Ronald Isley v. Commissioner

141 T.C. No. 11

UNITED STATES TAX COURT

RONALD ISLEY, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 5616-11L. Filed November 6, 2013.

P was a founding member of the popular Isley Brothers singing
group, which for many years generated substantial income from
personal appearances and record sales. P failed to pay Federal
income tax on much of that income. The Commissioner sought to
collect unpaid tax for all but five years within the 1971-95 period by
filing proofs of claim in two bankruptcy proceedings (bankruptcies I
& II), which resulted in his collection of substantial amounts from P.
The United States also obtained P's criminal conviction for tax
evasion and willful failure to file with respect to 1997-2002
(conviction years), which resulted in his being sentenced, on Sept. 1,
2009, to 37 months in prison followed by a three-year probationary
period during which P was required to discharge his liabilities for the
conviction years and his tax filing and payment obligations for the
probation years. After bankruptcy II, P instituted an unsuccessful suit
for the refund of amounts that the Commissioner collected in that
bankruptcy proceeding that P alleged should have been offset by
payments emanating from bankruptcy I.
 -2-

R issued to P two notices of Federal tax lien (NFTLs) and two
notices of levy that together covered P's assessed liabilities for the
conviction years plus 2003, 2004, and 2006. P requested a collection
due process (CDP) hearing, which resulted in his offer and the
Appeals officer's preliminary acceptance of an offer-in-compromise
(OIC). The Appeals officer referred the OIC to C, an attorney in R's
Office of Chief Counsel, for review. C recommended the OIC be
rejected because the conviction years (which were covered by the
OIC), had been referred to the Department of Justice (DOJ) for
prosecution so that R was prohibited by I.R.C. sec. 7122(a) from
unilaterally compromising P's liabilities for those years, and also
because the Appeals officer had overlooked (1) potential sources for
the collection of more than P had offered and (2) P's noncompliance
with the terms of the OIC. Following C's advice, Appeals rejected the
OIC and sustained the NFTL filings and the levy notices.

P seeks to have the OIC reinstated on the ground that (1) I.R.C.
sec. 7122(a) did not prohibit Appeals from entering into an OIC
pursuant to I.R.C. sec. 6330(c)(2) and (3); (2) C's involvement
effectively made him the "de facto" Appeals officer, and, because of
his earlier involvement in bankruptcy II, his involvement in P's CDP
hearing violated the "impartial officer" requirement of I.R.C. sec.
6330(b)(3); and (3) as the "de facto" Appeals officer, his improper ex
parte communications with non-Appeals IRS personnel require that
we disregard his rejection of the OIC and ratify Appeals' initial
acceptance of it. P also renews the argument, made in his
unsuccessful refund suit, that the assessed liabilities are overstated
because the Commissioner did not properly credit to P's account
payments made to the Commissioner at the conclusion of bankruptcy
I (offset issue). Lastly, P argues that, should we uphold Appeals'
rejection of his OIC, we must order a refund of the 20% partial
payment that he made pursuant to I.R.C. sec. 7122(c) because P was
induced to submit the OIC under false pretenses.

1. Held: I.R.C. sec. 7122(a) barred Appeals' unilateral
acceptance of P's OIC.
 -3-

2. Held, further, C's advice was properly requested and
furnished to the Appeals officer pursuant to I.R.C. sec. 7122(b).
Thus, his involvement did not cause him to become the "de facto"
Appeals officer and, therefore, could not and did not result in (1) a
violation of the "impartial officer" requirement of I.R.C. sec.
6330(b)(3), or (2) improper ex parte communications between
Appeals and non-Appeals IRS personnel.

3. Held, further, because (1) bankruptcy II gave P a prior
opportunity to raise the offset issue, and (2) P's position with respect
to that issue was rejected in his unsuccessful refund suit, I.R.C. sec.
6330(c)(2)(B) and (4)(A) alternatively barred him from raising that
issue during his CDP hearing.

4. Held, further, P was not invited to submit his OIC under
false pretenses. Therefore, pursuant to the normal rules providing for
the nonrefundability of the 20% partial payment required by I.R.C.
sec. 7122(c) (which P does not dispute), P is not entitled to a refund
of that payment.

5. Held, further, Appeals' determination not to withdraw the
NFTLs is sustained.

6. Held, further, Appeals' determination to sustain the notices
of levy and proceed with collection by levy of the assessed liabilities
is rejected and the case is remanded to Appeals to explore the
possibility of a new OIC or installment agreement, not to be finalized
until approved by DOJ pursuant to I.R.C. sec. 7122(a).

Steven Ray Mather, for petitioner.

Cassidy B. Collins, Katherine Holmes Ankeny, and Carolyn A. Schenck, for

respondent.
 -4-

HALPERN, Judge: This case is before the Court to review determinations

made by the Internal Revenue Service (IRS) Appeals Office (Appeals) in four

notices issued to petitioner after a collection due process (CDP) hearing conducted

pursuant to sections 6320(b) and (c) and 6330(b) and (c).1 Together, those

determinations sustained (1) respondent's right to proceed to collect by levy

petitioner's assessed liabilities for 1997 through 2003 and (2) the filing of notices

of Federal tax lien (NFTLs) with respect to those years plus 2004 and 2006. In

response thereto, petitioner, pursuant to section 6330(d)(1), timely filed a petition

with this Court in which he assigns error on the grounds that respondent should

have (1) determined that the assessed liabilities for the years in issue were

overstated and (2) accepted petitioner's offer-in-compromise (OIC) as a collection

alternative. Petitioner also alleges that (1) if we determine that Appeals did not err

in rejecting his OIC, we should order the return to petitioner of his 20% partial

payment made pursuant to section 7122(c)(1)(A)(i) (section 7122(c) payment),2

1
Unless otherwise indicated, all section references are to the Internal
Revenue Code of 1986, as amended and in effect at all relevant times. Dollar
amounts have been rounded to the nearest dollar.
2
The Tax Increase Prevention and Reconciliation Act of 2005, Pub. L. No.
109-222, sec. 509(a), 120 Stat. at 362, enacted new sec. 7122(c), effective for
OICs submitted on or after July 16, 2006. Sec. 7122(c)(1)(A)(i) requires that the
submission of any lump-sum OIC "be accompanied by the payment of 20 percent
(continued...)
 -5-

and (2) we have jurisdiction to adjudicate his challenge to the underlying liabilities

based upon respondent's alleged failure to properly credit against those liabilities

amounts paid to respondent in prior years that should have been credited to his

delinquent account.

FINDINGS OF FACT

Some facts are stipulated and are so found. The stipulation of facts, with

accompanying exhibits, is incorporated herein by this reference.

Petitioner resided in St. Louis, Missouri when he filed his petition.

Petitioner's Musical Career

Petitioner's musical career generated considerable income. His failure to

pay Federal income tax with respect to much of it led to his perhaps even more

considerable problems with the law.

Petitioner was the third of six brothers, three of whom (petitioner and his

two older brothers, O'Kelly and Rudolph) moved to New York as teenagers and

launched what became a successful recording and concert career as the Isley

Brothers. Years later, the group also included two younger brothers, Ernie and

Marvin. Their musical genres included rhythm and blues, doo-wop, funk, and

2
(...continued)
of the amount of such offer."
 -6-

contemporary R&B. Various versions of the group had top 40 singles and/or top

20 albums during a period stretching from 1962 to 2006, which ultimately led to

various accolades including the induction of petitioner and four of his brothers

into the Rock and Roll Hall of Fame. Late in his career, petitioner focused on solo

work, and as late as 2011 he was still performing with his younger brother Ernie.

The New Jersey Bankruptcy

On August 23, 1984, petitioner and his two older brothers, O'Kelly and

Rudolph, each filed for bankruptcy protection in a proceeding under chapter 11 of

the Bankruptcy Code, with the U.S. Bankruptcy Court for the District of New

Jersey, subsequently converted to a chapter 7 bankruptcy proceeding (New Jersey

bankruptcy). Upon motion by the trustee, the three bankruptcy estates were

consolidated. Thereafter, the bankruptcy court issued an order determining the

extent, validity, and priority of respondent's claims against the three brothers.

Respondent's approved claims against petitioner were for tax years 1971-76, 1978,

and 1980-83. The trustee satisfied all of respondent's prepetition claims against

the consolidated bankruptcy estate, and ordered that, because respondent also had

postpetition claims against the consolidated estate, any funds left in the estate after

discharge of the prepetition claims would also be paid to respondent. Respondent

applied almost all of those postpetition liability payments in discharge of O'Kelly's
 -7-

outstanding liabilities, with little or nothing applied to the outstanding liabilities of

petitioner and Rudolph.

The California Bankruptcy

On April 2, 1997, petitioner filed a voluntary petition for bankruptcy

protection in a proceeding under chapter 11 of the Bankruptcy Code (also

subsequently converted to a chapter 7 bankruptcy proceeding) with the U.S.

Bankruptcy Court for the Central District of California (California bankruptcy).

Respondent filed proofs of claim in the California bankruptcy for tax years 1976,

1978,3 1985, 1986, 1988, 1989, and 1991-95. The bankruptcy court approved a

settlement agreement whereby a number of petitioner's "songwriter interests" (then

belonging to the bankruptcy estate) were sold, and, on June 23, 2000, $2 million

was paid to respondent (June 23, 2000, payment) and applied to petitioner's

outstanding liabilities to respondent for all of the foregoing years except 1992.

During the bankruptcy proceeding, neither petitioner nor the trustee objected to

respondent's proofs of claim (satisfied by the June 23, 2000, payment) on the basis

that respondent had misapplied (to O'Kelly's account) payments received from the

New Jersey bankruptcy trustee.

3
For both 1976 and 1978, respondent sought post-(New Jersey) petition
interest not covered by the consent order terminating the New Jersey bankruptcy.
 -8-

Petitioner's Suit For Refund

On June 19, 2002, petitioner filed a claim with respondent for refund of the

June 23, 2000, payment, and, on March 1, 2005, he filed a suit for refund of that

payment in the U.S. District Court for the Central District of California. In his

refund suit, petitioner alleged that, pursuant to the June 23, 2000, payment,

respondent "illegally and unlawfully collected the full balance of tax, penalty and

interest determined by [respondent] for the [p]eriods in [i]ssue." The Government

moved to dismiss the complaint and/or for summary judgment, in part, on the

ground that petitioner's claims (1) were barred by the doctrine of res judicata

because the New Jersey and California bankruptcies finally determined the

amounts owed to respondent and (2) were untimely. The Government also argued

that petitioner could not challenge respondent's application of payments from the

New Jersey bankruptcy "because * * * [the IRS] was entitled to apply the

payments as it saw fit." In granting the Government's motion for summary

judgment, the court first stated that petitioner was barred by the doctrine of res

judicata from challenging his liabilities to respondent for 1976 and 1978 as

determined in the New Jersey bankruptcy. The court further stated that petitioner's

challenge to respondent's claims in the California bankruptcy was barred by that

same doctrine because (1) during the California bankruptcy, "neither the Chapter 7
 -9-

trustee nor * * * [petitioner] objected to the IRS' claims that were satisfied by the

June 23, 2000 payment", (2) "[p]roofs of claim to which no objection is filed are

'deemed allowed'", and (3) "'deemed allowed' claims are themselves entitled to res

judicata effect". The court also determined that petitioner lacked standing to

assert the refund claim because both the assets sold and the amounts received

therefor, which funded the June 23, 2000, payment, were assets of the bankruptcy

estate. Therefore, the court concluded that "the bankruptcy estate, and not * * *

[petitioner], made the alleged overpayment" and was the party with standing to

pursue the refund claim.

The Court of Appeals for the Ninth Circuit affirmed the District Court's

decision and, in particular, that court's determination that the California

bankruptcy estate, not petitioner, had standing to pursue the refund. Isley v.

United States, 272 Fed. Appx. 640 (9th Cir. 2008). The Court of Appeals further

determined that (1) petitioner's claim "also fails to state a basis for refund" because

the IRS has "the right to apply payments in the manner it chooses" and (2) even if

petitioner has standing to pursue the refund, his claim would be barred by res

judicata because the bankruptcy court's allowance of the Government's claim

"necessarily decided the legality of the tax claim at issue in this appeal". Id. at

641-642.
 - 10 -

Criminal Proceedings Against Petitioner

Petitioner was indicted, tried, and convicted in the District Court for the

Central District of California on five counts of tax evasion and one count of

willful failure to file a tax return covering tax years 1997-2002 (conviction years).

Following the guilty verdict, the court, on September 1, 2006, issued a judgment

and probation commitment order (JPC order) sentencing petitioner to 37 months'

imprisonment and, upon release from imprisonment, placing petitioner on

"supervised release for a term of three years" (three-year probationary period).

The JPC order set forth a number of terms and conditions with respect to the three-

year probationary period, including the following:

2. The defendant shall truthfully and timely file and pay taxes owed
for the years of conviction; and shall truthfully and timely file and
pay taxes during the period of community supervision. Further, the
defendant shall show proof to the Probation Officer of compliance
with this order;

* * * * * * *

10. The Defendant shall pay all taxes when due, and, if necessary,
sell assets to satisfy his tax obligations.

The JPC order also provided for the adjustment of petitioner's restitution

obligation as follows:

The defendant shall notify the Court through the Probation
Office, and notify the United States Attorney of any material change
 - 11 -

in the defendant's economic circumstances that might affect the
defendant's ability to pay a fine or restitution, as required by 18
U.S.C. § 3664(k). The Court may also accept such notification from
the government or the victim, and may, on its own motion or that of a
party or the victim, adjust the manner of payment of a fine or
restitution-pursuant to 18 U.S.C. § 3664(k).

On February 11, 2008, the Court of Appeals for the Ninth Circuit affirmed

the District Court's 37-month sentence.

Respondent's Notices of Lien and Levy

Between December 12, 2006, and August 31, 2007, respondent issued to

petitioner two NFTLs and two notices of intent to levy (each including a notice of

petitioner's right to a hearing) covering the assessed liabilities for the years in

issue. Together, the notices covered the conviction years (1997-2002), plus 2003,

2004, and 2006.4

The CDP Hearing

In 2007, while in prison, petitioner timely filed Forms 12153, Request for a

Collection Due Process or Equivalent Hearing, with respect to all of the tax years

covered by the NFTLs and levy notices. In each of his hearing requests, petitioner

alleged one or more of the following: (1) the assessed liability is excessive, (2)

the penalties should be abated for reasonable cause, (3) prior payments were

4
As noted supra, the levy notices covered 1997-2003, and the NFTLs
covered 1997-2004 and 2006.
 - 12 -

applied to the wrong periods, and (4) the liability for one of the years (2006) was

paid. In each hearing request, in the section denominated "Collection

Alternative", petitioner checked the boxes for "Installment Agreement" and "Offer

in Compromise". Petitioner requested and received (via his counsel, Mr. Mather)

a "face-to-face" hearing, which was conducted by Settlement Officer Nathan

August (Appeals officer or Mr. August) on April 27, 2009, with additional

meetings between June 4, 2009, and February 3, 2011.5 During one or more of

those meetings, petitioner's counsel renewed petitioner's argument (rejected by the

California Federal courts in connection with petitioner's refund suit) that

respondent had improperly applied the payments emanating from the New Jersey

consolidated bankruptcy by not crediting petitioner's account for a portion thereof

(offset issue).

As part of the CDP hearing, Mr. August verified that the liabilities listed in

the lien and levy notices were validly assessed and that all legal and administrative

procedure requirements were met. At the conclusion of Mr. August's

consideration of the case, petitioner's total assessed liabilities, including tax,

5
Petitioner did not specifically request a face-to-face hearing in his response
to the NFTL covering 2002-04. Nevertheless, Mr. August treated the face-to-face
hearing with petitioner's counsel as covering that NFTL as well as the other NFTL
and the two levy notices.
 - 13 -

interest, and penalties, exceeded $9 million, which included penalty assessments

under section 6651(f) for fraudulent failure to file totaling $1,811,983. The

section 6651(f) penalty assessments were not part of petitioner's CDP hearing

because respondent had not yet issued CDP notices with respect to those

assessments.

The face-to-face meetings, telephone conversations, and correspondence

between Mr. August and petitioner's counsel eventually resulted in petitioner's

July 31, 2009, submission of a Form 656, Offer in Compromise, in the sum of $1

million, which covered all of the CDP hearing years plus 2007, accompanied by a

$200,000 (20%) section 7122(c) payment. On September 29, 2009, after further

review of petitioner's existing and potential postincarceration financial

circumstances, Mr. August told petitioner's counsel to submit an amended OIC for

$1,047,216 and an additional section 7122(c) payment so that, the total section

7122(c) payment would equal 20% of the new OIC amount. On October 30, 2009,

Mr. August received the amended OIC for $1,047,216 and checks totaling $9,444

representing the additional section 7122(c) payment.6 In submitting the original

and amended OICs, petitioner undertook to "comply with all provisions of the

Internal Revenue Code relating to filing * * * [his] returns and paying * * * [his]

6
The amended OIC did not cover 2004.
 - 14 -

required taxes for 5 years or until the offered amount is paid in full, whichever is

longer."

On November 4, 2009, Mr. August recommended acceptance of the

amended OIC in conjunction with a Future Income Collateral Agreement (FICA)

of five years' duration, from 2010 through 2014. The FICA called for payments

equal to percentages of petitioner's annual income for those years in excess of

$750,000, which increased as petitioner's income (in excess of $750,000)

increased. On November 5, 2009, the Appeals team manager preliminarily

approved both the OIC and the FICA.

On November 13, 2009, Mr. August submitted the OIC and the FICA to IRS

Chief Counsel Attorney Ronald Chun for a legal sufficiency determination.

Mr. Chun was no stranger to petitioner's Federal income tax difficulties. He

had been one of four IRS attorneys who, at one time or another, were assigned to

work on respondent's proofs of claim filed in connection with the California

bankruptcy. Much of his involvement in that bankruptcy proceeding stemmed

from a March 25, 2002, letter from petitioner's counsel, Mr. Mather, to him in

which Mr. Mather challenged respondent's amended proof of claim in two

respects: (1) he raised the offset issue, alleging that payments related to

respondent's "secured [priorities] claim" had been misapplied, most prominently,
 - 15 -

by applying the entire payment from the New Jersey bankruptcy to O'Kelly Isley's

account rather than to the accounts of all three Isley brothers involved in the

bankruptcy, one-third each, and (2) he alleged that respondent's "unsecured

priority claim", which was based upon a bank deposits analysis, was "grossly and

demonstrably inflated." Mr. Chun's involvement appears to have been confined to

working with Mr. Mather in order to resolve the second issue, which was

ultimately resolved to their mutual satisfaction in March 2003 by respondent's

agreement to file amended proofs of claim based upon (mutually agreed-to)

deficiency computations for tax years 1992-94 in sharply reduced amounts as

compared with respondent's previously filed unsecured priority claim.

Mr. Chun furnished his recommendation to Mr. August in a memorandum

dated January 10, 2011. He recommended rejection of petitioner's OIC (and, by

implication, the FICA) on the ground that the IRS "lacks settlement authority to

compromise the liabilities under * * * Section 7122(a)." In reaching that

conclusion, Mr. Chun relied on section 7122(a), the regulations thereunder, and

provisions of the Internal Revenue Manual. He also pointed to what he considered

impermissible inconsistencies between the JPC order and the OIC.

Alternatively, Mr. Chun determined that petitioner's OIC should be rejected

"because the Realizable Collection Potential exceeds the proposed offer amount of
 - 16 -

$1,047,216, * * * [petitioner] provided incomplete or inaccurate information to the

Settlement Officer, and * * * [petitioner] is not in compliance with his filing

obligations." Mr. Chun's finding of noncompliance was based upon his finding

that petitioner had not timely filed his 2009 return. In connection with his

alternative determination that petitioner's offer was insufficient in the light of the

realizable collection potential, Mr. Chun found that petitioner had understated the

values of his assets and omitted potential sources of future income. He suggested

that petitioner provide additional information to Mr. August, including an

amended Form 433-A, Collection Information Statement for Wage Earners and

Self-Employed Individuals, and an amended Form 433-B, Collection Information

Statement for Businesses.

Mr. Chun secured the assistance of the revenue officer assigned to

petitioner's case in obtaining an appraisal of petitioner's residence and spoke to the

appraiser. He also mailed a copy of his recommendation to Mr. August to the

revenue officer and to a special agent.

On the basis of both Mr. Chun's factual findings and his legal conclusion

that section 7122(a) precluded the acceptance of petitioner's amended OIC, and

upon his own finding confirming that petitioner had failed to comply with the

terms of the OIC by not filing his 2009 return and, also, by underpaying his 2010
 - 17 -

estimated taxes, Mr. August rejected the amended OIC and recommended

sustaining the proposed levies and the NFTL filings. He also rejected petitioner's

argument that respondent misapplied the payments he received from the Isley

brothers' New Jersey bankruptcy estate by not applying a pro rata share to

petitioner's liabilities (the offset issue) on the ground that "the IRS had the

authority to apply the payment as it chose." A copy of his "Summary and

Recommendation" was attached to each of the four notices of determination issued

to petitioner sustaining the levy notices and NFTLs and rejecting petitioner's

amended OIC.

OPINION

I. Introduction

The parties have raised a number of issues for us to consider in deciding

whether to sustain the challenged notices of determination: (1) whether section

7122(a) barred the Appeals officer's acceptance of petitioner's amended OIC

(preemption issue); (2) whether Mr. Chun, in recommending rejection of the

amended OIC, attained the status of the de facto Appeals or settlement officer in

this case so that his prior involvement in the California bankruptcy resulted in a

violation of the section 6330(b)(3) requirement that a CDP hearing be "conducted

by an officer or employee who has had no prior involvement with respect to the
 - 18 -

unpaid tax" (impartiality issue); (3) whether Mr. Chun's communications with the

revenue officer assigned to petitioner's case and with an IRS special agent

constituted improper ex parte communications requiring that we disregard Mr.

Chun's determination to reject the OIC and ratify Mr. August's determination to

accept it (ex parte communication issue); (4) whether we should exercise

jurisdiction to decide the offset issue and, if so, whether we should resolve it in

petitioner's favor; and (5) should we sustain the Appeals officer's rejection of the

amended offer-in-compromise, whether we should order respondent to return to

petitioner the section 7122(c) payment (section 7122(c) payment issue).

Superimposed over issues (1) through (4) is the overall question of whether the

Appeals officer, Mr. August, abused his discretion in rejecting the amended OIC

and sustaining the NFTLs and the collection, by levy, of petitioner's outstanding

assessed liabilities for the tax years at issue. We will separately consider each of

the foregoing issues.

II. Sections 6320, 6330, and 6331

Section 6331(a) authorizes the Secretary to levy against property and

property rights when a taxpayer liable for taxes fails to pay those taxes within 10

days after notice and demand for payment. Section 6331(d) requires the Secretary

to send to the taxpayer written notice of the Secretary's intent to levy, and section
 - 19 -

6330(a) requires the Secretary to send the taxpayer written notice of his right to a

hearing before Appeals at least 30 days before any levy begins. A taxpayer

receiving an NFTL has hearing rights similar to the hearing rights accorded to a

taxpayer receiving a notice of intent to levy. See sec. 6320(c). At the hearing, the

taxpayer may raise any relevant issue including collection alternatives, which may

include an OIC. After the hearing, an Appeals officer must determine whether and

how to proceed with collection, taking into account, among other things,

collection alternatives the taxpayer proposed and whether any proposed collection

action balances the need for the efficient collection of taxes with the legitimate

concern of the taxpayer that the collection action be no more intrusive than

necessary. See sec. 6330(c)(3). The taxpayer may contest the underlying tax

liability at the hearing if he or she did not receive any statutory notice of

deficiency for the liability or did not otherwise have an opportunity to dispute it.

Sec. 6330(c)(2)(B). Where the underlying tax liability is properly at issue, we

review the Appeals officer's determination de novo. E.g., Goza v. Commissioner,

114 T.C. 176, 181-182 (2000). Where the underlying tax liability is not properly

at issue, we review the determination for abuse of discretion. Id. at 182. In

reviewing for abuse of discretion, we must uphold the Appeals officer's
 - 20 -

determination unless it is arbitrary, capricious, or without sound basis in fact or

law. See Woodral v. Commissioner, 112 T.C. 19, 23 (1999).

III. The Preemption Issue

A. Section 7122(a) and the Pertinent Regulations

Section 7122(a) provides: "The Secretary may compromise any civil or

criminal case arising under the internal revenue laws prior to reference to the

Department of Justice for prosecution or defense; and the Attorney General or his

delegate may compromise any such case after reference to the Department of

Justice for prosecution or defense."

Section 301.7122-1(d)(2), Proced. & Admin. Regs., states in pertinent part:

"The IRS may not accept for processing any offer to compromise a liability

following reference of a case involving such liability to the Department of Justice

for prosecution or defense."

B. The Parties' Arguments

On the basis of the foregoing provisions, respondent argues that Appeals

was without authority to accept (or, indeed, even to process) petitioner's amended

OIC because it sought to compromise tax liabilities for the conviction years, which

had been referred to the Department of Justice (DOJ) for prosecution. Respondent

attempts to harmonize section 7122(a) and section 6330(c)(2)(A), which permits a
 - 21 -

taxpayer to "raise at * * * [a CDP] hearing any relevant issue relating to the unpaid

tax or the proposed levy, including * * * (iii) offers of collection alternatives,

which may include * * * an offer-in-compromise" (emphasis added), by arguing

that, in the light of section 7122(a), the propriety of an OIC in this case is not a

"relevant issue". Respondent also argues that, because the Appeals officer's

consideration of collection alternatives "may include" an OIC, there was

"Congressional recognition that not every collection alternative will be * * *

available in every hearing."

Petitioner argues that, pursuant to section 6330(c)(2)(A), he had an absolute

right to submit an OIC and that, pursuant to section 6330(c)(3)(B), respondent was

required to take petitioner's OIC into consideration.7 Petitioner argues that section

7122(a) prohibits respondent to compromise only tax liabilities that are subject to

"pending" criminal prosecutions and that, because the criminal case against

petitioner was complete with his sentencing on September 6, 2006, more than

eight months before petitioner's liabilities for all but one of the years at issue

herein were assessed, section 7122(a) is inapplicable to this case. Petitioner also

7
As noted in the text, sec. 6330(c)(2)(A)(iii) permits the taxpayer to make
"offers of collection alternatives, which may include * * * an offer-in-comprise."
Sec. 6330(c)(3)(B) requires the Appeals officer to "take into consideration * * *
issues raised * * * [at the hearing]".
 - 22 -

argues that respondent's position is unjustified because "acceptance of petitioner's

offer in compromise in fact has no effect whatsoever on petitioner's sentence and

probation." Petitioner posits that his "compliance with the terms of the Judgment

and Probation Commitment Order * * * is a matter that lies within the exclusive

jurisdiction of the federal district court, the Department of Justice and the United

States Probation Office." Lastly, petitioner notes that neither the prosecutor in the

criminal case nor petitioner's probation officer actually objected to the acceptance

of petitioner's OIC.

C. Analysis

1. Introduction

Both parties attempt to resolve the potential conflict between sections

6330(c) and 7122(a). Respondent argues that, after the taxpayer's nonpayment of

tax has been referred to DOJ for prosecution or defense, consideration of the

taxpayer's OIC is no longer a "relevant issue" at a CDP hearing. Petitioner argues

that only where a criminal prosecution against the taxpayer is still pending (i.e.,

where the outcome is still in doubt) is the Appeals officer at a CDP hearing

prohibited from considering the taxpayer's OIC. The parties' efforts to harmonize

the two provisions are consistent with the Supreme Court's admonition that "when

two statutes are capable of co-existence, it is the duty of the courts, absent a
 - 23 -

clearly expressed congressional intention to the contrary, to regard each as

effective." Morton v. Mancari, 417 U.S. 535, 551 (1974); see also Blak Invs. v.

Commissioner, 133 T.C. 431, 439-440 (2009) ("The various sections of the Code

should be construed so that one section will explain and support and not defeat or

destroy another section."). We do not subscribe to either party's rationale for

reconciling the two provisions, however; and although we agree with respondent

that, once a case has been referred to DOJ for prosecution or defense, section

7122(a) trumps section 6330(c), we conclude that the former provision does not

prohibit the Appeals officer in a CDP hearing from at least negotiating the terms

of a potential OIC with a taxpayer after referral of his or her case to DOJ for

prosecution. It only prevents Appeals from unilaterally approving the OIC.

2. Impact of Section 7122(a)

The Courts of Appeals for both the Third Circuit and the Ninth Circuit have

held, albeit in unpublished opinions, that, pursuant to section 7122(a), from the

moment a taxpayer's case is referred to DOJ for prosecution (or defense), the

Commissioner loses his authority to compromise the taxpayer's tax liabilities

unless authorized by DOJ. See United States v. Jackson, 511 Fed. Appx. 200, 203

(3d Cir. 2013); Faust v. United States, 28 F.3d 105, 1994 WL 327584, at *2, 74
 - 24 -

A.F.T.R.2d 94-5194, at 94-5196 (9th Cir. 1994).8 In Jackson, which was decided

after the enactment of section 6330 in 1998, the court further stated that "the DOJ

retains authority to compromise even if a judgment has been obtained and the case

has been returned to the IRS for collection." Jackson, 511 Fed. Appx. at 203;

accord Chief Counsel Notice CC-2011-020 (Sept. 15, 2011).

As respondent notes: "The language of section 7122(a) is clear on its face

* * * [and] there is no evidence, statutory or otherwise, that Congress intended for

sections 6320 and 6330 to supersede section 7122(a)." As respondent also notes,

to treat section 6330(c) as carving out an exception to the application of section

7122(a) would be to violate an established rule of statutory construction that

8
Pursuant to Fed. R. App. P. 32.1(a) (applicable to and adopted by all
Federal Courts of Appeals), "[a] court may not prohibit or restrict the citation of
federal judicial opinions * * * that have been: (i) designated as 'unpublished,' 'not
for publication,' 'non-precedential,' 'not-precedent,' or the like; and (ii) issued on or
after January 1, 2007." That rule is applicable to the opinion of the Court of
Appeals for the Third Circuit in United States v. Jackson, 511 Fed. Appx. 200 (3d
Cir. 2013). The advisory committee notes accompanying the promulgation of Fed.
R. App. P. 32.1 make clear, however, that the rule "says nothing about what effect
a court must give to one of its unpublished opinions". The local appellate rules
adopted by the Court of Appeals for the Third Circuit on November 20, 2008, do
not specifically address the precedential value of its unpublished opinions. The
Court of Appeals for the Ninth Circuit does not generally treat its post-January 1,
2007, unpublished opinions as precedent. See 9th Cir. R. 36-3. Barring written
stipulation to the contrary, the venue for appeal of this case would be the Court of
Appeals for the Eighth Circuit. See sec. 7482(b). We are not so much concerned
with the application of the principles of stare decisis to the two cases as we are
with the persuasiveness of their reasoning.
 - 25 -

amendments by implication are not to be favored. See Estate of Morgens v.

Commissioner, 133 T.C. 402, 421 (2009) (citing United States v. Welden, 377

U.S. 95, 103 n.12 (1964)), aff'd, 678 F.3d 769 (9th Cir. 2012).

Moreover, it makes perfect sense from a policy standpoint that DOJ's

primacy in compromising tax liabilities that have been referred to the Attorney

General for prosecution should continue until the terms of the court's judgment (or

of any settlement authorized by the Attorney General or his delegate) have been

satisfied. In this case, any compromise by respondent of petitioner's liabilities

would have violated the express terms of the JPC order, which requires that,

during the three-year probationary period, petitioner make full payment of "taxes

owed for the years of conviction".9

It is also clear that there is nothing in section 7122(a) that would have

prevented petitioner, either on his own or in conjunction with Mr. August acting

on behalf of respondent, from asking the District Court and/or the Attorney

General or his delegate to modify the full payment requirement contained in the

9
Although the record does not indicate the exact dates of petitioner's
incarceration, it appears that he entered prison on or shortly after December 1,
2006, and was released at the end of December 2009 or in early 2010. Therefore,
the three-year probationary period could not have terminated until December
2012, at the earliest, with the result that it was necessarily in effect during Mr.
August's consideration of petitioner's OIC, in 2010 and 2011, and when
respondent issued the notices of determination on February 10 and 11, 2012.
 - 26 -

JPC order, which, by its terms, provides that the court, upon notification by the

defendant (i.e., petitioner), the Government, or the victim (respondent, in either

case), or on its own motion "may * * * adjust the manner of payment of * * *

restitution". Although that provision, arguably, does no more than permit the

payment terms in the JPC order to be revised, we do not doubt the Attorney

General's or the District Court's right to settle or compromise (as well as extend

the time for payment of) a defendant's restitution obligation.10 See Creel v.

Commissioner, 419 F.3d 1135, 1140-1142 (11th Cir. 2005). In Creel, the Court of

Appeals for the Eleventh Circuit affirmed our decision rejecting an Appeals

officer's determination, after a CDP hearing, to sustain a proposed levy where a

restitution order, arising out of the taxpayer's prior criminal case, that required the

taxpayer to pay the IRS "$83,830 plus any applicable penalties and interest" was

deemed, by the U.S. Attorney's Office, to have been satisfied after the taxpayer's

payment of $83,830. The Commissioner had sought approval of a levy to collect

the unpaid penalties and interest. On the basis of what we had found, the Court of

Appeals found that the U.S. Attorney's Office

believed that the receipt of petitioner's civil taxes (exclusive of
penalties and interest) in the amount of $83,830 was the most that it

10
Sec. 7122(a) appears to explicitly grant that right to the Attorney General
or his delegate where the case has been referred to DOJ for prosecution or defense.
 - 27 -

could recover from petitioner and agreed with him following his
sentencing that his timely payment of that amount would serve to
settle his civil tax liability of $83,830 plus related penalties and
interest. * * * Thus, although not compelled to do so, the
government discharged Creel's civil tax liabilities as part of the
criminal case.

Id. at 1141.

Thus, we do not consider section 7122(a) to be an absolute bar to an

Appeals officer's consideration, pursuant to section 6330(c), of an offer to

compromise a taxpayer's assessed liabilities, after referral of those liabilities to

DOJ for prosecution. It does, however, require prior approval by the Attorney

General or his delegate of the proposed compromise, which, in this case, was not

sought by either petitioner or the Appeals officer.

As noted supra, section 301.7122-1(d)(2), Proced. & Admin. Regs.,

provides: "The IRS may not accept for processing any offer to compromise a

liability following reference of a case involving such liability to the Department of

Justice for prosecution or defense." (Emphasis added.) The emphasized language

makes clear that the Attorney General's exclusive right of compromise applies

only to liabilities that have been referred to DOJ for prosecution or defense, in this

case, petitioner's assessed liabilities for the conviction years. But the notices of

levy cover 2003 in addition to the conviction years, and the NFTLs cover 2003,
 - 28 -

2004, and 2006. Therefore, section 7122(a) did not negate Mr. August's authority,

pursuant to section 6330(c), to compromise petitioner's assessed liabilities for

2003, 2004, and 2006. Nonetheless, because both petitioner's OIC and his

amended OIC would have compromised his unpaid liabilities for the conviction

years as well for the subsequent years, section 7122(a) barred Mr. August from

unilaterally accepting either.

D. Conclusion

Section 7122(a) barred Appeals from unilaterally accepting petitioner's

amended OIC. On the basis of that limitation and upon Mr. August's finding of

petitioner's noncompliance with the tax filing and payment requirements of the

OIC, Appeals did not abuse its discretion by rejecting that OIC.

IV. Mr. Chun's Involvement: The Impartiality and Ex Parte Communication
Issues

A. Introduction

Because section 7122(a) barred Appeals from unilaterally accepting

petitioner's amended OIC as a matter of law, Mr. Chun's involvement in Mr.

August's determination to reject that OIC, whether or not proper, is of no

consequence. Therefore, both the impartiality and ex parte communication issues
 - 29 -

are technically moot. Nonetheless, assuming there were a need to decide those

issues herein, we would resolve both in respondent's favor.

B. Analysis and Conclusion

1. Mr. Chun's Involvement Did Not Result in a Violation of the
Section 6330(b)(3) Impartial Officer Requirement.

Section 7122(b) provides, in pertinent part, that, in the case of a decision to

compromise a taxpayer's liability in excess of $50,000, "there shall be placed on

file in the office of the Secretary the opinion of the [Treasury's] General Counsel

* * * or his delegate, with his reasons therefor". See also section 301.7122-

1(e)(6), Proced. & Admin. Regs., providing that, where an OIC involving a

liability in excess of $50,000 is accepted, "there will be placed on file the opinion

of the Chief Counsel for the IRS with respect to such compromise, along with the

reasons therefor."

Because Mr. August initially recommended acceptance of and the Appeals

team manager preliminarily approved the amended OIC, it was incumbent upon

them to obtain the Chief Counsel opinion required by section 7122(b) and the

regulations thereunder, and they acted appropriately in referring the matter to

Chief Counsel for that purpose. Mr. Chun, as a member of respondent's Office of

Chief Counsel, was assigned to handle that referral, and he recommended rejection
 - 30 -

of the amended OIC in that capacity. Mr. Chun's involvement did not cause him

to become, as petitioner argues, the de facto Appeals officer in the case. As a

result, the section 6330(b)(3) requirement that petitioner's CDP hearing "be

conducted by an officer or employee who has had no prior involvement with

respect to * * * [petitioner's] unpaid tax" does not apply to Mr. Chun, and his prior

involvement in the California bankruptcy, which, in any event, concerned

petitioner's unpaid taxes for different tax years, could not have resulted in a

violation of that requirement.

2. Mr. Chun Was Not Subject to the Rule Prohibiting Ex Parte
Communications.

The Internal Revenue Service Restructuring and Reform Act of 1998, Pub.

L. No. 105-206, sec. 1001(a)(4), 112 Stat. at 689, requires that the mandated plan

to reorganize the IRS "ensure an independent appeals function within the Internal

Revenue Service, including the prohibition * * * of ex parte communications

between appeals officers and other Internal Revenue Service employees to the

extent that such communications appear to compromise the independence of the

appeals officers."

Rev. Proc. 2000-43, sec. 3, Q&A-1, 2000-2 C.B. 404, 405, makes clear that

the prohibition against ex parte communications extends to communications
 - 31 -

between "Appeals and another Service function". Because, as discussed supra,

Mr. Chun was not an Appeals employee, his communications with the revenue

officer and the special agent did not constitute prohibited ex parte

communications.

V. The Offset Issue

A. Introduction

On February 27, 2012, we denied petitioner's motion to raise the offset issue

(which had been raised at his CDP hearing) by amending his petition in order to

add an allegation challenging "the amount of the liability based on Respondent's

unlawful application [to petitioner's brother O'Kelly's account] of payments [made

in connection with the New Jersey bankruptcy] in prior years". During the trial,

petitioner renewed that motion. We sustained respondent's objection to that

motion but ruled that petitioner was still free "to ask leave to amend the petition,

to assign error to * * * [Mr. August's] failure to credit the payments * * * [but]

without recourse to * * * facts [beyond the administrative record]".

B. Analysis

Regardless of whether the offset issue presents a challenge to petitioner's

"underlying liability" within the meaning of section 6330(c)(2)(B) (subject to de

novo review) as petitioner argues, or constitutes a "relevant issue relating to the
 - 32 -

[allegedly] unpaid tax" within the meaning of section 6330(c)(2)(A) (subject to

review for abuse of discretion) as respondent argues, petitioner is barred from

raising the issue.11

1. Underlying Liability Analysis

Pursuant to section 6330(c)(2)(B), a taxpayer may challenge his underlying

liability at a CDP hearing if the taxpayer "did not receive * * * [a] statutory notice

of deficiency for * * * [the] liability or did not otherwise have an opportunity to

dispute such * * * liability." Here, the District Court for the Central District of

California, in denying petitioner's refund claim based upon the Commissioner's

misapplication of funds paid into the New Jersey bankruptcy proceeding,

specifically found that the Isleys (including petitioner) were in a position to, but

did not, object to respondent's proofs of claim in the California bankruptcy, which

claims necessarily included amounts that, in petitioner's view, would not have

been due but for respondent's allegedly improper application of the New Jersey

bankruptcy funds. The court held that, as a result of that failure to object,

respondent's claims were "deemed allowed", entitling them to res judicata effect.

11
See Kovacevich v. Commissioner, T.C. Memo. 2009-160, 2009
WL 1916351, at *5-*6, for a discussion of the caselaw involving the
classification, under sec. 6330(c)(2), of challenges to the proper crediting of
taxpayer payments to the Commissioner.
 - 33 -

It is sufficient for us to decline to consider the offset issue on the ground that the

California bankruptcy afforded to petitioner a prior opportunity to dispute his

liabilities. See Kendricks v. Commissioner, 124 T.C. 69, 77 (2005) ("[W]hen the

* * * [bankruptcy] provides the taxpayer the opportunity to object to the IRS's

proof of claim for an unpaid Federal tax liability, the taxpayer is afforded an

opportunity to dispute the liability, as contemplated by Congress in section

6330(c)(2)(B).").

2. Unpaid Tax Analysis

If we assume, however, that the offset issue does not involve a challenge to

petitioner's underlying liabilities but, instead, constitutes a "relevant issue relating

to the unpaid tax" within the meaning of section 6330(c)(2)(A),12 we agree with

respondent that our consideration of the issue is barred by section 6330(c)(4)(A).

That provision states, in pertinent part, that "[a]n issue may not be raised at the

hearing if * * * the issue was raised and considered * * * [in a] previous

administrative or judicial proceeding; and * * * the person seeking to raise the

issue participated meaningfully in such hearing or proceeding".

12
See Freije v. Commissioner, 125 T.C. 14, 26 (2005) ("[A] 'relevant issue
relating to the unpaid tax * * *' surely includes a claim * * * that the 'unpaid tax'
has in fact been satisfied by a remittance that the Commissioner improperly
applied elsewhere.").
 - 34 -

As noted supra, petitioner raised the offset issue in his refund suit before the

District Court for the Central District of California, which rejected petitioner's

claim of offset on the grounds that (1) it was barred by the doctrine of res judicata

and (2) petitioner lacked standing to sue for the refund, the liabilities at issue

having been discharged by proceeds from the sale of assets belonging to the

bankruptcy estate. The Court of Appeals for the Ninth Circuit affirmed on both

grounds and on the further ground that the IRS "'enjoys the right to apply payment

in the manner it chooses.'" Isley v. United States, 272 Fed. Appx. 640 (9th Cir.

2008) (quoting United States v. Plummer (In re Plummer), 174 B.R. 284, 286

(Bankr. C.D. Cal. 1992)).

Petitioner argues that the holding at both the trial and appellate court levels

was that petitioner lacked standing to sue for a refund (i.e., that his suit was

procedurally deficient), a position implying that those courts' alternative bases for

denying relief were dicta. Petitioner concludes that "in none of these prior

proceedings was * * * [he] allowed to reach a determination on the merits * * *

[so that he has] had no opportunity in those proceedings to dispute the liability."

We disagree. Each of the courts' alternative bases for the denial of petitioner's

refund claims was sufficient, by itself, to sustain that result. Where there are

multiple bases for the result in a case, they constitute alternative holdings. See
 - 35 -

Superior Trading, LLC v. Commissioner, T.C. Memo. 2012-110, 2012 WL

1319748, at *2 ("These are all alternative holdings, each by itself sufficient to

sustain respondent's adjustments."), aff'd, 728 F.3d 676 (7th Cir. 2013).

Moreover, it is a long-established principle of law that each alternative rationale

for the result in a case has precedential value. See, e.g., Massachusetts v. United

States, 333 U.S. 611, 623 (1948) ("[A]s we were asked to do and rightly could do

* * * we decided both issues, and the judgment rested as much upon the one

determination as the other. In such a case the adjudication is effective for both.");

Richmond Screw Anchor Co. v. United States, 275 U.S. 331, 340 (1928) ("It does

not make a reason given for a conclusion in a case obiter dictum, because it is only

one of two reasons for the same conclusion."). Thus, it is clear that, during the

refund litigation in the District Court for the Central District of California and the

Court of Appeals for the Ninth Circuit, the offset issue "was raised and

considered" and that petitioner "participated meaningfully" in that litigation as

required by section 6330(c)(4)(A).

Nor is the application of section 6330(c)(4)(A) as a bar to petitioner's

raising the offset issue herein compromised by the fact that that issue was

improperly addressed during petitioner's CDP hearing. See sec. 301.6330-1(e)(3),

Q&A-E11, Proced. & Admin. Regs. ("Any determination * * * made by the
 - 36 -

Appeals officer with respect to * * * a precluded issue shall not be treated as part

of the Notice of Determination * * * and will not be subject to any judicial review

* * * it is not reviewable by the Tax Court because the precluded issue is not

properly part of the CDP hearing."); see also Swanson v. Commissioner, 121 T.C.

111, 118 (2003); Behling v. Commissioner, 118 T.C. 572, 579 (2002).

C. Conclusion

Section 6330(c)(2)(B) and (4)(A) alternatively preclude petitioner from

raising the offset issue herein.13

13
In his opening brief, petitioner seeks credit (offset), not only for the
allegedly misapplied payments made to the Commissioner in connection with the
New Jersey bankruptcy, but also for some $900,000 "in fees paid to the
[California] bankruptcy trustee, the trustee's attorney, the trustee's accountant and
the debtor's attorney." Petitioner argues that those expenditures were "needlessly
wasted" because proper application of a portion of the New Jersey bankruptcy
payments to his account would have eliminated the need for the California
bankruptcy proceeding, and the $900,000 "would have been available to pay the
tax liabilities" that were satisfied by the June 23, 2000, payment. We agree with
respondent that petitioner's failure to make this novel argument during his CDP
hearing bars him from making it here. See sec. 301.6330-1(f)(2), Q&A-F3,
Proced. & Admin. Regs. ("In seeking Tax Court review of a Notice of
Determination, the taxpayer can only ask the court to consider an issue * * * that
was properly raised in the taxpayer's CDP hearing."); see also Giamelli v.
Commissioner, 129 T.C. 107, 112-115 (2007).
 - 37 -

VI. The Section 7122(c) Payment Issue

A. Analysis

As noted supra note 2, section 7122(c)(1)(A)(i) requires that the submission

of any lump-sum OIC "be accompanied by the payment of 20 percent of the

amount of such offer." H.R. Conf. Rept. No. 109-455 (2006), 2006 U.S.C.C.A.N.

234, is the report of the committee of conference to accompany H.R. 4297, 109th

Cong. (2006), which, when enacted as the Tax Increase Prevention and

Reconciliation Act of 2005, Pub. L. No. 109-122, sec. 509(a), 120 Stat. at 362,

added the new section 7122(c). The report's explanation of the new provision

refers to the 20% payment as a "partial payment" or "down payment" of the

taxpayer's liability. H.R. Conf. Rept. No. 109-455, at 234, 2006 U.S.C.C.A.N. at

420-421. Notice 2006-68, sec. 1.02, 2006-2 C.B. 105, states: "The Service will

treat the required 20-percent payment as a payment of tax, rather than a refundable

deposit under section 7809(b) or Treas. Reg. § 301.7122-1(h)." Moreover, the

amended OIC that petitioner submitted to respondent contained the following

representation and acknowledgment by petitioner: "I * * * voluntarily submit all

tax payments made on this offer, including the mandatory payments of tax

required under section 7122(c). These tax payments are not refundable even if I

* * * withdraw the offer prior to acceptance or the IRS returns or rejects the offer."
 - 38 -

Thus, it is clear that, in the normal circumstances of a taxpayer's submission

of an OIC to the IRS, the section 7122(c) payment constitutes a nonrefundable,

partial payment of the taxpayer's liability, and petitioner does not argue to the

contrary. Petitioner does argue, however, that his amended OIC was neither

submitted nor rejected under normal circumstances, and that he is entitled,

therefore, to a refund of his section 7122(c) payment.

Petitioner notes that Mr. August assured his counsel that his OIC "would be

based on collectibility." He argues that, because his amended OIC was rejected on

grounds (e.g., section 7122(a)) other than doubt as to collectibility, Mr. August's

assurance to the contrary constituted, under principles of contract law, a "false

representation and inducement [that] voids the terms of the offer in compromise

and makes the deposited funds refundable." Respondent argues that we lack

jurisdiction to order a refund of the section 7122(c) payment, and that "the proper

means of requesting [a] return of the funds is to file * * * [a] claim for refund and,

if necessary, a refund suit in federal court." In the alternative, he argues that,

because there is no evidence that Mr. August was aware of either the JPC order or

the section 7122(a) bar to his acceptance of an OIC when he agreed to make

collectibility the sole determining factor in connection with his consideration
 - 39 -

thereof, he did not "fraudulently misrepresent material facts to petitioner in order

to induce him to submit the * * * [section 7122(c)] payment."

We need not address respondent's first alternative ground since we agree

with his second; i.e., there is no evidence of false representations or fraudulent

inducement. Moreover, petitioner overlooks the fact that among Mr. August's

grounds for ultimately rejecting the amended OIC was his finding, based upon Mr.

Chun's memorandum, that petitioner had understated the value of his assets and

the amount of his anticipated future income, which, in his view, raised "multiple

collectibility issues". Also, Mr. August made a finding that petitioner had violated

the terms of the OIC by failing to remain in compliance with his tax filing and

payment obligations (i.e., he failed to timely file his 2009 return or pay sufficient

estimated taxes for 2009 and 2010), a finding that petitioner's counsel admitted to

Mr. August was correct.

B. Conclusion

In the light of Mr. August's good-faith processing of the amended OIC, the

presence of issues regarding collectibility, and petitioner's noncompliance with his

ongoing tax obligations, we find that Appeals did not abuse its discretion in

retaining the section 7122(c) payment in conjunction with its rejection of the

amended OIC.
 - 40 -

VII. Conclusion

We conclude that Mr. August and his Appeals team manager did not abuse

Appeals' discretion in rejecting petitioner's OIC and retaining his section 7122(c)

payment. Still unresolved, however, is the question of whether it was an abuse of

discretion for Appeals to refuse to withdraw the NFTLs and to sustain the levies.

A. The NFTLs

Pursuant to section 6323(j)(1), the Commissioner is authorized to withdraw

an NFTL if (A) the notice is premature or otherwise violates administrative

procedures, (B) the taxpayer has entered into an installment payment agreement to

satisfy the liability for which the lien was imposed, (C) the withdrawal will

facilitate collection of the liability, or (D) the withdrawal would be "in the best

interests of the taxpayer * * * and the United States." There is no evidence in the

record, nor any claim by petitioner, that any of those conditions has been satisfied.

Moreover, Mr. August's "Case Activity Record" states that petitioner's counsel

told him he did not care about the liens and that the IRS is entitled to its liens. It

was not an abuse of discretion for Appeals to sustain the NFTLs.

B. The Levies

Pursuant to section 6330(c)(3)(C), the determination by the Appeals officer

conducting the CDP hearing must "take into consideration * * * whether any
 - 41 -

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." (Emphasis added.)

While Mr. Chun may have been correct in concluding that the OIC of

$1,047,216 was below the realizable collection potential from petitioner and,

therefore, insufficient, he suggested, in his January 10, 2011, memorandum to

Mr. August, that Mr. August "obtain more updated information"; that Appeals

reiterate its "requests for accounting information and accounting statements

covering the last five years"; and that "Appeals or the revenue officer obtain the

assistance of an IRS engineer to value Isley Brothers LLC." Mr. Chun's

suggestions that Mr. August obtain additional information regarding petitioner's

assets and future income potential, and his repeated references to potential sources

of both that petitioner had failed to include in the financial statements (Forms

433A and B) that he submitted to Mr. August in connection with his OICs,

indicate his view (which appears reasonable) that further negotiations with

petitioner might have proven fruitful and that petitioner had (or would have) the

financial wherewithal to submit another OIC in a larger amount or, perhaps, enter

into an installment agreement with respondent to pay his assessed liabilities over

time. Either alternative would have needed the prior approval of DOJ, pursuant to
 - 42 -

section 7122(a), but, as noted supra, either or both petitioner and Appeals could

have solicited such prior approval. Also, if petitioner is correct that neither the

prosecutor in the criminal case nor petitioner's probation officer actually objected

to the acceptance of petitioner's OIC, such approval likely would have been

forthcoming.

Moreover, it would appear that petitioner's 2009 and 2010 compliance

shortcomings were not intentional and were readily curable. Mr. August's case

activity report indicates that the failure to file petitioner's 2009 return was due to a

mixup between his advisers as to who had that responsibility, and that the

estimated tax payment shortfall was due to the fact that estimated tax payments

had been based inadvertently upon petitioner's "touring income" but not his

"royalty income".

Under the circumstances, a referral to DOJ being required, we conclude that

Appeals acted prematurely in sustaining the levies. Moreover, such an action

might very well have been "more intrusive than necessary". Therefore, we will

remand the case to Appeals for further consideration and instruct Appeals to

reexamine petitioner's financial position, and if, in Appeals' view, it warrants

petitioner's submission of another OIC or of an installment agreement (and
 - 43 -

petitioner is amenable thereto), to seek approval thereof from DOJ before entering

into or processing either.14

An appropriate order will be issued.

14
The three-year probationary period appears to have expired at or shortly
after the end of 2012. If petitioner has fully complied with its terms, which
include the obligation to discharge his liabilities for both the conviction years and
the three-year probationary period, or if those liabilities have been discharged by
means of a settlement between petitioner and DOJ, there will be nothing more to
collect for those years, making the issues of compromise and the continued
application of sec. 7122(a) to the conviction years moot. Not having been so
notified by the parties, we suspect that that is not the case and that there are still
uncollected assessed liabilities. If that is true, DOJ's prior approval of any
compromise with respect to the conviction years still will be necessary.