T.C. Memo. 2003-302
UNITED STATES TAX COURT
DONALD G. AND CLAUDIA A. WILLIS, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 6456-02L. Filed November 3, 2003
Mark H. Westlake, for petitioners.
Caroline Krivacka, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
SWIFT, Judge: This case arises from a petition for judicial
review timely filed in response to a notice of determination
concerning collection action under section 6330.1 The notice of
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect at all relevant times, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
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determination relates to petitioners’ Federal income tax
liabilities for 1992, 1993, 1994, 1995, 1996, and 1997.
Petitioners’ liability for the underlying taxes, interest, and
penalties is not disputed. The issue for decision is whether
respondent’s rejection of petitioners’ three proposed
alternatives to collection constitutes an abuse of discretion.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
At the time of filing the petition, petitioners resided in
Lebanon, Tennessee. Petitioner Donald G. Willis2 operates a
locksmith business as a sole proprietorship. Petitioner
subcontracts much of the locksmith work. In addition, petitioner
derives income from a part-time ministry. Petitioner Claudia A.
Willis is not employed outside the home.
On January 30, 2001, respondent sent to petitioners a final
notice of intent to levy with respect to petitioners’ outstanding
Federal income taxes, interest, and penalties for 1992 through
1997 (cumulative liability). On March 1, 2001, respondent
received petitioners’ timely request for a collection due process
hearing.
After submitting to respondent for consideration certain
personal financial information relating to petitioners, on May 9,
2
Hereinafter, unless otherwise indicated, references to
petitioner in the singular are to petitioner Donald G. Willis.
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2001, petitioners’ counsel met with a settlement officer from
respondent’s Appeals Office. Petitioners’ counsel requested that
respondent allow petitioners to partially satisfy their
cumulative liability by means of an installment agreement.
The settlement officer correctly advised petitioners’
counsel that, under respondent’s policy, an installment agreement
would be acceptable only if the payments thereunder would satisfy
in full the total amount of the cumulative liability within the
applicable periods of limitation, plus any allowable extensions.
Petitioners did not offer to make payments to respondent in an
amount sufficient, within the applicable periods of limitation
plus allowable extensions, to fully satisfy the cumulative
liability, which, at that time, totaled approximately $125,000.
As a result, respondent rejected petitioners’ proposed
installment agreement.
On July 17, 2001, petitioner personally met with the
settlement officer. At that meeting, petitioner requested that
respondent designate the cumulative liability as currently not
collectible (i.e., as uncollectible), and the settlement officer
considered the revisions petitioner submitted to his financial
information. After considering the revisions, the settlement
officer concluded that petitioners had disposable monthly income
of $348 and that petitioners could afford to make payment to
respondent of $180 per month. As a result, the settlement
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officer advised petitioners that the cumulative liability could
not be classified as currently not collectible. The settlement
officer then suggested to petitioner that petitioners submit an
offer in compromise in the amount of $180 per month for 116
months. Under this suggested offer in compromise, respondent
would consider compromising the cumulative liability for a total
payment by petitioners of $20,880.
On or about September 5, 2001, petitioners submitted on the
appropriate form the above offer in compromise as proposed by
respondent’s settlement officer. On September 18, 2001, the
settlement officer wrote to petitioners indicating that
verification of the financial information petitioners had
submitted was required before petitioners’ offer in compromise
could be reviewed and approved.
During the settlement officer’s verification of petitioners’
financial information, certain real estate was identified which
had not been previously disclosed to respondent.3 Petitioners’
mobile home in which they resided was located on the real estate.
In 1996, the real estate had been purchased in petitioners’
names, using a cashier’s check in the amount of $8,750 as part of
a $9,000 downpayment toward the $35,000 total purchase price. In
1998, nominal title to this real estate was transferred by
3
The information that petitioners had submitted up until
that time indicated that petitioners paid rent for the “land” on
which the mobile home in which they resided was located.
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petitioners to petitioner’s mother. Although the warranty deed
recording this title transfer reflects consideration of $10,000,
petitioner’s mother made no such payment to petitioners. Since
1999, the mobile home located on this real estate has been
petitioners’ primary residence.
Petitioners advised the settlement officer that the real
estate belonged to petitioner’s mother. Petitioners indicated
that petitioner’s mother had provided the funds for the 1996
cashier’s check used to purchase the real estate. Petitioners
submitted to respondent’s settlement officer copies of checks and
a bank statement in support of this contention. The bank
statement reflects a payment by petitioner’s mother of $8,750 on
August 26, 1996. The bank statement, however, also reflects a
deposit of $10,532.33 into the same bank account on that same
date.
From the time of purchase in 1996 through the time of the
collection due process hearing, petitioners paid the property
taxes and mortgage payments relating to the real estate. No
rental agreement between petitioners and petitioner’s mother was
provided, and none appears to exist. On her Federal income tax
returns, petitioner’s mother did not include rental income or
deduct mortgage interest relating to this real estate.
Petitioner’s mother was not called as a witness in this case.
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Also, information obtained by the settlement officer
indicated that, just prior to the above 1996 purchase of the real
estate, petitioners sold a house in Nashville, Tennessee.
Petitioners did not provide to the settlement officer requested
information regarding the disposition of the proceeds from the
sale of the Nashville house.
Based on valid and unresolved concerns regarding ownership
of the real estate on which petitioners’ mobile home residence
was located, the settlement officer rejected petitioners’ offer
in compromise of $180 per month and calculated a minimum
acceptable offer in compromise from petitioners of $529 per month
for 116 months, until a total of $61,364 would be paid. In
preparing computations of this new minimum amount for an
acceptable offer in compromise from petitioners, the settlement
officer used a fair market value for the real estate of $82,300,
based upon a 2001 local property tax appraisal. The settlement
officer calculated petitioners’ net realizable equity in the real
estate at $39,840.
Petitioners disputed the settlement officer’s decision to
consider the equity in the real estate in evaluating their offer
in compromise. Petitioners, however, did not submit to
respondent’s settlement officer information sufficient to resolve
the settlement officer’s question regarding ownership of the real
estate.
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On January 17, 2002, the settlement officer prepared an
Appeals Case Memorandum sustaining the proposed levy action. On
February 19, 2002, respondent issued to petitioners a notice of
determination concluding that petitioners’ offer in compromise
was unacceptable and denying petitioners’ request to suspend
collection action.
OPINION
Because the underlying tax liability is not in dispute, we
review the settlement officer’s actions under an abuse of
discretion standard. Goza v. Commissioner, 114 T.C. 176, 181-182
(2000). An abuse of discretion occurs when respondent takes
action that is arbitrary or capricious, lacks sound basis in law,
or is not justifiable in light of the facts and circumstances.
Mailman v. Commissioner, 91 T.C. 1079, 1084 (1988).
Petitioners contend that the settlement officer abused his
discretion in refusing to designate petitioners’ cumulative
liability as currently not collectible. Petitioners also contend
that the settlement officer abused his discretion in refusing to
accept the proposed payments of $180 per month under either an
installment agreement or an offer in compromise.
Generally, Appeals officers are to consider alternatives to
collection offered by taxpayers in the course of collection due
process proceedings. Sec. 6330(c). As indicated, petitioners
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proposed three alternatives to collection. We address each
seriatim.
Currently Not Collectible
Generally, currently not collectible (CNC) status may be
available when a taxpayer has no ability to make payments.
2 Administration, Internal Revenue Manual (CCH), sec. 5.16.1.1,
at 17,803 (2000). A taxpayer’s ability to make payments is
determined by calculating the excess of income over necessary
living expenses. 2 Administration, Internal Revenue Manual
(CCH), sec. 5.16.1.2.1, at 17,804 (2000). CNC status may be
available based on “hardship” if the levy action would prevent
the taxpayer from meeting necessary living expenses.
Petitioners submitted to the settlement officer certain
personal financial information in support of their request for
CNC status for the cumulative liability. The settlement officer
concluded that petitioners had the ability to make monthly
payments and that CNC status was not appropriate. Petitioners do
not challenge the settlement officer’s conclusion as to their
ability to make some payments toward their cumulative liability;
indeed, petitioners’ proposed offer in compromise, involving
payments of $180 per month, would belie any such claim.
Petitioners clearly had some ability to make payments toward
the cumulative liability. As a result, petitioners were not
eligible to have the cumulative liability classified as CNC. We
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find no abuse of discretion in the settlement officer’s decision
that petitioners were not eligible for CNC status.
Installment Agreement
Section 6159 authorizes respondent to consider installment
agreements when a taxpayer lacks the current ability to satisfy
the full amount of taxes. At the time of the collection due
process hearing in this case, respondent maintained a policy of
accepting installment agreements only with terms that would
result in full payment of all Federal income tax liabilities
within the applicable collection periods of limitation. Internal
Revenue Manual, sec. 5.14.1.1 (effective Oct. 18, 1999 to
Mar. 30, 2002). A 5-year extension of the periods of limitation
is permissible when making this determination. Internal Revenue
Manual, sec. 5.14.1.7 (effective Oct. 18, 1999 to Mar. 30, 2002).
In light of the amount of petitioners’ cumulative liability,
an acceptable installment agreement would have required payments
of approximately $1,500 per month for the 116 months in the
collection periods of limitation. Even with a 5-year extension,
payments of more than $1,100 per month would have been required.
Petitioners do not dispute their inability to make payments in
that amount.
After the notice of determination was issued in this case,
respondent changed its policy related to installment agreements.
Under respondent’s new policy, respondent may allow taxpayers to
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enter into installment agreements to pay specific tax periods in
full and to have other tax periods designated as CNC.
2 Administration, Internal Revenue Manual (CCH), sec. 5.14.2.2,
at 17,529 (effective Mar. 30, 2002). Respondent’s new policy,
however, still requires that taxpayers borrow upon or liquidate
current assets. 2 Administration, Internal Revenue Manual (CCH),
sec. 5.14.2.2(1), at 17,529 (effective Mar. 30, 2002). At trial,
petitioners’ counsel argued that this case was not about abuse of
discretion by an individual settlement officer, but rather about
an “institutional abuse of discretion” in the application of the
policy that respondent used when considering petitioners’
proposed installment agreement. Petitioners claim respondent
should have treated the cumulative liability as consisting of
separate liabilities for each year and should have classified
some years as CNC while allowing petitioners an installment
agreement for the liabilities for other years.
The settlement officer properly applied the policies
applicable when considering petitioners’ request for an
installment agreement, and we find no abuse of discretion in his
action. Further, particularly in light of the unresolved
question relating to ownership of the real estate, petitioners
have failed to establish that they would qualify for treatment
under respondent’s new policy. We find no abuse of discretion in
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respondent’s use in this case of the prior policy for installment
agreements.
Offer in Compromise
Section 7122 provides authority for an offer in compromise
as an alternative to collection action. An offer in compromise
reduces a taxpayer’s overall liability. An offer in compromise
may be granted for reasons such as doubt as to the actual tax
liability, doubt as to collectibility, or for other purposes
relating to effective tax administration. Sec. 7122.
As indicated, petitioners do not dispute the amount of the
cumulative liability. The proposed offer in compromise was
considered on the grounds of doubt as to collectibility. In
general, an offer in compromise based on doubt as to
collectibility may be accepted where there are substantial
questions concerning whether the tax liability will be collected
in full and where the offered amount reflects realistic
collection potential. 2 Administration, Internal Revenue Manual
(CCH), sec. 5.8.1.1.3, at 16,253 (2001).
After reviewing the initial financial information provided
by petitioners, the settlement officer suggested that
petitioners’ proposed offer in compromise of $180 a month for 116
months, for a total of $20,880, appeared acceptable. However, as
explained above, the settlement officer’s verification of
petitioners’ financial information uncovered a significant
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question regarding ownership of real estate in which an equity
interest of nearly $40,000 appeared to exist. As a result, the
settlement officer concluded that petitioners’ offer in
compromise was not acceptable.
Although petitioners continue to assert that the real
estate belongs to petitioner’s mother, petitioners failed to
provide to respondent’s settlement officer certain requested
information in support of this assertion. For example,
petitioners failed to provide information relating to the
proceeds of the Nashville house that petitioners sold,
information that is particularly significant because of the
$10,532.33 deposit into petitioner’s mother’s bank account on the
same day that the cashier’s check used for part of the
downpayment on the real estate was purchased. Moreover, the
information petitioners provided to the settlement officer showed
that the real estate was originally titled in petitioners’ names,
that petitioners transferred title for no consideration, that
petitioners lived there, and that petitioners paid the property
taxes and mortgage payments.
Generally, when challenging a levy action, taxpayers bear
the responsibility of providing relevant information.
Rule 142(a). The information petitioners provided to the
settlement officer was insufficient to resolve the question
regarding ownership of the real estate. We find no abuse of
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discretion in the settlement officer’s determination. Other
arguments made by petitioners that are not specifically addressed
have been considered and rejected.
Based on the foregoing,
A decision will be
entered for respondent.