Schulman v. Comm'r

T.C. Memo. 2002-129

UNITED STATES TAX COURT

ALAN M. AND MARCIA F. SCHULMAN, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 9567-01L. Filed May 29, 2002.

Alan M. and Marcia F. Schulman, pro sese.

James E. Schacht, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

RUWE, Judge: Petitioners were issued a notice of

determination pursuant to section 6330(c)(3),1 in which it was

determined that a proposed levy should proceed for petitioners’

unpaid tax liabilities. Petitioners filed a petition for

1
Unless otherwise indicated, all section references are to
the Internal Revenue Code as amended.
 - 2 -

judicial review under section 6330(d)(1)(A) from that

determination. The only issue for decision is whether the

settlement officer abused her discretion in failing to accept

petitioners’ collection alternative.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found.

The stipulation of facts and the attached exhibits are

incorporated herein by this reference. At the time of filing of

the petition, petitioners resided in Bayside, Wisconsin.

Petitioner Alan Schulman is employed as a C.P.A., and his

wife is an educator. As of January 11, 2001, petitioners owed

unpaid Federal income taxes, penalties, and interest as follows:

Tax period Unpaid assessment amount

1993 $4,701.17
1994 3,733.13
1995 6,102.33
1996 6,492.48
1997 8,226.46
1998 6,097.53

On January 11, 2001, respondent rejected petitioners’

proposed installment agreement to pay $75 per month for their

unpaid tax liabilities. Respondent estimated that petitioners’

monthly income was $6,639, consisting of Mr. Schulman’s salary of

$3,856 and his wife’s salary of $2,783. Respondent estimated
 - 3 -

total monthly necessary living expenses of $5,861,2 consisting

of:

Item of expense Expense allowed

National standard expenses $1,473
Housing/utilities 1,440
Transportation 965
Health care 324
Taxes (income and FICA) 1,451
Court-ordered payments 150
Child/dependent care 0
Life insurance 58
Secured/legally-perfected debts 0
Other 0
Total 5,861

Respondent concluded that petitioners had the ability to pay $778

per month, the net difference between petitioners’ monthly income

and their monthly expenses.

On April 9, 2001, respondent issued to petitioners a Letter

1058, Final Notice/Notice of Intent to Levy and Notice of Your

Right to a Hearing. In that notice, respondent proposed a levy

for the collection of $36,032.35 in unpaid income taxes,

penalties, and interest for the taxable years 1993, 1994, 1995,

1996, 1997, and 1998. On April 17, 2001, petitioners filed a

2
In computing their proposed monthly installment payment,
petitioners claimed monthly necessary living expenses as follows:

Item of expense Expense claimed

National standard expenses $0
Housing/utilities 1,440
Transportation 965
Health care 324
Taxes (income and FICA) 1,451
Court-ordered payments 150
Child/dependent care 0
Life insurance 58
Secured/legally-perfected debts 0
Other 0
Total 4,388
 - 4 -

Form 12153, Request for a Collection Due Process Hearing.

Petitioners’ attachment to that form states their disagreement

with respondent’s proposed monthly installment payment and

includes “a listing of monthly expenses to provide information

that will assist in reaching a compromise”:

Item of expense Expense claimed

Housing and utilities
Rent $1,355
Gas 90
Electric 70
Telephone 100
Cable 45
Water 60
Total 1,720

Transportation
Gas, oil et al. 195
Loans 660
Insurance 180
Total 1,035

Health care
Insurance 455
Dental 65
Prescription copays 120
Total 640

Taxes
Federal 805
Social Security 385
Wisconsin 295
Total 1,485

Court-ordered payments 150
Life insurance 58
Retirement 120
Computer loan 55
Credit card payments 300
Student loan payments 220
Loan not current being repaid $11,500
______________________________________________

Total 5,783

A telephone conference was held on May 21, 2001, and, thereafter,

the parties exchanged correspondence.
 - 5 -

On June 8, 2001, respondent’s settlement officer sent

petitioners the following letter regarding the proposed

installment agreement:

I have not received a more viable proposal for payment
of your 1993 thru 1998 (and 1999) Federal Income Taxes.

As we discussed during our telephone conference on
5/21/2001, although you do not demonstrate an ability
to pay in full within the near future, an adjustment of
your expenses should be made so that within one year
you can commence substantial payments to allow payment
in full of all the liabilities listed on the Notice of
Intent and the 99 and prospective 2000 tax debt. An
installment agreement in the amount of $75.00 could be
initially allowed which would increase to $748.00 per
month in one year. I am sorry, but the unsecured and
incidental debt you list in your April 2001 financial
statements * * * [is] not allowable when forbearance
would result in payment in full of all tax liabilities,
penalty and interest.

The standards for allowable living expenses are
prescribed in the Internal Revenue Manual are the guide
used by both the Compliance and Appeals functions. I
cannot * * * [forgo] these guidelines unless there is a
special circumstance such as critical health needs.

In response to this letter, petitioners submitted a Form 433-A,

Collection Information Statement for Individuals, dated June 20,

2001, in which they stated: “I would like to reach a compromise

between the $75 that was previously agreed to + the $735 [sic]

that the IRS has calculated.” The Monthly Income and Expense

Analysis, as part of that form, lists monthly income of $6,965,

which consists of Mr. Schulman’s salary of $3,965 and his wife’s

salary of $3,000, as well as the following expenses:
 - 6 -
Item of expense Expense claimed

National standard expenses $1,453
Housing/utilities 1,750
Transportation 1,030
Health care 695
Taxes (income and FICA) 1,485
Court-ordered payments 150
Child/dependent care
Life insurance 60
Secured/legally-perfected debts
Other expenses
Loan payments 910 (685)
Student loans
Total 7,533

On June 26, 2001, the settlement officer sent a letter to

petitioners, which enclosed a list of the following allowable

expenses:

Item of expense Expense allowed

National standard expenses $1,473
Housing/utilities 1,214
Transportation 1,024
Health care 400
Taxes (income and FICA) 1,685
Court-ordered payments 150
Child/dependent care
Life insurance 60
Secured/legally-perfected debts
Other expenses
Loan payments 0
Student loans 210
Total 6,216

The letter states:

I have received your updated collection information
statement dated 6/20/01 and Mr. Schulmans’ [sic] wage
verification. Enclosed is a calculation of the
allowable Necessary Living Expenses.

Note that significant changes were made to the
allowable amounts for health care, taxes and the
student loan repayment is being allowed. The health
care figure is based on an average monthly premium of
171.00 co-pays averaging 140.00 and the remaining is
for miscellaneous medical supplies or needs. The
monthly tax figure was adjusted because I believe you
are under-estimating your monthly combined State and
 - 7 -

Federal Income Tax accrual. The school loan is being
allowed because I am assuming it is for the education
of either one of you for the purpose of enhancing your
careers and earning capacity. Student loans repayments
for current or former dependents are not allowable
unless a critical health situation exists.

Your gross income of $6965.00 minus the allowable
expenses totaling $6216.00 leaves a monthly payment
capability of $751.00.[3] Again, the unsecured charge
card or loan debt is not allowable.

Upon submission of your 1999 and 2000 Federal Income
Tax Returns I would consider an agreement of $75.00 per
month for one year, to be increased to $750.00 per
month. All tax returns must be filed timely during a
pending agreement.

Should you have information to further substantiate
some of the expenses you have claimed I will consider
it. I will wait until 7/10/2001 to hear from you
regarding this proposal for resolution of your unpaid
Federal Income Tax Accounts.

My tentative determination is to sustain the Notice of
Intent to Levy absent filed returns and an agreement to
pay in full as described above. Your financial
statement reveals you have the ability to pay in full
by making substantial monthly payments.

On July 6, 2001, petitioners sent a letter in response to the

settlement officer’s letter:

I received your letter of June 26, 2001 and I must
disagree with your findings. I have made some
adjustments to the form 433-A based on new information
that I received and your changes and have included a
new form 433-A.

The housing and utilities are based upon the actual
monthly expenditures. The health care is based upon
actual monthly insurance premiums and out of pocket co-
pays for prescription medications. The loan payments

3
Due to a subtraction error, this number should have been
$749.
 - 8 -

are also actual payments being made on outstanding
credit card balances.

I am again requesting a compromise monthly payment at a
level that can be made on a regular basis. If we are
not able to reach a compromise, than I am requesting to
take the next step in the appeal process.

The letter attached a new Form 433-A, which listed the following

amounts as necessary living expenses:

Item of expense Expense claimed

National standard expenses $1,473
Housing/utilities 1,715
Transportation 1,045
Health care 589
Taxes (income and FICA) 1,685
Court-ordered payments 150
Child/dependent care
Life insurance 60
Secured/legally-perfected debts
Other expenses
Loan payments 685
Student loans 210
Total 7,612

On July 19, 2001, a Form 3193, Notice of Determination

Concerning Collection Action(s) Under Section 6320 and/or 6330,

was issued to petitioners in which the Appeals Office “sustained”

the notice of intent to levy and verified that “All

administrative procedures were followed prior to issuance.”4 On

July 30, 2001, petitioners filed a timely petition with this

Court from that determination. On August 28, 2001, petitioners

filed an amended petition in which they disagreed with the

settlement officer’s proposed monthly installment payment and

4
An attachment to this form describes the determination to
sustain the levy and is attached to this opinion as an appendix.
 - 9 -

alleged that she failed to compromise or to otherwise accept

their claimed expenses.

OPINION

A taxpayer is entitled to notice before levy and notice of

the right to a fair hearing before an impartial officer of the

Internal Revenue Service Office of Appeals. Secs. 6330(a) and

(b), 6331(d). If the taxpayer requests a 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 shall be made

which shall take into consideration those issues, 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).

In the instant case, petitioners raise only issues relating

to collection alternatives, specifically whether the settlement

officer failed to consider certain expenses that petitioners

claimed as part of their proposed installment agreement.5

5
The notice of determination states that petitioners
requested an offer in compromise; however, petitioners do not
(continued...)
 - 10 -

Because petitioners do not dispute the existence or amount of

their underlying tax liabilities, we review the determination for

an abuse of discretion. Lunsford v. Commissioner, 117 T.C. 183,

185 (2001); Nicklaus v. Commissioner, 117 T.C. 117, 120 (2001).

The settlement officer’s consideration of petitioners’

collection alternative, an installment agreement, was reasonable.

Her determination was based on a financial analysis of

petitioners’ monthly income and expenses and their ability to

pay. She allowed certain expenses in amounts greater than those

originally claimed by petitioners, e.g., taxes. And, her

disallowance of claimed expenses was based on applicable

procedures contained in the Internal Revenue Manual.6 The

5
(...continued)
raise any issues relating to any offer in compromise, and the
record does not show that they filed a Form 656, Offer in
Compromise. Indeed, at trial, Mr. Schulman indicated his
unwillingness to satisfy the procedures applicable to an offer in
compromise.
6
The Internal Revenue Manual provides procedures for
proposed installment agreements. See 2 Administration, Internal
Revenue Manual (CCH), sec. 5.15.1 to 5.15.1.4, at 17,653-17,660.
Those procedures contain guidelines for allowable expenses, which
include necessary and conditional expenses. Necessary expenses
are those that meet the necessary expense test; i.e., “they must
provide for a taxpayer’s and his or her family’s health and
welfare and/or the production of income” and they must be
reasonable. There are three types of necessary expenses: (1)
Those based on national standards, e.g., food, housekeeping
supplies, apparel and services, and personal care products and
services; (2) those based on local standards, e.g., housing,
utilities, and transportation; and (3) other expenses, which are
not based on national or local standards, e.g., health care.
Conditional expenses are those expenses that do not meet the
(continued...)
 - 11 -

settlement officer informed petitioners that, under those

procedures, she could not allow expenses for unsecured debt as

they had claimed. She also informed them that certain other

expenses they had claimed had not been substantiated. She

provided petitioners considerable time and opportunity to submit

additional information to substantiate expenses they had

previously claimed, but which were disallowed, and to submit

evidence of any “special circumstance”. The settlement officer

offered a 1-year period for petitioners to modify their spending

habits and lifestyle before full monthly payments would be

required.

Petitioners submitted additional information, however, they

continued to claim expenses which were previously disallowed and

which they had been told could not be allowed. They did not

provide substantiation for certain expenses, e.g., medical

expenses, but, nevertheless, they continued to claim those

expenses. Petitioners’ letter of July 6, 2001, shows clearly

that an installment agreement could not be reached by the parties

given the wide disparity in petitioners’ claimed expenses and the

expenses allowable under the Internal Revenue Manual guidelines.

Indeed, in that letter petitioners claimed expenses in amounts

6
(...continued)
necessary expense test, but which may be allowable if the tax
liability, including projected accruals, can be fully paid within
five years.
 - 12 -

greater than those they had claimed in their June 20, 2001,

letter. Given those circumstances, the determination to sustain

the levy was not an abuse of discretion.

The crux of petitioners’ contentions in this case is that

certain expenses should have been allowed by the settlement

officer in greater amounts. Petitioners dispute two items which

the settlement officer refused to allow additional expenses for.

First, petitioners contend that the expenses for housing and

utilities should have been based on the local standards

applicable to Ozaukee County, Wisconsin, and not Milwaukee

County, Wisconsin, since “Our house is less than one half mile

from Ozaukee county and is more consistent with the costs of that

county than with those of Milwaukee county.”7 Petitioners

propose an average of the allowable expense standards for the two

counties; i.e., $1,394, be used to determine a proper monthly

installment payment. Second, petitioners claim that the

settlement officer “arbitrarily” allowed $400 of medical

expenses, whereas she should have allowed $695, the amount

petitioners listed on the June 20, 2001, Form 433-A that they

7
The local standards for housing and utilities for calendar
year 2002 list the allowable expenses for a family of four in
Milwaukee County, Wisconsin, at $1,255, and in Ozaukee County,
Wisconsin, at $1,533.
 - 13 -

submitted.8 We do not find that the settlement officer abused

her discretion in disallowing petitioners’ claimed expenses.

The settlement officer was entitled to rely on the standards

applicable to Milwaukee County. Petitioner husband admitted at

trial that both he and his wife lived and worked in Milwaukee

County. Petitioners did not introduce any evidence of any

meaningful ties to Ozaukee County, other than the relative

proximity of their residence. We cannot agree that the

settlement officer abused her discretion in relying on the

housing and utility standards applicable to Milwaukee County.

And, it was not an abuse of discretion for her to refuse to

accept what petitioners claimed to be their actual housing and

utility expenditures. The expenses claimed by petitioners

exceeded the applicable local standards for housing and

8
Petitioners now propose additional amounts of medical
expenses, increasing their total to $726, as well as an increase
in the tax expenses allowed from $1,685 to $2,065. We decline to
discuss those additional amounts, since they were not raised
before the settlement officer and were not raised at trial. “It
is the responsibility of the taxpayer to raise all relevant
issues at the time of the pre-levy hearing.” H. Conf. Rept. 105-
599, at 266 (1998), 1998-3 C.B. 755, 1020. In addition,
petitioners have submitted with their brief a revision of the
expenses used by the settlement officer which shows total
expenses of $7,071. Petitioners propose “a monthly payment of
$300 as a way of settling this case”. Again, this revision is
relevant, for purposes of our review, only to the extent it was
proposed to the settlement officer.
 - 14 -

utilities. See 2 Administration, Internal Revenue Manual (CCH),

sec. 5.15.1.3.2.2 (2), at 17,657 (“Taxpayers will be allowed the

local standard or the amount actually paid, whichever is less”).

The settlement officer allowed $400 of medical expenses on

the basis of average monthly premiums, copays, and miscellaneous

medical supplies or needs. Petitioners claim that $695 in

medical expenses should have been allowed, which amount they

claim to be their “actual out-of-pocket health insurance, copays,

things like that.” However, it is clear that the settlement

officer did not accept those additional amounts, because

petitioners provided no substantiation. See 2 Administration,

Internal Revenue Manual (CCH), sec. 5.15.1.3(8)(a), at 17,655:

“A taxpayer is required to provide evidence and justification for

claimed expenses, except National Standards”.9 Petitioners

presented no evidence at trial or on brief to otherwise

substantiate their expenses.10 We hold that the settlement

9
See also sec. 301.6330-1(e)(1), Proced. & Admin. Regs.:
“Taxpayers will be expected to provide all relevant information
requested by Appeals, including financial statements, for its
consideration of the facts and issues involved in the hearing.”
10
At trial, Mr. Schulman testified:

Q Mr. Schulman, did you ever provide Ms. Wastian any
evidence of your medical expenses?

A Yes. They’re on a schedule.

Q But did you provide them to her when you conferred
with her?
(continued...)
 - 15 -

officer did not abuse her discretion in computing petitioners’

allowable monthly expenses.

On the basis of the record as a whole, it is clear that the

parties were, and are still, unable to agree to an appropriate

monthly installment payment. The settlement officer’s proposed

monthly installment payment was computed under the guidelines

provided in the Internal Revenue Manual. We have reviewed those

computations, and we find them to be reasonable. The settlement

officer’s disallowance of petitioners’ claimed expenses was not

arbitrary, and she gave due consideration to each of the

proposals they submitted. We hold that the settlement officer

did not abuse her discretion, and respondent may proceed with the

proposed levy action. See Estate of Doster v. Commissioner, T.C.

Memo. 2002-2 (“To the extent respondent considered installment

10
(...continued)
A I don’t know if they were given to her, but
somebody in the Service, in the office, had them, yes.
In a notice to Ms. Marge Flaig, who, I guess, was the
revenue officer who you had before, in an attachment to
Form 12153 in April of 2001, it listed health care for
insurance, health insurance, dental and prescription
copays.

* * * * * * *

Q And did you submit any additional information
beyond this, in terms of where these line items
consisted of?

A No. Nobody ever asked me.
 - 16 -

payments as a collection alternative, there was no abuse of

discretion”).

An appropriate decision will

be entered permitting respondent to

proceed with collection.
 - 17 -

APPENDIX
Attachment - 3193
Notice of Determination

Settlement Officer Ursula Kordasiewicz Wastian has not had prior
contact with the taxpayers concerning this specific tax return or
the years listed. No other Collection Due Process Appeals are
pending at this time for the specific tax returns or years
listed.

Notice of Intent to Levy Issued on 4/9/2001. The taxpayers
submitted a Request for a Collection Due Process Hearing on
4/14/2001.

ISSUES RAISED BY THE TAXPAYER

The taxpayer is requesting an installment agreement or an offer
in compromise be granted based on financial information he
submitted to the compliance employee and again to the Settlement
Officer. The Service does consider both collection alternatives
after an analysis of income and monthly expenditares [sic]
claimed on a Collection Information Statement. Certain
restrictions do apply in that expenses considered reasonable and
allowable under the Internal Revenue Manual are granted and the
taxpayer must be in full compliance with all Federal Tax Return
filing requirements.

The taxpayers submitted financial information to the compliance
function and to appeals which contained expenses not normally
allowable in the area of unsecured debt. The Internal Revenue
Manual permits a taxpayer a one year period of time to adjust
their spending habits and life-style to allow for payment in full
of accrued liabilities over the life of an installment agreement.
A proposal of initial payments in the amount of $75.00 per month
to be increased to $750.00 at the one year anniversary was made
to the taxpayers. They do not agree with this proposal and did
not counter with anything more viable.

Additionally, the Service could not seriously entertain an
installment agreement or an offer in compromise until the
taxpayer became current with all filing requirements. The 1999
and 2000 Federal Income Tax Returns remain unfiled.

VERIFICATION OF LEGAL AND PROCEDURAL REQUIREMENTS

A review of the compliance case history reveals the Revenue
Officer communicated the Services’ policy regarding allowable
 - 18 -

expenses and current compliance to the taxpayer prior to issuance
of the Notice of Intent to Levy. An independent review of this
determination was also conducted per the Internal Revenue Manual
and was sustained. Sources of collection were identified prior
to issuance of the Notice of Intent to Levy. All administrative
procedures were followed.

BALANCING THE NEED FOR EFFICIENC [sic] COLLECTION WITH THE
CONCERN THAT COLLECTION IS NO MORE INTRUSIVE THAN NECESSARY

The taxpayers has [sic] been given repeated explanations and
policy guidelines relative to allowable expenses and current
compliance. Both the compliance employee and Settlement Officer
have provided the taxpayer with alternatives to the levy however
he insists on more reasonable terms. The financial information
reveals an ability to pay all the subject taxes, penalty and
interest in full by making substantial monthly payments after
giving one year to adjust his life-style. Resolving the
unsecured charge card debt and excessive housing expenses will
permit substantial payments. The compliance issue is also a
road-block to these collection alternatives at this time. Levy
activity at this time is not considered overly intrusive
considering the attempts made by the Service to resolve this
situation and lack of compliance with filing Federal Income Tax
Returns in a timely manner.

RECOMMENDATION

The Notice of Intent to Levy is sustained.