O'Brien v. Comm'r

T.C. Memo. 2003-290

UNITED STATES TAX COURT

AMY H. O’BRIEN, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 9958-02L. Filed October 14, 2003.

P filed a petition for judicial review pursuant to
secs. 6320 and 6330, I.R.C., in response to a
determination by R to leave in place a filed notice of
Federal tax lien.

Held: Because the record does not establish an
abuse of discretion by R in rejecting P’s offer in
compromise, R’s determination to proceed with
collection action is sustained.

Ansel B. Chaplin, for petitioner.

Nina P. Ching, for respondent.
 - 2 -

MEMORANDUM OPINION

WHERRY, Judge: This case arises from a petition for

judicial review filed in response to a Notice of Determination

Concerning Collection Action(s) Under Section 6320 and/or 6330.1

The issue for decision is whether respondent may proceed with

collection of tax liabilities for years 1995 through 1999 as so

determined.

Background

This case was submitted fully stipulated pursuant to Rule

122. The stipulations of the parties, with accompanying

exhibits, are incorporated herein by this reference.2

Petitioner is an artist who supported herself during the

1995 through 1999 tax years by taking odd jobs as an artist’s

model. She was born on May 21, 1951, and has, at all relevant

times, been single with no dependents.

On July 7, 1999, petitioner filed late Federal income tax

returns for 1995, 1996, and 1997 showing balances due. No

payments were remitted with the returns. Respondent assessed the

1
Unless otherwise indicated, section references are to
the Internal Revenue Code, as amended, and Rule references are to
the Tax Court Rules of Practice and Procedure.
2
Respondent objected to certain stipulations on the grounds
of relevancy and materiality. To the extent we have included
information from such stipulations to provide context, we deem
respondent’s objections moot in light of our opinion and the
resolution therein.
 - 3 -

reported tax liabilities, as well as delinquency additions to tax

and interest, for 1995, 1996, and 1997, and sent corresponding

notices of balance due, on August 23, 1999, September 6, 1999,

and August 9, 1999, respectively. Similarly, on October 5, 1999,

petitioner filed a late 1998 income tax return showing a balance

due, which was not accompanied by any payment. The 1998 tax

liability, additions to tax, and accrued interest were assessed

by respondent on November 15, 1999, and a notice of balance due

was sent.

For the 1999 taxable year, petitioner filed a timely return

showing an overpayment and claiming an earned income credit.

Respondent assessed the 1999 tax liability on February 28, 2000,

and transferred an overpayment credit to 1995. Thereafter, on

August 7, 2000, respondent made additional assessments to

petitioner’s 1999 account, and sent a notice of balance due, for

tax, additions to tax, and interest resulting from certain

uncontested adjustments.

After filing her 1995 through 1998 returns, petitioner on

October 26, 1999, created the “Amy H. O’Brien 1999 Irrevocable

Trust”. The trust instrument designated a third party as trustee

and established a support trust for petitioner’s benefit.

Specifically, the trust instrument’s “THIRD” term and condition

provided as follows with regard to distributions:

During my lifetime, the Trustee shall pay the net
income from the trust property at least quarter-
 - 4 -

annually to me or for my benefit. The Trustee shall
also pay to me or apply for my benefit so much of the
principal of the trust property as she may determine in
her sole discretion to be necessary or desirable for my
health, welfare, maintenance and support. In so doing,
she should be guided by the fact that I have no spouse
or other comparably significant object of my affection,
and will leave no descendants or collateral descendants
for whom the principal should be preserved, if
possible.

The trust also contained a spendthrift provision as its “SEVENTH”

term and condition. At petitioner’s death, the trustee was

directed to distribute remaining principal and undistributed

income to a friend of petitioner’s, if then living, or to the

friend’s descendants.

On the same October 26, 1999, date, petitioner executed a

quitclaim deed transferring to the trust for nominal

consideration a single-family residence located on Cape Cod,

Massachusetts. Petitioner had inherited the home from her

parents on July 28, 1986. At the time petitioner transferred the

property, the residence did not enjoy clear marketable title on

account of an outstanding 25-percent interest that had never been

obtained by the family members who were her predecessors in

title. After transfer of the property, petitioner owned no other

significant assets. The home generated rental income of

approximately $600 per month, which petitioner admittedly failed

to report on her 1995 through 1999 returns.

In December of 1999, the trust entered into an agreement to

sell the residence. Petitioner’s lawyer had been able to
 - 5 -

negotiate a purchase-and-sale agreement that permitted the

downpayment to be used to clear title through a judicial

proceeding. The sale closed, and the trust conveyed the property

on February 7, 2001, for a purchase price of $290,000, which

netted the trust approximately $235,000 after payment of expenses

approximating $55,000 to obtain marketable title. The trust now

consists entirely of liquid assets.

On November 9, 2000, respondent filed a notice of Federal

tax lien with the Register’s Office of New York County, New York,

listing petitioner’s income tax liabilities for the 1995 through

1999 years. The lien reflected a total unpaid balance of

$12,587.62 and was recorded on November 17, 2000.

On November 15, 2000, respondent mailed to petitioner a

Notice of Federal Tax Lien Filing and Your Right to a Hearing

Under IRC 6320 regarding the just-described lien. Petitioner

returned to respondent a completed and signed Form 12153, Request

for a Collection Due Process Hearing, with the following

explanation of her disagreement:

It is just impossible for me to pay this amount at this
time. I can pay up to $100.00 per month beginning in
January ’01. I have one full-time job which pays me
between $300-$400 per week. After rent + utilities +
expenses, I can agree to begin paying $100.00 per
month.

Thereafter, by a letter dated February 28, 2001, respondent

rejected the installment plan as stated on the Form 12153. The

proposal was rejected because petitioner had defaulted on a
 - 6 -

previous installment plan, because information submitted by

petitioner showed monthly expenses in excess of income, and

because the suggested monthly payments would be insufficient to

pay her liabilities within the statute of limitations for

collection. After petitioner received this letter, her

representative apparently contacted respondent by telephone and

discussed possible use of an offer in compromise. Respondent

then sent a letter dated May 1, 2001, confirming the telephone

conversation and requesting completion of the enclosed Form 656,

Offer in Compromise, and Form 433-A, Collection Information

Statement for Wage Earners and Self-Employed Individuals.

Respondent received the Form 656 and Form 433-A submitted by

petitioner on September 4, 2001. The Form 656 asked petitioner

to select as the reason for the offer either doubt as to

liability, doubt as to collectibility, or effective tax

administration. Petitioner checked effective tax administration,

which the form explained as meaning “I owe this amount and have

sufficient assets to pay the full amount, but due to my

exceptional circumstances, requiring full payment would cause an

economic hardship or would be unfair or inequitable.” Petitioner

proposed to pay a total of $2,400 by remitting $240 for the first

month and $180 per month for each of the next 12 months. The

Form 656 indicated that the source of the funds would be the “Amy
 - 7 -

H. O’Brien 1999 Irrevocable Trust account at Fidelity

Investments”.

On September 28, 2001, respondent sent a letter rejecting

petitioner’s offer in compromise. The letter explained that,

because the tax liabilities of approximately $13,000 could be

collected from the at least $175,000 remaining in the body of the

trust, the offer of $2,400 was not acceptable “due to the fact

that the taxpayer has the means to satisfy the entire debt at

this time.”

Petitioner submitted additional information supporting her

offer in compromise on October 4, 2001. Specifically, she

provided bank statements for the period of May 18 to August 19,

2001, a renewal lease for her apartment, a telephone bill, and a

utility bill. Then, in a letter dated October 10, 2001,

petitioner requested “further review” of respondent’s decision to

reject her offer, on grounds that respondent failed to address

“mitigating factors” weighing in petitioner’s favor. In

response, respondent sent a letter reiterating the reasons for

the rejection. By a final letter dated October 18, 2001,

petitioner’s representative continued to argue for acceptance of

her offer.

On May 9, 2002, respondent issued to petitioner the Notice

of Determination Concerning Collection Action(s) Under Section

6320 and/or 6330 sustaining use of the lien as an appropriate
 - 8 -

collection action. The notice, consistent with the earlier

correspondence, was premised primarily on the inadequacy of

collection alternatives in light of petitioner’s ability to pay

her tax liabilities in full from the assets of the trust.

Petitioner’s petition challenging this notice was filed with the

Tax Court on June 12, 2002, and reflected an address in New York,

New York.

Discussion

I. Collection Actions--General Rules

Section 6321 imposes a lien in favor of the United States

upon all property and rights to property of a taxpayer where

there exists a failure to pay any tax liability after demand for

payment. The lien generally arises at the time assessment is

made. Sec. 6322. Section 6323, however, provides that such lien

shall not be valid against any purchaser, holder of a security

interest, mechanic’s lienor, or judgment lien creditor until the

Secretary files a notice of lien with the appropriate public

officials. Section 6320 then sets forth procedures applicable to

afford protections for taxpayers in lien situations. Section

6320(a)(1) establishes the requirement that the Secretary notify

in writing the person described in section 6321 of the filing of

a notice of lien under section 6323. This notice required by

section 6320 must be sent not more than 5 business days after the

notice of tax lien is filed and must advise the taxpayer of the
 - 9 -

opportunity for administrative review of the matter in the form

of a hearing before the Internal Revenue Service Office of

Appeals. Sec. 6320(a)(2) and (3). Section 6320(b) and (c)

grants a taxpayer, who so requests, the right to a fair hearing

before an impartial Appeals officer, generally to be conducted in

accordance with the procedures described in section 6330(c), (d),

and (e).

Section 6330(c) addresses the matters to be considered at

the hearing:

SEC. 6330(c). Matters Considered at Hearing.--In
the case of any hearing conducted under this section--

(1) Requirement of investigation.--The
appeals officer shall at the hearing obtain
verification from the Secretary that the
requirements of any applicable law or
administrative procedure have been met.

(2) Issues at hearing.--

(A) In general.--The person may raise at
the hearing any relevant issue relating to
the unpaid tax or the proposed levy,
including--

(i) appropriate spousal defenses;

(ii) challenges to the
appropriateness of collection actions;
and

(iii) 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.

(B) Underlying liability.--The person
may also raise at the hearing challenges to
 - 10 -

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.

Once the Appeals officer has issued a determination

regarding the disputed collection action, section 6330(d) allows

the taxpayer to seek judicial review in the Tax Court or a U.S.

District Court. In considering whether taxpayers are entitled to

any relief from the Commissioner’s determination, this Court has

established the following standard of review:

where the validity of the underlying tax liability is
properly at issue, the Court will review the matter on
a de novo basis. However, 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. [Sego v.
Commissioner, 114 T.C. 604, 610 (2000).]

II. Contentions of the Parties

The parties have stipulated that “petitioner’s only argument

in this case is that respondent abused his discretion by failing

to accept her offer in compromise.” Accordingly, petitioner’s

underlying tax liabilities for the 1995 through 1999 years are

not at issue in the instant proceeding.

In arguing that rejection of her offer was an abuse of

discretion, petitioner on brief “takes the position that she

cannot afford to pay her liabilities in full”, “agrees that the

respondent has the naked power to reach and apply the Trust

assets, but contends that it would be grossly unfair to do so.”
 - 11 -

In other words and as summarized by petitioner, although “the

O’Brien Trust assets can be reached to satisfy the 1995-1999 tax

liability”, “it was an abuse of discretion to ignore her over-all

financial situation and reject her offer-in-compromise which

acknowledged an indebtedness, but sought recognition that to

deplete her trust would not be in the public interest.”

Conversely, respondent asserts that standards reflected in

section 7122 and regulations promulgated thereunder regarding

evaluation of offers in compromise support respondent’s rejection

of petitioner’s offer. In this connection and relying on

principles set forth in caselaw and in Rev. Rul. 55-210, 1955-1

C.B. 544, respondent maintains that petitioner’s interest in the

trust is properly reachable by Federal tax lien and that

petitioner therefore has sufficient assets to pay her liabilities

in full. Respondent further contends that petitioner has failed

to establish economic hardship or to present compelling public

policy or equity considerations, as described in the applicable

regulations discussed below, that would show any abuse of

discretion in respondent’s actions against these trust assets.

III. Analysis

Section 7122(a), as pertinent here, authorizes the Secretary

to compromise any civil case arising under the internal revenue

laws. Section 7122(c)(1) then addresses standards for evaluation

of offers, as follows: “The Secretary shall prescribe guidelines
 - 12 -

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.” In accordance with this

directive, section 301.7122-1T(b), Temporary Proced. & Admin.

Regs., 64 Fed. Reg. 39024 (July 21, 1999)3, sets forth three

grounds for compromise of a liability: (1) Doubt as to

liability, (2) doubt as to collectibility, or (3) promotion of

effective tax administration. Section 301.7122-1T(b)(4),

Temporary Proced. & Admin. Regs., supra, the provision relevant

here, reads as follows:

(4) Promote effective tax administration. If
there are no grounds for compromise under paragraphs
(b)(2) and (3) of this temporary regulation, a
compromise may be entered into to promote effective tax
administration when--

(i) Collection of the full liability will create
economic hardship within the meaning of § 301.6343-1;
or

(ii) Regardless of the taxpayer’s financial
circumstances, exceptional circumstances exist such

3
By their terms, the temporary regulations apply to offers
in compromise submitted on or after July 21, 1999, through July
19, 2002. Sec. 301.7122-1T(j), Temporary Proced. & Admin. Regs.,
64 Fed. Reg. 39027 (July 21, 1999). The temporary regulations
thus were effective throughout the period during which
petitioner’s offer was under consideration by respondent. Final
regulations, which do not differ materially in substance, were
subsequently issued and are applicable for offers pending on or
submitted on or after July 18, 2002. Sec. 301.7122-1, Proced. &
Admin. Regs. Temporary regulations are entitled to the same
weight and binding effect as final regulations. Peterson Marital
Trust v. Commissioner, 102 T.C. 790, 797 (1994), affd. 78 F.3d
795 (2d Cir. 1996).
 - 13 -

that collection of the full liability will be
detrimental to voluntary compliance by taxpayers; and

(iii) Compromise of the liability will not
undermine compliance by taxpayers with the tax laws.

(iv) Special rules for evaluating offers to
promote effective tax administration.--(A) The
determination to accept or reject an offer to
compromise made on the ground that acceptance would
promote effective tax administration within the meaning
of this section will be based upon consideration of all
the facts and circumstances, including the taxpayer’s
record of overall compliance with the tax laws.

(B) Factors supporting (but not conclusive of) a
determination of economic hardship under paragraph
(b)(4)(i) include--

(1) 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;

(2) Although taxpayer has certain assets,
liquidation of those assets to pay outstanding tax
liabilities would render the taxpayer unable to meet
basic living expenses; and

(3) Although taxpayer has certain assets, the
taxpayer is unable to borrow against the equity in
those assets and disposition by seizure or sale of the
assets would have sufficient adverse consequences such
that enforced collection is unlikely.

(C) Factors supporting (but not conclusive of) a
determination that compromise would not undermine
compliance by taxpayers with the tax laws include--

(1) Taxpayer does not have a history of
noncompliance with the filing and payment requirements
of the Internal Revenue Code;

(2) Taxpayer has not taken deliberate actions to
avoid the payment of taxes; and
 - 14 -

(3) Taxpayer has not encouraged others to refuse
to comply with the tax laws.

For purposes of appraising respondent’s exercise of

discretion, we consider petitioner’s circumstances, as presented

to the Appeals Office, in light of the foregoing standards. The

regulations emphasize economic hardship, and petitioner

throughout these proceedings has generally asserted her lack of

ability to pay. Economic hardship is defined as an inability to

meet reasonable basic living expenses. Sec. 301.6343-1(b)(4),

Proced. & Admin. Regs.

Petitioner in her Form 433-A alleged an estimated monthly

income of $2,000, comprising $1,500 in earnings as an artist’s

model and $500 in distributions from the trust. The Form 433-A

further showed estimated monthly expenses of $1,975.50, including

$250 for food, clothing, and miscellaneous; $1,016.50 for housing

and utilities; $62 for transportation; $40 for health care; $557

for taxes; and $50 for other expenses. Yet petitioner submitted

bank statements reflecting miscellaneous expenditures and cash

withdrawals of at least $1,500 to $1,800 per month, which amounts

apparently exclude rental expenses. A number of the outlays are

to establishments that provide other than “basic necessities”,

such as Castle Wine & Spirits, Sea Grape Wine & Spirits, Ryan’s

Irish Pub, Rockefeller Center Cafe, Borders Books & Music, Tower

Records, World of Video, Triton Video, Radio Shack, The Gap, and

Speedo Authentic Fitness. The discrepancy between the seeming
 - 15 -

amount of discretionary expenditures shown by the Form 433-A and

the bank statements is unexplained and leaves the record

ambiguous as regards petitioner’s basic living expenses or her

ability to meet them.

Similarly, the record contains no evidence of any illness,

medical condition, or disability that would render petitioner

incapable of earning a living or would exhaust all of her

financial resources. Although on brief petitioner references

uninsured medical expenses incurred in 2002, such uncorroborated

information never raised in the administrative proceeding falls

short of revealing any abuse of discretion. See Magana v.

Commissioner, 118 T.C. 488, 493 (2002) (considering “only

arguments, issues, and other matters that were raised at the

collection hearing or otherwise brought to the attention of the

Appeals Office”).

Turning to petitioner’s assets, we note at the outset that

no dispute between the parties exists as to whether the trust is

reachable for collection of petitioner’s Federal tax liabilities.

Further, this view would appear to accord with relevant

authorities. State law determines the existence of property

rights to which Federal tax consequences, such as a tax lien, may

then attach. Aquilino v. United States, 363 U.S. 509, 512-514

(1960); Magavern v. United States, 550 F.2d 797, 800 (2d Cir.

1977). As this Court has recognized, the court in In re
 - 16 -

Rosenberg’s Will, 199 N.E. 206 (N.Y. 1935), cert. denied 298 U.S.

669 (1936), “held that the interest of a beneficiary under a New

York spendthrift trust may be reached by the United States under

an income tax lien”. Mahler v. Commissioner, T.C. Memo. 1987-64.

The Court of Appeals for the Second Circuit, to which appeal

in the instant case would normally lie, has indicated that where,

under State law, a beneficiary can force a trustee to act, as in

a support trust, the beneficiary has an interest in property

subject to Federal tax lien. Magavern v. United States, supra at

802. In this context, the Court of Appeals has also explained

that “New York law clearly establishes * * * that an aggrieved

trust beneficiary can enforce his right to trust property or

income against a trustee who refuses to exercise his discretion

as directed in the trust instrument”. Id. (citing In re

Rosenberg’s Will, supra). Further, “the New York Court of

Appeals has included taxes within the definition of the term

‘support’ in a case involving enforcement of a federal tax lien

against a beneficiary’s rights in a spendthrift trust.” Id.

(citing In re Rosenberg’s Will, supra); see also United States v.

Murray, 217 F.3d 59, 65 & n.5 (1st Cir. 2000); United States v.

Rye, 550 F.2d 682, 685 (1st Cir. 1977); Rev. Rul. 55-210, 1955-1

C.B. 544.

At the time petitioner’s offer in compromise was under

consideration, the trust corpus was approximately $175,000. Her
 - 17 -

tax debt approximated $13,000. The evidence fails to establish

that collection against less than one-thirteenth of the asset’s

value would leave petitioner unable to meet basic living costs in

the immediately foreseeable future. Needs over the longer term

would be no more than rampant speculation. Hence, the totality

of the financial information in the record does not show that

respondent committed an abuse of discretion in concluding that

the disputed lien would not create economic hardship.

In addition, while the regulations also provide that

collection that will prove detrimental to voluntary compliance

may be inappropriate regardless of financial circumstances,

petitioner’s overall compliance history does not weigh in favor

of compromise. Petitioner repeatedly failed to file timely

Federal tax returns and to pay taxes due. She annually omitted

from her returns significant rental income from the Cape Cod

residence prior to its sale. The record also suggests that

petitioner defaulted on an earlier installment agreement.

Against this background and in the absence of other unique or

compelling circumstances alleged by petitioner, considerations of

policy or fairness do not require that petitioner be relieved of

her tax liabilities.

To summarize, the evidence before us does not indicate that

in rejecting petitioner’s offer in compromise, respondent acted

arbitrarily, capriciously, or without sound basis in fact or law.
 - 18 -

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

considered petitioner’s circumstances in light of the prescribed

guidelines for accepting offers. Respondent then reasonably

concluded that the information presented fell short of

establishing either the requisite economic hardship or other

exceptional factors demonstrating that compromise of the

liability will not undermine voluntary compliance with the tax

laws. The Court will sustain respondent’s collection action.

To reflect the foregoing,

Decision will be entered

for respondent.