AND LEGAL CONCLUSIONS AS MAY BE ACCEPTED OR ADOPTED BY THE DISTRICT COURT.

FINAL JUDGMENT

Segudino and Delfa Razo v. Commissioner, Dkt. No. 16969-02L , TC Memo. 2004-101, April 9, 2004.

David P. Leeper, for petitioners. Michael W. Bentley and Gordon P. Sanz, for respondents.

MEMORANDUM OPINION

GOEKE, Judge: This proceeding was commenced in response to a "NOTICE OF DETERMINATION CONCERNING COLLECTION ACTION(S) UNDER SECTION 6320 AND /OR 6330" (notice of determination). The notice of determination sustained the Federal tax lien, but suspended petitioners' account as "temporarily not collectible". The issue for decision is whether it was an abuse of discretion for respondent's Appeals officer to sustain the lien and reject petitioners' offer to compromise their 1995, 1996, and 1997 liabilities of $7,832.90 for $100. Because of the value of petitioners' assets, we hold that it was not an abuse of discretion.

Background

The parties submitted this case fully stipulated under Rule 122¹ . The stipulation of facts and the attached exhibits are incorporated herein by this reference. Petitioners, Mr. Razo and Mrs. Razo, resided in El Paso, Texas, at the time they filed their petition. This Court, in an Order dated November 19, 2003 , denied a motion by respondent to dismiss for lack of jurisdiction, as supplemented.

Petitioners filed joint Federal income tax returns for 1995, 1996, and 1997. Each of these returns showed tax due, but petitioners did not submit payment with the returns. On March 1, 2002 , respondent issued petitioners a Notice of Federal Tax Lien Filing and Your Right to a Hearing Under I.R.C. Section 6320, listing their total 1995, 1996, and 1997 liabilities as $7,832.90. On March 4, 2002 , respondent filed a notice of Federal tax lien in El Paso County, Texas.

On March 26, 2002 , petitioners' counsel, acting under a power of attorney from petitioners, submitted on behalf of petitioners a Form 12153, Request for a Collection Due Process Hearing, requesting a hearing under section 6320 with respondent's Appeals Office. Also submitted with the Form 12153 was a Form 656, Offer in Compromise, setting forth petitioners' offer to pay $100 to settle their 1995, 1996, and 1997 tax liabilities. Petitioners' offer in compromise was based on "effective tax administration" ( ETA ).

A section 6320 hearing was held on August 14, 2002. On October 3, 2002, respondent's Appeals officer issued the notice of determination rejecting petitioners' offer in compromise and sustaining the Federal tax lien, but recommending that petitioners' accounts be suspended as "temporarily not collectible". The Appeals officer based his determination to sustain the lien on the value of certain assets owned by petitioners, which include a house, two vehicles, and personal effects. The Appeals officer measured the quick sale value of petitioners' assets, less encumbrances against them, and found that the net amount of petitioners' equity in the assets greatly exceeded petitioners' tax liabilities for the years 1995-97. For example, one of petitioners' automobiles alone had a quick sale value in excess of the tax liabilities. However, the Appeals officer then noted that petitioners faced various hardships that would impede their ability to earn greater income in the future, or pay off their existing debts in an installment agreement. Mr. Razo is 62 years old and is employed as a manual laborer. Mrs. Razo is unemployed due to health problems. In addition, the Appeals officer noted that petitioners are currently in arrears on their mortgage and car payments, and they owe significant amounts of real estate taxes. The Appeals officer recommended that petitioners' account be suspended as "temporarily not collectible". By suspending their account as "temporarily not collectible", the Appeals officer halted collection activity until petitioners' financial situation changes and either payment is forthcoming or another collection alternative is feasible. The determination would allow the Government to recover a portion of any proceeds from a future sale or foreclosure on any of petitioners' assets. The Appeals officer concluded that although it was unlikely that petitioners would be able to pay their liabilities other than from the value of their assets, the lien would enable the Government to preserve its priority rights in any foreclosure or bankruptcy proceedings. Petitioners timely filed a petition with this Court for review of the Appeals officer's determination.

Discussion

Sections 6320 (pertaining to liens) and 6330 (pertaining to levies) were enacted as part of the Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L. 105-206, sec. 3401, 112 Stat. 746, in order to afford taxpayers new procedural protections with regard to collection matters. Section 6320 generally provides that the Secretary cannot proceed with collection of taxes by way of a lien on a taxpayer's property until the taxpayer has been notified in writing and provided with an opportunity for an administrative review in the form of a hearing before an impartial officer of the Internal Revenue Service Office of Appeals. Sec. 6320(b). Generally, hearings under section 6320 are conducted in accordance with the procedural requirements set forth in section 6330(c). Sec. 6320(c). At the hearing, the Appeals officer shall obtain verification that the requirements of any applicable laws and administrative procedures have been met. Sec. 6330(c)(1). Taxpayers may raise appropriate spousal defenses, challenges to the appropriateness of the collection action, and offers of collection alternatives, which may include offers in compromise. Sec. 6330(c)(2)(A)(iii). In certain circumstances, taxpayers may also challenge their underlying tax liability at the hearing. Sec. 6330(c)(2)(B).

In this case, petitioners do not dispute that the Appeals officer obtained verification that the requirements of any applicable laws and administrative procedures had been met. In addition, petitioners do not dispute the existence or amount of their underlying tax liability. The only collection alternative offered by petitioners at their hearing was their offer in compromise for $100. No other issues were raised.

We review the Appeals officer's determination for an abuse of discretion. Goza v. Commissioner [Dec. 53,803], 114 T.C. 176, 182 (2000). We must decide whether respondent exercised his discretion arbitrarily, capriciously, or without sound basis in fact or law. Woodral v. Commissioner [Dec. 53,206], 112 T.C. 19, 23 (1999); Fargo v. Commissioner [Dec. 55,514(M)], T.C. Memo. 2004-13. The issue raised with the Appeals officer is the proper point of reference in determining whether the Appeals officer abused his discretion. Magana v. Commissioner [Dec. 54,765], 118 T.C. 488, 493-494 (2002).

Petitioners contend that the Appeals officer abused his discretion in rejecting their offer to compromise the $7,832.90 total liability for $100. Specifically, petitioners argue that their offer in compromise should have been accepted because they will not be able to meet basic living expenses if their assets are lost to foreclosure and respondent's lien is left in place. They point to their poor health, age, and education as evidence that they will experience economic hardship if the value of their equity is not available to them. They also argue that the examples contained in section 301.7122 -1(c)(3)(iii), Proced. & Admin. Regs., compel respondent to accept their ETA offer.

We note at the outset that based on the record petitioners are not destitute. The record reflects that petitioners own two automobiles, one with a quick sale value of $10,120, subject to an encumbrance of $921, and the other with a quick sale value of $8,988, subject to an encumbrance of $5,700. Petitioners do not dispute that these figures are correct. The Appeals officer sustained the lien and suspended their account as "temporarily not collectible". There is no evidence that the Government is currently taking any efforts to collect on petitioners' account.

Section 301.7122 -1(c)(3), Proced. & Admin. Regs., authorizes the Internal Revenue Service, in compromising liabilities, to take into account circumstances where payment in full would create economic hardship. In this case, the Appeals officer determined that petitioners did not have sufficient income to enter an installment agreement. However, the regulations do not require the Commissioner to relieve a liability completely because the taxpayers are unable to pay the liability from current income. Petitioners have not shown that they are unable to pay at least a part of their liability from their remaining assets. Their $100 de minimis offer effectively asks respondent to forgive their entire liability, despite the value of their assets. On the basis of the undisputed facts presented to the Appeals officer, if petitioners were to sell one of their two automobiles, they could pay the entire amount of the liability at issue. Under these circumstances, we cannot find an abuse of discretion in the Appeals officer's determination to reject petitioners' de minimis offer in compromise. The Government is entitled to preserve its priority regarding petitioners' assets, given their value and the uncertainty regarding their disposition. In the face of petitioners' de minimis offer, respondent's willingness to forgo collection until petitioners' financial situation changes was reasonable and certainly was not an abuse of discretion.

To reflect the foregoing,

Decision will be entered for respondent.

¹ Unless otherwise indicated, all section references are to the Internal Revenue Code in effect at the time the petition was filed, and all Rule references are to the Tax Court Rules of Practice and Procedure.

Ronald J. and June M. Speltz v. Commissioner, Dkt. No. 15382-03L , 124 TC --, No. 9, March 23, 2005 .

 Timothy J. Carlson, for petitioners; Albert B. Kerkhove and Stuart D. Murray, for respondent.

Ps incurred AMT liability as a result of their exercise of incentive stock options in 2000. The stock declined precipitously in value after the date of exercise. Ps partially paid the tax liability and submitted an offer in compromise with respect to the unpaid balance. The IRS rejected the offer in compromise and filed a lien on Ps' property. Held: It was not an abuse of discretion to reject Ps' offer in compromise and to continue the lien.

OPINION

COHEN, Judge: This case is before the Court on respondent's motion for summary judgment, seeking a determination sustaining an Appeals officer's rejection of petitioners' offer in compromise. Petitioners seek a summary determination that it was an abuse of discretion to refuse their offer in compromise because of the unfair application of the alternative minimum tax ( AMT ) based on their exercise of incentive stock options (ISOs) where the stock acquired by exercise of the ISOs has lost substantially all of its value subsequent to the acquisition of the stock. Unless otherwise indicated, all section references are to the Internal Revenue Code as amended, and all Rule references are to the Tax Court Rules of Practice and Procedure.

Background

In ruling on respondent's motion for summary judgment, factual inferences are viewed in the light most favorable to petitioners. Preece v. Commissioner [Dec. 47,009], 95 T.C. 594, 597 (1990). Thus, the background facts set forth herein are based primarily on petitioners' declaration in opposition to the motion for summary judgment and on other materials submitted by petitioners.

Petitioners resided in Ely, Iowa, at the time that they filed their petition. For some years prior to 2000, petitioner Ronald J. Speltz (petitioner) was employed by McLeodUSA (McLeod). By 2000, petitioner was a senior manager at McLeod earning wages in excess of $75,000. By 2004, petitioner's wages were approximately $90,000 per year. As part of his compensation at McLeod, petitioner received ISOs for acquisition of McLeod stock.

During the year 2000, petitioner exercised certain of the ISOs that he previously had received. On petitioners' Form 1040, U.S. Individual Income Tax Return, for 2000, petitioners reported, for purposes of the AMT , those ISOs as resulting in "excess of AMT income over regular tax income" of $711,118. On their Form 1040, petitioners reported that their "regular" adjusted gross income was $142,070. Their taxable income was $105,461, and their "regular" tax was $18,678. Petitioners reported AMT of $206,191 for a total tax liability of $224,869. After application of Federal income tax withheld, the balance owed on petitioners' tax liability for 2000 was $210,065. Petitioners also filed a 2000 Iowa Individual Income Tax Long Form, IA 1040, on which they reported Iowa minimum tax of $46,792 and a total tax liability of $56,769.

The value of petitioners' McLeod stock dropped precipitously. On their tax return for 2000, petitioners reported that they sold 200 shares of McLeod stock on January 14 for a total of $14,011 and 500 shares of McLeod stock on March 10 for a total of $52,282. On their tax return for 2002, petitioners reported that they sold 2,070 shares of McLeod stock on December 30 for a total of $1,647.

Petitioners partially paid the liability reported on their 2000 Form 1040 at the time that it was filed and paid an additional $75,000 in installments prior to November 2, 2001 . Petitioners borrowed $134,000 from a bank to pay State and Federal taxes reported on their 2000 returns.

On or about November 2, 2001, petitioners submitted to the Internal Revenue Service ( IRS ) a Form 656, Offer in Compromise. Petitioners offered a cash payment of $4,457, the cash value of petitioner's life insurance policy, against the liability that then exceeded $125,000. On the Form 656, petitioners checked the box for "Doubt as to Collectibility --`I have insufficient assets and income to pay the full amount.' " Petitioners also attached to Form 656 a statement in which they explained that an offer in compromise was necessary because of the impact the AMT in 2000 had on their finances and their lifestyle. Specifically, petitioner's income in 2000 was at a comfortable level for a family of five including three young daughters; the McLeod stock they held was nearly worthless and declining and had been used to secure a $134,000 loan with a bank to pay part of the 2000 Federal and State taxes; and, in the event of a sale of the stock (forced or otherwise), petitioners would be unable to carry back the capital loss to offset their 2000 gain. They began building a new home in 2000 and sold their prior home in 2001, using the proceeds of sale to repay the bank. Lifestyle changes were necessary, including: Petitioner June M. Speltz had to get a job instead of staying home with the children; the oldest daughter had to switch schools; petitioners were unable to contribute to their retirement and to their children's education fund; and they had to reduce their charitable donations. Finally, they could not afford to have a fourth child, which they had wanted.

Petitioners offered in compromise $4,457, the cash surrender value on petitioner's life insurance. In the statement, petitioners expressed their mental anguish and frustration with the unfairness of their situation.

Petitioners' offer in compromise was reviewed by Revenue Officer Robert G. Dallas (Dallas), an offer in compromise specialist. Dallas indicated to petitioners that he was rejecting the offer in compromise because petitioners had the ability to pay the outstanding tax liability in full. On October 6, 2002 , petitioners wrote to Dallas disputing amounts that Dallas had used in his calculation. On October 9, 2002 , Dallas indicated that certain adjustments that were requested by petitioners had been made. He wrote, however:

The adjustments to the Income/Expense table you requested have not been granted because the allowed amount * * * is the allowable housing and utility standard for families of your number in Linn County, Iowa. The excess expenses you have claimed * * * cannot be moved * * * solely to circumvent the allowable standard amount.

Based upon your current financial condition, we have determined that you have the ability to pay your liability in full within the time provided by law. We have made this determination based on the following computations:

  Total net equity in assets:                                 $77,948.00

  Total future ability to pay and retire debt:               $113,568.00

  Total ability to pay:                                      $191,516.00

  Total balance due:                                         $148,744.64

  Amount you offered:                                          $4,457.00

Copies of our worksheets are enclosed for your review.

Your options at this time are to pay your liability in full, enter into an installment agreement, withdraw your offer using the withdrawal letter previously provided or withhold your response and appeal your offer's failure to gain acceptance through the appeal procedure that you will be offered. Please advise of your preferred course of action.

Please respond within 14 days of the date of this letter. If you fail to respond or if your response is egregiously inadequate, a Federal Tax Lien will be filed if one is not already a matter of record and the case will be forwarded to an independent reviewer without a recommendation for approval. If the reviewer concurs with the conclusion of my investigation, you will be notified by mail and advised of your appeal rights. If there is a need for additional information you will be notified.

On December 17, 2002, respondent sent to petitioners a Letter 3172, Notice of Federal Tax Lien Filing and Your Right to a Hearing Under IRC 6320, with respect to their unpaid income tax liability for 2000, advising that petitioners could request a hearing with respondent's Office of Appeals. On January 13, 2003, petitioners submitted a Form 12153, Request for a Collection Due Process Hearing. Petitioners stated that they were disagreeing with the Notice of Federal Tax Lien because:

Forms 433-A and 656 have been prepared and filed with the IRS as an Offer in Compromise. The only real estate owned by the taxpayers is their personal residence * * *. Such residence constitutes exempt property, and therefore, the IRS ' attempted lien is unenforceable.

Petitioners' Request for a Collection Due Process Hearing was signed by their then attorney.

On February 12, 2003, a telephone conference was held between respondent's Appeals Officer Eugene H. DeBoer (DeBoer) and petitioners' attorney. On February 13, 2003, DeBoer wrote to petitioners' attorney a letter summarizing their discussion and stating the following:

In regards to your question about changes to the alternative minimum tax laws. At this time there is no pending legislation that would retroactively change how the AMT was computed for 2000. Accordingly, the tax as reported appears to be correct.

Neither petitioners nor their attorney responded to the February 13, 2003, letter from DeBoer. Instead, petitioners' attorney contacted their Senator and the Taxpayer Advocate Service.

On August 12, 2003, a Notice of Determination Concerning Collection Action(s) Under Section 6320 and/or 6330 was sent to petitioners. The attachment to the notice explained the determination as follows:

SUMMARY AND RECOMMENDATION

Should the lien be released or withdrawn?

No, the tax as assessed is deemed correct and the offer in compromise proposed by the taxpayers has been rejected.

BRIEF BACKGROUND

Mr. and Mrs. Speltz filed their 2000 return showing a liability of $209,749.77. They made a payment with the return of $17,565. Payments of $70,000 were made prior to an installment agreement which was entered into for $2,500. Two payments of $2,500 made prior to the filing of an offer in compromise of $4,457 on 11/2/2001. The offer was rejected due to the taxpayers having assets and the ability to full pay the liability. A lien was then filed. The taxpayers' representative states on the request for a collection due process hearing that the personal residence constitutes exempt property and therefore the IRS ' attempted lien is unenforceable. A phone conference was held with the representative, * * * who questioned whether there was any pending legislation aimed at changing how the alternative minimum tax is computed. A check with the national office shows that there is no pending legislation to retroactively adjust how the alternative minimum tax is computed.

DISCUSSION AND ANALYSIS

1. Verification of legal and procedural requirements; Yes

2. Issues raised by the taxpayer; The offer in compromise was rejected.

3. Balancing of need for efficient collection with taxpayer concern that the collection action be no more intrusive than necessary. The collection action balances the need for the efficient collection of taxes with the Speltz's legitimate concern that the collection action be no more intrusive than necessary.

The petition in this case was filed by petitioners pro se; counsel entered his appearance after respondent filed a motion for summary judgment. In their petition, petitioners do not allege any specific abuse of discretion with respect to the notice of determination. Instead, they refer to their communications with the Taxpayer Advocate's Office and to the office of their Senator.

Discussion

Section 6321 imposes a lien in favor of the United States on all property and rights to property of a person when a demand for the payment of the person's taxes has been made and the person fails to pay those taxes. Section 6322 provides that such a lien arises when an assessment is made. To protect the Government's rights to recover its unpaid taxes, section 6323(a) provides that the IRS may file a notice of Federal tax lien in order to establish the priority of its claims against the taxpayer's other creditors.

In the Internal Revenue Service Restructuring and Reform Act of 1998 (RRA 1998), Pub. L. 105-206, sec. 3401, 112 Stat. 746, Congress enacted sections 6320 (pertaining to liens) and 6330 (pertaining to levies) to provide protections for taxpayers in tax collection matters. Section 6320 requires that the Secretary notify a person who has failed to pay a tax liability of the filing of a notice of lien under section 6323. The notice required by section 6320 must be provided not more than 5 business days after the day of the filing of the notice of lien, pursuant to section 6320(a)(2). Section 6320 further provides that the person so notified may request administrative review of the matter (in the form of a hearing) within 30 days beginning on the day after the 5-day period. Under section 6320(c), the hearing generally is to be conducted consistent with the procedures set forth in section 6330(c), (d), and (e). Section 6330(c) permits the person notified to raise collection issues such as spousal defenses, the appropriateness of the Commissioner's intended collection action, and possible alternative means of collection.

Section 6330(d) provides for judicial review of the administrative determination. Where the validity of the underlying tax liability is not properly at issue, the Court will review the Commissioner's administrative determination for abuse of discretion. See Sego v. Commissioner [Dec. 53,938], 114 T.C. 604, 609 (2000); Goza v. Commissioner [Dec. 53,803], 114 T.C. 176, 179 (2000); see also H. Conf. Rept. 105-599, at 266 (1998), 1998-3 C.B. 747, 1020.

Also in 1998, Congress amended section 7122, which authorizes compromise of any civil case arising under the internal revenue laws. RRA 1998, sec. 3462, 112 Stat. 764. Subsections (c) and (d) of section 7122 were amended for proposed offers in compromise and installment agreements submitted after July 22, 1998 , and provide as follows:

SEC . 7122(c). Standards for Evaluation of Offers. --

(1) In general. --The Secretary shall prescribe guidelines for officers and employees of the Internal Revenue Service to determine whether an offer-in-compromise is adequate and should be accepted to resolve a dispute.

(2) Allowances for basic living expenses. --

(A) In general. --In prescribing guidelines under paragraph (1), the Secretary shall develop and publish schedules of national and local allowances designed to provide that taxpayers entering into a compromise have an adequate means to provide for basic living expenses.

(B) Use of schedules. --The guidelines shall provide that officers and employees of the Internal Revenue Service shall determine, on the basis of the facts and circumstances of each taxpayer, whether the use of the schedules published under subparagraph (A) is appropriate and shall not use the schedules to the extent such use would result in the taxpayer not having adequate means to provide for basic living expenses.

(3) Special rules relating to treatment of offers. --The guidelines under paragraph (1) shall provide that --

(A) an officer or employee of the Internal Revenue Service shall not reject an offer-in-compromise from a low-income taxpayer solely on the basis of the amount of the offer; and

(B) in the case of an offer-incompromise which relates only to issues of liability of the taxpayer --

(i) such offer shall not be rejected solely because the Secretary is unable to locate the taxpayer's return or return information for verification of such liability; and

(ii) the taxpayer shall not be required to provide a financial statement.

(d) Administrative Review. --The Secretary shall establish procedures --

(1) for an independent administrative review of any rejection of a proposed offer-in-compromise or installment agreement made by a taxpayer under this section or section 6159 before such rejection is communicated to the taxpayer; and

(2) which allow a taxpayer to appeal any rejection of such offer or agreement to the Internal Revenue Service Office of Appeals.

Regulations adopted pursuant to section 7122 set forth three grounds for the compromise of a liability: (1) Doubt as to liability; (2) doubt as to collectibility; or (3) promotion of effective tax administration. Sec. 301.7122-1, Proced. & Admin. Regs. With respect to the third ground, paragraph (b)(3)(i) of the regulation allows for a compromise to be entered into to promote effective tax administration where collection in full could be achieved but would cause economic hardship. Paragraph (c)(3)(i) sets forth factors that would support (but are not conclusive of) a finding of economic hardship. With respect to the third ground, those regulations state:

(3) Compromises to promote effective tax administration. --(i) Factors supporting (but not conclusive of) a determination that collection would cause economic hardship within the meaning of paragraph (b)(3)(i) of this section include, but are not limited to --

(A) Taxpayer is incapable of earning a living because of a long term illness, medical condition, or disability, and it is reasonably foreseeable that taxpayer's financial resources will be exhausted providing for care and support during the course of the condition;

(B) Although taxpayer has certain monthly income, that income is exhausted each month in providing for the care of dependents with no other means of support; and

(C) Although taxpayer has certain assets, the taxpayer is unable to borrow against the equity in those assets and liquidation of those assets to pay outstanding tax liabilities would render the taxpayer unable to meet basic living expenses.

The regulation states that no compromise may be entered into if such compromise of liability would undermine compliance by the taxpayer with the tax laws. Sec. 301.7122-1(b)(3)(iii), Proced. & Admin. Regs. Paragraph (c)(3)(ii) then sets forth factors that support (but are not conclusive of) a determination that a compromise would undermine compliance with the tax laws. These factors include: (A) A taxpayer who has a history of noncompliance with the filing and payment requirements of the Internal Revenue Code; (B) a taxpayer who has taken deliberate action to avoid the payment of taxes; and (C) a taxpayer who has encouraged others to refuse to comply with the tax laws. Sec. 301.7122-1(c)(3)(ii), Proced. & Admin. Regs. The regulation continues:

(iii) The following examples illustrate the types of cases that may be compromised by the Secretary, at the Secretary's discretion, under the economic hardship provisions of paragraph (b)(3)(i) of this section:

Example 1. The taxpayer has assets sufficient to satisfy the tax liability. The taxpayer provides full time care and assistance to her dependent child, who has a serious long-term illness. It is expected that the taxpayer will need to use the equity in his assets to provide for adequate basic living expenses and medical care for his child. The taxpayer's overall compliance history does not weigh against compromise.

Example 2. The taxpayer is retired and his only income is from a pension. The taxpayer's only asset is a retirement account, and the funds in the account are sufficient to satisfy the liability. Liquidation of the retirement account would leave the taxpayer without an adequate means to provide for basic living expenses. The taxpayer's overall compliance history does not weigh against compromise.

Example 3. The taxpayer is disabled and lives on a fixed income that will not, after allowance of basic living expenses, permit full payment of his liability under an installment agreement. The taxpayer also owns a modest house that has been specially equipped to accommodate his disability. The taxpayer's equity in the house is sufficient to permit payment of the liability he owes. However, because of his disability and limited earning potential, the taxpayer is unable to obtain a mortgage or otherwise borrow against this equity. In addition, because the taxpayer's home has been specially equipped to accommodate his disability, forced sale of the taxpayer's residence would create severe adverse consequences for the taxpayer. The taxpayer's overall compliance history does not weigh against compromise.

Under the regulations, a compromise may also be entered into to promote efficient tax administration if there are compelling public policy or equity considerations identified by the taxpayer. Compromise is justified where, due to exceptional circumstances, collection would undermine public confidence that tax laws are being administered fairly. Sec. 301.7122-1(b)(3)(ii), Proced. & Admin. Regs. Some examples where a compromise is allowed for purposes of public policy and equity are: (1) A taxpayer who was hospitalized regularly for a number of years and was unable, at that time, to manage his financial affairs and (2) a taxpayer learns at audit that he was given erroneous advice and is facing additional taxes, penalties, and additions to tax. Sec. 301.7122-1(c)(3)(iv), Proced. & Admin. Regs. In addition to the regulations, detailed instructions concerning offers in compromise are contained in the Internal Revenue Manual, sections 5.8. Relevant portions are as follows:

Sec. 5.8.11.2.2 (05-15-2004)

Public Policy or Equity Grounds

1. Where there is no Doubt as to Liability (DATL), no Doubt as to Collectibility ( DATC ), and the liability could be collected in full without causing economic hardship, the Service may compromise to promote Effective Tax Administration ( ETA ) where compelling public policy or equity considerations identified by the taxpayer provide a sufficient basis for accepting less than full payment. Compromise is authorized on this basis only where, due to exceptional circumstances, collection in full would undermine public confidence that the tax laws are being administered in a fair and equitable manner. Because the Service assumes that Congress imposes tax liabilities only where it determines it is fair to do so, compromise on these grounds will be rare.

2. The Service recognizes that compromise on these grounds will often raise the issue of disparate treatment of taxpayers who can pay in full and whose liabilities arose under substantially similar circumstances. Taxpayers seeking compromise on this basis bear the burden of demonstrating circumstances that are compelling enough to justify compromise notwithstanding this inherent inequity.

3. Compromise on public policy or equity grounds is not authorized based solely on a taxpayer's belief that a provision of the tax law is itself unfair. Where a taxpayer is clearly liable for taxes, penalties, or interest due to operation of law, a finding that the law is unfair would undermine the will of Congress in imposing liability under those circumstances.

Example:

The taxpayer argues that collection would be inequitable because the liability resulted from a discharge of indebtedness rather than from wages. Because Congress has clearly stated that a discharge of indebtedness results in taxable income to the taxpayer it would not promote Effective Tax Administration ( ETA ) to compromise on these grounds. See Internal Revenue Code (IRC) 61(a)(12).

Example:

In 1983, the taxpayer invested in a nationally marketed partnership which promised the taxpayer tax benefits far exceeding the amount of the investment. * * * [T]he IRS made a global settlement offer in which it offered to concede a substantial portion of the interest and penalties that could be expected to be assessed if the IRS 's determinations were upheld by the court. The taxpayer rejected the settlement offer. After several years of litigation, the partnership level proceeding eventually ended in Tax Court decisions upholding the vast majority of the deficiencies asserted in the FPAA on the grounds that the partnership's activities lacked economic substance. The taxpayer has now offered to compromise all the penalties and interest on terms more favorable than those contained in the prior settlement offer, arguing that TEFRA [Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. 97-248, 96 Stat. 324] is unfair and that the liabilities accrued in large part due to the actions of the Tax Matters Partner ( TMP ) during the audit and litigation. * * *

Note:

In both of these examples, the taxpayers are essentially claiming that Congress enacted unfair statutes and are arguing that the Service should use its compromise authority to rewrite those statutes based on a perception of unfairness. Compromise for that reason would not promote effective tax administration. The compromise authority under Section 7122 is not so broad as to allow the Service to disregard or override the judgments of Congress. [1 Administration, Internal Revenue Manual ( CCH ), sec. 5.8.11.2.2, at 16,385-7 to 16,385-8.]

We need not detail in this opinion the complexities of the AMT imposed by sections 55 and 56 or the taxation of ISOs under sections 421 and 422. Petitioners do not dispute the applicability of those sections or the computations under them. The tax liability in this case was based on petitioners' reporting on their Form 1040 for 2000. Nonetheless, petitioners devote a substantial portion of their posthearing memorandum to arguing that:

The Speltzes request for relief under the OIC Statute, from the unintended harm being caused them by the rote application of the AMT ISO Statute, does not put the IRS or this Court in a position where Section 7122 is undermining Congressional intent with respect to any other statute--including the AMT ISO Statute. Rather, based on their special circumstances in their particular situation, the rote and literal application of the internal revenue laws is imposing an impossible-to-pay 220% tax rate or 11x the tax required of a similarly situated taxpayer--an unintended result not consistent with the legislative purpose of Congress for any internal revenue law. In such a special case, Congress intended that the OIC Statute would operate to step in and provide relief from this unintended and unfair tax liability arising from unintended results arising from the literal application of the internal revenue laws (in this case, the AMT ISO Statute).

Petitioners contend that there was an abuse of discretion because:

The IRS failed to consider (or if it did consider it failed to properly consider), under the principles and processes laid out in Section 7122, corresponding regulations 26 CFR 301.7122 , and the corresponding IRM provisions, the special circumstances raised by the Speltzes in their offer in compromise.

Petitioners argue that "under their special circumstances the tax liability being imposed on them is unfair and inequitable, a situation for which Congress has fashioned a remedy in the law --Section 7122." The crux of petitioners' position is that section 7122 "trumps" the literal application of statutes imposing a tax in their situation and that, therefore, it was an abuse of discretion by the Appeals Office not to accept their offer in compromise.

Respondent, on the other hand, contends that the Appeals officer correctly applied the statute, the regulations, and the Internal Revenue Manual provisions. For the reasons explained below, we agree with respondent.

The unfortunate consequences of the AMT in various circumstances have been litigated since shortly after the adoption of the AMT . In many different contexts, literal application of the AMT has led to a perceived hardship, but challenges based on equity have been uniformly rejected. See, e.g., Alexander v. Commissioner [96-1 USTC ¶50,011], 72 F.3d 938 (1st Cir. 1995), affg. [Dec. 50,458(M)] T.C. Memo. 1995-51; Okin v. Commissioner [87-1 USTC ¶9152], 808 F.2d 1338 (9th Cir. 1987), affg. [Dec. 42,049(M)] T.C. Memo. 1985-199; Warfield v. Commissioner [Dec. 41,869], 84 T.C. 179 (1985); Huntsberry v. Commissioner [Dec. 41,632], 83 T.C. 742, 747-753 (1984); Prosman v. Commissioner [Dec. 53,300(M)], T.C. Memo. 1999-87; Klaassen v. Commissioner [Dec. 52,775(M)], T.C. Memo. 1998-241, affd. without published opinion [99-1 USTC ¶50,418] 182 F.3d 932 (10th Cir. 1999).

In Kenseth v. Commissioner [2001-2 USTC ¶50,570], 259 F.3d 881, 885 (7th Cir. 2001), affg. [Dec. 53,895] 114 T.C. 399 (2000), the Court of Appeals for the Seventh Circuit commented:

it is not a feasible judicial undertaking to achieve global equity in taxation * * * especially when the means suggested for eliminating one inequity (that which Kenseth argues is created by the alternative minimum income tax) consists of creating another inequity (differential treatment for purposes of that tax of fixed and contingent legal fees). And if it were a feasible judicial undertaking, it still would not be a proper one, equity in taxation being a political rather than a jural concept. * * *

Most recently, in Commissioner v. Banks [2005-1 USTC ¶50,155], 543 U.S. ___, 125 S.Ct. 826 (2005), the U.S. Supreme Court emphasized that the issue of the effect of the AMT on cases such as Kenseth v. Commissioner, supra, involving the deductibility of attorney's fees, has partially been addressed by Congress. We believe that here, too, the solution must be with Congress.

Petitioners have submitted materials from congressional, Taxpayer Advocate, and bar association sources, dealing with a widespread perception that application of the AMT to ISOs is unfair and should be the subject of redress. Respondent argues that petitioners did not raise efficient tax administration as a ground in their original offer in compromise and that we should not consider materials beyond the administrative record. The Court has indicated that we are not confined to the administrative record. Robinette v. Commissioner [Dec. 55,698], 123 T.C. 85, 94-104 (2004). However, most of the material that petitioners attached to their filings is not part of the administrative record, is not admissible evidence, and was in large part generated subsequent to the notice of determination that is the basis of this case. Such material does not show that there was an abuse of discretion by the Appeals officer when the notice of determination was sent on August 12, 2003 . See Sego v. Commissioner [Dec. 53,938], 114 T.C. 604, 612 (2000).

Petitioners' materials, in any event, could support arguments both for and against petitioners' position. Petitioners assert that those materials show "public policy". In our view, however, those materials show that Congress is well aware of the claimed inequities resulting from the application of the AMT and has, so far, declined to act. In the absence of congressional action, we cannot discern public policy from the materials tendered by petitioners. Moreover, the materials submitted by petitioners show that their situation is, unfortunately, not unique.

We do not discern in section 7122 an intent of Congress to override application of specific provisions of the tax laws in every instance in which the liability is perceived to be unfair or inequitable. As the Court of Appeals for the Seventh Circuit observed in Kenseth v. Commissioner, supra, this is not a feasible judicial function. A fortiori, individual revenue officers and Appeals officers, carrying out their respective functions in the IRS collection process, cannot be expected to engage in the type of statutory interpretation urged on us by petitioners or to nullify unfortunate consequences of the tax laws on a case-by-case basis. The terms of section 7122, the regulations adopted under it, and the Internal Revenue Manual are consistent with the experience and expertise of IRS personnel in evaluating financial circumstances. Petitioners do not argue that the regulations or the Internal Revenue Manual provisions are invalid. They claim that they were not followed. But terms such as "promotion of effective tax administration", "special circumstances", and "compelling public policy or equity considerations" have a narrower meaning than that urged by petitioners, and the explanations of those terms in the regulations and in the Internal Revenue Manual are not unreasonable.

Unlike the examples set forth under section 301.7122-1(c), Proced. & Admin. Regs., petitioners do not claim illness or a medical condition or disability; they do not have income that is exhausted providing for the care of dependents; and they have sufficient income to meet "basic living expenses". Petitioners' hardship argument is essentially that the tax liability is disproportionate to the value that they received from the ISOs and that they have already been forced to change their lifestyle unreasonably. Although we sympathize with their situation, this type of hardship is not unique.

Petitioners argue that the AMT imposed on their exercise of ISOs is a "prepayment" of tax on value that they never received. Under the statutory scheme, however, the tax imposed at the time of exercise of ISOs is a deferred tax on a form of compensation that petitioners received at an earlier time. See Commissioner v. LoBue [56-2 USTC ¶9607], 351 U.S. 243 (1956). As explained in Luckman v. Commissioner [70-1 USTC ¶9101], 418 F.2d 381, 384 (7th Cir. 1969), revg. and remanding on other grounds [Dec. 29,060] 50 T.C. 619 (1968), stock options "represent a form of compensation paid to employees in connection with successful present and future business performance. They constitute a particularly rewarding form of bonus." See generally 1 Mertens, Law of Federal Income Taxation, sec. 601 (2005 rev.). Because of sections 421(a) and 422, regular tax at ordinary rates that would normally be imposed on compensation is not imposed on the receipt or exercise of ISOs. See sec. 83(a), (e)(1). The offset, however, is that ISOs are treated as "tax preference items" for AMT purposes in section 56(b)(3).

In addition to affecting the time of taxation, the complexity of statutes applicable to stock options involves differences between taxation at ordinary income rates and capital gains rates. See generally Luckman v. Commissioner, supra at 386-387. Accepting petitioners' position would result in nullification of a portion of the statutory scheme by administrative or judicial action. We cannot conclude that section 7122 gives the Court a license to make adjustments to complex tax laws on a case-by-case basis. Cf. Rank v. United States [65-1 USTC ¶9396], 345 F.2d 337, 344-345 (5th Cir. 1965) (describing other circumstances in which "the attention of Congress was once again focused on this highly complex, if not controversial, question of employee stock options"). Moreover, we cannot conclude that it is an abuse of discretion for the Appeals officer to decline to do so. In this case, we conclude that the Appeals officer correctly applied the provisions of the regulations and of the Internal Revenue Manual, specifically those portions cautioning against granting relief based on inequity where to do so would undermine congressional intent.

The Appeals officer considered and adjusted the financial information submitted by petitioners and concluded that petitioners could pay the balance of their tax liability by use of an installment agreement. See generally Orum v. Commissioner [Dec. 55,681], 123 T.C. 1, 13-14 (2004). Neither the information provided to the Appeals officer nor that provided to the Court in this case shows that it was not reasonable for the Appeals officer to conclude that petitioners have the ability to pay over time the balance of the tax liability. Petitioners contend that they should not be required to pay the full amount. We are not unsympathetic to the burdens and lifestyle changes that petitioners have and may suffer as a result of their tax liability. Petitioners have not contended or shown, however, any invalidity in the Appeals officer's determination of their basic living expenses as that term is used in section 7122. Petitioners seek to have the Court redefine "hardship", "special circumstances", and "efficient tax administration" in a manner different from that set forth in the regulations and in the Internal Revenue Manual.

There is a dispute between the parties with respect to the individual adjustments used by the Appeals officer in determining that petitioners could pay the remaining tax liability under an installment plan. Respondent has suggested some revised computations and a remand for further consideration of petitioners' offer in compromise if the motion for summary judgment is denied. Petitioners have repudiated this suggestion and asked us to decide this case on the arguments presented. In view of petitioners' position, for purposes of this case, that they should not be required to pay any more than the amount that they offered, differences as to the calculation of their ability to pay installments are not material and do not preclude resolution of this case on summary judgment. See Rule 121(b). We are not in a position to determine the amount or duration of any installments that petitioners could or should be required to pay. The only issue before us is whether there was an abuse of discretion in refusing the offer in compromise in the amount of $4,457 and concluding that the lien filed by the IRS should remain in place. As respondent points out, any levy on particular assets of petitioners that the IRS proposes to pursue in the future will also require notice and an opportunity to be heard under section 6320 or 6330. Petitioners may submit another offer in compromise. Petitioners' income and expenses may change. We conclude, however, that there was no abuse of discretion in declining to accept petitioners' offer dated November 2, 2001 , and continuing the lien in effect.

Order and Decision wil

William Negron Ramos, Plaintiff v. Internal Revenue Service, Defendant, U.S. District Court, No. Dist. N.Y.; 1:04-CV-540 (LEK/RFT), January 3, 2005 .
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MEMORANDUM-DECISION AND ORDER ¹



I. Background

K AHN, District Judge: Plaintiff William Negron Ramos ("Negron") filed this action to dispute Defendant Internal Revenue Service's (" IRS ") April 14, 2004 determination ("determination") with respect to his tax liability. Negron seeks to have the Court overturn this determination of the IRS Appeals Office and order in its place Negron's Offer in Compromise ("OIC"). Negron requests damages in the amount of $2,500 for a business investment that he made in reliance on representations made to him by an IRS agent regarding the amount of time it would take the IRS Appeals Office to issue a determination of his tax liability. He also requests that his suspension from the electronic tax filing program based upon his outstanding tax liability be limited to the current tax year only. Currently before the Court are the IRS ' motion to affirm its determination concerning collection action and motion to dismiss Negron's claims for damages and alteration of his suspension from the electronic filing program.



II. Facts

The IRS assessed a trust fund recovery penalty against Negron for the tax period ending September 30, 1995 for failure to pay income and Federal Insurance Contribution Act (FICA) taxes owed by a failed business for which he was a principal. Complaint (Dkt. No. 1) at 3; IRS Motion (Dkt. No. 7) at 2. The original debt was approximately $13,000. Complaint (Dkt. No. 1) at 3. On April 17, 2003, the IRS sent him a Final Notice of Intent to Levy and Notice of Your Right to a Hearing letter. Final Notice (Dkt. No. 7, Ex. B) at 1; Complaint (Dkt. No. 1) at 7. According to this letter, Negron owed $23,121.38, which included the assessment of $12,899.73 plus statutory additions of $10,221.65. Final Notice (Dkt. No. 7, Ex. B) at 2. Negron timely requested a Collection Due Process ("CDP") hearing, seeking a reconsideration of his last OIC because he had been unemployed for six months. Request (Dkt. No. 7, Ex. C) at 1; Complaint (Dkt. No. 1) at 4. The CDP hearing was held on September 9, 2003. Complaint (Dkt. No. 1) at 3. Negron claims that at the close of this hearing, the IRS agent said, "I will evaluate your new offer, I will at least like to recover the original debt, but I would not be able to get back to you probable [ sic] until next month." Id.

Negron has been unemployed since November 2002, and his employment benefits ceased in October 2003. Id. After the termination of his unemployment benefits, he started a business providing accounting services, including tax preparation. Id. At the end of October, Negron called the IRS about the status of his case, and was told by an IRS agent that "I am in the middle of finishing another case, your case is next." Id.

Negron was previously authorized to participate in the IRS ' electronic tax filing program, but had to be readmitted into the program. Id. He borrowed and invested approximately $2,500 and began the process for readmission. Id. On February 2, 2004, Negron was denied authorization to participate in the program because, although he was trying to rectify the issue, he still had a balance due to the IRS . Program Denial Letter (Dkt. No. 1) at 10. Negron wrote a letter to appeal that denial, explaining that his case was still being decided by the IRS Appeals Office. Program Appeal (Dkt. No. 1) at 12. On February 17, 2004, his appeal of the February 2 decision was denied because, regardless of his situation, his civil penalty issue remained unresolved and his balance was still unpaid. Program Appeal Denial (Dkt. No. 1) at 13. He was suspended from participation in the program until January 1, 2006. Id. This denial stated that Negron had a right to appeal that decision. Id. Negron contends that between February 1 and April 15, 2004, he had 123 inquiries regarding tax preparation services, but he was only able to prepare seven tax returns because the other 116 people wanted electronic filing. Complaint (Dkt. No. 1) at 3.

On April 14, 2004, the IRS Appeals Office issued a Notice of Determination Concerning Collection Action(s) Under Section 6320 and/or 6330, which stated that the collection action proposed by the IRS could resume and that the OIC submitted by Negron was denied. Determination (Dkt. No. 1) at 7-8. Negron timely commenced this proceeding on May 13, 2004, seeking judicial review of this determination. Complaint (Dkt. No. 1). Negron also seeks $2,500 in damages for his business investment and for a reduction in his suspension from the electronic tax filing program. Id. at 4.



III . Discussion

A. Motion to Affirm IRS Determination

This Court has jurisdiction to review an IRS determination pursuant to 26 U.S.C. §6330(d)(1)(B), which states in pertinent part that a "person may, within 30 days of a determination under this section, appeal such determination ... (B) to a district court of the United States" when, as in this case, the Tax Court does not have jurisdiction. 26 U.S.C. §6330(d)(1)(B); see Pelliccio v. United States [ 2003-1 USTC ¶50,293], 253 F.Supp.2d 258, 262 (D. Conn. 2003); see also Anderson v. Comm'r of Internal Revenue [ CCH Dec. 54,071(M)], 80 T.C.M. (CCH) 461 (2000) (Because the Tax Court's jurisdiction is generally limited to income, estate, gift, and certain excise taxes, it does not have jurisdiction to review an employment tax liability determination under §6330. When the underlying tax liability is not at issue, as is true in this case, the court reviews the determination for abuse of discretion. Pelliccio [ 2003-1 USTC ¶50,293], 253 F.Supp. at 262. For judicial review of administrative appeals, a decision "would be an abuse of discretion if it were made without a rational explanation, inexplicably departed from established policies, or rested on an impermissible basis, or ... on other considerations that Congress could not have intended to make relevant." MCRA Info. Servs. v. United States [ 2000-2 USTC ¶50,683], 145 F.Supp.2d 194, 199 (D. Conn. 2000) (citing Wong Wing Hang v. I.N.S., 360 F.2d 715, 719 (2d Cir. 1966)) (internal quotations omitted).

Pursuant to §6330(c)(3), in making a determination, the IRS officer must take into consideration (1) the verification that "the requirements of any applicable law or administrative procedure have been met"; (2) the issues raised by the taxpayer, which may include spousal defenses, challenges to the appropriateness of collection actions, and offers of collection alternatives; and (3) "whether any proposed collection action balances the need for efficient collection of taxes with the legitimate concern of the person that any collection action be no more intrusive than necessary." 26 U.S.C. §6330(c).

The IRS officer considered each of the three criteria prior to issuing the determination. The Summary and Recommendation included with the Notice of Determination explains how the requirements of applicable laws and administrative procedures were met and how the levy balanced the need for efficient collection with taxpayer concern that the collection action be no more intrusive than necessary. Determination (Dkt. No. 1) at 7-8. Negron did not raise anything relating to these issues at the hearing, nor does he challenge these conclusions in his complaint.

At the hearing, Negron did propose an OIC to reduce his overall liability to $8,000, the acceptance of which he also requests in his complaint. Id.; Complaint (Dkt. No. 1) at 3-4. The IRS has the authority to compromise any civil liability pursuant to 26 U.S.C. §7122(a). Regulations promulgated under that section give broad discretion to the IRS to determine whether an OIC will be accepted. 26 C.F.R. §301.7122-1(a)(1). There are three grounds that make an OIC eligible for acceptance, namely (1) doubt as to liability; (2) doubt as to collectibility; and (3) promotion of effective tax administration ("ETA") when collection of the tax liability would cause the taxpayer economic hardship. 26 C.F.R. §301.7122-1(b)(1)-(3)(i).

The IRS officer determined that Negron did not question the liability, and that he had the income and/or assets available to pay it in full. Determination (Dkt. No. 1) at 7-8. Further, the officer found that collection of the full liability would not cause economic hardship. Id. The IRS officer analyzed Negron's current financial circumstances, as well as his ability to obtain employment based upon his education, experience, and overall good health. Id. He concluded that his unemployment did not appear to be permanent, and that it would not be an economic hardship considering that his spouse was employed, his at-home adult children assist him financially, and he can meet his basic living expenses. Id. Further, the IRS officer noted that he had or had access to assets sufficient to pay the entire liability. Id.

If none of the three grounds listed above are applicable, the IRS may compromise to promote ETA where "compelling public policy or equity considerations identified by the taxpayer provide a sufficient basis for compromising the liability." 26 C.F.R. §301.7122-1(b)(3)(ii). For this to apply, there must exist exceptional circumstances which would cause public confidence in the fair administration of the tax laws to be undermined. Id. The taxpayer has the burden of demonstrating such circumstances. Id. The IRS found that no exceptional circumstances existed, and Negron did not allege any in his complaint. Determination (Dkt. No. 1) at 8.

In its determination, the IRS fully addressed all of the factors contained in the regulations for the acceptance of an OIC. There are no allegations by Negron that the IRS officer failed to consider any information, or that any of the factual findings were incorrect. Therefore, the Court finds no basis to conclude that the IRS abused its discretion, and the motion to affirm is granted. See, e.g., Pelliccio [ 2003-1 USTC ¶50,293], 253 F.Supp.2d at 262. Accordingly, Negron's request that his liability be reduced to $8,000 is denied.

B. Motion to Dismiss

1. Standards

A motion to dismiss for failure to state a claim upon which relief can be granted pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure must be denied "'unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.'" Cohen v. Koenig, 25 F.3d 1168, 1172 (2d Cir. 1994) (quoting Conley v. Gibson, 355 U.S. 41, 45-46 (1957)). In assessing the sufficiency of a pleading, the Court must "assume all well-pleaded factual allegations to be true, and ... view all reasonable inferences that can be drawn from such allegations in the light most favorable to the plaintiff." Dangler v. New York City Off Track Betting Corp., 193 F.3d 130, 138 (2d Cir. 1999). Consideration is limited to the complaint, written instruments that are attached to the complaint as exhibits, statements or documents that are incorporated in the complaint by reference, and documents on which the complaint heavily relies. See Chambers v. Time Warner, Inc., 282 F.3d 147, 152-53 (2d Cir. 2002) (citations omitted).

A motion to dismiss for lack of subject matter jurisdiction pursuant to Rule 12(b)(1), however, has a different standard. The Court "need not accept as true contested jurisdictional allegations." Shenandoah v. Halbritter, 275 F.Supp.2d 279, 284 (N.D. N.Y. 2003) (Mordue, J.) (citations omitted). A court "may resolve disputed jurisdictional facts by referring to evidence outside the pleadings." Id. (citing Zappia Middle E. Constr. Co. v. Emirate of Abu Dhabi, 215 F.3d 247, 253 (2d Cir. 2000); Filetech S.A. v. France Telecomm. S.A., 157 F.3d 922, 932 (2d Cir. 1998). The burden is on the plaintiff to show that a court has subject matter jurisdiction. Lunney v. United States, 319 F.3d 550, 554 (2d Cir. 2003); Shenandoah, 275 F.Supp. at 285. If at any time it comes to the court's attention, by the parties or otherwise, that subject matter jurisdiction is lacking, the action must be dismissed. Fed. R. Civ. P. 12(h)(3).

2. Damages

Negron requests damages from the IRS in the amount of $2,500 for his business investment, claiming that he spent this amount in reliance upon an IRS officer's representation that he would receive a determination based upon the September 9, 2003 CDP hearing in October 2003. Complaint (Dkt. No. 1) at 3. He also claims that the denial of authorization to participate in the electronic tax filing program resulted from the outstanding case. Id. The IRS contends that the Court does not have jurisdiction to hear this claim. IRS Memo. (Dkt. No. 7) at 9.

The IRS , as part of the United States government, is immune from suit, "except where [C]ongress, by specific statute, has waived sovereign immunity." Liffiton v. Keuker, 850 F.2d 73, 77 (2d Cir. 1988). If Congress has not waived sovereign immunity for this type of claim, the Court does not have subject matter jurisdiction. Chayoon v. Chao, 355 F.3d 141, 142-43 (2d Cir. 2004). Negron does not present any basis upon which to invoke this Court's jurisdiction in his complaint, ² and a review of the possible bases for subject matter jurisdiction demonstrates that this Court does not have jurisdiction to hear this claim.

There are few provisions that allow suit to be brought in a district court for money damages against the IRS . Section 6330, which is the basis for this Court's review of the IRS determination, does not authorize the Court to provide such relief for Negron in this case. Review under §6330(d) is limited to issues raised in the CDP hearing. Pelliccio [ 2003-1 USTC ¶50,293], 253 F.Supp.2d at 261. As Negron's claim is for money invested after the hearing based upon the length of time it took for a post-hearing determination to be issued, this issue could not have been brought up at the hearing. Therefore, this relief cannot be awarded under §6330.

Further, this Court cannot award money damages under the Administrative Procedure Act (" APA "), 5 U.S.C. §702. Congress waived sovereign immunity under the APA for a "legal wrong because of agency action" only when seeking relief other than money damages. 5 U.S.C. §702; see, e.g., Presidential Gardens Assocs. v. United States, 175 F.3d 132, 143 (2d Cir. 1999). Because Negron is seeking monetary damages as compensation, it cannot be allowed under the APA . Additionally, the Federal Torts Claims Act retains sovereign immunity for "[a]ny claim arising in respect of the assessment or collection of any tax." 28 U.S.C. §2680(c).

The exclusive provision for recovering monetary damages in connection with any collection of a federal tax is 26 U.S.C. §7433(a):

If, in connection with any collection of Federal tax with respect to a taxpayer, any officer or employee of the Internal Revenue Service recklessly or intentionally, or by reason of negligence disregards any provision of this title, or any regulation promulgated under this title, such taxpayer may bring a civil action for damages against the United States in a district court of the United States. Except as provided in section 7432, such civil action shall be the exclusive remedy for recovering damages resulting from such actions.

26 U.S.C. §7433(a). ³ However, Negron fails to state a claim under §7433 because he does not allege that any officer violated any provision of the Internal Revenue Code or any regulation promulgated thereunder. CPS Elec. Ltd. v. United States [ 2002-1 USTC ¶50,425], 200 F.Supp.2d 120, 128-29 (N.D. N.Y. 2002) (Scullin, C.J.). The only allegation that Negron makes respecting his investment of $2,500 for which he seeks compensation is the amount of time that it took for the IRS to issue a determination as to his liability, and that it took longer than an IRS officer estimated. Complaint (Dkt. No. 1) at 3. However, this Court is not aware of any statute or regulation that requires a determination to be issued within a certain time period, and Negron has not pointed to any. Furthermore, this section only applies to the collection of a tax, not a determination of a tax, which is what is at issue in this case. See Arnett v. United States [ 95-1 USTC ¶50,319], 889 F.Supp. 1424, 1430 (D. Kan. 1995) ("Congress was undoubtedly aware of the distinction between the 'determination' of a tax and the 'collection' of a tax, and that distinction is clearly evidenced by the language of the statute"). Therefore, §7433 does not provide Negron with an avenue of relief.

3. Suspension from Electronic Filing Program

Negron also asks this Court to alter his suspension from the electronic tax filing program to limit it to the current tax year only. Complaint (Dkt. No. 1) at 4. The Court's authority to review the decision to exclude Negron from the program would have to come from §704 of the APA . See, e.g., Brenner Income Tax Ctrs. Inc. v. Dir. of Practice of the IRS [ 2000-1 USTC ¶50,308], 87 F.Supp.2d 252, 257 (S.D. N.Y. 2000). Although Negron does not phrase his complaint in APA terms, he is proceeding pro se, and this Court will read his complaint liberally. See, e.g., Haines v. Kerner, 404 U.S. 519, 520-21 (1972); Gill v. Pidlypchak, 389 F.3d 379, 385 (2d Cir. 2004). For an agency decision to be reviewed under the APA , it must be a "final agency action." 5 U.S.C. §704. "A preliminary, procedural, or intermediate agency action or ruling not directly reviewable is subject to review on the review of the final agency action." Id.

The IRS contends that Negron is not the subject of a final agency decision, and thus, this Court does not have the authority to review the decision under the APA . IRS Memo. (Dkt. No. 7) at 10. Negron alleges that his appeal of the IRS ' initial decision to suspend him was denied and that he has been suspended from the program. Complaint (Dkt. No. 1) at 3. In this letter denying his first appeal, he was informed of his right to a second appeal. Appeal Denial (Dkt. No. 1) at 13. Negron did not appeal again, and therefore, as of March 2004, the sanction should have been imposed. Id. However, the failure to take advantage of the opportunity to appeal does not necessarily deprive this Court of jurisdiction. Under the APA , "if Congress has not enacted an explicit exhaustion requirement, courts may not exercise their judicial discretion to impose one." Bastek v. Fed. Crop Ins. Corp., 145 F.3d 90, 94 (2d Cir. 1998) (quoting Darby v. Cisneros, 509 U.S. 137, 153-54 (1993)). The Court is not aware of any provision that requires Negron to exhaust all of his administrative remedies before filing suit in district court. It appears that Negron has been subjected to a final agency action, considering that he has no further recourse with the IRS and his suspension should be in effect as of March 2004. Appeal Denial (Dkt. No. 1) at 13. Therefore, the Court will not dismiss this action for a lack of final agency action.

The IRS also contends that Negron fails to state a claim under the APA . IRS Memo. (Dkt. No. 7) at 11. In relevant part, the APA states that agency action, findings, and conclusions can only be set aside when they are "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law." 5 U.S.C. §706(2)(a). "An agency rule may be deemed arbitrary, capricious, or an abuse of discretion 'if the agency has relied on factors which Congress has not intended it to consider, entirely failed to consider an important aspect of the problem, offered an explanation for its decision that runs counter to the evidence before the agency, or is so implausible that it could not be ascribed to a difference in view or the product of agency expertise.'" Henley v. Food & Drug Admin., 77 F.3d 616, 620 (2d Cir. 1996) (quoting Motor Vehicle Mfrs. Assoc. of the United States, Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983)).

The IRS has the authority to develop guidelines and procedures for participation in the electronic tax filing program. Rev. Proc. 2000-31. Authorized electronic filers must adhere to all revenue procedures and publications related to the program, and sanctions for violations include suspension. Id. at §4.04, 7.02. The IRS may suspend an electronic filer for, inter alia, failure to pay any tax liability or assessment of penalties. IRS , Pub. No. 3112, IRS e-file Application and Participation, 15, 25 (2004). This rule is rationally related "to the IRS ' mission of assuring taxpayers that paid preparers understand and will abide by all relevant rules." Brenner [ 2000-1 USTC ¶50,308], 87 F.Supp.2d at 257.

In this case, the IRS suspended Negron from the program because he had a balance due based upon the assessment that is the subject of the instant action. Program Denial Letter (Dkt. No. 1) at 10. On appeal, the IRS considered the issues he raised, but as he still had a balance due, his request for authorization was denied. Appeal Denial (Dkt. No. 1) at 13. Negron does not dispute that he owed money to the IRS or that penalties were assessed against him. Complaint (Dkt. No. 1) at 3. He does not assert any wrongdoing on the part of the IRS officials that made the determination to suspend him from the program. Id. Negron offers no reason for this Court to award him this relief under the APA , other than his desire to make money by preparing and electronically filing tax returns and his understandable frustration with the length of time it took the IRS Appeals Office to make a determination. Id. As Negron does not allege any wrongful action on the part of the IRS specifically respecting the decision to suspend him from the electronic tax filing program, the IRS ' motion to dismiss is granted.



IV. Conclusion

Based on the foregoing discussion, it is hereby

ORDERED, that the IRS ' motion to affirm is GRANTED; and it is further

ORDERED, that the IRS ' motion to dismiss Negron's claim for $2,500 in damages is GRANTED; and it is further

ORDERED, that the IRS ' motion to dismiss Negron's claim for an alteration to his suspension from the electronic tax filing program is GRANTED; and it is further

ORDERED, that Negron's complaint is DISMISSED in its entirety; and it is further

ORDERED, that the Clerk serve a copy of this order on all parties.

¹ For printed publication in the Federal Reporter.

² Negron did not file a response to the IRS ' motions to affirm and to dismiss.

³ Section 7432, regarding the failure

William C. Eberhardt, Jr. and Susan A. Eberhardt, Petitioners v. Commissioner of Internal Revenue, Respondent., T.C. Summary Opinion 2004-147, Docket No. 1918-03S . Filed October 21, 2004.

William C. Eberhardt, Jr. and Susan A. Eberhardt, pro sese. Kevin W. Coy, for respondent.

DEAN, Special Trial Judge: This case was heard pursuant to the provisions of sections 6330(d) and 7463 of the Internal Revenue Code in effect at the time that the petition was filed. Unless otherwise indicated, subsequent section references are to the Internal Revenue Code in effect at all relevant times, and all Rule references are to the Tax Court Rules of Practice and Procedure. The decision to be entered is not reviewable by any other court, and this opinion should not be cited as authority.

The petition in this case was filed in response to a Notice of Determination Concerning Collection Action(s) Under Section 6320 and/or 6330. Pursuant to section 6330(d), petitioners seek review of respondent's determination to proceed with collection of their tax liability of $40,094.22 for 1995. At trial, petitioners also challenged the amount of interest that has accrued on their tax liability. The issues for decision are whether: (1) The Appeals officer abused her discretion in rejecting petitioners' Offer in Compromise (OIC) and sustaining a proposed levy to collect petitioners' unpaid income tax liability; and (2) the Appeals officer should have abated interest assessed with respect to petitioners' liability for the 1995 tax year.

The stipulation of facts and the exhibits received into evidence are incorporated herein by reference. Petitioners resided in Riverside, California, at the time the petition was filed.

Background

A. Examination of Petitioners' Individual Income Tax Return for 1995

On April 15, 1996 , petitioners filed a joint Form 1040, U.S. Individual Income Tax Return, for 1995. On September 23, 1997 , respondent notified petitioners that their 1995 return had been selected for examination. On November 5, 1997 , respondent mailed to petitioners a letter containing a report of proposed adjustments. In that report, respondent determined that petitioners were liable for the 10-percent additional tax for making a premature withdrawal from their retirement plan. On December 2, 1997 , petitioners sent respondent a letter detailing petitioner William C. Eberhardt, Jr.'s (Mr. Eberhardt) disability and relying on that condition as authorization to withdraw retirement funds without penalty.

On December 9, 1997 , respondent notified petitioners that additional issues had been identified for audit with regard to petitioners' 1995 tax year. The letter contained a Form 4564, Information Document Request ( IDR ), which solicited documentation pertaining to petitioners' medical expenses, casualty or theft loss, and income and expense items on petitioners' Schedule C, Profit or Loss From Business, as well as additional information pertaining to Mr. Eberhardt's disability.

On January 22, 1998 , petitioners sent respondent a letter containing additional documentation regarding the issue of Mr. Eberhardt's disability. Also enclosed was a copy of a letter dated May 6, 1996 , in which petitioners were notified that the examination of their 1993 return showed that no change was necessary in the tax reported in that return. Petitioners did not submit any documents pertaining to Mr. Eberhardt's medical expenses or any of the other documents requested in the IDR .

On March 10, 1998 , respondent sent petitioners a second IDR regarding petitioners' medical expenses, casualty or theft loss, and Schedule C income and expenses. On May 2, 1998 , petitioners submitted to respondent documentation pertaining to their claimed casualty or theft loss, which was related to petitioners' pension plan. They did not submit any medical expense or Schedule C documentation.

On May 24, 1998 , petitioners sent respondent a copy of their 1993 Federal income tax return and a copy of a letter respondent sent to petitioners resolving an audit of their 1993 tax year. After reviewing petitioners' 1993 return, respondent's examiner narrowed the scope of the audit of petitioners' 1995 return to their medical expenses and the pension-related casualty or theft loss.

On May 27, 1998 , respondent mailed to petitioners a report proposing adjustments to petitioners' medical expense deductions and the pension-related casualty or theft loss. Petitioners had invested in a self-directed IRA with First Pension Corporation (First Pension). In April 1994, First Pension filed for bankruptcy, and the accounts of their investment trustee, Summit Trust Company, were frozen. At the time of the bankruptcy filing, petitioners' account contained a 5-acre parcel of land that petitioners allege decreased in value while their account was frozen.

On August 10, 1998 , petitioners submitted to respondent additional documents they had prepared pertaining to the casualty or theft loss issue. Respondent reviewed the documentation and on October 26, 1998 , notified petitioners that respondent's determination had not changed. Respondent also provided petitioners with copies of cases supporting respondent's decision to disallow petitioners' casualty or theft loss.

On November 25, 1998 , respondent sent petitioners an updated report proposing adjustments to petitioners' medical expense and casualty or theft loss deductions as well as an additional case supporting respondent's decision regarding the casualty or theft loss issue. Respondent also sent petitioners a separate letter soliciting an extension of the period of limitations within which to audit petitioners' 1995 return. On December 14, 1998 , petitioners signed a Form 872, Consent to Extend Time to Assess Tax, extending to June 30, 2000 , the period within which respondent could assess the tax due for petitioners' 1995 tax year.

Respondent sent petitioners a revised audit report dated January 6, 1999 , disallowing petitioners' medical expenses for lack of substantiation and also disallowing their casualty or theft loss. On January 11, 1999 , respondent closed out the audit of petitioners' 1995 return as unagreed and forwarded the case to the Appeals Office.

B. Review of Petitioners' Return by the Appeals Office

Petitioners' case file was received in Appeals on or about January 27, 1999 , and Appeals Officer Marilyn Radford (Ms. Radford) was assigned to handle the case. Petitioners agreed to hold their initial meeting with Ms. Radford on March 19, 1999 . On March 18, 1999 , petitioners sent her information setting forth their position on the audit. Ms. Radford asked for a postponement of the initial meeting so she could review the information.

Ms. Radford held telephone conferences with petitioners on March 24, 1999 , and March 26, 1999 . Petitioners complained that the IRS handled their audit unprofessionally and caused unnecessary delays. Petitioners also blamed the IRS for allowing a qualified plan to "defraud" its investors and for the resulting loss in the value of their IRA. Petitioners did not discuss the medical expense issue at all.

Ms. Radford prepared an Appeals Case Memorandum on April 22, 1999 , in which she recommended disallowing petitioners' medical expenses for lack of substantiation. Petitioners provided only a typed list of expenses incurred, not actual receipts or statements as requested in the IDRs. Ms. Radford also recommended disallowing petitioners' claimed casualty or theft loss because petitioners still owned the property. On May 7, 1999 , respondent issued a notice of deficiency disallowing the deductions and determining a deficiency of $30,771.

C. Petitioners' Tax Court Case

On August 9, 1999 , petitioners filed a petition with this Court seeking a redetermination of the 1995 tax deficiency determined by respondent. Prior to trial, respondent conceded the issue pertaining to petitioners' medical expenses on Schedule A. At trial, the Court entered a decision for respondent sustaining the disallowance of the casualty or theft loss. Eberhardt v. Commissioner, T.C. Summary Opinion 2000-163. Petitioners filed a Motion for Reconsideration which was denied. Subsequently, respondent assessed the tax deficiency and interest.

D. Respondent's Collection Efforts

On April 15, 2001 , respondent withheld petitioners' 2000 Federal income tax refund of $754.22 and applied it to their outstanding 1995 tax liability. Between April 23, 2001 , and July 2, 2001 , respondent mailed to petitioners three separate notices of balance due with respect to the unpaid liability. On December 3, 2001 , respondent withheld petitioners' midyear 2000 refund of $600 and applied it to petitioners' outstanding 1995 tax liability.

On February 7, 2002 , respondent issued a Final Notice, Notice of Intent to Levy and Notice of Your Right to a Hearing (Notice of Intent to Levy), with respect to petitioners' taxable year 1995. On February 27, 2002 , in response to the Notice of Intent to Levy, respondent received petitioners' Form 12153, Request for a Collection Due Process Hearing (hearing).

E. Petitioners' Section 6330 Hearing

Appeals Officer Wendy Clinger (Ms. Clinger) was assigned to handle petitioners' hearing. Petitioners met with her for their hearing on November 21, 2002 .

During the hearing, petitioners disputed their underlying tax liability. Ms. Clinger advised them that they had already had an opportunity to challenge the liability when they had a trial before the Tax Court and could not do so again in the hearing. Ms. Clinger explained that petitioners could discuss the collection alternatives available to petitioners to satisfy their tax liability.

At the hearing, petitioners submitted an OIC offering $1,000 to satisfy their outstanding 1995 tax liability which totaled over $49,000, including accumulated interest. The $1,000 would be paid within 90 days of written acceptance of their OIC. Petitioners requested that their OIC be accepted in the interests of effective tax administration, or doubt as to collectibility.

In support of their grounds for effective tax administration, petitioners revisited the facts and circumstances of their prior Tax Court proceeding. Petitioners claimed that they cannot pay the tax in full because they have a substantial amount of short-term debt, the expenses of deferred maintenance on their home, and the need to fund their retirement savings over a limited number of years.

As to doubt as to collectibility, petitioners pointed to the Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, they submitted to Ms. Clinger. On their Form 433-A, petitioners indicated that they owned their home located in Riverside, California, which they valued at $350,000 with mortgages of $331,290. Petitioners also have retirement accounts valued at $24,815.65 and bank accounts valued at $606.75. Petitioners indicated that their monthly income is $10,834 and their monthly expenses are $12,571. Monthly expenses of $4,473 are attributable to petitioners' debts.

Ms. Clinger's analysis of petitioners' monthly income over allowable expenses revealed the following:

                                                             Allowable    

                Income              Expense Type         Expense Amount   

                                 National standard1                       

                                 National standard                        

                                 expenses are for                         

                               clothing and clothing                      

                                  services, food,                         

                              housekeeping supplies,                      

                              personal care products                      

                                 and services. See                        

                                    Schulman v.                           

                             Commissioner, T.C. Memo.                     

                                   2002-129 n.6.                          

                $10,834                                       $1,235      

                                 Housing & utilities           1,223      

                                   Transportation              1,070      

                                     Health care                382       

                                        Taxes                  1,546      

                                        Total                  5,456      

Ms. Clinger concluded that petitioners had the ability to pay $5,378 per month --the net difference between petitioners' monthly income and monthly allowable expenses --toward their outstanding 1995 tax liability. Petitioners declined Ms. Clinger's offer of an installment agreement. Petitioners also requested an abatement of interest on the deficiency because they feel the audit of their 1995 tax year was prolonged due to mistakes of the IRS employees who performed the audit.

Upon consideration of petitioners' submitted documentation, Ms. Clinger prepared a Form 1271-c, Rejection or Withdrawal Memorandum, recommending that petitioners' OIC be rejected. Ms. Clinger concluded that, given petitioners' available asset equity and monthly disposable income, petitioners have the ability to pay the liability in full via an installment agreement. She also noted that petitioners did not demonstrate any special circumstances or grounds for an exception for effective tax administration. On December 12, 2002 , Ms. Clinger notified petitioners that respondent was rejecting their OIC.

On January 9, 2003 , Ms. Clinger sent petitioners a Notice of Determination Concerning Collection Action Under Section 6330 sustaining respondent's proposed levy as the appropriate means of collecting petitioners' unpaid liability for the 1995 tax year. She also sent petitioners another copy of the letter rejecting their OIC. Additionally, Ms. Clinger sent petitioners a Notice of Full Disallowance --Final Determination denying petitioners' request for an abatement of interest on their 1995 deficiency assessment.

Discussion

Section 6330(c) prescribes the matters that a person may raise at an Appeals Office hearing. Section 6330(c)(2)(A) provides that a person may raise collection issues such as spousal defenses, the appropriateness of the Commissioner's intended collection action, and possible alternative means of collection. See Sego v. Commissioner, 114 T.C. 604, 609 (2000); Goza v. Commissioner, 114 T.C. 176, 180 (2000). In addition, section 6330(c)(2)(B) establishes the circumstances under which a person may challenge the existence or amount of his or her underlying tax liability. Section 6330(c)(2)(B) provides:

(2) Issues at Hearing. --

* * * * * * *

(B) Underlying Liability. --The person may also raise at the hearing challenges to the existence or amount of the underlying tax liability for any tax period if the person did not receive any statutory notice of deficiency for such tax liability or did not otherwise have an opportunity to dispute such tax liability.

A taxpayer, however, is precluded from relitigating issues raised and considered in any previous Appeals hearing or any other administrative or judicial proceeding in which the taxpayer meaningfully participated. Sec. 6330(c)(4); Katz v. Commissioner, 115 T.C. 329, 339 (2000).

Petitioners not only received a notice of deficiency for tax year 1995, they also litigated the matter before this Court. Therefore, they are precluded from challenging the existence or amount of their 1995 tax liability in a subsequent section 6330 hearing. Sec. 6330(c)(2)(B).

Where, as is the case here, the validity of the underlying tax liability is not properly placed at issue, the Court will review the administrative determination of the Appeals Office for abuse of discretion. Sego v. Commissioner, supra at 610; Goza v. Commissioner, supra at 181-183. The Court reviews only whether the Appeals officer's refusal to accept petitioners' OIC was arbitrary, capricious, or without sound basis in fact or law. See Woodral v. Commissioner, 112 T.C. 19, 23 (1999).

A. Petitioners' Offer in Compromise

Section 7122(a) authorizes a compromise of a taxpayer's Federal tax liability. An OIC may be accepted where there is doubt as to liability or collectibility, or where it would promote effective tax administration. Sec. 301.7122 -1(b), Proced. & Admin. Regs.

Doubt as to liability does not exist where the liability has been established by a final court decision or judgment concerning the existence or amount of the liability. Sec. 301.7122 -1(b)(1), Proced. & Admin. Regs. Doubt as to collectibility exists in any case where the taxpayer's assets and income are less than the full amount of the liability. Sec. 301.7122 -1(b)(2), Proced. & Admin. Regs.

After reviewing petitioners' financial situation, Ms. Clinger determined that their financial situation enabled them to pay the entire tax liability within a reasonable time. Petitioners' financial information indicated that both petitioners had gainful employment and that their monthly income exceeded their necessary living expenses, thereby allowing the full payment of their liability.

If there is no doubt as to liability or collectibility, a compromise may be entered into to promote effective tax administration when collection of the full liability will create economic hardship within the meaning of section 301.6343 -1, Proced. & Admin. Regs. Sec. 301.7122 -1(b)(3)(i), Proced. & Admin. Regs. Economic hardship is defined as the inability of the taxpayer to pay his or her reasonable living expenses. Sec. 301.6343 -1(b)(4), Proced. & Admin. Regs.

Factors supporting a determination that collection would cause economic hardship within the meaning of section 301.7122 -1(b)(3)(i), Proced. & Admin. Regs., include, but are not limited to:

(A) Taxpayer is incapable of earning a living because of a long term illness, medical condition, or disability, and it is reasonably foreseeable that taxpayer's financial resources will be exhausted providing care and support during the course of the condition;

(B) Although taxpayer has certain monthly income, that income is exhausted each month in providing for the care of dependents with no other means of support; and

(C) Although taxpayer has certain assets, the taxpayer is unable to borrow against the equity in those assets and liquidation of those assets to pay outstanding tax liabilities * * *.

Sec. 301.7122 -1(c)(3)(i)(A), (B) and (C), Proced. & Admin. Regs.

Petitioners claim they cannot pay the tax in full because they have a substantial amount of short-term debt, the expenses of deferred maintenance on their home, and the need to fund their retirement savings over a limited number of years. These circumstances fall short of qualifying as economic hardship within the meaning of section 301.6343 -1(b)(4), Proced. & Admin. Regs.

When there are no grounds for compromise under the provisions pertaining to doubt as to liability, doubt as to collectibility, or effective tax administration due to economic hardship, the IRS may compromise a liability to promote effective tax administration where compelling public policy or equity considerations identified by the taxpayer provide a sufficient basis for compromising the liability. Sec. 301.7122 -1(b)(3)(ii), Proced. & Admin. Regs. Compromise will be justified only where, due to exceptional circumstances, collection of the full liability would undermine public confidence that the laws are being administered in a fair and equitable manner. A taxpayer proposing such a compromise will be expected to demonstrate circumstances that justify compromise even though a similarly situated taxpayer may have paid his liability in full. Id.

Petitioners have failed to demonstrate that there are any circumstances showing that collection of their full liability would undermine public confidence that the tax laws are being administered fairly and equitably. Petitioners have not shown evidence sufficient to warrant consideration of an OIC based on effective tax administration grounds.

Having reviewed the entire record, including the financial information presented to Ms. Clinger, the Court cannot find that the determination rejecting petitioners' OIC was an abuse of discretion. See Van Vlaenderen v. Commissioner, T.C. Memo. 2003-346; Crisan v. Commissioner, T.C. Memo. 2003-318; Willis v. Commissioner, T.C. Memo. 2003-302. Accordingly, collection by levy of petitioners' unpaid 1995 tax liability reflected in the Notice of Determination may proceed.

B. Abatement of Interest

If, as part of a section 6330 hearing, a taxpayer makes a request for abatement of interest, the Court has jurisdiction over the request for abatement of interest that is the subject of the Commissioner's collection activities. Katz v. Commissioner, 115 T.C. at 340-341.

This Court may order an abatement of interest only if there is an abuse of discretion by the Commissioner in failing to abate interest. See sec. 6404(i) (formerly sec. 6404(g)). In order to demonstrate an abuse of discretion, a taxpayer must prove that the Commissioner exercised his discretion arbitrarily, capriciously, or without sound basis in fact or law. See Rule 142(a); Lee v. Commissioner, 113 T.C. 145, 149 (1999); Woodral v. Commissioner, 112 T.C. at 23.

Under preamendment section 6404(e),² the Commissioner "may abate the assessment of interest on any payment of tax to the extent that any error or delay in payment is attributable to an officer or employee of the IRS being erroneous or dilatory in performing a ministerial act." Lee v. Commissioner, supra at 148. A ministerial act does not include a "decision concerning the proper application of federal tax law (or other federal or state law)". Sec. 301.6404 -2(b)(2), Proced. & Admin. Regs.

An error or delay by the Commissioner can be taken into account only if: (1) It occurs after the Commissioner has contacted the taxpayer in writing with respect to the deficiency, and (2) no significant aspect of the error or delay is attributable to the taxpayer. See sec. 6404(e)(1); Krugman v. Commissioner, 112 T.C. 230, 239 (1999); Hawksley v. Commissioner, T.C. Memo. 2000-354. Section 6404(e)(1) "does not therefore permit the abatement of interest for the period of time between the date the taxpayer files a return and the date the IRS commences an audit, regardless of the length of that time period." H. Rept. 99-426, at 844 (1985), 1986-3 C.B. (Vol. 2) 1, 844; S. Rept. 99-313, at 208 (1986), 1986-3 C.B. (Vol. 3) 1, 208.

Petitioners request abatement partly because respondent did not notify them that their return had been selected for examination until September 23, 1997 . They argue that such a length of time constitutes a ministerial error by respondent and warrants an abatement of interest.

For purposes of section 6404(e), an error or delay cannot be considered for the period before September 23, 1997 , because that is the date on which respondent first contacted petitioners in writing regarding the deficiency for 1995. See sec. 6404(e); Krugman v. Commissioner, supra at 239; Nerad v. Commissioner, T.C. Memo. 1999-376.

Petitioners also assert that the audit was unreasonably lengthy because several different IRS employees participated in the audit. There is no evidence in the record that any of the employees assigned to petitioners' audit mishandled any portion of the audit. There were no significant delays by respondent replying to contacts or correspondence from petitioners. The greatest delays came in petitioners' responses to respondent's document requests.

Respondent's decisions on how to proceed during the audit necessarily required the exercise of judgment and thus cannot be ministerial acts. Additionally, the mere passage of time does not establish error or delay by the Commissioner in performing a ministerial act. Lee v. Commissioner, supra at 150. The Court, therefore, concludes that the passage of 19 months during the audit of petitioners' 1995 tax year is not attributable to error or delay in performing a ministerial act.

Reviewed and adopted as the report of the Small Tax Case Division.

Decision will be entered for respondent.

² Sec. 6404(e) was amended under sec. 301 of the Taxpayer Bill of Rights 2, Pub. L. 104-168, 110 Stat. 1457 (1996), to permit the Secretary to abate interest with respect to an "unreasonable" error or delay resulting from "managerial" and ministerial acts. This amendment, however, applies to interest accruing with respect to deficiencies or payments of tax for years beginning after July 30, 1996 ; therefore, the amendment is inapplicable to the case at bar. See Woodral v. Com

 
Charles G. and Elizabeth A. Fargo v. Commissioner, Docket No. 9492-02L . T.C. Memo. 2004-13. Filed January 16, 2004.

Dennis N. Brager, for the petitioners. Linette B. Angelastro, for the respondent.

MEMORANDUM OPINION

HOLMES, Judge: The petitioners, Charles and Elizabeth Fargo, bought two tax shelters 20 years ago. When respondent disallowed their losses and sent them a notice of deficiency in 2000, time and the compounding of interest had nearly quadrupled their total bill. Petitioners paid the tax portion of the deficiencies in full. We consider whether respondent abused his discretion under section 6330 in refusing to compromise the remainder.

Background

Petitioners filed joint returns for the tax years 1983 and 1984. For 1983, they claimed a Schedule E loss of $30,767 attributable to their interest in a partnership named Jackson & Associates (Jackson). For 1984, they claimed Schedule E losses of $2,749 attributable to their interest in Jackson and $28,996 attributable to their interest in another partnership, Smith & Asher Associates (Smith/Asher). Both Jackson and Smith/Asher were partners in other partnerships: Jackson in a partnership called Wilshire West Associates (Wilshire), and Smith/Asher in a partnership called Redwood Associates (Redwood). All these partnerships were subject to the TEFRA provisions of sections Secs. 6221 - 6234.¹

These partnerships were all affiliated with a group of tax shelters known as the Swanton Coal Programs, a coal mining venture which produced much more litigation than coal. See, e.g., Smith v. Commissioner [Dec. 45,807], 92 T.C. 1349 (1989); Beagles v. Commissioner [Dec. 55,075(M)], T.C. Memo. 2003-67; Kelley v. Commissioner [Dec. 49,360(M)], T.C. Memo. 1993-495. In Kelley, we concluded that "The formation and operation of the Swanton Coal Programs appear to have as substance little more than a grandiose serving of whimsy", and that they were "nothing more than an elaborate scam to provide highly leveraged deductions for nonexistent expenses." We therefore disallowed the partnership losses at issue, and sustained the Commissioner's imposition of increased interest pursuant to section 6621(c) because the programs were so clearly tax-motivated transactions.

Because the programs used tiered partnerships, however, our decision in Kelley did not automatically resolve the tax liability of partners in Jackson or Smith/Asher, and the Commissioner continued to negotiate with the tax matters partners (TMPs) for these partnerships until finally reaching closing agreements with both of them by mid-1999. After Jackson and Smith/Asher concluded their closing agreements, respondent contacted petitioners in November 1999, sending them a notice of examination that proposed changes to their 1983 and 1984 returns. In March 2000, respondent sent out notices of deficiency. Petitioners paid the entire tax portion of their outstanding 1983 and 1984 deficiencies (amounting to $23,977), but did not pay any of the accrued interest (which had grown to more than $100,000). After assessing the deficiencies, respondent sent petitioners a final notice of intent to levy. Petitioners timely requested a hearing, the focus of which was their offer to compromise the nearly two decades of compound interest for $7,500. The Appeals officer rejected their offer and determined that a levy was appropriate. This action followed. The case was calendared for trial in California, where the Fargos resided when they filed their petition. The parties stipulated the relevant facts, and moved to submit the case for decision without trial under Rule 122.

Discussion

Section 7122(c) directs the Secretary to prescribe guidelines for determining whether to accept or reject specific offers in compromise. Under section 301.7122 -1T(b), Temporary Proced. & Admin. Regs., 64 Fed. Reg. 39024 (July 21, 1999),² there are three grounds for compromise: Doubt as to liability, doubt as to collectibility, and promotion of effective tax administration. Petitioners argue that their compromise offer met two of the temporary regulations' separate standards for acceptance "in furtherance of effective tax administration" --collection of the full amount would cause them economic hardship, see sec. 301.7122 -1T(b)(4)(i), Temporary Proced. & Admin. Regs., supra; and, even if it did not, would because of "exceptional circumstances" be "detrimental to voluntary compliance by taxpayers" by creating doubt as to the fair administration of the tax laws, see sec. 301.7122 -1T(4)(ii), Temporary Proced. & Admin. Regs., supra.

Respondent rejected both arguments. He concluded that petitioners could fully satisfy both their tax debt and their foreseeable expenses without economic hardship. He also concluded that they had failed to show "exceptional circumstances" sufficient to justify accepting their compromise.

We examine each issue in turn, mindful that our review under section 6330 is for abuse of discretion. See Davis v. Commissioner [Dec. 53,969], 115 T.C. 35, 39 (2000). This standard does not ask us to decide whether in our own opinion the offer in compromise should have been accepted, but whether the Commissioner exercised his "discretion arbitrarily, capriciously, or without sound basis in fact or law." Woodral v. Commissioner [Dec. 53,206], 112 T.C. 19, 23 (1999).

A. Hardship

Petitioners suggest that although they currently enjoy fairly substantial means, their economic future is tainted by a diagnosis that petitioner Charles Fargo suffers from a progressive neurological condition that may eventually require round-the-clock nursing care. They claim that such care is so expensive (almost $90,000/year, by their estimate) that it would cause them to wholly consume their liquid assets in 10 years. They argue that respondent should have accepted their offer as a viable alternative to a levy because of this foreseeable economic hardship.

As we already noted, we look to respondent's determination for anything that runs counter to established law or suggests the lack of a "sound basis in fact or law." In that light, we decline to second-guess his determination that petitioners' resources are sufficient to warrant collection of the entire outstanding liability. The record compiled by respondent indicates that petitioners possess substantial wealth --over a million dollars in total assets (if equity in real estate is counted) and a large income even in their retirement. While petitioners certainly present a legitimate view of their possible future needs, we do not find that the record shows respondent to have abused his discretion in concluding that petitioners can pay their debt without suffering substantial economic hardship.

B. Exceptional Circumstances

Petitioners also renew here the arguments in favor of a finding of "exceptional circumstances" that they made to respondent. First, they contend the IRS had no justification for its extraordinary delay in assessing their unpaid tax liability after we decided Kelley v. Commissioner, supra. Quoting extensively from legislative history, petitioners argue that the delay between the adjudication of the underlying tax issues in 1993 and the first contact they received from the IRS in 1999 falls within the class of situations contemplated by Congress when it described the offer in compromise program as a method for resolving "longstanding cases * * * which have accumulated as a result of delay in determining the taxpayer's liability." H. Conf. Rept. 105-599, at 289 (1998), 1998-3 C.B. 747, 1043.

Petitioners suggest that the IRS was at the very least complicit, and perhaps negligent or malicious, in allowing their original tax savings of $23,977 to balloon into a total liability of more than $127,000. They allege that this IRS conduct should have compelled respondent to accept their offer in compromise.

Respondent, while acknowledging the length of time that passed between our decision in Kelley v. Commissioner [Dec. 49,360(M)], T.C. Memo. 1993-495, and his contacting petitioners, contends that it was due not to any improprieties by the IRS , but rather to the deliberate pace at which TEFRA partnership audits may progress. The partnership interests which petitioners held were not in the partnerships directly at issue in Kelley, but rather in partnerships which themselves were partners in the partnerships that Kelley analyzed. This tiered structure meant that under TEFRA, even after Kelley, respondent had to negotiate a closing agreement with the TMPs of the partnerships in which petitioners had an interest before starting collection activity at their level.

The Appeals officer determined that the delay in petitioners' learning of their snowballing liability is a matter they should address with the TMPs of their partnerships. We agree. TEFRA contemplates that it is generally a TMP 's responsibility to keep his partners informed.³ Sec. 6233(g); sec. 301.6223 (g)-1T, Temporary Proced. & Admin. Regs., 52 Fed Reg. 6785 (Mar. 5, 1987). We decline to decide that the failure of the IRS to contact petitioners sooner is reason to compel respondent to accept a settlement of approximately 7 percent of petitioners' interest liability.

We do agree with petitioners that there is something disconcerting about their not receiving notice of the ramifications for them of the Swanton coal litigation until 1999. Indeed, respondent's determination notes that petitioners may have received no correspondence at all from their TMPs since 1991. We believe however, that if there is a remedy, it does not lie in denying the Government the interest to which it is legally entitled.

Petitioners also call our attention to the decision in Beagles v. Commissioner [Dec. 55,075(M)], T.C. Memo. 2003-67, which indicates that the Commissioner abated over 6 years' worth of interest arising out of a similar liability for the taxpayers in that case, which also arose from the Swanton Coal Programs. Petitioners argue that this makes it inequitable for respondent to have denied their offer in compromise, which sought only similar relief.

We are unpersuaded. The Commissioner's decision to grant interest abatement to one Swanton participant would hardly suffice to show that he abused his discretion in denying another's request for an offer in compromise. Different factors are relevant to each form of relief, and of course, different taxpayers face different circumstances: in Beagles, the Commissioner may have abated interest at least in part because the taxpayer became terminally ill during the collection process. Id.

In any event, review for abuse of discretion allows different decisions even in similar cases, so long as none represent a clear error in judgment by the decisionmaker. Rasbury v. IRS [94-2 USTC ¶50,319], 24 F.3d 159, 168 (11th Cir. 1994).

Decision will be entered for respondent.

¹ Section references are to the Internal Revenue Code of 1986, as amended. Secs. 6221 to 6234 were added by the Tax Equity and Fiscal Responsibility Act (TEFRA) of 1982, Pub. L. 97-248, sec. 402(a) 96 Stat. 648, and provide for the determination of partnership items at the partnership, rather than at the individual partner, level. The Commissioner is generally unable to assess a deficiency relating to a TEFRA partnership item until after the completion of partnership-level proceedings. See generally Katz v. Commissioner [Dec. 54,207], 116 T.C. 5, 8 (2001), revd. on other grounds [2003-2 USTC ¶50,557] 335 F.3d 1121 (10th Cir. 2003).

² As petitioners submitted their offer in compromise after July 21, 1999, and before July 18, 2002, it is governed by the temporary regulations that were then in force. (The portions relevant to this case survived in substantially similar form in the final regulations at sec. 301.7122-1(b), Proced. & Admin. Regs.)

³ One part of respondent's determination regarding the long delay between Kelley and assessment does seem mistaken. The Appeals officer found that "no link had been established" between the Swanton Coal Programs and petitioners' tax liabilities. This statement is fundamentally in error if it was intended to mean that Kelley did not at least indirectly affect petitioners' tax liabilities. Nevertheless, it appears to be dictum. Regardless of the interrelation of the partnerships involved in the Swanton Programs, respondent is correct that legal responsibility for more promptly notifying petitioners and trying to resolve their partnerships' tax issue

 

Keith and Cherie Orum v. Commissioner, Dkt. No. 18317-02L , 123 TC 1, No. 1, July 1, 2004 .

Keith Orum, pro se; Sean R. Gannon, for respondent.

Ps filed joint Federal income tax returns for 1998 and 1999 but did not make full payment of the tax liabilities. On June 23, 2000 , R sent Ps by certified mail a Notice of Intent to Levy and Notice of Your Right to a Hearing for 1998. Ps did not file a sec. 6330, I.R.C., hearing request in response to this notice. On Dec. 14, 2001 , R sent Ps a Notice of Intent to Levy and Notice of Your Right to a Hearing for 1998 and 1999. P sent R a sec. 6330, I.R.C., hearing request dated Dec. 31, 2001 , for 1998 and 1999.

In February 2002, Ps submitted an offer-in-compromise. R rejected the request on the basis of financial information submitted by Ps.

R granted Ps an equivalent hearing for 1998 and a sec. 6330, I.R.C., hearing for 1999. During the hearings, R requested additional financial information from Ps by Aug. 9, 2002 , to consider an installment agreement. Ps failed to timely provide the additional information. R issued a decision letter for 1998 and a notice of determination for 1999 which concluded that the proposed collection activities would be sustained.

Ps filed a petition to dispute the decision letter and the notice of determination. R filed a motion to dismiss for lack of jurisdiction with respect to 1998.

1. Held: The June 23, 2000 , notice of intent to levy was sent to the last known address of Ps.

2. Held, further, R's motion to dismiss for lack of jurisdiction is granted. Ps did not file a sec. 6330, I.R.C., hearing request within 30 days of the June 23, 2000 , notice of intent to levy. See sec. 6330(a)(3), I.R.C. The Dec. 14, 2001 , notice of intent to levy did not entitle petitioners to a sec. 6330, I.R.C., hearing. Sec. 301.6330-1(b)(2), Q&A-B2, Q&A-B4, Proced. & Admin. Regs. The decision letter subsequently issued does not provide a basis for the Court's jurisdiction under sec. 6330(d)(1), I.R.C. See Moorhous v. Commissioner [Dec. 54,316], 116 T.C. 263, 270 (2001); Kennedy v. Commissioner [Dec. 54,315], 116 T.C. 255, 262 (2001).

3. Held, further, R did not abuse his discretion in issuing the notice of determination for 1999, and the proposed collection action is sustained.

OPINION

HAINES, Judge: Respondent sent petitioner Keith Orum (Mr. Orum) and petitioner Cherie Orum (Mrs. Orum) a Decision Letter Concerning Equivalent Hearing Under Section 6320 and/or 6330 (decision letter) for 1998 and a Notice of Determination Concerning Collection Action(s) Under Section 6320 and/or 6330 (notice of determination) for 1999.

The issues for decision are: (1) Whether the Court lacks jurisdiction under section 6330(d)(1)¹ with regard to 1998; and (2) whether there was an abuse of discretion in the determination that the proposed collection action for 1999 should be sustained.

Background

Some of the facts have been stipulated. The stipulated facts and the attached exhibits are incorporated herein by this reference.

At the time of the filing of the petition, petitioners resided in La Grange Park, Illinois. Mr. Orum has lived at the same address his entire life. Mr. Orum is a patent attorney, and Mrs. Orum is a zookeeper.

Petitioners filed joint Federal income tax returns for 1998 and 1999 on November 29, 1999 , and November 20, 2000 , respectively, but did not make full payments of the tax liabilities when the returns were filed.

On November 29, 1999 , respondent assessed tax liabilities of $63,683 plus additions to tax for 1998. Respondent issued petitioners three notices of demand for payment of the 1998 tax liabilities and additions to tax on November 29, 1999 , January 3, 2000 , and February 7, 2000 .

On June 23, 2000 , respondent sent petitioners, by certified mail, a Letter 1058, Notice of Intent to Levy and Notice of Your Right to a Hearing, for 1998 (June 23, 2000, notice). The return receipt for the June 23, 2000 , notice was signed on June 26, 2000 .

On November 20, 2000 , respondent assessed tax liabilities of $38,661 plus additions to tax for 1999. Respondent issued two notices of demand for payment of the 1999 tax liabilities and additions to tax on November 20 and December 11, 2000 .

On January 5, 2001 , petitioners entered into an installment agreement for the payment of the 1998 and 1999 tax liabilities. Petitioners did not make all of the monthly payments as required by the installment agreement schedule. By December 2001, the installment agreement was terminated.

On December 14, 2001 , respondent sent petitioners a Final Notice --Notice of Intent to Levy and Notice of Your Right to a Hearing for 1998 and 1999 (December 14, 2001, notice). The taxes owed with statutory additions, as set forth in the final notice, were $41,435 and $44,345 for 1998 and 1999, respectively.

Mr. Orum sent respondent a Form 12153, Request for a Collection Due Process Hearing (hearing request), for 1998 and 1999, dated December 31, 2001 . On the hearing request, petitioners stated: "Desires continuation of payment plan. Will contact IRS agent by phone to discuss. Have been working with agents in Chicago." Mr. Orum proposed to Settlement Officer Susan L. Vuicich (Ms. Vuicich) that petitioners be permitted to satisfy the 1998 and 1999 tax liabilities through another installment agreement.

On or about February 7, 2002 , petitioners submitted a Form 656, Offer in Compromise, and Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals.

On June 20, 2002 , respondent sent Mr. Orum a letter scheduling an equivalent hearing for 1998 and a section 6330 hearing for 1999 by telephone for July 23, 2002 , and requesting Mrs. Orum's signature on the hearing request. The June 20, 2002 , letter also stated:

You are not entitled to a Collection Due Process Hearing for 1998. According to our records a final notice was sent to you by certified mail for this year on June 22, 2000 .² However, you are entitled to an equivalent hearing. I have enclosed Publication 1660, which explains an equivalent hearing.

You marked Form 12153 appealing the filed Notice of Federal Tax Lien. You are not entitled to a hearing on this issue as our records show no lien has been filed.

You subsequently submitted an offer in compromise under doubt as to collectibility and Effective Tax Administration. I have returned this offer to you under separate cover. You can resubmit your offer once you are current with filing your tax returns. However, let me explain why your offer would not be accepted. It appears that based upon the financial information you provided you have the ability to pay in full over the life of the collection statute, therefore there is no doubt as to collectibility. The explanation you provided for Effective Tax Administration does not meet the economic hardship criteria for consideration of your offer.

Our records show that you have not made any estimated payments for 2001 and 2002. You need to get current with your estimated tax payments for 2002 in order for me to consider any collection alternatives, such as an installment agreement to resolve your tax liabilities.

Please make your estimated tax payments for 2002 prior to the conference, so that we can discuss any alternatives to the proposed levy action.

On July 29, 2002 , respondent received a facsimile of the completed hearing request containing the signatures of Mr. Orum and Mrs. Orum.

During the July 23, 2002 , hearings, Ms. Vuicich requested from Mr. Orum additional financial information by August 9, 2002 , for the Appeals Office to consider Mr. Orum's request for another installment agreement. Such requested information included an income and expense report on a cash basis for Mr. Orum's partnership for 2002, a copy of Mrs. Orum's pay statement, copies of the last 3 months of bank statements, copies of the most recent home equity loan and motorcycle loan, a breakdown of housing and transportation expenses, the amount of current State and local income taxes, the amount of life insurance premium, and the amount of out-of-pocket health care costs.

On July 25, 2002 , Ms. Vuicich sent Mr. Orum computer-generated statements of account for 1998 and 1999.

On September 25, 2002 , Ms. Vuicich reported in her Case Activity Record that petitioners had failed to provide the requested information. Ms. Vuicich also reported that Mr. Orum was not current with his estimated tax payments and the financial information she possessed was incomplete and unverified.

On October 17, 2002 , respondent sent petitioners a decision letter for 1998. The decision letter stated in part:

Your due process hearing request was not filed within the time prescribed under Section 6320 and/or 6330. However, you received a hearing equivalent to a due process hearing except that there is no right to dispute a decision by the Appeals Office in court under IRC Sections 6320 and/or 6330.

* * * * * * *

It has been determined that no relief is to be granted and that the proposed enforcement action (levy) is sustained. You failed to provide the additional financial information as requested in order for us to consider your request for an installment agreement.

Further, the attachment to the decision letter stated:

You filed joint income tax returns for 1998 and 1999 with a balance due. You were sent a final notice of intent to levy by certified mail for 1998 on June 22, 2000 . You entered into an installment agreement for $5,000 per month to pay taxes due for both 1998 and 1999. Your first payment was due March 5, 2001 .

You did not make your monthly payments as required. A final notice was sent to you by certified mail on December 14, 2001 for 1998 and 1999. You submitted Form 12153, Request for a Collection Due Process Hearing, which was received on January 4, 2002 . Your request was not received timely for 1998. You are entitled to an equivalent hearing only for the proposed levy action for this year. * * *

On October 17, 2002 , respondent also sent petitioners a notice of determination for 1999. The "Summary of Determination" stated:

It has been determine [sic] that no relief is to be granted and that the proposed enforcement action (levy) is sustained. You failed to provide additional financial information as requested in order for us to consider your request for an installment agreement.

The attachment to the notice of determination stated:

On your Form 12153, you requested the continuation of a payment plan. You raised no other issues on your written protest.

Subsequent to making your request for a Collection Due Process Hearing, you submitted an Offer in Compromise, Form 656 under doubt as to collectibility effective tax administration. Your offer was received February 11, 2002 . The Settlement Officer assigned to your case returned your offer because you were not in compliance with filing required tax returns. We had no record of your Form 1065 being filed for 1998 for Orum & Roth. The offer was returned with a letter dated June 20, 2002 explaining this.

Keith Orum contacted the Settlement Officer on July 17, 2002 to confirm the telephone conference and declined a face-to-face conference. The Settlement Officer reviewed her letter with Keith explaining the reasons why the offer would not be accepted. Those reason [sic] are as follows:

 The reason you provided for Effective Tax Administration does not meet the economic hardship criteria.

 Based upon the financial information you provided it appears you have the ability to pay the liabilities in full within the statutory period for collection

 You had not made any estimated tax payments for 2001 and 2002

Keith provided an adequate explanation why a Form 1065 for 1998 was not filed. The only other partner resigned prior to 1998. The partnership dissolved, but Keith continued to use the partnership federal employer's identification number (FEIN) for reporting employment tax returns. * * * Keith said he understood why an offer could not be considered and expressed an interest in an installment agreement.

* * * * * * *

A scheduled telephone conference was held on July 23, 2002 at 10:10 a.m. EST with Keith Orum. The Settlement Officer reviewed the information on Form 433A with him and identified additional information needed in order to determine an appropriate amount for an installment agreement. The additional financial information was to be provided by August 9, 2002 .

* * * * * * *

We received an estimated tax payment for 2002 in the amount of $8,500 on September 6, 2002 however; we have not received the additional financial information nor heard from you.

BALANCING EFFICIENT COLLECTION AND INTRUSIVENESS

You have failed to provide by an agreed deadline the additional financial information requested. This information is necessary in order for us to consider an installment agreement. Absent your willingness to provide this information, alternatives to the proposed levy action such as an installment agreement could not be considered. * * *

On November 15, 2002 , petitioners sent the Court a Petition for Lien or Levy Action Under Code Section 6320(c) or 6330(d) to dispute the decision letter for 1998 and the notice of determination for 1999. On January 21, 2003 , petitioners sent the Court an amended petition pursuant to a Court order.

On July 30, 2003 , respondent filed a motion to dismiss for lack of jurisdiction with respect to 1998. Petitioners filed an objection to respondent's motion.

The Court held a hearing on respondent's motion and trial for this case in Chicago, Illinois, on September 23, 2003 , in which Mr. Orum appeared. Mr. Orum stated that he was not disputing the amounts of taxes owed for 1998 and 1999 but wanted to establish another installment agreement to satisfy those obligations.

Discussion

I. Respondent's Motion To Dismiss for Lack of Jurisdiction

Section 6331(a) provides that if any person liable to pay any tax neglects or refuses to pay such tax within 10 days after notice and demand for payment, then the Secretary is authorized to collect such tax by levy upon the person's property. Section 6331(d) provides that, at least 30 days before enforcing collection by way of a levy on the person's property, the Secretary is obliged to provide the person with a final notice of intent to levy, including notice of the administrative appeals available to the person.

Section 6330(a) provides that the Secretary shall notify a person in writing of his or her right to a section 6330 hearing with the Appeals Office regarding the proposed levy. The written notice must be given in person, left at the person's dwelling or usual place of business, or sent by certified or registered mail to the person's last known address. Sec. 6330(a)(2).

Section 6330(a)(2) provides that the prescribed notice (notice of intent to levy) shall be provided not less than 30 days before the day of the first levy with respect to the amount of the unpaid tax for the taxable period. Further, section 6330(a)(3)(B) provides that the notice of intent to levy shall explain that the person has the right to request a section 6330 hearing during the 30-day period under section 6330(a)(2).

Where the Appeals Office issues a notice of determination to the taxpayer following a section 6330 hearing regarding a levy action, section 6330(d)(1) provides that the taxpayer will have 30 days following the issuance of such determination letter to file a petition for review with this Court or a Federal District Court, as may be appropriate. Offiler v. Commissioner [Dec. 53,912], 114 T.C. 492, 498 (2000). This Court's jurisdiction under section 6330 depends upon the issuance of a valid determination letter and the filing of a timely petition for review. Sec. 6330(d)(1); Lunsford v. Commissioner [Dec. 54,552], 117 T.C. 159, 164 (2001).

The parties dispute whether a valid determination letter was issued for 1998 to give the Court jurisdiction under section 6330(d)(1). Respondent argues that this Court should dismiss the case as to 1998 upon the grounds that the decision letter does not constitute a determination sufficient to invoke the Court's jurisdiction pursuant to section 6330(d)(1). In objecting to respondent's motion, petitioners argue that: (1) They did not receive the June 23, 2000 , notice; and (2) the December 14, 2001 , notice offered petitioners a section 6330 hearing for 1998 because it was titled a "Final Notice".

A. Was the June 23, 2000 , Notice Sent to Petitioners' Last Known Address?

As noted above, the notice of intent to levy must be given in person, left at the person's dwelling or usual place of business, or sent by certified or registered mail to the person's last known address. Secs. 6330(a)(2) and 6331(d)(2); secs. 301.6330-1(a), 301.6331-2(a)(1), Proced. & Admin. Regs. The regulations under sections 6330 and 6331 reference section 301.6212-2, Proced. & Admin. Regs., to define "last known address". Secs. 301.6330-1(a), 301.6331-2(a)(1), Proced. & Admin. Regs. Under section 6212, in general, the Commissioner is entitled to treat the address on a taxpayer's most recent tax return as the taxpayer's last known address, unless the taxpayer has given "clear and concise notification of a different address." Kennedy v. Commissioner [Dec. 54,315], 116 T.C. 255, 260 n.4 (2001); Abeles v. Commissioner [Dec. 45,203], 91 T.C. 1019, 1035 (1988); sec. 301.6212-2(a), Proced. & Admin. Regs.

Although respondent did not enter the June 23, 2000 , notice into the record, as proof of its mailing respondent provided petitioners' Form 4340, Certificate of Assessments, Payments, and Other Specified Matters, for 1998, which reported that the notice of intent to levy was issued on June 23, 2000 , and a return receipt was signed on June 26, 2000 . That certificate is "generally regarded as being sufficient proof, in the absence of evidence to the contrary, of the adequacy and propriety of notices and assessments that have been made." Gentry v. United States [92-1 USTC ¶50,225], 962 F.2d 555, 557 (6th Cir. 1992); see Schroeder v. Commissioner [Dec. 54,829(M)], T.C. Memo. 2002-190; Kaeckell v. Commissioner [Dec. 54,737(M)], T.C. Memo. 2002-114. Further, respondent provided an ACS LT11 Certified Mail List for 1998 which reported that a Notice of Intent to Levy and Notice of Your Right to a Hearing was sent to petitioners by certified mail at "LaGrange Park, IL 60526-134603" on June 23, 2000 . See Weber v. Commissioner [Dec. 55,588], 122 T.C. 258, 259 n.3 (2004).

We also note that the parties stipulated that petitioners filed a tax return for 1998 before the June 23, 2000 , notice was issued, and Mr. Orum reported on his offer-in-compromise application that he had been "current" with his tax liabilities from 1981 until 1998. Mr. Orum stated on his Form 433-A that he has lived at the same address his entire life. On the basis of the record and the Commissioner's practice of using the address of a taxpayer's most recently filed tax return as the last known address, we find that the address used for the June 23, 2000 , notice was petitioners' last known address.

The only evidence that petitioners presented is testimony from Mr. Orum that he and Mrs. Orum did not receive the June 23, 2000 , notice.³ That testimony is inconsistent with the evidence on the record. After observing Mr. Orum's demeanor at trial, the Court found his testimony, on this point, not credible. Mr. Orum pointed to petitioners' address listed on Ms. Vuicich's Case Activity Report which incorrectly listed petitioners' ZIP Code. We note that: (1) the Case Activity Report was created after the June 23, 2000 , notice was sent to petitioners; and (2) respondent's official certified mailing list that reported the mailing of the June 23, 2000 , notice listed the correct ZIP Code. Therefore, we do not accept Mr. Orum's testimony on this point and find that the June 23, 2000 , notice was sent to petitioners' last known address.

B. Does the Court Lack Jurisdiction Over 1998?

Petitioners argue that the December 14, 2001 , notice offered them a section 6330 hearing for 1998 because it was titled a "Final Notice" and the Commissioner can send only one notice of intent to levy under section 6330(a)(1). We disagree.

Section 6330(a)(1) provides, in relevant part, that the notice before levy "shall be required only once for the taxable period to which the unpaid tax specified in paragraph (3)(A) relates." Petitioners misinterpret this sentence. We interpret this sentence to mean that the Commissioner need send only one notice of intent to levy for a taxable period. The Commissioner may issue more than one notice of intent to levy to a taxpayer. See sec. 301.6330-1(b)(2), Q&A-B2, Q&A-B4, Proced. & Admin. Regs. Although more than one notice may be issued, the taxpayer is still entitled to only one hearing for the relevant tax period. Sec. 6330(b)(2); sec. 301.6330-1(b)(1), Proced. & Admin. Regs.

This interpretation is buttressed by the regulations under section 6330, which provide:

Q-B2. Is the taxpayer entitled to a CDP hearing when the IRS , more than 30 days after issuance of a CDP Notice under section 6330 with respect to the unpaid tax and periods, provides subsequent notice to that taxpayer that the IRS intends to levy on property or rights to property of the taxpayer for the same tax and tax periods shown on the CDP Notice?

A-B2. No. Under section 6330, only the first pre-levy or post-levy CDP Notice with respect to the unpaid tax and tax periods entitles the taxpayer to request a CDP hearing. If the taxpayer does not timely request a CDP hearing with Appeals following that first notification, the taxpayer foregoes the right to a CDP hearing with Appeals and judicial review of Appeals' determination with respect to levies relating to that tax and tax period. The IRS generally provides additional notices or reminders (reminder notifications) to the taxpayer of its intent to levy when no collection action has occurred within 180 days of a proposed levy. Under such circumstances, a taxpayer may request an equivalent hearing as described in paragraph (i) of this section.

* * * * * * *

Q-B4. If the IRS sends a second CDP Notice under section 6330 (other than a substitute CDP Notice) for a tax period and with respect to an unpaid tax for which a CDP Notice under section 6330 was previously sent, is the taxpayer entitled to a section 6330 CDP hearing based on the second CDP Notice?

A-B4. No. The taxpayer is entitled to only one CDP hearing under section 6330 with respect to the tax and tax period. The taxpayer must request the CDP hearing within 30 days of the date of the first CDP Notice for that tax and tax period.

Sec. 301.6330-1(b)(2), Q&A-B2, Q&A-B4, Proced. & Admin. Regs.

On June 23, 2000 , respondent sent petitioners a notice of intent to levy for 1998 at their last known address. Petitioners did not send a hearing request until December 31, 2001 , which is beyond the 30-day filing period required by section 6330(a)(3). Section 6330 does not authorize the Commissioner to waive the time restrictions imposed therein. Kennedy v. Commissioner [Dec. 54,315], 116 T.C. at 262. The fact that respondent, after the termination of the intervening installment agreement, sent petitioners a second notice of intent to levy on December 14, 2001 , did not entitle petitioners to a hearing as contemplated under section 6330(b). See sec. 301.6330-1(b)(2), Q&A-B2, Proced. & Admin. Regs.

Under the circumstances, respondent was not obliged to conduct a section 6330 hearing as contemplated under section 6330(b). See sec. 301.6330-1(i)(1), Proced. & Admin. Regs. In place of the section 6330 hearing, the Appeals Office granted petitioners an equivalent hearing for 1998. Id. Thereafter, the Appeals Office issued a decision letter to petitioners stating that the proposed collection action was sustained. Id. The decision letter does not constitute a notice of determination under section 6330(d)(1) which would provide a basis for petitioners to invoke the Court's jurisdiction for 1998. See Moorhous v. Commissioner [Dec. 54,316], 116 T.C. 263, 270 (2001); Kennedy v. Commissioner, supra at 263.

This case is distinguishable from Craig v. Commissioner [Dec. 54,933], 119 T.C. 252 (2002), in which we held that we had jurisdiction under section 6330(d)(1) when the Appeals Office issued a decision letter to the taxpayer. Id. at 259. In Craig, the Commissioner mailed to the taxpayer a notice of intent to levy on February 22, 2001 . Id. at 254. On March 17, 2001 , the taxpayer timely requested a section 6330 hearing by mailing the Commissioner a letter accompanied by unsigned Forms 12153. Id. at 255. On May 6, 2001 , the Commissioner received signed Forms 12153 but granted the taxpayer only an equivalent hearing. Id. at 255-256. A decision letter was then issued to the taxpayer following the equivalent hearing. Id. at 256. The Court held that "where Appeals issued the decision letter to petitioner in response to his timely request for a Hearing, we conclude that the `decision' reflected in the decision letter issued to petitioner is a `determination' for purposes of section 6330(d)(1)." Id. at 259. In the instant case, petitioners did not timely request a section 6330 hearing in response to the June 23, 2000 , notice. As a result, we do not conclude that the decision in the decision letter is a determination for purposes of section 6330(d)(1).

We will grant respondent's motion to dismiss for lack of jurisdiction as to 1998 because the petition was not filed in response to a notice of determination sufficient to confer jurisdiction on the Court under section 6330(d)(1).

II. Respondent's Determination for 1999

Petitioners argue that respondent abused his discretion in the determination to sustain the proposed collection action for 1999 because respondent refused to process petitioners' offer-in-compromise and rejected petitioners' request for an installment agreement.

As discussed above, before a levy may be made on any property or right to property, a taxpayer is entitled to notice of intent to levy and notice of the right to a fair hearing before an impartial officer of the Appeals Office. Secs. 6330(a) and (b) and 6331(d). If the taxpayer requests a section 6330 hearing, he may raise in that hearing any relevant issue relating to the unpaid tax or the proposed levy, including challenges to the appropriateness of the collection action and "offers of collection alternatives, which may include the posting of a bond, the substitution of other assets, an installment agreement, or an offer-in-compromise." Sec. 6330(c)(2)(A). A determination is then made which takes into consideration those issues, the verification that the requirements of applicable law and administrative procedures have been met, and "whether any proposed collection action balances the need for the efficient collection of taxes with the legitimate concern of the person that any collection action be no more intrusive than necessary." Sec. 6330(c)(3).

Petitioners raise issues only as to collection alternatives, in that they dispute respondent's rejection of another installment agreement and rejection of an offer-in-compromise. We review the determination for an abuse of discretion because the underlying tax liability is not at issue. Lunsford v. Commissioner [Dec. 54,553], 117 T.C. 183, 185 (2001); Nicklaus v. Commissioner [Dec. 54,477], 117 T.C. 117, 120 (2001).

Respondent's rejection of another installment agreement for petitioners was not an abuse of discretion. Installment agreements are based upon the taxpayer's current financial condition. See 2 Administration, Internal Revenue Manual ( CCH ), sec. 5.19.1.5.4.1, at 18,299-65. Respondent's determination was based on information petitioners provided to Ms. Vuicich. See Schulman v. Commissioner [Dec. 54,757(M)], T.C. Memo. 2002-129. At the section 6330 hearing, Ms. Vuicich requested from Mr. Orum additional financial information by August 9, 2002 , for the Appeals Office to consider Mr. Orum's request for another installment agreement. Petitioners failed to timely respond to Ms. Vuicich's request. As discussed with Mr. Orum at the section 6330 hearing, Ms. Vuicich found the information provided on petitioners' Form 433A to be incomplete and unverified. We find that the Appeals officer could have reasonably rejected an installment agreement proposal by petitioners on the basis of petitioners' failure to make the required monthly payments on the initial January 5, 2001 , installment agreement that was terminated, and petitioners' failure to timely provide the requested information to Ms. Vuicich in order for her to consider another installment agreement.

Additionally, respondent's determination not to enter into an offer-in-compromise agreement with petitioners was not an abuse of discretion. Section 7122(a) authorizes the Secretary to compromise any civil case arising under the internal revenue laws. The regulations set forth three grounds for the compromise of a liability: (1) Doubt as to liability; (2) doubt as to collectibility; or (3) promotion of effective tax administration. Sec. 301.7122 -1T(b), Temporary Proced. & Admin. Regs., 64 Fed. Reg. 39024 (July 21, 1999);⁴ see sec. 7122(c)(1). Doubt as to liability is not at issue in the instant case.

The Secretary may compromise a liability on the ground of doubt as to collectibility when "the taxpayer's assets and income are less than the full amount of the assessed liability." Sec. 301.7122 -1T(b)(3)(i), Temporary Proced. & Admin. Regs., supra. Additionally, the Secretary may compromise a liability on the ground of "effective tax administration" when: (1) Collection of the full liability will create economic hardship; or (2) exceptional circumstances exist such that collection of the full liability will be detrimental to voluntary compliance by taxpayers; and (3) compromise of the liability will not undermine compliance by taxpayers with tax laws. Sec. 301.7122 -1T(b)(4), Temporary Proced. & Admin. Regs., supra; see 2 Administration, Internal Revenue Service ( CCH ), sec. 5.8.11.2, at 16,385-15 (taxpayer's liability may be eligible for compromise to promote effective tax administration if not eligible for compromise based on doubt as to liability or doubt as to collectibility, and taxpayer has exceptional circumstances to merit the offer).

Ms. Vuicich reviewed petitioners' submitted financial information and determined that an offer-in-compromise was not appropriate on the basis of doubt as to collectibility and promotion of effective tax administration. Ms. Vuicich communicated her determination to Mr. Orum in the June 20, 2002 , letter. In a later telephone conversation, Mr. Orum told Ms. Vuicich that he understood why an offer-in-compromise could not be considered. We received as an exhibit the financial information before Ms. Vuicich and find that she could have reasonably concluded that there are sufficient income and assets to satisfy the tax liability. On the basis of respondent's consideration of petitioners' information, we conclude that respondent's refusal to enter into an offer-in-compromise was not an abuse of discretion. See Crisan v. Commissioner [Dec. 55,350(M)], T.C. Memo. 2003-318 (held the Commissioner's refusal to enter into an offer-in-compromise was not an abuse of discretion on the basis of a review of the financial information submitted to the Appeals officer).

As a result, we hold that the determination to proceed with collection for 1999 was not an abuse of respondent's discretion, and the proposed collection action is sustained.

In reaching our holdings herein, we have considered all arguments made, and, to the extent not mentioned above, we conclude that they are moot, irrelevant, or without merit.

To reflect the foregoing,

An appropriate order and decision will be entered.

¹ Unless otherwise indicated, all section references are to the Internal Revenue Code, as amended. Amounts are rounded to the nearest dollar.

² We note that the Form 4340, Certificate of Assessments, Payments, And Other Specified Matters, and the ACS LT11 Certified Mail List report that this notice was sent on June 23, 2000.

³ Mrs. Orum did not appear at trial.

⁴ Final regulations under sec. 7122 were promulgated effective for offers-in-compromise pending on or submitted on or after July 18, 2002. Sec. 301.7122-1(k), Proced. & Admin. Regs.