Clawson v. Comm'r

                        T.C. Memo. 2004-106



                      UNITED STATES TAX COURT



          JERRY B. AND DONNA E. CLAWSON, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 18716-02L.           Filed April 23, 2004.



     Mitchell I. Horowitz, for petitioners.

     Michael Pesavento, for respondent.


             MEMORANDUM FINDINGS OF FACT AND OPINION


     COHEN, Judge:   This proceeding was commenced in response to

a Notice of Determination Concerning Collection Action Under

Section 6330 (notice of determination).   The notice of

determination sustained a proposed levy with respect to

petitioners’ unpaid income tax liabilities for 1999 and 2000.

The issue for decision is whether the Appeals officer abused his
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discretion by sustaining a proposed levy to collect petitioners’

unpaid income tax liabilities for 1999 and 2000.

     Unless otherwise indicated, all section references are to

the Internal Revenue Code as amended, and all Rule references are

to the Tax Court Rules of Practice and Procedure.   All amounts

have been rounded to the nearest dollar.

                        FINDINGS OF FACT

     Some of the facts have been stipulated, and the stipulated

facts are incorporated in our findings by this reference.    At the

time that the petition in this case was filed, petitioners

resided in Cape Coral, Florida.

Background

     Petitioners filed their joint Federal income tax return for

1999 on or about October 15, 2000, and their joint Federal income

tax return for 2000 in October 2001 showing balances due.    As of

July 17, 2002, petitioners’ unpaid income tax liabilities for

1999 and 2000, including accruals of interest and penalties,

exceeded $385,000 and $64,000, respectively.

     In March 2001, petitioners retained a certified public

accountant, David B. McKinnon (McKinnon), to represent them

before the Internal Revenue Service (IRS) in connection with the

collection of their tax liabilities.   On or about March 28, 2001,

petitioners filed a Form 2848, Power of Attorney and Declaration
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of Representative, designating McKinnon, Rance D. Hall, and

R. Glenn Kirk, C.P.A., as their representatives.

     On May 9, 2001, petitioner Jerry B. Clawson (Clawson), by

signed stipulation and consent, agreed to the entry of an Order

of Permanent Injunction and Other Relief As To Jerold Benjamin

Clawson (order of permanent injunction) by the U.S. District

Court for the Northern District of Georgia in an action brought

against him by the Securities and Exchange Commission (SEC).     The

order of permanent injunction restrained and enjoined Clawson

from further violations of various securities laws.    The order of

permanent injunction also required Clawson to pay disgorgement in

the amount of $2,700,000, which represented Clawson’s gains from

the conduct that had been alleged in the complaint brought

against him by the SEC.   Payment of disgorgement in excess of

$558,000 and prejudgment interest thereon was waived, however,

based upon representations made by Clawson to the SEC in January

2001 as to his financial condition.    The entire balance of the

$558,000 disgorgement debt was to be paid by Clawson within

2 years of the entry of the order of permanent injunction (i.e.,

by May 9, 2003).

     The order of permanent injunction also included a section

entitled “Modification of the Freeze” that provided as follows:

          IT IS FURTHER ORDERED that the freeze on   Clawson’s
     assets, which was earlier imposed by order of   this
     Court, shall be modified as follows: Clawson    is
     allowed to liquidate non-cash assets provided   notice
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     prior to the liquidation of the assets is given to the
     Commission [SEC] staff, and the Commission [SEC] is
     given an opportunity to object [to] such liquidation,
     and that the proceeds from the liquidation of any such
     assets remain subject to the freeze. Clawson shall be
     allowed to borrow against his Florida homestead. The
     freeze shall also be modified to allow the Hatteras
     boat owned by Clawson to be placed in a charter fleet,
     for the purpose of generating income for Clawson to pay
     his disgorgement, or to otherwise preserve assets. The
     freeze shall be completely lifted as to Clawson at the
     time that his disgorgement obligation is retired,
     provided he is in compliance with all other orders of
     the Court.

Review by Revenue Officer Riley

     On or about July 30, 2001, Revenue Officer Vicki Riley

(Riley) was assigned to collect petitioners’ unpaid income tax

liability for 1999.     On August 7, 2001, Riley contacted

petitioners by mail and by telephone to schedule an appointment

for the purpose of obtaining financial information from them.

Riley requested that petitioners complete a Form 433-A,

Collection Information Statement for Wage Earners and Self-

Employed Individuals (individual CIS).

     On August 24, 2001, petitioners signed an individual CIS and

submitted it to Riley.     On their individual CIS, petitioners

disclosed assets and equity, in pertinent part, as follows:

               Asset                Current Value   Encumbrance Net Value

  First Union Bank checking acct.       $3,000           None    $3,000
  First Union Bank checking acct.        2,000           None     2,000
  Fidelity Investments acct.            27,000           None    27,000
  Investment (Sanibel-Captiva          200,000       $180,000    20,000
    Airport Shuttle, Inc.)
  Anticipated increase in income       500,000           None   500,000
  1999 Chevrolet Suburban               30,000         25,000     5,000
  1996 BMW 328                          25,000           None    25,000
                                 - 5 -
  46-foot Trojan yacht              100,000          71,000    29,000
  61-foot Hatteras yacht            600,000         410,000   190,000
  30-foot Fountain yacht             55,000          33,000    22,000
  Real estate                     1,450,000       1,150,000   300,000
  Real estate                       330,000         250,000    80,000
  Real estate                         7,000            None     7,000
  Furniture/personal effects         25,000            None    25,000
  Business assets–-Equipment          2,000            None     2,000
  Accounts/notes receivable           2,850/mo.        None     2,850/mo.

The instructions for the individual CIS directed petitioners to

indicate the current value of their assets, i.e., the amount for

which they could sell their assets as of that date.

     The real estate valued at $1,450,000 on petitioners’

individual CIS is their residence in Cape Coral, Florida (Cape

Coral property).    Petitioners acquired the Cape Coral property in

November 1999 for $675,000.     According to their individual CIS,

petitioners had an outstanding mortgage balance of $1,150,000 on

the Cape Coral property and a monthly mortgage payment of $9,384

as of August 24, 2001.     On August 19, 2001, 5 days prior to

submitting their individual CIS to Riley, petitioners listed the

Cape Coral property for sale with Arvida Realty Services (Arvida)

at a price of $2,700,000.

     In addition to submitting their individual CIS to Riley on

August 24, 2001, petitioners submitted the order of permanent

injunction and four Forms 433-B, Collection Information Statement

for Businesses.    The Forms 433-B described business entities

controlled and/or operated by petitioners.

     On September 19, 2001, McKinnon proposed an installment

agreement to Riley in which petitioners would pay $1,000 per
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month for 18 months, with the remaining amount of their income

tax liability to be paid at the end of the 18-month period.    At

the time that petitioners proposed this installment agreement to

Riley, Riley had determined that the total amount of their unpaid

tax liabilities was $645,537.   This figure included the reported

but unpaid income tax liability on petitioners’ joint Federal

income tax return for 1999 and trust fund penalties that had been

imposed against each of them for 1991.   Based upon the financial

information petitioners submitted to Riley, she determined that

petitioners had the ability to pay the total amount of their

unpaid tax liabilities sooner than the amount of time requested

in the proposed installment agreement.   Accordingly, Riley

rejected petitioners’ proposed installment agreement.

     On September 19, 2001, petitioners also submitted a

Form 9423, Collection Appeal Request, in which they requested

that respondent not file a Federal tax lien.   Petitioners

provided, in pertinent part, the following explanation for their

request:

     Taxpayer is working to sell the assets reported on
     Forms 433-A and 433-B * * *. Taxpayer believes that a
     substantial portion of such assets can be sold by
     December 31, 2001 and that all can be disposed of
     within the next twelve months. These sales would
     provide funds to satisfy the tax liability in question.
     Filing a tax lien would materially reduce the market
     value of the assets to be sold and cause the banks to
     call loans on which most of these assets are pledged.
     That would put the taxpayer out of business with no
     resources to pay the tax liability.
                               - 7 -

          We respectfully request that taxpayer be allowed a
     reasonable time to sell these assets in order to
     generate the funds necessary to satisfy this tax
     obligation.

     On September 20, 2001, Riley informed McKinnon that

petitioners’ proposed installment agreement had been forwarded to

an independent reviewer.   Riley suggested to McKinnon that

petitioners commence good faith payments of $1,000 per month in

the event that the independent reviewer approved the proposed

installment agreement.   On September 21, 2001, the independent

reviewer concurred in Riley’s decision to reject petitioners’

proposed installment agreement.

     On October 4, 2001, Riley received a letter in response to a

request that she had made to the IRS Office of Chief Counsel for

an opinion with respect to the issue of whether the judgment

rendered in favor of the SEC against Clawson (i.e., the $558,000

disgorgement debt) would have priority over the IRS if the IRS

chose not to file a notice of Federal tax lien in its efforts to

collect petitioners’ unpaid income tax liability for 1999.    That

letter, in pertinent part, provided the following explanation to

Riley:

          In the present case, if the SEC has taken the
     steps necessary to perfect its lien against whatever
     property the Service might wish to look to for
     collection, it will have priority since the government
     has not yet filed a notice of federal tax lien. If the
     SEC has not yet taken such steps, but does so in the
     future before a notice of federal tax lien is filed, it
     similarly will enjoy priority. The only way that the
     government can ensure that it will prevail with respect
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     to the taxpayer’s property is if the SEC has taken no
     steps to perfect its judgment and the Internal Revenue
     Service chooses to file a notice of federal tax lien.

     On October 23, 2001, Riley received a payment from

petitioners in the amount of $1,000.    Petitioners designated this

payment to be applied against their income tax liability for

2000, and Riley applied it against that liability.

     On December 19, 2001, Riley received a $2,000 payment from

petitioners.   This payment was applied to petitioners’ income tax

liability for 1999.

     Petitioners obtained the SEC’s permission to sell their

61-foot Hatteras yacht for $550,000 in December 2001.

Petitioners used the proceeds of this sale to pay off the debt

that encumbered the yacht (which was listed on their individual

CIS as $410,000) and to pay for their living expenses.    None of

the proceeds of this sale were used towards the payment of

petitioners’ income tax liabilities for 1999 or 2000.

     On February 4, 2002, Riley received two separate payments of

$1,000 each from petitioners.   Both payments were applied to

petitioners’ income tax liability for 1999.

     On March 19, 2002, Riley received a $2,000 payment from

petitioners.   This payment was applied to petitioners’ income tax

liability for 1999.

     On or about April 4, 2002, Riley faxed a message to McKinnon

seeking an explanation of how the filing of a Federal tax lien
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would destroy petitioners’ ability to pay their tax liabilities

and how petitioners would be able to pay those liabilities in

full in 18 months.   On or about April 6, 2002, McKinnon faxed a

response to Riley.   McKinnon’s response stated, in pertinent

part:

          If a tax lien is filed, taxpayer’s lenders will
     call the notes on which taxpayer’s assets are pledged.
     This would put the taxpayer out of business with no
     resources to pay the IRS.

          Taxpayer believes that he will be able to sell the
     encumbered assets within the next 18 months and clear
     enough to pay the IRS in full.

     On July 17, 2002, Riley issued a Final Notice-Notice of

Intent to Levy and Notice of Your Right To a Hearing (final

notice) to each petitioner for their unpaid income tax

liabilities for 1999 and 2000.    Clawson’s final notice included

the unpaid amount of the trust fund penalty that had been imposed

against him for 1991.   Riley sent a copy of the final notice to

McKinnon along with a letter that provided the following

explanation:

     We are taking this action because the taxpayer has not
     made Estimated Tax payments for 2000, 2001, nor 2002.
     He has only paid seven of ten promised payments toward
     the liability as you had suggested in September of
     2001. According to the 2000 Income Tax return, he has
     increased his liability substantially via a capital
     gain that was not used to pay his tax obligation.

     On July 31, 2002, the IRS Office of Appeals denied

petitioners’ Collection Appeal Request of September 19, 2001.
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Proceedings Before Appeals Officer Luhmann

     On August 6, 2002, petitioners timely filed a Form 12153,

Request for a Collection Due Process Hearing, in which they

objected to both the proposed levy action and the filing of a

Federal tax lien with respect to their unpaid income tax

liabilities for 1999 and 2000.   At the time that petitioners

filed Form 12153, no Federal tax lien had been filed against

them.   In the Form 12153, McKinnon disclosed that petitioners

were continuing their efforts to sell the Cape Coral property.

     Taxpayers are in the process of selling their personal
     residence. * * *

     Anticipated proceeds, after satisfaction of existing
     mortgages, should be sufficient to pay the amount owed
     the IRS.

McKinnon attached to the Form 12153 a copy of the listing

agreement that petitioners had entered into with Arvida for the

sale of the Cape Coral property.   Appeals Officer Monty Luhmann

(Luhmann), respondent’s settlement officer in the St. Paul,

Minnesota, Appeals Office, received petitioners’ request for a

hearing on or about August 27, 2002.

     On September 27, 2002, Luhmann sent a letter to petitioners

offering a telephonic hearing or, in the alternative, to transfer

their case to Florida for a face-to-face meeting.   This letter

also set forth the following information:

     When we meet to discuss your case, our meeting will be
     informal and you may present facts, arguments, and
     legal authority to support your position. We will
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     discuss the law and how it applies to the facts in your
     case. The primary purpose of this hearing is to verify
     all legal and procedural requirements were followed in
     proposing the collection action for the periods listed
     above. Additionally, the consideration of less
     intrusive collection alternatives will be a focus of
     this hearing. Please be prepared to discuss any
     alternative that you wish for me to consider in an
     effort to resolve your case.

In addition, Luhmann advised petitioners that they were not

entitled to a hearing on the filing of a Federal tax lien because

no such lien had been filed.

     By letter dated October 2, 2002, petitioners elected to hold

a telephonic hearing, which was subsequently held on October 21,

2002, between Luhmann and McKinnon.

     On October 25, 2002, respondent filed a Notice of Federal

Tax Lien against petitioners for their unpaid income tax

liabilities for 1999 and 2000 in the public records of Lee

County, Florida.   Petitioners were notified of the filing of the

Federal tax lien as required under section 6320, but they did not

request that a hearing be held with respect to the filing of that

lien.

     On October 30, 2002, Luhmann issued a notice of

determination to each petitioner in which he sustained the

proposed levy to collect petitioners’ unpaid income tax

liabilities for 1999 and 2000.   Luhmann also issued a separate

notice of determination to Clawson in which he sustained the

proposed levy to collect the unpaid portion of the trust fund
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penalty that had been imposed against him for 1991 (a matter not

before us or within our jurisdiction).    Luhmann provided, in

pertinent part, the following explanation for sustaining the

proposed levy:

     The Revenue Officer advised you of pending enforcement
     action on 08/15/01. After you failed to sell your
     house to satisfy this liability, the Revenue Officer
     proceeded to issue the Notice of Intent to Levy.
     LT1058 Notice of Intent to Levy was issued by certified
     mail to your last known address. The Revenue Officer
     had a levy source and levy was the next anticipated
     action. The Revenue Officer followed the legal and
     administrative requirements necessary for issuing a
     Notice of Intent to Levy.

                 *   *   *    *       *   *    *

     Issues raised by the taxpayer:

     On an attachment to Form 12153, you raised the issue of
     selling your house as an alternative to collection
     action. Your power of attorney raised this issue
     during your hearing on 10/21/02 and requested more time
     to sell your second home, valued at $2.9 million. A
     copy of the listing agreement shows that this property
     has been on the market since September of 2001. I
     recognize that it takes longer to sell a home valued at
     $2.9 million than it would to sell a home priced at the
     median value in your market. Even so, thirteen months
     should have been sufficient to either sell or borrow
     against the property. Your power of attorney advised
     me during your hearing that you borrowed against the
     property to meet your expenses in the last year.

                 *   *   *    *       *   *    *

     Balancing the need for efficient collection with the
     taxpayer concern that the collection action be no more
     intrusive than necessary:

     Revenue Officer Vicki Riley has been working with you
     since August of 2001 to see that this liability is
     paid. I can find no compelling reason to further delay
     the collection of this account. There is sufficient
                             - 13 -

     equity in your second home to pay this liability in
     full either through the sale of the property or through
     a cash-out loan against the property. To delay
     collection further would risk the collection of this
     liability.

     Perhaps you should consider lowering your asking price
     or consulting with your real estate agent to see what
     you can do to expedite a voluntary sale of the
     property. If you are unable or unwilling to borrow
     against or sell the property to satisfy the IRS, then
     the IRS has no choice but to proceed to collect this
     account through levy action.

     Petitioners timely petitioned the Court under section

6330(d) from their notices of determination for the unpaid income

tax liabilities for 1999 and 2000.

                             OPINION

     Section 6331(a) provides that, if any person liable to pay

any tax neglects or refuses to pay such tax within 10 days after

notice and demand for payment, the Secretary is authorized to

collect such tax by levy upon property belonging to the taxpayer.

Section 6331(d) provides that the Secretary is obliged to provide

the taxpayer with notice, including notice of the administrative

appeals available to the taxpayer, before proceeding with

collection by levy on the taxpayer’s property.   Section 6330

generally provides that respondent cannot proceed with the

collection of taxes by way of a levy on a taxpayer’s property

until the taxpayer has been given notice of and the opportunity

for an administrative review of the matter (in the form of an

Appeals Office hearing) and, if dissatisfied, with judicial
                              - 14 -

review of the administrative determination.   Section

6330(c)(2)(A) specifies issues that the taxpayer may raise at the

hearing.   The taxpayer is allowed to raise “any relevant issue

relating to the unpaid tax or the proposed levy” including

spousal defenses, challenges to the appropriateness of collection

action, and alternatives to collection.   Sec. 6330(c)(2)(A).

Section 6330(c)(3) provides that the determination of the Appeals

officer shall take into consideration the verification under

section 6330(c)(1), the issues raised by the taxpayer, and

whether the proposed collection action balances the need for the

efficient collection of taxes with the legitimate concern of the

taxpayer that any collection action be no more intrusive than

necessary.   Where, as here, liability for the underlying tax is

not disputed, we review the Appeals officer’s determination for

abuse of discretion.   Goza v. Commissioner, 114 T.C. 176, 181-182

(2000).

     At trial of this case in September 2003, petitioners offered

into evidence a First Supplemental Stipulation of Facts

(supplemental stipulation).   The supplemental stipulation

referred to exhibits that were not before Luhmann at the time of

petitioners’ section 6330 hearing and were not a part of the

administrative record in this case.    Respondent objected to the

supplemental stipulation’s being received into evidence on the

grounds that the exhibits referred to therein were not a part of
                               - 15 -

the administrative record.   The exhibits referred to in the

supplemental stipulation include petitioners’ income tax returns

for 1998 through 2001; two orders by the U.S. District Court for

the Northern District of Georgia in the case of SEC v. Phoenix

Telecom, LLC that are dated in August 2000; the opinion rendered

in the case of SEC v. ETS Payphones, Inc., 300 F.3d 1281 (11th

Cir. 2002); an order by the U.S. District Court for the Middle

District of Florida in the case of William & Hazel Barclay v.

Phoenix Telecom, LLC that is dated in October 2002; a listing

agreement between petitioners and Century 21 Sunbelt Realty, Inc.

for the sale of the Cape Coral property that is dated in

September 2002; an appraisal of $2,900,000 for the Cape Coral

property that is dated in October 2002; three different

advertisements for the Cape Coral property that are dated between

December 2002 and August 2003; and a marketing service report for

the sale of the Cape Coral property that shows activity through

August 1, 2003.   Respondent also objected to the testimony

offered by Clawson at trial.   The Court noted respondent’s

objection but allowed testimony to proceed.

     Respondent contends that we should not consider the

supplemental stipulation, the trial testimony, or any other

matters that were not presented to Luhmann because they are not a

part of the administrative record in this case.   For the reasons
                              - 16 -

set forth below, we sustain Luhmann’s determination whether or

not we consider the additional evidence.

     The sole issue raised by petitioners at their section 6330

hearing was an offer of a collection alternative.   The collection

alternative proposed by petitioners involved postponing the levy

to allow petitioners to sell the Cape Coral property at some

unspecified point in the future for its market value,

approximately $2,700,000.   (As of the time of trial in September

2003, the Cape Coral property had not been sold.)

     Petitioners argue that Luhmann abused his discretion by

rejecting their proposed collection alternative because he failed

to take into consideration the impact of the events of

September 11, 2001, on petitioners’ ability to sell the Cape

Coral property.   Moreover, petitioners argue that Luhmann abused

his discretion by sustaining the proposed levy because he (1) did

not request updated financial information from petitioners in his

letter of September 27, 2002; (2) did not give greater

consideration to the impact of the order of permanent injunction

on petitioners’ ability to pay their income tax liabilities for

1999 and 2000; (3) did not include any notes from his telephonic

meeting with McKinnon on October 21, 2002, in the administrative

record; and (4) reached his decision to sustain the proposed levy

in “barely one month” from the time that he contacted
                              - 17 -

petitioners.   As we discuss below, petitioners’ arguments are not

persuasive.

     Clawson testified as to, inter alia, the “soft” real estate

market since the Cape Coral property had been listed for sale in

August 2001, petitioners’ inability to borrow any further against

the Cape Coral property, petitioners’ business dealings between

August 2001 and October 2002, and his understanding of the order

of permanent injunction and the modified asset freeze contained

therein.   Much of Clawson’s testimony, on cross-examination,

admitted dispositions of assets and increased borrowing against

the Cape Coral property without application of any of the

proceeds to petitioners’ tax obligations.   This evidence, had it

been presented to Luhmann, is not likely to have changed his

determination and does not show an abuse of discretion.   See,

e.g., Pless v. Commissioner, T.C. Memo. 2004-24.

     There is no requirement that an Appeals officer take notes

at a section 6330 hearing, and there is neither requirement nor

reason that the Appeals officer wait a certain amount of time

before rendering his determination as to a proposed levy.   See

sec. 301.6330-1(d)(2), Q&A-D6, Proced. & Admin. Regs.; sec.

301.6330-1(e)(3), Q&A-E9, Proced. & Admin. Regs.   Moreover, Riley

worked with petitioners for more than 1 year before their case

was assigned to Luhmann.   Accordingly, we reject petitioners’

argument that Luhmann abused his discretion on those grounds.
                             - 18 -

     Based upon our review of the relevant evidence in this case,

we conclude that Luhmann did not abuse his discretion by

rejecting petitioners’ proposed collection alternative.

Consequently, we further conclude that Luhmann did not abuse his

discretion by sustaining the proposed levy to collect

petitioners’ unpaid income tax liabilities for 1999 and 2000.

     We have considered the arguments of the parties that were

not specifically addressed in this opinion.   Those arguments are

either without merit or irrelevant to our decision.

     To reflect the foregoing,


                                         Decision will be entered

                                   for respondent.